Venture Capital China: Field Study

Venture Capital China: Field Study
SLS students on the field study trip to China

China is a country very different from any we have encountered in the history of Western civilization. No nation has managed to lift more than 800 million people out of poverty over the course of fewer than 40 years (commencing with Deng Xiaoping’s market reforms in 1978). Over the most recent decade, this explosive growth and reform process has been accompanied by an increased importance of venture capital and private equity as growth drivers of the Chinese economic machine. This development has occurred against two key backdrops: what the Party refers to as “socialism with Chinese characteristics” and the cultural and political aspects inherent in Chinese society.

While the majority of our class time at Stanford focused on the technical comparative elements of Chinese and American venture capital and venture capital law, our field study provided us with a unique opportunity to hear from and have questions answered by lawyers and investment professionals working on venture capital transactions, regulators and bureaucrats involved in transaction oversight and governance, and political appointees looking at the burgeoning industry from a policy perspective. We met with two leading Chinese private equity and venture capital firms, American law firms, both large full-service and smaller specialty Chinese law firms, representatives from the Department of Commerce and the Office of the Trade Representative at the U.S. Embassy, an official from the CSRC (China’s SEC equivalent), a dean of Peking University, several early-stage entrepreneurs, and representatives from Tencent (one of the largest technology companies in the world with a market capitalization in excess of $190 billion).

Even as a long-term student of China who has studied the country for years and who lived and worked there for a year and a half, each meeting was incredibly edifying. I discovered that in China reputation and name brand matter immensely.
Stanford Law School’s sponsorship of the trip and the alumni we met with who live and work there went a long way in lending credibility to our field study and presented our class with the opportunity to hear real opinions on the workings of the Chinese venture capital system.

Access to Western institutions put the “Chinese characteristics” of the VC markets into familiar terms, while access to Chinese firms facilitated an understanding of the critical elements of Chinese culture and politics pervasive in the Chinese economy. For example, the variable interest entity (VIE) structure in venture capital is both crucial and mostly unique to China. Most well-known, venture-backed Chinese companies organize as a VIE. Our meeting with an American law firm’s representative office in Beijing allowed us to pick the brain of a partner who spends much of his time working through the contractual morass and regulatory risks inherent in the VIE structure that, at core, provides an avenue through which firms can invest in sensitive industries in China. Our meetings with Chinese institutions highlighted two key features. First, investors and lawyers alike impressed upon us the importance of moving with speed. Although China has passed significant intellectual property laws, enforcement remains challenging, so staying ahead of the competition is more rewarding than fighting in court.

Second, we found that social capital and relationships, or guanxi in Chinese, remain absolutely critical to business success in China. Although President Xi Jinping’s recent crackdown on corruption has been widely publicized—the power of personal relationships has yet to be quashed in China.

This field study gave us a deep look into the Chinese market from both the foreign and domestic perspectives while facilitating networking between our class and the professionals with whom we met—an invaluable practical addition to the theory-focused coursework. SL