Sunday, 25th February 2018

Ask A VC with Harry Weller

Posted on 02. May, 2011 by in FINANCE

Most of the post analysis concerning the failures of big U.S. names in China focus on erred approaches to the market. These companies followed a blueprint based on their previous success in the U.S., but the strategy failed to excite Chinese consumers. Could you give some examples of U.S. businesses thriving right now in the Chinese market?
Despite some notable failures, there are plenty of U.S. businesses that have successfully expanded to China, including companies like Coca-Cola, KFC, Nike, Boeing, and Goldman Sachs. Above all, a strong value proposition is the common factor linking these success stories. Each offers a product or service that addresses (or addressed at the time of entry) an under met but fast-growing need in China. They either have a tremendous first mover advantage, or have succeeded in a business by virtue of superior branding, execution or technology.

When companies like Mattel’s Barbie Best Buy and Home Depot are returning home, what are the chances that smaller companies will be able to succeed in the Chinese market?
In addition to the characteristics mentioned above, efficient decision making is critical in a rapidly evolving market like China. Without flexibility in process, product and strategy, any U.S. company is destined for a rough ride. Small American companies have the wonderful advantage of streamlined organizational structures that can adapt quickly to market shifts versus their larger brethren. This kind of dexterity coupled with the relentless execution that is a hallmark of the American startup is an indispensable trait of success in China. In NEA’s case, we’ve learned that the areas of greatest opportunity in China don’t always mirror our investment focus within the U.S., and we’ve tailored our strategy accordingly over the last decade.


One of your companies, Groupon, has recently entered the Chinese market as Gaopeng.com, which is taken from a Chinese phrase meaning, “cherished friend sitting around the table.” We’ve heard that Groupon was actually inspired by Chinese group buying habits, so jumping into the Chinese market should be like a return home for them. How will Groupon succeed in the $2.51 billion a year Chinese market for group buying?

Group buying has long been a common practice for Chinese consumers. Therefore when the Groupon clones started popping up in China back in Feb 2010, they grew like wildfire. The Chinese daily-deal market grew over 600% last year, and though it’s fragmented, consolidation has occurred with the top cohort of 10 or so players recently. Consolidation has raised from the barrier to entry and forced major players to focus more on deal quality and customer experience.

Groupon has several distinct advantages at this stage of the game, most notably their relentless quality control across all aspects of the business. Our technology and business intelligence platforms allow us to better track and target consumer preferences and lower the risk of fraud. Our product development and sales teams target the more affluent and brand conscious customers as we build an enduring consumer brand among the upper-middle class.

Gaopeng is a JV between Groupon and China’s Tencent (600m strong online community). The company will combine the know-how of Groupon with the local network and knowledge from Tencent. Add a little secret sauce, and I think you’ll see something special.

EFFICIENT DECISION MAKING IS CRITICAL IN A RAPIDLY EVOLVING MARKET LIKE CHINA.

Recently, we have seen numerous newspaper stories about faltering U.S. companies finding a lifeline from Chinese investors. The varieties of companies where Chinese businesses are investing are surprising and they include RV makers to silicon wafer manufacturers for solar panels. What can DC Metro companies do to solicit capital investment from China? Do you recommend that they actively pursue Chinese investments?
Chinese investors increasingly see strategic value in investing in a range of U.S. businesses. With capital in relatively short supply, this is great news for U.S. businesses. Many of NEA’s portfolio companies have received capital from Chinese investors, and in our experience they add value far beyond capital.

Startup companies today have a global component to their business plan from day one; this has been one of the most interesting shifts we’ve seen during the last decade. Groupon is case in point. To the extent a company is eyeing China as an end-market or supply-chain, Chinese partners can help the company navigate the web of relationships and offer guidance during the negotiation process. For example, Suniva, our U.S. solar cell manufacturer, just closed a round of financing with significant participation from its Chinese suppliers and buyers.

The issue with Chinese investment is finding the right partners. Navigating the region’s capital sources is complicated, more so than domestically. This is one of the reasons NEA has expanded internationally. Our startups compete in a global market and, to help our portfolio companies, we needed a presence on the ground in emerging regions. Fundamentally, venture capital is undergoing the same transformation investment banking did in the early 1900s led by John Pierpont Morgan himself — it is institutionalizing from a boutique business into a multinational effort. NEA has developed the capability to identify pools of capital, partners, buyers, suppliers, regulators and so forth in emerging regions for our companies, assets inaccessible to other venture firms.

CHINESE INVESTORS INCREASINGLY SEE STRATEGIC VALUE IN INVESTING IN A RANGE OF U.S. BUSINESSES.

Are there private Chinese investors or is all investment abroad done by the Chinese government?
There are many private Chinese investors. For these investors, investment decisions are made no differently from private investors in the U.S. The Chinese government plays a role in those transactions to the extent that they could potentially influence the state-owned banks to be strict or loose in extending loans to private investors in their overseas investment activities. It’s worth noting that in recent years, we have seen Chinese banks increasingly supporting private clients in making investments overseas. For instance, SolFocus, an NEA portfolio company engaged in the design and manufacture of CPV (concentrated photovoltaic) modules, received an investmentfrom a purely private domestically listed Chinese company. This company ultimately became its parts supplier and distributor in China.

Do: Buy gifts. While this practice is shunned in many western business cultures, it’s welcomed in China. Beware however; your gift should reflect the status of its recipient. If asked by your Chinese counterpart what you would like as your gift, don’t be shy, but make sure that the gift you choose is China specific.

Don’t: Lose face. The concept of ‘face’ is all-important in China. Face roughly translates to honor, or a person’s reputation. Once this cultural redline is crossed, you might as well pack your bags and come on home.

Do: Hand your contacts your business card using two hands. If you write on a card that was handed to you, or put it away without first closely examining it, the meeting might be over before it starts.

Don’t: Be informal. You are not an individual; you are your company’s representative. Speaking out of turn, or making jokes will be frowned upon.


Most of the media coverage about China has a fear-based undertone. You can almost hear the cry, “The Chinese are coming…” Yet when you look at foreign direct investment, China including Hong Kong and Macau has only 6% of the global share. Compare this figure to England at 45% in 1914 and the U.S. peaking at 50% in 1967, and a different picture is painted. Is the fear over China much ado about nothing?

The fear-based undertone in much of the media coverage about China’s growth is not unlike the media portrayal of Japan’s overseas asset grab in the 80’s. Even worse, you see some denial in the U.S. press about the true capabilities in China, writing off the Chinese as simple copycats and weak in innovation. The English Parliament in the 19th century propagated a similarly false view of American innovation calling us “a nation of counterfeiters.”

Rather than focusing on fear and denial, I believe the more Chinese companies are integrated into in the worldwide economy, not just as suppliers, but as customers and owners as well, the more responsibly they will act as a natural consequence of protecting their own interests. Weak intellectual property laws in China, a weathered complaint of many U.S. companies, have been strengthening as their market becomes more integrated. That very same process occurred as the U.S. emerged as an economic power. I agree with President Obama that China’s “peaceful rise” is good for the U.S. and that the two countries ultimately have a huge stake in each other’s success.


You are also investing in China. What types of companies are you investing in China?
Since 2004 we have invested over $300 million in almost 30 companies in China across a range of sectors including semiconductor, consumer technology, financial services, cleantech, and healthcare. Our strategy favors industries undergoing transformation, with a focus on companies with not just innovative technology but also highly scalable business models. For example, healthcare is going through major structural changes as it shifts from a 100% state-owned entity to a more diverse ownership model. We like cleantech because China is not only the world’s foremost manufacturing base for renewable energy, but is also potentially the largest market, with the government setting a hard 20% renewable energy target for 2020. We also continue to like the broad consumer space as the country’s economy evolves from being export driven to being consumption driven, and at an especially accelerated pace since the global financial crisis in 2008.


How do you cope with the uncertainty risks in the Chinese market, such as government interference, competition from government owned companies, and changing rules that seem to be stacked up against foreign companies?
Like anything else, you need to understand your environment. For instance, investing in alternative energy in the U.S. is a very complicated endeavor with competition from government regulated entities and constantly changing policies that don’t always seem fair to the new entrant. Sound familiar? In our energy practice, NEA spends a lot of time on Capitol

It’s no different in China. At NEA, we help our companies build relationships with Chinese regulators and we work hard to maintain them. One of our venture partners, Songde Ma, was the former Vice Minister of Science and Technology for China. This helps the NEA community grasp the fundamental motivations behind policies that may otherwise seem befuddling or simply nationalistic. If you understand the intent behind policy, it’s easier to demonstrate commercial strategies that are closely aligned with the government’s objectives.

For example, a cleantech company in our portfolio recently received invitations to open factories across China. Eager to develop cleantech both as a political and an economic mission, the government in some of these locales used their influence on local banks to make sure the company receives favorable terms with local credit facilities.

The fact is, the Chinese government is like the U.S. government was in the post World War II era — the best and brightest are attracted to public service. They are very effective to work with if you foster the relationships.

What advice would you give to U.S. companies looking to expand in the Chinese market?
Those looking to expand into the Chinese market must first gauge the strength of the opportunity. China is certainly a massive market, but in many industries, China is also one of the most competitive markets. If the market opportunity is there and the organization has the ability to scale, then start building the relationships you’ll need to succeed. Find experienced, proven, referenceable partners that can guide you. It’s also critical to localize your team in China fairly quickly. A strong on-the-ground presence will make all the difference.

Post By Harry_Weller (1 Posts)

Harry WellerHarry Weller joined NEA in 2002. He focuses on technology and renewable energy investments, as well as NEA’s activities in China. He is a director of Availink, Boulder Wind Power, Clearspring, Groupon, MediaBank, OPOWER, ScienceLogic, SolidFire, Sprout Social and Suniva. Harry served as an officer in the U.S. Navy and received his MBA from Harvard Business School and his bachelor’s degree in Physics from Duke University.

Network Magazine named Harry one of the “50 Most Powerful People in Networking”, Washingtonian Magazine named him one of the region’s “Titans of Technology”, and he has been honored numerous times in Forbes magazine’s “Midas List”.

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