Insight Q1 2015

John Gruetzner, Intercedent Limited Key Note Speech made in Toronto March 3, 2015 at the 1st Canadian Crowd Funding Summit

My presentation today is about why and how China and Asia can provide your Crowd Funded start-up firms sources of capital, manufacturing capacity and additional markets.

It is important to put the internet and its impact on global commerce in context. When I was first accepted to university in China in 1982 the amount of information available about China in Canada was so scant that I did not even know where Nankai University where the Chinese Embassy assigned me to was.

Now it would take a few seconds on a smart phone to find Nankai’s website.  Only after failing to locate any information about the University in the Pratt Library over the weekend was I able to reach the Chinese Embassy and find out it was the third best university in China and located in Tianjin.  Now there are over 10 million domain names with the ending in Dot CN.

The Global marketplace and Village market should be treated as two distinct concepts. A Global Market unlike a village market in a small town operates with more power now due to the internet but is still a market place where people must start to do business with strangers. This is dramatically different approach from the village farmer’s market where people are very informed about which vender has good meat and which one does not.  

The lack of informal information that exists locally is a trade-off against the wider variety of opportunities that exist globally.

This Global marketplace, however as an aggregate, is still a constructive and also limitless source for a number of the different needs that arise as you grow from a funded idea to a company offering a product to the marketplace. China or Asia are potentially a source of capital, but of equal important also a source of production and finally post-production a potential market place to sell your new company’s goods and services.  

We must clarify that a village is a place for cultural and social interaction. A Global marketplace is a place for commerce and is a place where even local cultural values that are important to the village are often subjugated to the desire for profit.

We are often so focused on cultural sensitivity that we get taken advantage of commercially in this global market.

We do business increasingly in a world where ideas and products can be copied in real time before an under resourced company can mature quickly enough to get first to market advantage globally.   

About 15 years ago I was advising Silicon Valley funded firm on how to implement the company’s vision for a world trading network in China. Here in Toronto I met a young chap named Ma Yun. His vision was to put every Chinese company on the map. Despite the strange name of his company, badly printed business card with his friend’s apartment in Edmonton as the Canadian HQ there was something unique about him-He was Jack Ma the founder of Alibaba.  When I suggested to my client we consider working with him I was told the internet did not need partners. This then as is still the case now is wrong.  Part of my client’s miscalculation was also based on the idea that a global trading platform was a unique idea.

China for start-ups relying on Crowd Funding provides via smart phones and internet accounts the potential for over a billion partners with via cellphone and over 600 million via the internet.  The World Bank in a recent report “ Crowd Funding’s Potential for the Developing World” estimates that by 2025 China’s crowd funding could be as much as 46-50 US$ Billion. Canada’s traditional venture capital market last year was estimated to be $ 2 billion. 

More realistic numbers are found in these facts. Chinese citizens are currently permitted to spend up to US$ 50,000 dollars a year outside of China. If there is one difference between Chinese consumers and Canadian consumers is that Chinese people have savings to spend on your projects and many Canadians may be investing on their visa credit in lieu of shopping. Most of these off-shore purchases done by Chinese are currently processed by Credit card and Unipay.  China and Canada are starting later this year to settle trade accounts in RMB. It is predicated by some banking experts that RMB will be fully convertible by 2020 with 2025 being more realistic a target if you are conservative.

This means that in certain cases there may be an advantage to including a description of your company’s product or service in Mandarin. China’s regulatory environment for Crowd funding coupled consumer scepticism indicate that pre-selling a product for future delivery may be short term more compliant with government policy and more acceptable approach for a product that is looking for thousands or tens of thousands of supporters.

Mandarin pages will permit you to access capital outside of Canada but also amongst the 50,000,000 million overseas Chinese.  Chinese Canadians, especially from China, often are well financed and looking for more ways to become involved in the local economy as they migrate their business and family lives over time to become full time residents.

It may also make sense to direct ads or search optimization to Baidu or Google Chinese.  While it is too early to post your project on Demohour or Dreammore in China there are a number of sites in HK, Taiwan, Japan and Singapore that are worth exploring.  China’s regulatory environment is maturing and at this stage I would not advise posting a project on a crowd funding site within China for that reason.  The small number of sites operating in China and the lack of consumer trust in local entrepreneurs amongst the Chinese citizen’s may play in your favor.  Chinese consumers, more so than their Canadian equivalent, would want to see a major shareholder or member of the Board with traditional credentials to verify the funding opportunity.

The most important concern, and this applies to your site in Canada as there is no Electronic Great Wall around Canada, is to post your project in a way that protects your idea and intellectual property.  The first rounds of internet companies in China were built on the “C to C” or copy to China model. Worldwide cyber theft is becoming a reality so it might make sense to keep your most sensitive technical information on an air-gap computer.  The Chinese government is also keen to develop “indigenous technology” and even funded as example of the depth of capital available and breadth of interest in localization a project for close to US$ 10 million dollars in 2011 to develop over 3 years a local ballpoint pen.

China’s private sector and state sector do not lack capital. There is a domestic industry that is both transparent and also below the radar that monitors technology development worldwide. 

Even if China or Asia is not the solution to your financing it may be a good place to source low cost products.  Whether or not and when you should source off-shore depends on a number of factors that include the status of your company, alternate sources in Canada or US and amount of product being sourced etc.  If there is a rational business case for sourcing in China then there are a number of internet options including Panjiva, Tradeeasy, and Global Sources etc to assist this process.  An important part of the process is to make sure you have insurance on delivery and also pay a company like SGS to do quality control prior to shipment if you can afford to oversee this directly on the ground.

Government agencies such as Hong Kong Trade and Development Council, Taiwan’s trade offices and Chinese Embassy and Consulate can provide some assistance.  There are also professional intermediaries and trading companies that will source manufacturing expertise. 

If technically or physically possible to source components for your product from more than one source and integrate in Canada this maybe along with patents and the terms and conditions of your sourcing agreement may be the best way to protect intellectual property theft.  Another approach is to license the company that makes your product the rights to sell your product domestically to the company you retain to do your manufacturing.

There are of course a number of other traditional channels to sell your products back to Asia or China. One way is to sell your business model with current products and future upgrades back to the region as a separate operation that operates under a different name in a specially mandated territory.  This permits you to raise additional capital without dilution but as the best way to protect your IPR is to service the market it will provide revenue from a market that for many start-ups is too distant of a prospect to realize.  China is as we know the second or possibly the largest economy now.  It is not an easy market nor is an impossible market to access.  One should also a few words of caution.  If I could figure out how to do business with China, especially now that we cannot breathe many days in Beijing, and not live there then I would have done that by now. 

The internet is a cheap and fast bridge to the Global marketplace but nothing can substitute the role of being on the ground as ultimately for real growth you will need a P to P or people to people model. As a China business adviser with over 30 years of experience there I would caution that the biggest mistakes are and will be made when you do something in China that you would not agree to in Canada. This simple rule is the basic rule to guide success.

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