Introduction
The purpose of this paper is to analyze the intention of American Startup Capital Ventures (SCV) to invest in the Chinese Zero2IPO. SCV is headed by managing partners John and Danny, both of whom have experience of geometrically increasing the revenues of technology startups. Zero2IPO is a Chinese market research firm that provides insight into the demand for venture capital in China. SCV is currently at a point of intersection of two influence figures – a prominent investor Charlie Eubanks and the CEO of Zero2IPO Gavin Ni. Both pressure SCV to invest in China and Zero2IPO specifically. Understanding the parameters that have to be considered for entering Chinese market as well as the strengths and weaknesses of SCV is essential in ascertaining the arguments for and against investing in Zero2IPO.
Parameters for Entering Foreign Markets
The first parameter that has to be considered is the availability of startups that would allow a Venture Capital firm to perform its investment work on a long-term basis. Due to the saturated status of large Asian markets, they have a common feature, which is a large presence of high-risk enterprises offering explosive growth prospects (Wen et al., 2018). However, their abundance is also indicative of a high chance of partnering with an entity that will experience only short term growth or will yield no successful return on investments. Therefore, the firm should consider how fast it can find enterprises capable of long-term cooperation.
The second parameter is the firm’s ability to handle competition. Startups in emerging markets are numerous and have a large selection of venture capital firms to choose from. This implies that in order to stay competitive in this market niche a firm has to distinguish itself among its competitors. Furthermore, China is characterized by the strong influence of state-owned enterprises, which also seek to provide startups with venture investment. This circumstance presents an additional challenge to managing competition.
The third parameter is the readiness of the firm to accept local business norms. There is a multitude of differences between ways Chinese and Americans conduct business. Cultural norms also determine how business success is classified, which can potentially lead to miscommunication between startups’ owners and venture investment firms. The less flexible a firm is in terms of adapting to local business practices, the more likely it is to impose domestic norms on local startups. If culture differences do prove too complex to be resolved, the success of the investment partnership will be compromised.
The fourth parameter is the level of governmental intervention in the economy. The more the state attempts to influence private businesses, the less control the firm will have over its investments. In extreme cases, it might take the form of the firm’s assets being frozen without an opportunity to pull out from the market. The more the firm is willing to bear such risk, the more resilient it will be towards sudden intervention policies. Considering that long-term investments spanning decades are preferable, their success is highly dependent on the firm’s tolerance to governmental meddling.
The fifth parameter is tax pressure in the chosen market. As much as regulatory practices may stimulate foreign investors to cooperate with local startups, tax policies may compromise the benefits derived from investing in highly promising enterprises. Similarly, the absence of certain taxes might encourage more intense entrepreneur activities, thus providing the firm with more partners and opportunities. Subsequently, choosing a market with a welcoming tax environment is essential for ensuring long-term profitability of venture investments.
The sixth parameter is the presence of a legal system with favorable conditions for foreign investors. Each country has laws regulating business practices on its territory. The less bureaucratic complications are involved, the easier it is for companies to cooperate. Legal system determines the status of foreign investors and outlines their restrictions and capabilities. In order to successfully invest in local startups, the firm has to be aware of its legal status and corresponding opportunities.
SCV’s Four Strengths and Two Weaknesses
The most evident strength of SCV is its geographic origin. Being an entity with a history of work with American enterprises, it possesses certain investor appeal to local startups. Generally, experienced US firms entering local markets are seen as more financially stable in comparison with local venture capital firms. For the reason of positive public perception, SCV is likely to receive a stable supply of business offers and investing opportunities. Had it not been a US enterprise, it would have likely had had more complications entering the market or getting noticed by Zero2IPO.
The second strength of SCV is its experience on the market. SCV has been operating continuously since 2005, looking for undervalued organizations and helping them generate larger revenues. By the moment, the firms turned to the Chinese market, it had already accumulated a portfolio, containing numerous successful cases. The managing partners of SCV are experienced managers with appropriate reputation. Having worked with many boards, they have knowledge of the limiting factors in any business and decisions needed to alleviate them. Any investors with such experience and expertise will receive substantial attention and be a welcoming voice in younger business settings.
The third strength is that SCV is backed by Charlie Eubanks. As he is one of the anchor investors, he is in a unique position to see the firm’s financial situation. The idea of investing a significant proportion of the portfolio in Chine belongs to him. Eubanks has comprehension of proper structure of investing portfolios as well as potential investing targets. He can offer insight into any complications and opportunities the firm might encounter in China, which John and Danny might not see on their own. Finally, Eubanks is a wealthy investor whose money are in demand by other venture enterprises, which adds further credibility to SCV.
The fourth strength of SCV is its small size, which allows it to exercise flexibility in decision-making. The firm is headed by two managing partners, thus removing the necessity to call large board meetings. All important communication can be handled via a single phone call, which is a privilege not possessed by larger entities. The fact that such a small firm has produced results comparable with larger competitors is a definite selling point that is likely to attract many business opportunities.
The main weakness of SCV is its lack of experience in China. The firm’s eye-catching portfolio consists primarily of American entrepreneurs. At the same time, an important part of SCV strategy is its mentorship ability, yet it is admitted that the managing partners are concerned with cultural differences. The lack of experience communicating with Chinese business representatives might undermine John’s and Danny’s mentorship. If at any point, SCV is not satisfied with their partners’ performance, they might impose American business practices, thus potentially creating a conflict of cultures.
The second weakness of SCV is its high dependence on third side capital and contracts. The firm experiences both domestic and foreign pressure to adjust the strategy. Charlie Eubanks exerts substantial influence on the firm since a sizable portion of SCV’s portfolio belongs to him. Meanwhile, Gavin Ni could use the offers of SCV’s competitors as leverage against John and Danny. Essentially, the managers have found themselves at a disadvantage since they have to satisfy conditions from both sides. However, the responsibility for any error will be placed solely on John and Danny.
Investing in Zero2IPO
Investing in Zero2IPO has a number of benefits for SCV. First, it is the fastest way of entering the Chinese market. The current point in time is especially advantageous since SCV has both the backing of Eubanks and the offer from Zero2IPO. As the Chinese market becomes increasingly saturated, delaying entrance will make entering the market more complicated in the future. Second, there is a small probability of the investment failing to meet its expectations. Both managers admit that their greatest concern with Zero2IPO is that it will not yield high enough return of investment, while at least some success is assured.
Third, Zero2IPO is an objectively attractive investment target due to steady growth and its sources. Three revenue streams hedge the company from any sudden financial problems. In case one source is compromised, the company will remain profitable due to income diversification. Furthermore, Zero2IPO is aware of all significant developments in the sphere of venture capital, which enables it to foresee most negative changes. Fourth, Zero2IPO has insight into the demand for venture capital among Chinese enterprises. Working with it would provide SCV with a stable supply of customers. Finally, Zero2IPO hit the broader market due to its status as a services company. Had it been a technology exclusively company, it would have had fewer chances of success.
The first argument against investing in Zero2IPO is that it is overvalued. John has noted himself that tripling its revenues is not likely, and the overall performance might be mediocre. Besides, tricking American investors into supporting overvalued Chinese enterprises is a standard practice in China. Second, Zero2IPO does not meet SCV’s criteria for the target niche. SCV specializes in technology enterprises, while Zero2IPO focuses on services, which might compromise John and Danny’s expertise. They know how to advise a company on handling issues related to technology, but are not as well-versed in services. Third, Zero2IPO is a relatively young company with an inexperienced manager, who might not be able to hit the financial target set by SCV. Finally, SCV had better alternatives where risk-reward ratio is more favorable, although they are not part of the Chinese market.
Conclusion
Altogether, it should be evident that SCV’s managers are not as interested in investing in Zero2IPO as third parties are. There are numerous risks relating to Zero2IPO’s business model and market history that dissuade SCV from partnering with it. Nevertheless, SCV does have expertise and experience that are in demand in Chinese technology market. Even though Zero2IPO is not a technology company, partnering with it will give SCV exposure to other Chinese startups, this way reaching its intended market niche. Therefore, SCV should invest in Zero2IPO, as the long term benefits outweigh the risk stemming from Zero2IPO’s potentially mediocre performance.
Reference
Wen, J., Yang, D., Feng, G. F., Dong, M., & Chang, C. P. (2018). Venture capital and innovation in China: The non-linear evidence. Structural Change and Economic Dynamics, 46, 148-162. Web.