Future of Crowdfunding in China
Equity-based crowdfunding is set to alter the landscape of startup financing forever. Perhaps the success of donative platforms such as Kickstarter and Indiegogo triggered the regulatory reevaluation of general solicitation, or maybe the American entrepreneur’s perpetual cry for capital finally caught the right ear. Either way, the increasing popularity of alternative startup financing represents a victory for investors and entrepreneurs alike, razing barriers to entry and supporting innovation in the process.
But what about crowdfunding internationally? More specifically, what about China? China has a tendency to implement Western trends to bolster economic development, but the potential of crowdfunding in China remains uncertain. Few platforms have emerged in response to this perceived market opening with sites like DemoHour, SeedAsia, Dreamore, and Emie leading the pack. Earlier this summer, Chinese startup crowdfunding site CTQuan raised $4 million. CTQuan envisions its future as shifting away from traditional brokerage services:
“In the earlier deals we were just brokers helping foreign startups find Chinese technology companies and then getting them to invest… In later deals we will get to be co-investors,” says Li Xiaoning, CTQuan’s chief executive.
In theory, this hybrid business model would maximize CTQuan’s market functionality and potential profitability, enabling the CTQuan to support early stage startups in a variety of ways.
Even with the seemingly promising position of Chinese startups like CTQuan to push crowdfunding into the mainstream, several challenges must be overcome.
- China’s weak intellectual property laws do not provide adequate protection for entrepreneurs. Without a legal system that protects new ideas, the financial incentive behind innovation is effectively eliminated. Entrepreneurial ventures already incur plenty of risk; when competitors or market dominators can steal ideas with little to no retribution, the viability of new ventures is degraded.
- China’s success-obsessed cultural landscape is fundamentally at odds with the prevalence of failure in startup ventures. When such high risk is limited to a handful of experienced investors, the entrepreneur that fails may still maintain his or her social dignity. However, the public exposure of crowdfunding may discourage humiliation-averse entrepreneurs from participating.
The future of crowdfunding in China depends in part on how investors and entrepreneurs balance these societal obstacles with the potential benefits of crowdfunding.
Unlike China’s domestic ambivalence towards crowdfunding, Chinese investors are pumping money into the crowdfunding startup scene here in the United States. A skeptical perspective may question the motives behind investments from China. For example, if a Chinese company decided to invest into an American crowdfunding platform, there’s the issue of whether this represents an opportunity for the Chinese investor to learn about the crowdfunding space and implement its own version in China. When and if Chinese firms invest with the intention to exploit intellectual property, they risk conflict with the recipient company, a tainted image, as well as lost opportunities for long-term presence in the host country. Conducting business with shortsighted goals such as technological exploitation is a policy that threatens the sustainability of Chinese investments abroad. Nevertheless, such strategic considerations are a legitimate concern for American startups to evaluate before accepting Chinese capital.
Although crowdfunding is a relatively new phenomenon in China, another (more unique) approach to early stage financing targets the type of currency… or in this case, lack thereof. David Shin recently launched Cryptomex, China’s first Bitcoin-based equity crowdfunding platform. Without the regulatory oversight for virtual currency, deals could be carried out seamlessly, especially in cross-border transactions. Cryptomex also seeks to address the trend amongst Chinese Bitcoin holders to hoard instead of spend by promoting them to invest in China’s entrepreneurial community. On the flipside, even the name “Cryptomex” sounds like a villain from the dystopian future.
The widespread popularity of Bitcoins certainly indicates its mass appeal, but the dark side of virtual currency will most likely subsume any chance for longevity. That being said, trailblazers such as David Shin account for an important part of the entrepreneurial ecosystem. These bold, tech-forward types of companies (even when still impractical) epitomize the heart of entrepreneurism: to push limits, break down barriers, and ceaselessly propel innovation.
As China continues to develop economically, attempting to transition its global position from a manufacturing-based to an innovation-based economy, a new class of entrepreneurs and investors will emerge. Crowdfunding, particularly with equity, may equip China with an additional tool to facilitate such progress, especially if the overwhelmingly positive reaction to crowdfunding in the West serves as any precedent.
With the deep pockets and bulging wallets of Chinese investors, the startup scene here in the United States may witness an influx of cash. In fact, it already has: in just the first quarter of 2014, Chinese firms have invested upwards of $6 billion in the U.S. tech sector. As the American tech sector continues to magnetize Chinese capital, said investors may forgo homegrown opportunities for a slice of the American startup pie. These Chinese investors may also function as mentors for startups looking to expand business into China’s market. Joe Medved, a partner at SoftBank Capital, encourages startups to take on China:
With its advanced mobile infrastructure, Asia ranks as one of the leading mobile markets, especially for companies that have a strong foundation in advertising, gaming and commerce…. Successful expansion in Asian requires the right partners to break in. Many Asian firms are exploring international partnerships to bring technology innovations to their countries.
As with any mutually beneficial business relationship, capital and innovation must flow both ways: I do for you, you do for me. But nobody can do anything without credibility and an introduction. That’s where SeedInvest comes in. As SeedInvest continues to expand its platform, an Asian outpost may be the logical next step, facilitating cross-border deals as the common link between entrepreneurs and investors in both China and the United States. Stay tuned!
Monk Seaman | SeedInvest
Monk Seaman graduated summa cum laude from University of Pennsylvania with a BA in International Relations, concentrating on U.S.-China relations. He wrote his honors thesis, entitled Risky Business, on the perceived national security threat of Chinese business operations in the United States. In the course of his studies, he spent two full summers Beijing, one of which under a signed pledge to speak only Mandarin for the duration of the trip.
This post was written by James Han on August 14, 2014
Future of Crowdfunding in China