1. 2013 U.S.-China Legal Exchange
Legal Aspects of Entrepreneurship in China
James C. Chapman
Partner, Bingham McCutchen LLP
December 9, 2013

2. Why China?
“It’s dynamic, messy and very different. But Silicon Valley aside, there’s
no better place on earth for tech right now.”
- Kai Lukoff, TechCrunch.
“Every year another wave of “sea turtles” — Chinese who have studied
or worked abroad — returns home. Many have worked with the world’s
best engineers at MIT and Stanford. Many have seen firsthand how
Silicon Valley works.”
- The Economist, March 2012.
“Success is where preparation meets opportunity.”
- Scott McNealy, former CEO of SUN Microsystems.
• China faces big challenges in many areas including communications,
logistics, healthcare, food and agriculture, water, pollution control
and abatement.
• China has a very talented and hardworking population.
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3. The Entrepreneurial Ecosystem
Comparison — China and U.S.
Venture Capital
• 2011 U.S. — $28.4 billion in 3,673 deals (PWC Coopers/NVCA Money Tree
Report)
• 2012 U.S. — $26.5 billion in 3,698 deals approx. 10% decline
• 2011 China — $6.44 billion
• 2012 China — $4.94 billion significantly down from 2011 when $6.44 billion was
invested. The greater Beijing area captured 28% of the investment dollars
followed by Jiangsu province, Shenzhen and Shanghai.
• 2013 — through the 3rd quarter, VC firms raised only $1.62 billion and invested
$1.74 billion in start-ups
• Consumer Services led the way followed by information technology
and business and financial services.
Source: Dow Jones Venture Source, PWC MoneyTree Report.
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4. Ecosystem Differences
United States
• Culture — there is a tremendous amount of knowledge sharing,
collaboration and mentoring; there is a culture of trust that encourages
people with diverse skills to meet, come together and take risks together.
• Universities — most universities have good technology transfer programs
• Service Providers — attorneys, CPAs and consultants understand start-
ups and are able to accommodate their needs
• Incubators and Accelerators — these are plentiful and the numbers are
growing rapidly, i.e. Plug N’ Play Y-Combinator
• Ease of starting a business — can form a corporation in one day and
open a bank account in one day
• Government — little involvement
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5. Ecosystem Differences
China
• Culture — knowledge is carefully guarded, high suspicion of copying, little
or no toleration of failure. However, those who make it big are “rock stars.”
• Universities — technology transfer programs are undeveloped or
nonexistent
• Service Providers — few attorneys, CPA’s, consultants understand start-
ups
• Incubators and Accelerators — are growing in number. China is building
150 start-up incubators for students returning from overseas.
• Ease of starting a business — challenging and time consuming. Opening
a bank account can take months.
• Government — major involvement. Major source of funding, cheap office
space, tax incentives. However, the process is tedious and time
consuming, relationship driven, bureaucratic reporting requirements. In
2010, Chinese Government provided $4.16 billion in loans to new
enterprises (a 65% increase over 2009).
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6. Start-up Challenges in China
• Pervasiveness of copycats — history of copying; copying Internet
business models is easy and cheap; lack of strong IP enforcement
• Lack of experienced talent especially at the CXO level. In recent study of
top engineering students, the top career choice was government (52%); in
U.S., government is 5%. In China the number interested in launching or
joining a start-up is 3%. In the U.S., the number is 22%.
• Cultural differences — lower appetite for risk, intolerance of failure,
unwillingness to share, lack of serial entrepreneurs, inability to offer
competitive salary, stock options ineffective at attracting and incentivizing
employees
• Different Exit Environment — in China 69% of exits are IPOs; in the U.S.
90% of exits are M&A
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7. Exit Environment
IPO Market in China
• China’s stock markets declined from 2011 to 2012 and again from 2012 to
2013.
• 2012 — 46 IPOs of venture-backed companies, a major drop from the 99
venture-backed IPOs in 2011. This accounted for approximately 77% of the
exits. In October 2012, The Chinese Securities Regulatory Commission
suspended new listings in China. 49 venture-backed companies went
public in the U.S.
• 2013 — during the first three quarters, there were only 3 IPOs of venture-
backed companies in China. There were 57 in the U.S.
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8. Mergers and Acquisitions
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Comparison of M&A Psychology — U.S. and China
United States China
Speed If do not acquire, competitors
will.
Due to regulatory complexities
and barriers to M&A, why
acquire when one can copy?
IP Can be acquired for strategic
purposes, offensive or
defensive.
IP has low perceived value.
Penalties for infringement are
too low to deter.
Talent In war for talent, M&A allows
one to acquire valuable
developers, managers and
entrepreneurs.
Low value, high turnover.

9. About Jim Chapman
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James C. Chapman
Partner
Corporate Practice Group
james.chapman@bingham.com
T 650.849.4850
James C. Chapman focuses his practice on securities law, venture
capital, mergers and acquisitions, and international business
transactions. He has more than 25 years experience in corporate and
securities law and has been involved in over 250 mergers, acquisitions
and financing transactions. These transactions have included public
offerings, private placements, debt financings, venture capital
transactions, stock sales, asset sales, mergers, reorganizations and
recapitalizations.
James also has a significant background in international transactions,
particularly dealing with China and Chinese-related companies. These
transactions include both assisting Chinese companies invest and raise
capital in the U.S. and helping U.S. firms make investments and
operate in China. From the media industry to the pharmaceutical
industry, he has been engaged in working with clients on numerous
China-U.S. transactions and matters.

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