Report summarizes the start-up and growth company finance market in China. The report consists of analysis and views of the present state of the start-up/growth company finance market in China as well as views of the future trends and implications of those. Then, advise to the Finnish public sector, companies and VCs is provided.

1. China Investment Environment
Start-up/Growth Company Finance Market in China

2. Contact information
Mikko Puhakka
Lion Partners Limited
mikko@lion-partners.com
Lion Partners
Lion Partners is a Beijing-based investment focused consulting company serving both Chinese and
international clients.
Tekes – the Finnish Funding Agency for Innovation
Tekes is the main public funding organisation for research, development and innovation in Finland.
Tekes funds wide-ranging innovation activities in research communities, industry and service sectors
and especially promotes cooperative and risk-intensive projects. Tekes’ current strategy puts strong
emphasis on growth seeking SMEs.

3. 1
Executive
Summary
This document summarizes the start-up
and growth company finance market in
China. The report is based on desktop
research and interviews with VCs
working in the Chinese investment
environment, and start-up and growth
company CEOs who have experience
from getting finance from China, as well
as Chinese investors who have invested
in Finland. The report is further
complemented by comments from the
Author.
The report consists of five parts. First,
analysis and views of the present state
of the start-up/growth company finance
market in China are presented with
comments. Second, geographical
considerations in select cities are
summarized. Then, advise to the
Finnish public sector, companies and
VCs is provided. Further, views of the
future trends and implications of those
as well conclusions are presented.
President Xi Jinping announced during
APEC 2014 that China will invest
abroad 1,25 trillion USD in the next 10
years. However, it is notable from the
various VC interviews and statistics that
OFDI is still a challenge to most
Chinese investors. Considerations have
been gathered to suggest how to
approach this when seeking finance into
Finland. Unfortunately Finland is still a
net investor to China. Chinese
cumulative investments to Finland are
around 100 million euros vs. over 10
billion euros investments from Finland
to China.
Examples of the type of investments
taking place to Finland (2013-2014)
cover a range of investments from M&A
to corporate investment to VC
investments. So whilst the numbers
might still be small, the full range is
available in theory for Finnish
companies. Most companies have been
satisfied with the cooperation with
investors after the investment despite of
some natural challenges when dealing
with different cultures.
As market entry to China typically goes
hand-in-hand with considering a
Chinese investor comments on how to
approach this are covered through the
report.
One thing is certain; dealings with
various types of Chinese investors will
only increase in the future so Finland as
a country, Finnish companies and
Finnish investment community need a
strategy for cooperating with Chinese
investors. To do that, more coordinated
activities and efforts in China are
needed. Finland should consider putting
more emphasis in privately owned
enterprises and corporate investors as
they seem to have the most resources
and capabilities in investing
internationally. Currently venture
capitalists are still in pilot phase when
looking at investments from China into
international ventures.
‘’Near to rivers, we recognize fish, near
to mountains, we recognize the songs
of birds’’ - It is very important to make
on-the-spot investigations. (Chinese
proverb.)

4. 2
Present State of the
Start-up/ Growth
Company Finance
Market in China
Statistical Considerations
Overall
Investment
Environment
Globally China has become a net
Overseas Foreign Direct Investor
(OFDI) last year. Unfortunately Finland
is still a net investor to China. Chinese
cumulative investments to Finland are
around 100 million euros vs. over 10
billion euros investments from Finland
to China.
Chinese ODFI in 2013 was 78 billion
euros. 5,5% of this was in Europe.
China’s non-financial ODFI totaled
74,96 billion USD in the first three
quarters of 2014, up 21,6% from the
previous year. The biggest investment
targets were the Great Britain, France
and Germany. The majority of Chinese
investments into the EU have been
relatively small in size but larger M&A
deals are becoming more common and
this trend is likely to continue to
increase in the future.
Europe’s top 5 industries in Chinese
OFDI stock in 2013 were leasing and
business services (21,3%),
manufacturing (20,4%), mining (18%),
finance (16,7%) and wholesale and
retail trade (8,5%).
The OFDI from China was started by
SOE’s and followed by POE’s and
wealthy individuals. Venture Capital
investments from China as well as FOF
type investments into foreign VCs are in
‘’pilot stage’’ but likely to grow rapidly
once enough successful cases take
place and sound working practices with
international counterparts are found.
However, there are considerations in
the VC area that should be noted, and
these are explained later in this report.
In terms of value, SOEs account for
75% percent of the Chinese
investments made globally, but in terms
of numbers POEs have made 70% of
the investments. The most common
investment mode is M&A. More than
four fifths (83%) of Chinese M&A
projects in Europe were concluded
between 2009 and 2013.
The value of overseas assets and
property owned by 25 000 Chinese
companies amounts to three trillion
USD in 166 countries and regions. The
companies have more than one million
employees outside of China.
Investment
into
Start-­‐ups/Growth
Companies
Overall, it is fairly difficult to provide
exact numbers on VC investment in
China as the statistics from different
sources vary significantly. According to
some sources, Chinese VCs invested
13 billion USD in 2011 and 3,7 billion
USD in 2012, but according to Dow
Jones VentureSource 2014 the
investment size was only 6,5 billion
USD in 2011 and 5 billion USD in 2012.
In any case, 2013 was a slow year, and
the Chinese VC investments declined
from 11% in 2012 to 7% in 2013 on a
global scale, amounting to 3,5 billion
USD. For 2014 official numbers were
not yet available, but the outlook is good
and the numbers are expected to go up:
In the first half of 2014, China saw 83
new venture capital funds set up, worth
a total of 6,76 billion USD, according to
data from Zero2IPO Capital. In that
same period, 5,3 billion USD worth of
VC investments were made into start-up
companies in China. (TechinAsia
15.1.2015)
In any case, the Chinese VC investment
is still small compared to the US,
ranging between 5 and 10% of the US
VC investments but already close to
European numbers. From the above
numbers it can also be seen that SOEs
and POEs are much more significant
investors to date, and this should have
an effect also in the strategies Finnish
governmental organizations and
companies deploy to seek finance from
China to Finland.
About one third of all of China’s venture

5. 3
capital investments are made in Beijing,
and a majority of that in TMT. Internet,
eCommerce, Mobile Internet, Chinese
consumer software for the local market
are the main investment targets. The
generic trend for Chinese VCs seems to
be to invest at the second or later
investment round, where the risk of
investment is smaller and exit can be
realized sooner. This of course has an
impact on the size of the investments.
Respectively, Chinese VCs have
historically made very few seed
investments. This may be partly due to
the fact that very few Chinese VCs have
technology/product/market
understanding, a point made also by
Chris Evdemon from Innovation Works.
Mickio Liu, FortuneLink (Chinese VC
that invested in Jolla), also says that
they are looking to invest earliest in the
A round when they are looking for
investment targets in Finland, and that
the target company can not be too small
and should already be established in
the Finnish market. Also, there has to
be clear understanding that there is also
potential in China. He, however,
continues to explain that there is a
difference in market vs. tech focus, so,
for example, in the gaming area many
investors are interested in licensing
games even before they are released.
Angel investors are gaining ground in
China and are filling the gap of Chinese
VCs. 55 new seed funds were started in
China in 2013 alone. The combined
capital of these is said to be over half a
billion euros. (Kiina8 12.12.2014)
In general, angel investors are still
relatively inexperienced and demand a
high stake in the company. There have,
however, been more experienced angel
investors emerging from successful
Chinese companies. William Bao Bean,
SOS Ventures, summarizes; there are
10 000 angel investors in China, so the
number has ballooned over the last two
years, and China has become so
competitive and talent has become so
scarce that the internet leaders have
added the acquisition tool to their tool
box.
Manmeet Singh, Angel Investor,
summarizes that Government/Province/
District/City funding and support for
software, biotech, hardware is available,
but you need a local champion to make
it happen and get the funding. This point
is significant when you consider how to
try to get funding from China. However,
to date nearly all of the companies who
have received money have been
founded by ‘foreigners’ that have
actually been returning Chinese.
Types
of
Chinese
Investors
As can also be seen from the statistics
above, not all Chinese investors are
alike; they can be categorized by nature
and background, extent of experience
and commercial objectives. Also, the
potential to locate investment targets
can be seen as an important factor
when it comes to investment to Finland.
According to the ownership and
corporate governance of Chinese
enterprises, Chinese MNEs with direct
investments in Europe can be divided
into three groups.
Figure 1. Types of Chinese OFDI
investors (EU SME Centre).
State-owned enterprises (SOEs)
Most of China’s state-owned enterprises
are large industrial and service groups

6. 4
belonging to SASAC’s central and local
administrations. In addition, there are
also sovereign wealth funds, state-
owned insurance companies, venture
capital firms, pension funds, research
institutes and government departments
and agencies. The expansion of SOEs
in Europe has been strongly supported
by the Chinese central and local
governments. Most of them often opt for
the acquisition of key tangible and
intangible resources and strategic
assets, mainly through asset
augmenting M&As.
Private-­‐owned
enterprises
(POEs)
Chinese private-owned enterprises
(POEs) have successfully developed
into dominant players in the industries
where the monopoly of SOEs was
removed or waning, such as machine
tools, consumer electronics, telecom
equipment, automotive industry and
renewable energy. Due to the rapidly
growing large-sized home market, these
firms succeeded to acquire the
capability to engage into large scale
manufacturing activities based on state-
of-the-art production facilities and cost
leadership position. The direct
investment of these private companies
in Europe, either through take-overs of
existing European companies or via
greenfield establishments, is strongly
driven by their search for new
technology, well-known brands and
efficient distribution channels.
Individual
and
family
investors
Most of Chinese individual and family
investors are small-sized companies
mainly involved in cross-border trading
activities. These individual and family
investors can often be described as
international entrepreneurs or “suitcase
investors” who are searching for
business opportunities abroad. Such
investors do not necessarily have a
strong business basis in their home
country and most often lack
sophisticated ownership advantages.
The international development of
Chinese entrepreneurs is clearly
illustrated by the surge and expansion
of Chinese private business in Central
and Eastern Europe. Their
establishment in Europe is driven by the
desire to look and find opportunities of
growth in foreign countries as a way to
avoid the saturation of the Chinese
market. Yet, some of these companies
can be considered as “hidden
champions”, as, despite their low profile
in Europe, they are strong family
businesses in China. (EU SME Centre.)
Venture
capital
firms
A fourth category of investors, missing
from the above categorization of
Chinese MNEs, is Venture Capital
Firms. There are a large number of VCs
in China, as well as Angel Investors, but
the latter can be categorized under
individual and family investors.
Remarks
Related
to
Different
Types
of
Investors
Chinese SOE’s and POE’s main
investment model has been M&A taking
control of the investment targets, so at
least partially this is likely to continue to
VC type investments where the Chinese
counterpart is likely to take control at
least in the efforts into China. This has
been seen in even very high profile
cases such as Amazon and LinkedIn
entering China with the support of a
local VC (note: these companies hardly
need Chinese investment, but they
need the access to market and after
having failed to do so on their own they
have turned to local investors for that).
Different investors have different
motivations for making an investment.
For some the goal is purely return of
investment or financial gains, for others
there may be different motivations such
as strategic (access to technology,
access to market, brand). Venture
capitalists by definition look at purely for

7. 5
return on investment. VC/ROI motivated
cross-border investment from China to
international markets has been active
towards the US, especially Silicon
Valley, but to a much lesser degree into
the EU and especially Finland. The
reason behind this is obvious, there are
relatively few cases emerging out of
small countries like Finland that could
provide the type of returns of
investments that these types of
investors are looking for. For these
types of Chinese investors the
motivation to invest outside of the
domestic market can be categorized
into two options: 1) lack of deal flow in
the domestic market, 2) better
opportunities with bigger returns outside
of the domestic market. Investors like to
look at reference cases and examples
that they can duplicate.
As an example of the best investment
from China in recent times, Xiaomi
founded in April 2010 is now four years
later valued at 45 billion USD, making it
the most valuable start-up in the world.
There are numerous similar cases in
China providing remarkable return of
investment for the VCs that can access
these deals. For the top VCs there is
enough quality deal flow in China to be
complemented with the top cases from
the US. Strong support from the
government into innovation and R&D
and the active entrepreneurial
environment in China, the success
cases most likely will continue to
emerge in China. In other words, there
is no strong pressure for Chinese
investors to go abroad. However, once
thinking about expanding operations
some VCs are looking to expand
investment activities abroad, too.
The role of Finland in attracting these
types of investors is in that there are
some unique technologies that can be
capitalized in such as way that they will
bring exceptional returns for the
investors. In reality, a country with the
size of Finland can only provide a
handful of such cases at any given time.
According to Legend Capital (Lenovo’s
investment arm), another possibility is to
work with these types of Chinese
investors in finding technologies and
solutions that in some way support the
existing portfolio companies of the
Chinese investors.
Investment
Process
SOEs are generally seen more
challenging in terms of investment
process and speed. Annabella Fu van
Bijnen from Linklaters, for example,
pointed out in December 2014 at the EU
Chamber of Commerce event in China
that for SOEs the decision making
process is generally more inflexible and
time-consuming due to due diligence
being more extensive and decision-
makers are usually far from the
negotiation table. Also, the lack of
transparency of the process can be
frustrating to the parties. Private-owned
enterprises are generally quicker in the
decision-making process and tend to
rely heavily on advisers to complete the
process.
Fu van Bijnen also listed the general
concerns of Chinese investors. These
included, for example, lack of trust or
bias towards Chinese investors, lack of
understanding of target jurisdiction,
investor needs vs. market practice in
target country, Chinese government
reviews and need for approval (due to
change only to include investment in
sensitive countries and industries), and
integration after investment.
One significant change in the last few
months is the Chinese government
policy change to ease approvals for
foreign investment. Before, this has
prolonged the investment process
considerably, so most Finnish target
companies will be able to benefit from
this change. Only investment into
companies operating in sensitive
industries still need the to go through
the lengthy approval process. The

8. 6
investment process will be described
further later in this report in the section
titled Advise to Companies Seeking
Finance from China.
Commercial
Objectives
The commercial objectives of different
types of Chinese investors also have an
impact on what type of investment they
are looking for. SOEs can be driven by
government directives, POEs by e.g.
gaining market share, value chain,
acquiring IP or Brand, raising profile,
finding resources and assets, or just
opportunity. Gaining access to the local
market and an entry point to Europe
seems historically a dominant
motivation for most Chinese companies
investing in Europe.
According to the European Chamber of
Commerce in China, Chinese
companies invest abroad to obtain
resources (e.g. physical resources,
specific skills or expertise), market
share, and brand recognition in order to
overtake their competition in China.
They also seek strategic assets through
investment abroad to enhance future
competitiveness (ports, airports,
logistics, transport). Specifically in the
EU, Chinese OFDI seeks not natural
resources, but brands, operating
platforms and technologies as well as
market access.
Paradox
of
Risk
Management:
Chinese
vs.
EU
Investors
European VCs want to see main
investments targeted to European
operations of their portfolio companies
as they feel more comfortable in
managing the companies interests close
by but Chinese investors for their own
risk management purposes want to
emphasize their investment into
execution of target companies’ business
in China as they can best contribute to
the success in China.
Main
Mode
of
Chinese
International
Investments
vs.
Domestic
Investments
The Chinese domestic investment
range is the full range available for
domestic companies, everything from
seed to pre-IPO/MBO/M&A. Domestic
investments today for the range of
scope as well as the way they are done
is beginning to be quite, if not
completely, similar if not the same as in
the rest of the world.
Government controlled VCs and Fund
of Funds (FOF) might have large
allocations of funds, but they haven’t
had the need to really think of how
investment processes work making the
practice of working with them quite
challenging, especially for foreign
companies and investors who don’t
understand the nuances of the Chinese
culture. But private Chinese VCs in their
fund raising efforts have had to put
together a solid plan of how they will
make investments and produce profits,
and they have copied a lot of the
working models from the West, which
makes working with them more
transparent and familiar. Chinese VCs
typically invest in a later stage than
European or US VCs since they expect
their return of investment to realize
quicker.
International or cross-border
investments, due to the challenges
(language, culture, juridical, business
culture, inexperience in international or
cross-border investments) that result in
complexities and increased risk limit the
range of investment. Historically the
types of investments the Chinese have
the most experience in and feel the
most comfortable doing, are
investments into infrastructure, natural
resources, M&A (initially started by
SOEs and lately have been followed by
POEs).

9. 7
Chinese VC minority investments seem
to be in pilot phase in Europe, but there
is no systematic presence in this yet,
even though there seems to be a lot of
interest in this in China, the EU and
Finland. It is likely that if the trend
continues, some actors specializing in
China-EU investment will emerge in the
next five years. Some early players are
already in the market looking to claim a
leading position, such as A Capital, with
offices both in Brussels and Beijing and
a 250 million euro denominated fund
with a focus on syndicating European
originated deals with Chinese co-
investors. A Capital’s success cases
from Europe to date include Bang &
Olufsen and Club Med.
Some big name US VCs such as
Sequoia Capital, Draper Fisher &
Jurvetson and European players such
as Atomico and DST from Russia have
successfully invested into Chinese
growth companies, and vice versa some
Chinese VCs such as China Broadcom
Capital have invested in the US (Silicon
Valley) successfully.
Foreign VCs have been involved in
nearly all big Chinese success stories,
such as Baidu, Tencent, Alibaba,
Xiaomi. There can be seen two reasons
for this: perhaps in the case of Baidu,
Tencent and Alibaba the large Chinese
investors were not yet active in this
scale or did not yet understand how
attractive investments these were, and
for later companies like Xiaomi the
reason might be that they want value
add that foreign investors can bring in
the internationalization efforts they are
planning at a very early stage.
Chinese
Investment
into
the
EU
In terms of the EU, Chinese investors
show a preference for investments in
the largest western European countries.
Overall, China sees the EU as a stable
and predictable market and due to the
current downturn of the economic
market attractive valuations also make
Europe a desirable destination for
investments.
Different sources emphasize different
areas of investment, but there is
variation also based on target countries.
Areas of investment include, for
example, technology, infrastructure,
heavy industry, goods manufacturing
and services, including healthcare,
finance, media and entertainment as
well as telecommunications equipment.
Different EU countries are perceived as
offering different strategic advantages in
terms of the business environment they
offer. How Chinese enterprises target
which country to invest in tends to come
down to a number of factors: a) Access
to local market; b) Presence of a local
business partner; c) Availability of
certain technologies; d) Availability of
skilled labor; e) Tax regime as well as
availability of incentives and supportive
policies; f) Logistical reasons; g)
Cultural and language factors. (Chinese
Outbound Investment in the European
Union, European Union Chamber of
Commerce in China, 2013.)
The 2013 Golden Bridge report on
Opportunities for Greater China VC
Investment in European Companies
lists Chinese investors/investments in
the EU and summarizes thoughts of
European companies who have
received investment from China/Hong
Kong as to the success or failure of the
investment process. The report states
that the investment experiences have
been mainly positive, but due to cultural
differences the process of getting the
investment has taken longer than it
would from Western counterparts. This
has also been the response the Author
has received from Finnish companies
who have received investment from
China.

10. 8
Current
Situation
of
Chinese
OFDI
to
Finland
Chinese investors regard Finland very
highly as a source for innovation and a
safe place to invest so this does not
explain the imbalance (it is partially
explained by big investments by large
Finnish industrial companies into China,
but China could easily in theory do the
same into Finland).
There have been relatively few
successful investment cases to Finland
so far. Finnish efforts have been led
mainly by public efforts with relatively
little to show for the work. Despite
attempts to coordinate and get various
actors to cooperate under the Team
Finland strategy, reality is still that there
is competition even among fully
government-funded agencies about
work.
Examples of the type of investments
taking place to Finland (2013-2014)
include Aavi, Progman, IndoorAtlas,
Jolla, Optomed, which cover a range of
investments from M&A to corporate
investment to VC investments. So whilst
the numbers might be small, the full
range is available in theory for Finnish
companies.
Finnish VCs are slowly becoming active
in China trying to establish contacts to
the local ecosystem. Finnish VCs are
frequently visiting China in order to
better understand the local start-up and
investor industry. Many Finnish VCs’
portfolio companies have operations in
China so there is more pressure to
become active in China, but so far the
only VC with actual presence in
Mainland China is Helsinki
headquartered Inventure with an office
in Shanghai. Besides syndicated and
co-investments with Chinese investors,
the Author’s view is that there would be
good opportunities to attract Chinese
investors as Limited Partners into
Finnish funds and via that establish
initial formal relations to China. Further,
China is a good potential destination for
Exits and should be explored more for
that.
Incubators/Co-­‐working
Spaces
In the last couple of years a number of
public and private incubators and
accelerators have emerged in China, at
least in all the main cities with heavy
start-up activity such as Beijing,
Shanghai, Shenzhen and Hong Kong
targeting foreign teams and companies
looking to enter Chinese market. So far
we have not found a single Finnish
team or company participating in these.
From the Finnish start-up perspective
Incubators could be an important
gateway for Finnish companies to gain
access to the Chinese market and to
get funding from China, mainly because
the best incubators provide direct
funding that is rarely available for early-
stage companies from outside of China
and they gain a real understanding that
is needed to access the market, so they
are better equipped to make the
decision of whether to enter the market
or not.
The main areas where incubators
relevant to Finnish companies can be
found are Beijing, Shanghai, Shenzhen
and Hong Kong. In principal there are
two types of incubators, public and
private. Public incubators seem to
typically want “bureaucracy first”, in
other words you have to established a
local presence and set up a physical
business in order to access the
incubator. Private incubators, on the
other hand, are very flexible providing
you a very low barrier to start and you
can scale up and formalize your
operations as need arises. Of course,
some very flexible options are available

11. 9
also from public organizations, such as
the EU SME Centre in Beijing that offers
a hot-desk from a few hours up to a
month, as long as you can provide a
valid visa and a copy of your passport.
The emergence of co-working spaces is
prominent in all hot-spots for start-up
activities, such as Beijing, Shanghai,
Chengdu, Shenzhen and Hong Kong. In
Beijing, for example, there is already a
strong incubation culture in co-working
spaces: there are even cafés, such as
Cheku, 3W and Beta, dedicated to start-
up activity. These cafés aim to link start-
up founders with potential investors and
some even provide office space,
resources and start-up capital.
According to Want China Times, the
municipal government is planning to
develop the area where these cafés are
located into a hub for venture capital
and start-up financing (Want China
Times, 16.02.2013).

12. 10
Geographical
Considerations
There are geographical differences in
where different sectors of industry are
concentrated in China. This also has an
impact on the interest of VCs from
different parts of China, and the
services provided in these areas. Below
is a summary of select hot-spots for
start-up and investment activities.
Beijing
Steve Blank describes in his Huffington
Post blog (29.04.2013): …”what made
the overwhelming impression for me
was finding an entrepreneurial software
cluster on par with the Internet software
portion of Silicon Valley. The physical
heart of the Beijing startups is
in Zhongguancun in the Haidian District,
located in the northwest side of Beijing.
Startups here are primarily in what they
call the TMT (Technology, Media and
Telecommunications) segment. Not only
does Zhongguancun have Chinese
startups, but global technology
companies (Nokia, Ericsson, Motorola,
Sony Ericsson, Microsoft, IBM, Sun,
Oracle, BEA, Alcatel Lucent, Google) all
have offices here or elsewhere in
Beijing.” Beijing is the national hub for
software and TMT in general.
Beijing is the capital with the big C, all
the key decisions happen in Beijing.
This also means that Beijng is a great
place to meet both the leading Chinese
entrepreneurs as well as the top leaders
of multinationals and leading technology
companies, as well as leading starp-
ups. Everyone visits Beijing regularly
even if the operations are based
elsewhere. Beijing is not only a Chinese
hub for business and technology but
quickly becoming a global hub.
Zhongguancun in Beijing is a
combination of science parks and
regional policy and most of the
technology companies in Beijing are in
areas governed by Zhongguancun. In
total there are currently more than 20
000 technology companies under
Zhongguancun’s administration,
totalling revenues of 2570 billion CNY
from January to October in 2014 with
19% year on year increase. They also
recorded profits of more than 300 billion
CNY. Out of the 20 000 companies, Mr
Yang, Executive in Zhongguancun
Software Park, told in June 2014 that
roughly 14% are already mid-size to
large companies that are looking for
internationalization through
investments.
There are three reasons for the success
of Zhongguancun; 1) there is a strong
academic hub with China’s top
universities, Tsinghua and Peking
University as well as many other top
universities and research institutions; 2)
technology and innovation are of
strategic national interest to China, so
Beijing being home to the government it
is natural that the concentration of
renewal and development is in Beijing;
3) success breeds success, growing
number of Beijing based entrepreneurs
have scaled up, become either valuable
listed companies such as Baidu, or the
most valuable start-up globally, like
Xiaomi.
Shanghai
Shanghai is historically a commercial
and financial center of China. Shanghai
is not only the leading container port in
China, but also the busiest container
port in the world in 2013. The top three
industries are retail and wholesale,
financial services and real estate. Other
focus areas are financial services,
logistics and cultural industries.
Shanghai is also one of the main cities
in China for heavy industry. Many
investors see Shanghai as the main hub
for design and related consumer
products.

13. 11
Shanghai is trying to position itself as
the financial hub of Asia, competing
against Hong Kong and Singapore. By
the end of 2013, there were 1240
financial institutions, including banks,
insurance companies and securities
companies, of which 215 were foreign-
invested.
By 2013, multinational companies have
set up 445 regional headquarters and
366 R&D centers in Shanghai. The city
is also the home of the China
(Shanghai) Pilot Free Trade Zone (see
more below). Shanghai is an attractive
destination for Finnish companies also
because the Finnish business
community is the largest in China in
Shanghai, and there are many services,
such as FinChi, available for start-ups
and growth companies. Several foreign
investors summarize Shanghai to be
very different from other areas in China
because it is so westernized. This
makes it easier to operate in China.
Shenzhen
Shenzhen has lately been labeled the
Silicon Valley of Hardware, which has
grown in 30 years from a fishing village
to a 10 million people city, thanks to
being the first Special Economic Zone in
China. Shenzhen is very much the
hardware capital of China, together with
the whole Pearl River Delta.
Shenzhen’s close proximity to Hong
Kong also makes it a convenient
location if you are in the hardware
business. It is also the home to, for
example, the technology giant Tencent,
and a base for numerous other
multinational companies.
Shenzhen is a very good destination for
start-up or growth companies that need
to develop hardware on a budget, since
there are numerous factories and
design firms in Shenzhen that support
agile development and fast production
of even small quantities of hardware
products. There are even generic
designs available for smartphone,
tablet, smart watch etc. hardware and
casing. Modification of existing designs
on the fly is easy together with the
experienced engineers that these
factories have.
Shenzhen is also becoming a popular
place for hardware incubation and
investment. This is an outcome of the
growth and success of the local
hardware industry, and especially in a
situation where low-cost manufacturing
is moving inland, factories are prone to
more co-design processes and
innovation.
Chengdu
Chengdu is rapidly becoming one of the
main technology hubs for China and the
city has ambitious plans to gain
importance on a global scale from just
high-tech manufacturing to software
development and innovation. When
interviewing VCs their first comment
was every time that Chengdu is best for
gaming related development in China.
One of the things that makes Chengdu
attractive for Finnish start-ups or growth
companies is that there is already a
solid presence of Finnish companies in
the city. Like Beijing and Shenzhen, it is
also a base for many multinational and
large Chinese companies, like Intel,
Foxconn, Dell, Philips and Huawei.
Overall there are over 1000 foreign
companies in the Chengdu Industrial Hi-
Tech Development Zone and it is said
that there are over 50 000 companies in
total. Labor costs are still cheaper than
in many other large cities, and there are
many good universities providing a
competitive talent pool.

14. 12
Hong
Kong
Hong Kong as one of the World’s most
significant finance districts is an
attractive option for Finnish companies.
It is fast and inexpensive to found a
company in Hong Kong, taking from a
few days to a week, compared to the six
month to a year process it takes in
Mainland China. Hong Kong is also a
convenient and important gateway to
Mainland China. Further benefits
include the relatively Westernized
culture, English as one of the spoken
languages, and money transfer is quick
and easy to/from Hong Kong and also
relatively easy between Mainland China
and Hong Kong.
Hong Kong’s combined fund
management business amounted to
2,05 trillion USD at the end of 2013 (up
27% from 2012) while assets under
management under private banking
totalled 353 billion USD. Hong Kong is
an important hub for VCs and other
private investors. Hong Kong also has
an active start-up scene with a growing
number of incubators.
Free-­‐Trade
Zones
The China (Shanghai) Pilot Free Trade
Zone (PFTZ) is a free-trade zone in
Shanghai established in 2013. Officially
launched in September 2013 it is the
first free-trade zone in Mainland China.
PFTZ is used as a testing ground for a
number of economic and social reforms.
The PFTZ offers various benefits for
companies and makes company
establishment within the zone much
faster and easier, and there is no
minimum registered capital. According
to the Shanghai Statistics Bureau, close
to 10 000 businesses had registered
within the PFTZ as of June 2014, 661 of
which were foreign-invested
enterprises.
PFTZ also introduces a number of
reforms designed to create a
preferential environment for foreign
investment. As of June 2014, the PFTZ
had finished 51 projects of overseas
investment, foreign investment of 1 272
billion USD covering 14 countries and
regions, mainly in trade, management,
consulting and other service industries.
PFTZ also does cooperation with the
neighboring cities to offer lower cost
options for production, etc. and have
made various policy renewals to ease
import/export operations.
In December 2014 the Chinese
government approved the establishment
of free-trade zones in Tianjin, Fujian
and Guangdong.

15. 13
Advise to the
Finnish Public
Sector, Companies
and VCs
Advise
to
Finnish
Public
Sector
There have been made reports made by
Finnish public organizations regarding
issues and problems related to
attracting investments from China to
Finland. Below there is a summary of a
couple of reports made on the EU level
addressing generic problems.
According to a survey made by the
European Chamber of Commerce in
China, they recommend the following
improvements at the EU/national/local
level:
a) Provide tax incentives It was
commonly stated that the establishment
of tax incentives and preferential
policies to lower costs would work to
encourage greater future investment
from China.
b) Provide better advice and support
in relation to the legal environment
Common recommendations focused on
support and advisory services that
Chinese enterprises felt would be of
assistance in investing in Europe. This
included requests for a centralized
source of EU27 legal, regulatory and
financial information in English,
providing regular seminars on issues
such as tax and labor law and also
providing certain legal and management
training for individuals.
c) Relax restrictions on visas and
work permits Recommendations
relating to the easier granting of visas
and work permits to Chinese employees
were common.
d) Relax labor laws Recommendations
were frequently made relating to the
relaxation of labor laws. It was noted
that in practice this might be easier to
enforce just for expatriate employees,
rather than local hires.
e) Provide preferential policies for
HR and R&D expenditure Other
preferential policies were recommended
to encourage investment in local HR
and R&D.
f) Simplify approval processes
Recommendations relating to an easier
regulatory regime and approval process
were made.
g) Improve EU-China trade and
investment relations The maintenance
of a stable and open trade and
investment environment for Chinese
enterprises in Europe was also
regarded as a priority.
h) Establish business-to-business
platforms The establishment of various
platforms to foster business
relationships between Chinese and
European enterprises was
recommended. The perception was
noted that other regions do this more
successfully in China than the EU.
i) Lower antitrust investigation
requirements Recommendations were
made to reduce the burden of antitrust
investigations. (Chinese Outbound
Investment in the European Union,
European Union Chamber of
Commerce in China, 2013.)
The EU SME Centre provides the
following advise for attracting
investment for SMEs:
• Raising awareness of local SMEs
about the opportunities and
challenges when linking up with
Chinese direct investors;
• Developing special programs that
facilitate networking and
matchmaking opportunities for local
SMEs and Chinese investors, or
providing databases on suppliers
and business alliance;
• Taking measures that encourage
local SMEs to link into different
stages of the GVC of Chinese
MNEs and the knowledge creation
stage in particular;
• Providing tax incentives for Chinese
MNEs to localize their R&D
activities;
• Promoting technology transfer
between local SMEs and Chinese
MNEs;
• Encouraging public-private
partnerships between local
research centers, universities and
Chinese MNEs;

16. 14
• Providing support for SMEs that wish
to expand their international market
through linkages with Chinese
MNEs;
• Facilitating cooperation (e.g. SME
consortia) for joint marketing or joint
bidding in the procurement
contracts of Chinese MNEs;
• Organizing competency training and
cultural awareness programs for
SMEs that facilitate their
communications with Chinese
MNEs. (Chinese Outward Foreign
Direct Investment in the EU, EU
SME Centre, 2014.)
Business-framework, and operating,
market and infrastructure related
difficulties are obstacles that must be
tackled if we wish to attract more
investment. The European Chamber of
Commerce in China lists related
difficulties when companies are trying to
enter the EU:
Business-framework related
difficulties
a) Residence and work permits: The
issue of visa, residence and work
permits for Chinese employees of
enterprises that are investing in the EU.
b) Labor laws (social security, unions,
contracts): This is particularly relevant in
M&A cases where such laws maybe
hinder planned restructurings and are
perceived by some Chinese enterprises
to be inflexible.
c) Tax regulations and accounting
Operating, market and infrastructure
difficulties
a) Human resource-related issues: This
includes cultural differences in terms of
management style, personnel cost, and
issues with hiring and retaining the right
staff. Management style- related issues
would particularly be an issue in M&A
cases. Other cultural issues include
issues relating to overseas Chinese
community and suitable schooling
facilities.
b) Currency risk
c) Perception and image: Concerns
about the quality of Chinese products,
lack of brand recognition and a general
negative perception of Chinese
enterprises. (Chinese Outbound
Investment in the European Union,
European Union Chamber of
Commerce in China, 2013.)
Advise
to
Companies
Seeking
Finance
from
China
When
to
Seek
Finance
from
China
You should not look for finance from
China just for the sake of financing your
operation. Rather, it should be viewed
as a way to either access or accelerate
growth in China. Typically Chinese
investors are not interested in cases
where there is no China strategy as
China is what they understand the best
and there they can potentially also
provide most added value through their
contacts.
However, if you are looking to take the
first step into China with an investor
they are most likely going to look for a
way to control the business in China,
and often also globally if there is reason
to believe decisions elsewhere will
affect the way business is conducted in
China, via e.g. majority ownership as
they are quite rightly skeptical about the
ability of newcomers to succeed on their
home turf. As a compromise, some
Chinese investors have suggested to
foreign companies to move their
headquarters to China.
So in many cases this means potentially
selling up all of the operations to the
Chinese buyer, who wants both new
products and technologies as well as
better reach to new market areas via
acquisitions, which is a model they have

17. 15
historically done most investments and
they have most understanding of.
However, in China everything is always
open for negotiation; anything is
possible when seeking for a solution for
a mutually agreeable and beneficial
deal, or as Chinese like to refer as win-
win, but in the end there is the ‘’Golden
Rule’’; the one with the Gold makes the
rules whether that is IPR or money or
something else of value, so you must
make sure you have all aspects of your
business interests covered and do not
come to China as a last resort to find
financing or customers.
Manmeet Singh, Angel Investor, for
example recommends: “Don’t come to
china just expecting to get money, come
here first to learn how things work, then
decide if you want to go for it. Some
larger funds are OK for getting funding,
but it’s not easy.” Todd Embley,
Chinaccelerator, continues to say that
you need to know how to navigate and
operate in China before taking money.
Also other investors say that for start-
ups it is not easy, since offering and
needs rarely meet, and Chinese
investors are much more likely to invest
in growth or larger companies.
How
to
Seek
Finance
from
China
Pablo Recio, Gold Millenium Group,
gives simple advise on how to approach
the Chinese market to attract investors.
He says that Chinese companies lack
knowledge about EU countries. The key
is to find the real competitive advantage
and offer something unique and useful
to Chinese companies. This means
building competitive advantage where
you can, not necessarily where we
want. Often this kind of advantage can
only be found on a sector, or even
company level.
Below is an overview of the key points
of the process for seeking finance:
1) Define your China strategy, you
must show real understanding of
the business environment in China
and preferably proof of that through
pilot customers.
2) Protect your IPR in anyway you can
locally according to local laws.
3) Define where is your best access
point to China (the right customers),
and how you scale up to meet the
investors expectations.
4) Define what type of investors can
best help you reach your business
goals (e.g. POEs for access to
customers or VCs for something
else).
5) Send a key executive to China for
3-6months to validate your plans
and to establish connections and
justification for an investment into
China (most likely accessing
Chinese investor will mean that
initially you have to finance the first
steps with company’s existing
funds).
6) Prepare a ‘’long list’’ of potential
investors, preferably investors that
you can access through some
trusted party’s introduction.
7) Start negotiations, use outside help
in the form of consultants or
lawyers, or both, that have done
this in China before and have
references to back that up.
8) Nothing is a ‘’done deal’’ until you
have money in the bank. This is
true everywhere, but even more so
in China.
Depending on how ‘’ready’’ you are the
process takes 6-18 months and quite a
bit of investment to cover investment
from management and fees from
outside help such as lawyers and
consultants.
Of course, there are other options than
just seeking finance if you have enough
capital to seek entry into the Chinese
market. Some investors recommend, for
example, franchising if you have a
ready consumer product, or a rep office
with some staff to make connections
and learn first, then see if you can start
leveraging through some big players in
Finland.

18. 16
Notes
on
VCs
Here are links to some venture capital
and private equity associations that
already list hundreds of venture
capitalists active in China. One can use
this as a starting point in preliminary
studies to map out venture capitalists in
China. In the above section there was
more specific information on how to find
the right type of investor.
China Venture Capital and Private
Equity association
http://www.cvca.com.hk/aboutcvca/profil
e.asp
Zhongguancun Venture Capital and
Private Equity association
http://www.zvca.org/Enindex.html
Shanghai Venture Capital Association
http://www.shvca.org/ (in Chinese)
Hong Kong Venture Capital and Private
Equity association
http://web.hkvca.com.hk/en/index.aspx
Examples
of
Incubators
Suitable
for
Finnish
Start-­‐ups
Chinaccelerator: Chinaccelerator, based
in Shanghai, has been referred to as
number one incubator in Asia. Once a
start-up is accepted into the program
the company gets 30 000 USD in cash
for up to 7% of equity, plus services
such as free rent for six months and
attendance at the 8x8 conferences in
Beijing and Shanghai. After graduation
Chinaccelerator exposes start-ups to a
wide variety of funding sources. They
have 150 mentors who are business
leaders and entrepreneurs and many
become investors in the companies they
mentor. They also have close relations
with AngelVest, the largest angel group
in North Asia, as well as a network of
other angel funds and early-stage
investors. Todd Embley from
Chinaccelerator says that their goal is to
get 50% of the companies funded after
the program.
FinChi Shanghai and Shenzhen: FinChi
Shanghai has been quite successful in
providing soft-landing services to
Finnish companies for many years
already. FinChi provides office space
and various services, which make it
easy for Finnish companies to enter
China with decreased risk and take time
to test the market. FinChi can also be
seen as a place where start-ups and
growth companies can spend some
time, while looking for investment
opportunities from China.
Zhongguancun Software Park
Incubator: Zhongguancun Software
Park (Zpark) in Beijing is the National
Software Industry Base and National
Software Export Base of Zhongguancun
National Innovation Zone in China. It is
China’s premier science park that wants
to attract Finnish companies to China
and has an office also in Espoo.
Companies seeking entry to China can
get advise from Zpark Finland. The
incubator in Zpark provides assistance
for companies registering their
operations in Zpark. In Zpark there will
also be a FinChi Beijing providing
softlandin services. Further, there is
Cloud Valley, which provides
softlanding as well as investments for
select cloud computing companies and
has already done such notable cases as
Evernote, Amazon web services and
LinkedIn from the US.
HAXLR8R: Haxlr8r Is a hardware
incubator that brings engineers and
entrepreneurs from around the globe to
Shenzhen for a crash course in
prototyping and manufacturing. The
fifteen week program offers hands-on
help, mentoring and networks. They
have 60 mentors and an extensive
team. Haxlrl8r gives those chosen to
participate 25 000 USD for a 6% equity
in the company, or 100 000 USD for
9%. There are also other services and
benefits available.

19. 17
Througout China there are many
science and technology parks that are
already in place or are looking to set up
new types of programs and incentives
to get more local and foreign companies
to locate or re-locate into their premises.
You need to consider carefully whether
the incentives provided are worth
setting up your business over there as
the main concerns should be proximity
to key customers and availability of
talent. Almost all first and second tier
cities seem to have one or more of
these initiatives either in place or in the
plans but before making a final decision
you should do your due diligence. ”All”
public initiatives seem to have some
very high level support, but whether that
is realized into practical benefits for your
business is a question.
Advise
to
Finnish
Venture
Capitalists
As Chinese technology market is
maturing and can be considered in most
cases in par or even excelling over its
European counterparts, the Venture
Capital market is still very much going
through adolescence and learning by
doing while Fund of Funds activities are
even younger and more immature for
the most part.
From the Chinese VC industry you can
find some very professionally run VCs
that are comparable to western
counterparts but also a wide mix of
players who want to invest into
something that somehow will make
profits very quickly.
Below are a few key points from a
recent China VC/PE industry Survey
Report (2013-2014):
- Limited Partner’s diversified their
investments
- Over half of the LPs realized a book
value of 10% to 25% on portfolio
investment
- Over 60% of the LPs enjoyed special
preferential terms not listed in the
fund agreements
- Default on LP’s capital commitment
increased significantly compared
with earlier surveys
- Over 40% of General Partners
encountered situations in which LPs
transferred their stakes in the funds
GP managed.
As all the research shows there is more
than enough money available from
various sources that are also very
willing to invest. However the ones that
have the biggest funds and therefore
also the most pressure also to look at
investment targets outside the domestic
market (Government, SOEs and POEs)
typically have relatively weak teams for
analyzing and processing investments
whether that is as an Limited Partner or
as a direct investor. The VCs that have
most capable teams have so far mostly
concentrated on the domestic market.
For Finnish VCs there are several
opportunities:
1) Increase the size of their funds by
having Chinese investors join in
as LPs but as noted in the China
VC/PE Survey a Chinese LP
might be challenging to work
with, so money should not be the
only consideration of having a
Chinese LP.
2) Exits of portfolio companies,
Chinese are comfortable with the
idea of M&A and getting more
skillful in that so exit to China
should be a must option to look
at.
3) Doing syndicated deals with
Chinese VCs or having them take
an active role in growth rounds
especially if the portfolio
company’s main target is in
China is an option, as a number
of successful cases between US
and China have shown.
European VCs might look into
ways US VCs have succeeded in
that. China’s ties to Silicon Valley
and key players over there have
obviously played a big role, but
Europe has its own strong points

20. 18
that it should emphasize e.g. a
more friendly attitude towards
Chinese investments, the strong
reputation of the Nordics and
Finland for innovation etc.

21. 19
Views on the
Future, Key Trends
and Expected
Implications
Chinese
Government’s
Goals
President Xi Jinping announced during
APEC that China will invest 1,25 trillion
USD in the next 10 years abroad. The
Chinese OFDI is expected to grow 10%
annually over the next ten years as
demand for industrial products and
infrastructure surges in developed and
developing markets. China will continue
to increase the flexibility of OFDI
procedures to allow domestic
companies to gain more control of their
overseas business.
The Chinese Government has just
announced that they will set up a state
venture capital fund worth 6,5 billion
USD to invest in the country’s start-ups.
It covers tech startups in innovative
areas, as well as young companies
venturing into new fields in things like
green energy and biotech. The
“establishment of the state venture
capital investment guidance fund, with
the focus to support fledging startups in
emerging industries, is a significant step
for the combination of technology and
the market, innovations and
manufacturing.” (TechinAsia 15.1.2015)
This further supports and emphasizes
the goal of switching China’s
operational goal from made in China to
innovated in China.
Key
Trends
for
the
Coming
Five
Years
(Authors
View)
Below are some key trends of the
Chinese Investment Market for the next
five years:
1) Chinese OFDI will keep growing as
the government has announced.
2) The investors will include investors
from all sectors (Public and Private)
into all sectors ranging from
infrastructure to start-ups and
funds.
3) Strong emphasis on M&A will
continue, but all other investment
modes will also become more
prominent as Chinese investors
learn the more about the way
international investments are made
and managed.
4) M&A with Chinese counterparts will
become business as usual for
European and Finnish VCs.
5) Strongest performing European and
Finnish VCs will attract lot of
interest from potential Chinese VCs.
6) Few strong partnerships will get
established between European and
Chinese investors specializing in
cross-border deals.
7) China will continue to grow in
importance for Finnish and
European VCs’ portfolio companies
in terms of target market as well as
competition.
8) All Finnish and European VCs will
have a China strategy and most will
have also either direct or indirect
representation in China to serve
their portfolio companies’ needs.
Expected
Implications
and
Recommendations
1) Both investors and companies will
be increasingly faced with dealings
of either Chinese investors or
companies; you should have at
least a preliminary China strategy.
2) A lot of initial contacts will be
clumsy (equal confusion by both
Western and Chinese
counterparts), best practices in
China are different from best
practices in the West. This is
especially highlighted in complex
transactions and documentation
that investments require. Therefore,
you should expect longer
negotiation times.
3) Chinese investors might seem to be
improvising their strategy when they
are negotiating with you and
sometimes they are, since they are
newer to investments they often
don’t have as formalized strategies
in place and tend to look at cases
very opportunistically. You should
be aware of this and check
constantly whether your goals are
aligned.

22. 20
4) While opportunities to cooperate
with Chinese investors increases so
does competition, the window of
opportunity is slowly opening, so
the first steps for Finnish VCs to
seek cooperation should be taken
relatively quickly between now and
in the next couple of years. Once
Chinese investors have either
learned to operate independently or
secured a partner the completion
will be much fiercer.
5) We will see some really big exits to
China from European backed VCs
in the next couple of years. This will
result in some peak in China activity
at the expense of the US, but that
will level off where China will grow
at the expense of the US but will
remain much smaller than the US
for a number of years.
6) As China will grow in importance as
a source of capital, markets and exit
destination and will have a place
next to the US and EU for Finnish
VCs, they should start to look at
how they will balance their
strategies to have a global strategy.

23. 21
Conclusions OFDI from China is growing and
expected to remain strong for years to
come. Besides China’s economy
becoming larger and therefore a more
attractive market, access to the market
is challenging, and money is only a part
of the solution. Chinese investors are a
relevant option to consider not purely
from the financing perspective but as a
way to access the local ecosystem.
Examples of the type of investments
taking place to Finland (2013-2014)
cover a range of investments from M&A
to corporate investment to VC
investments. So whilst the numbers
might still be small, the full range is
available in theory for Finnish
companies. There is one thing that most
companies share; they already have a
presence in China or have a clear
strategy in place to enter the market.
China is a challenging market but one
should not make it too hard, aim to
enter the market where both the
investment as well as relevant industry
ecosystem is already mature enough
and is relatively easy to access, e.g. in
the hot-spot areas of Beijing, Shanghai,
Chengdu, Shenzhen and Hong Kong.
The paradox of China is that it is very
large but also very quick to implement
change when need arises. New policies
can be introduced and implemented
with such pace that it is hard to really
understand (or react to) it from the
outside. In the past year this has
particularly impacted the investment
industry with a number of policies
loosened (and some policies became
stricter) as to what you can or cannot
do, and the still challenging bureaucracy
has been streamlined in special
economic areas, such as the China
(Shanghai) Pilot Free Trade Zone.
In recent years a number of Public and
Private incubators and co-working
spaces have emerged and these should
be taken into consideration by Finnish
companies as they can be an effective
platform for getting into the market and
to start building your business and
accessing finance.
Challenges for smooth cooperation
between Chinese and Finnish investors
as well as companies exist, partially
because cross-border cooperation is
always challenging, and we still have
very few reference cases. Therefore,
both Finnish and Chinese are still
learning by doing.
However, as the Chinese investment
industry is maturing and taking big steps
into international markets there are
more opportunities than ever before to
find win-win between Chinese investors
and Finnish companies and Investors.
Whether China and working with
Chinese investors is the right choice for
any particular company or investor can
only be evaluated by giving it a serious
effort. Market studies and short visits
are not enough. ‘’All the cats love fish
but fear to wet their paws’’ (Chinese
proverb).