Why China pays for access and Silicon Valley does not

Source: The Telegraph (UK)

Reading the exciting next steps of Angel List now that it has the backing of CSC — a Chinese private equity fund. As I was one thing that struck me as the differences of investors in U.S. versus China, could be summed up below:

TC [Techcrunch]: How would you describe your interactions specifically with CSC?

NR [Naval Ravinkant]: They’re far easier to deal with than the U.S. investors I’ve dealt with. If you go to a U.S. investor and say, “I’m going to get you access to the top seed-stage deals in Silicon Valley,” to them it’s like, “Yeah, but I could set up my own team,” or, “I know such-and-such investor in the Valley already.” In China, if you say, “Hey, you can put matching dollars behind people betting their own money,” they lean forward.

I have been thinking about this difference for awhile and why the mindset is such for a reason. Unlocking the reasons why can not only bring better understanding but can tap into faster closes, more money and better partnership outcomes. The reasons for this are nuanced and relate to much of their history, culture and development of their economy, but I will attempt to attribute a few reasons for this practice of paying for access.

Please note that some of these reasons are the same exact reasons for why Didi has as hot at world domination in ridesharing.

China is a develop(ed) country with a developing mindset

Tiananmen Square, mid 1990s

Tiananmen Square, 2010s

China’s development and growth has been really in the last 15–20 years. People from afar are amazed continuously at the changes this country has had over this period. The change happens so quickly that one can easily forget that there are things that are still developing just like in the “developing” world.

Local vs. Foreigner

The first advice any Westerner gets in entering China is to get a “local” partner if you want to do business. This is almost never the advice the other way around for a Chinese to do business in the West. When you land in China as a foreigner (yes myself included as a Chinese-American), you are struck with the stark difference between locals vs. foreigners. If you live as a foreigner there for some time, the society makes a stark difference between the two from education all the way to healthcare. This just is not the case in most developed countries. When visiting Germany, Japan, or Canada I do not expect to go to different health facilities because I am a foreigner. However, in any developing country, I will be most interested in going to a foreigner hospital for an emergency.

A relative suffered from some major health issues in Beijing went to the hospital. They went to the local wing and took one look at the lines and thought they could die just waiting in line. Immediately, they went to the international wing on the other side and was one of only 3 people. This was in the same hospital.

The people in that society reinforce the difference as well — local pricing vs. foreigner pricing, food recommendations, and even toilets. Oftentimes recommendations from locals would be tacked on with “oh, but that is really for local tastes, you probably won’t like it”.

The societal infrastructure reinforces the emphasis on locals being different is most seen in developing countries. It is customary and recommended that you visit with a local guide when visiting developing countries. These guides will keep you out of trouble and help you navigate.

When it comes to access to deals, it is a natural extension for China to assume that the local will have an inside track. They know Silicon Valley is still considered the hotbed of technology and would willingly pay to get into the good deals. Venture is very localized, and venture firms usually pay to get into good deals by setting up an office and staffing it with local investment professionals in that country. Even if a Chinese investment fund set up an office in Silicon Valley , would they get into the best deals compared to folks investing for years?

Cash-based Society

Source: Chinasmack

Business in China is highly relational as a reflection of their culture and society. However, compound this with a lack of infrastructure and the value of trust goes even higher. Where would you put your money if digital personal banking was not around? Most likely under a mattress. If you gave it to someone to manage, it would be family because literally you know where they live if anything went wrong. The system of accountability was based on community not from a report or record.

The introduction of digital personal banking in China has been around in the last 10–15 years. However, most people use cards like cash and credit only penetrates about 10% of China. Therefore, even with a card, it is treated like cash as a debit card, connecting directly to that person’s bank account. The bank account number is the same as a bank card and the only thing protecting someone from stealing your money is a 6-digit PIN number.

I was speaking to a local Chinese person about this security concern of mine with Chinese debit cards. He told me he didn’t trust credit cards because the card could not be protected by a PIN.

When it comes to deal access, they will trust people over recorded numbers. Typically financial reporting in China has had a stormied history and even gets dinged for its lack of transparency in the US markets. (Chinese based companies that IPO in the US have had lower valuations). So once they find a partner they feel they can trust paying for access makes sense.

Loyalty Based Trust

While on the surface many things from China are very developed — smartphone penetration, biggest middle class the world has seen, housing ownership, mobile payments — underneath many of these things is still a developing world mindset. China is still incredibly cash based, relational based, susceptible to change, with heavy reliance to catering to local culture (even within their country).

At the heart of society is trust based on loyalty

Loyalty-based trust is seen in most societies where there are warlords, clans, fragmentation and factions — most developing countries. China is by far more developed than most developing countries, but it still is not as easy to navigate around, live, or do business as other developed countries (Korea, Singapore or Germany). And it is still highly fragmented. You need to work with provincial government officials to get something done within that province. For developing countries, trust starts out highly relational and is earned through loyalty. Loyalty puts an emphasis on the relationship moreso than anything written.

When it comes to deal access, paying for that access means that most likely it was done because a relationship was there. In this scenario each person in the relationship will also be able to have more say and learn from the partner bringing in the deal flow. If the Chinese investor were to set up their own office, it would be a little harder for them to learn. Now, it could be that eventually their ambitions would be to set up their own SV office, but more often paying for deal access enables them to deepen the relationship in a way where they can also play an influential hand.

China knows VIP service , and access is at the heart of it.

China knows service, especially VIP service. VIP service works well in places where there is a mass population and you are removing a pain point. Think about this next time you are running late to the airport and you get to pass all these people standing in line and walk right up to the counter for priority check in. This service would not exist if the common experience was not so painful.

The default common experience is a lot, a lot , a lot of people. Getting from point A to point B could look like this:

With so many people fighting for few resources, life can be a constant struggle. A rush on the subway, a rush for standing room, a rush to lunch and a rush for the elevator will have anyone on gaurd.

In China, I had to wait in line just to go into the subway station and a 10 minute line to get on an elevator in a building. And neither of them were broken, it was just the normal influx of people at that time.

And after these ordeals, anyone who is just a little wealthy and tired might just pay for access. This is why private clubs and memberships do better in China and other crowded places.

Therefore when someone from China pays for deal access, they live in a world where access is difficult to come by, and it gives them the convenience of a continuous flow with minimal work. It is not strange at all, and in fact may be a welcome part of the partnership.