TALKING POINTS
The ideal China management team is a combination of foreign expertise and local savvy, says investor turned entrepreneur Rob Abbanat
Te other side of the table F
or the last five years, I have en- joyed a wild ride as managing director for two boutique mer-
chant banking firms in China. But I began my career as an entrepreneur, and despite the rush that comes with investing here, I never lost the entre- preneurial bug. Tere was always some aspect of investing in core Chinese in- dustrials – manufacturing, energy, food processing – which left a certain part of my soul wanting. I found myself longing to get in-
ABBANAT ROBERT
ent to me that a solid business – even one that is at a very early stage – that is managed by people with Western training and sensibilities would quick- ly catch the attention of the invest- ment community. As we prepare to close the first
volved with a new idea that evokes the effervescent inspiration that drives technology entrepreneurs. Unable to stop the wheels from turning, I formulated a business mod- el based on emerging video-conferencing technol- ogy aimed at English-based education in China. I left my post at Silver Rock Group last fall
to launch my second startup. I am now seeing the world of China-based investment through the eyes of an entrepreneur. What a change in perspective! I would be lying if I told you that love for en-
trepreneurship were the only driving factor behind my change in career. One thing that became evi- dent to me while I was working as an investment professional was the fact that there is quite a bit of money in China – perhaps too much – chasing a relatively few good deals. Tis is probably driven by a few factors, including a Chinese economy awash with cash and Western economies that have been stagnating. Tat’s not to say that there aren’t good oppor-
tunities to be had in China anymore. But it always seemed like the really good deals were getting bid through the roof as hoards of hungry investors lined up.
To the interior
To find deals at a reasonable valu- ation, one had to dig further into China’s hinterland, which became a key focus of the strategies I em- ployed as managing director. Te problem is that the further you dig, the smaller your chances of finding a management team with a profile palatable to Western investors. Te profitable firms in these regions are often run by people with relatively little formal education – certainly not an MBA – who don’t speak any English and have very little knowl- edge of Western business or finan- cial practices. At some point it became appar-
26 China Economic Review • May 2011
Robert abbanat was formerly director at MI Capital Group and Silver Rock Group, private equity firms focusing on investments in Chinese small- and mid-cap enterprises. He lives in Shanghai.
round of investment on the new ven- ture, I have learned that the above theory was half right. A solid plan of- fered by a team with Western training does indeed attract an early following of investors. However, savvy operators are quick to point out that Western sensibilities alone are not sufficient.
Business in China has its own unique charac-
teristics and every successful team must be stacked with people who know how to get things done. And while I’ve been in China now for five years, that by itself doesn’t qualify me. For many aspects of successful business intercourse, only locals have the language skills, relationships and knowledge of how the system “really” works to be effective. So as far as Western investors are concerned,
the ideal management team is composed of people both Western and local.
Know your target
Another interesting aspect of entrepreneurship in China is the need, even at a very early stage, to un- derstand and interact with government and gov- ernment policy. Whereas in most Western legal systems, actions are generally legal unless the law specifically states otherwise, in China such actions are often only legal if the law specifically permits them. As a result, there are many business models that fall into a gray area of not being prohibited, yet not permitted either. Entrepreneurs often work
Startups rarely have assets that offer much recourse for the investor if the deal goes south. In fact, in most cases, the entrepreneurs are the only real asset
with the real possibility that at any point, a new law could be passed that causes significant problems for their mode of business. As a result, it is imperative to maintain close relations with the authorities so as to anticipate any potential regula- tory challenges. Experienced inves- tors are aware of this, and will most certainly look at the team’s makeup to determine if the right people are on board to ensure a smooth ex- pansion. Aside from the structural nu-
ances of raising money in China, there are also some interesting differences between private equity deals – i.e. investments in relatively
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