Four Tragedies Of Chinese Startups and Investors

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How would you define the relationships between entrepreneurs and  investors? They should be friends, teammates, seller-buyer, or rivals? Conventionally, investors put in money in hope of breeding superstars which can yield even bigger return, while the entrepreneurs are supposed to spare no efforts to deliver on expectations. However this relationship could end up in tragedies sometimes when the two sides only care about their own benefits. Unfortunately, stories like this, which are overwhelming to look at, are emerging from time to time lately in China’s venture capital and startup world.

Here’re four of the latest tragedies –

 

Macbeth

It would be so heartbreaking to leave the startup which was built up by your own hand, let alone the sorrow of being forced to do so. Wu Bo, the founder of the group-buying site Lashou.com had disappeared after conflicts with the investors. The story of Wu is a bit similar to Macbeth for at the early stages he was told by the investors that after acquiring the capital Lashou would soon go for an IPO. Future-reading is not always a nice thing.

Later the founder was said to be trapped in the circle of meeting the requirements of various investors, modifying strategies rashly, and ended up being kicked off by the investors. The reason why the VCs are not so satisfied with Wu is the low profits, too-fast expansion and high costs. Now the investors have taken the job of managing the company, and the former CEO has already gone.

 

Hamlet  

“This is not about the number or the portion, it’s related to the dignity of every 24quan staff. Why should we give up the company that we have been fighting for and let the investor enjoy all the results? We are not just their chips for earing capital.”—Du Yinan, 24quan Founder and CEO

The discord also occurred in the group-buying circle in which the former partners Du(Founder and CEO of 24quan) and Kenneth Chang(main investor and former COO) turned to enemies eventually. Internal email records showed that the two argued with each other have been viral for a while. And the blasting fuse was said to be the number of the preference shares Du and his management team should take after the Series E funding. This September, Du officially announced to dismiss all the positions of Kenneth, and one of its investors also stopped pouring any capital. And what was left for the 300 staff of 24quan was a total loss and real mass. While the two are accusing each other for undermining the company, to believe or not to believe, that is a question.

 

Othello 

This is the news months ago, Suning Shopping RedBaby and Masa Maso for Expansion? And the question can be answered now as Suning has just acquired Redbaby(China’s biggest maternity-children B2C) for RMB 66million. However nothing happens to another candidate, the designer menswear e-tailer Masa Maso. Han Hui, former Marketing Director of the company sorrowfully revealed that, “I think the tragedy all starts on the day we got the first funding from   Sequoia Capital. After that very moment, I never really focused on how to market Masa, everything was about the sale promotions, and the sales number. ”

Sun Hong, the founder even cried saying that, “I’ve been asking myself several times that if I can turn back time would I still rush for the $10million.”

 

King Lear

A DCCI (Data Center of China Internet) report showed that a lot of Chinese TMT companies are backed by foreign capitals. Soft Bank and Yahoo! for Alibaba, DCM and Walton for Dangdang, to name just a few. Unlike an incubator who gives across-the-board support to startups, foreign VCs in China acted more like a revenue-chasing bank. They tend to favor those startups requiring “low input, short period, and high return”. In 2010, 106 startups won the capitals and 82(776%) of them are in the expansion stage.

What we can get from that? Probably a trend for both entrepreneurs and investors to pursue a “rapid” development and IPO.

M18.com, once was thought to be a very promising B2C stock got listed in Nasdaq in October, 2010. Targeting at “B2C+brick-and-mortar stores+catalogue business”, its stock price rose by 57% on its debut day. However, now it dropped by 95% after two years struggling and the price currently is almost under $1. Insiders analyzed that M18 tried too hard to show the capital market its potential. Moves like cutting down costs, growing sales number and, running for an IPO all happened within such a short duration of time, then the company couldn’t keep it up with the insane growing pace.

 

Faust made deal with the devil and he lost his soul. Even if he got unlimited knowledge and worldly pleasures, his life ended up miserable. Some entrepreneurs are being Faust now, when they only care for the funding, they are soon to find themselves heading to another path.

What the investors really care is the safety of the deals, often times they propose strict agreements to secure themselves like Offshore Agreements, Exclusive Agreements or VAM (Valuation Adjustment Mechanism). These could be traps for immature entrepreneurs because those who benefited from the funding in the beginning would eventually be saddled by the funding.

Photo credit: BigStockPhoto

 

  • http://www.facebook.com/wolfgroupasia David Wolf

    Nicely done!

    We used to say that the longest distance between any two points was the distance between the high-five and the check. Now it is quite clear that an even longer distance is that between the check and the real payoff.