Yesterday I attended the China Entrepreneurs BizSpark MEGA Angel Investment Forum at the Microsoft Office in Beijing. The first panel discussion was about ‘Finding the right early stage investor’.
Of course much of the conversation revolved around the importance of finding a strategic partner that invests ‘smart’ money as opposed to ‘dumb’ money. Meaning, investors who can bring a wealth of business partnerships, legal and strategic value etc. are investing ‘smarter’ money. Investors who just put in money but no real time or extra benefits are said to be investing ‘dumb money’.
Moving on from that discussion, one thing that was interesting to hear was a comment by Paul Asel, Partner of Nokia Growth Partners China; the VC arm of Nokia. He said, compared to America, there is “significant resistance for Chinese start-ups to taking outside independent directors that can add outside value.” The role of independent directors is to add an independent perspective backed by a strong track record of experience and can help guide the company and make decisions. So if independent directors have the potential to add such great value, why is there is a difference between America and China in respect to bringing them on?
I can’t proclaim to know all the reasons why, I can only speculate. Like many of my recent articles, China’s culture of low trust seems to always creep through as a major factor. Bringing on an ‘outsider’ into any organization requires a deep level of trust. You must believe that they only have the best intentions for you and your company.
In America , it seems that people will in most cases believe what you say and appear to have a strong resume or background that is impressive. For the case of independent directors, people would love to invite successful people like Google’s Ex-CEO, now Chairman, Eric Schmidt to the board or GE’s famous long serving CEO, Jack Welch who is an authority on managing people and a company. Although you may not know them personally, their background and history, usually speak for itself.
In contrast, Chinese start-ups likely have an aversion to bringing on outside people and independent directors because they don’t truly know them. For many, it is likely to second guess their motivations for coming into the organization. Questions like, ‘What do they want?’ or ‘Will they take my idea somewhere else?’ will inevitably enter the mind. On one hand, such caution may be warranted and will potentially save the company a lot of heart ache if something wrong did happen. But from an investor perspective, whose job it is to add ‘smart money’, such resistance to bringing on very experienced and qualified directors can be frustrating.
So for Chinese start-ups that operate in a crucial time of survival of the fittest and fastest, it may be worth sacrificing a little comfort and give outside directors, the benefit of the doubt to help them. If investors are truly aligned to growing the value of the startup, it doesn’t make sense to recommend independent directors that have a detrimental effect on the company.