Yariv Lotan Navy Sea Ls 2nd Rule In China Mit Forum Jan 2010
1. nd
Navy SEALs 2 Rule in China
Assumptions about Chinese and Israeli
Entrepreneurs
Yariv Lotan
Founder, Value-Focused Investments
Venture Partner, CIVC Private Equity
Representative, China Creative Capital
2. nd
Navy SEALs 2 Law
Assumption is the mother of all fuck-
ups.
The 1st Law or motto is:
Patience… at the end.
3. Capital Raised by VCs
Israel vs. China
8,000
7,000
6,000
Capital (US$m)
5,000
4,000
3,000
2,000
1,000
0
2005 2007 (40,971) 2009H1 (17,469)
2004 2006 (17,798) 2008 (64,502)
Year
Israeli VCs Chinese VCs
4. Invested Capital in Companies
Israel vs. China
18,000 800
16,000 700
14,000 600
Number of Companies
12,000
500
10,000
US$m
400
8,000
300
6,000
4,000 200
2,000 100
0 0
2006 2007 2008 2009
Year
Israeli Invested Chinese Invested Israeli #Comp. Chinese #Comp.
Capital Capital
5. Cross-Border M&As
20,000
Israel vs. China 100
18,000 90
16,000 80
14,000 70
12,000 60
US$m
10,000 50
8,000 40
6,000 30
4,000 20
2,000 10
0 0
2006 2007 2008
Year
Israeli C-B M&A Chinese C-B M&A Israeli Transactions Chinese Transaction
6. Business Assumptions
Parameter Israeli (Western) Chinese
Focus on Process, Focus on Relationships or
Attitude
Agreements Guanxi
Basic understanding* is Finalize as many details
Negotiations
enough for closing. possible. Closing is
HS > HP
Details will follow. actually only a beginning.
Endless time and
Time GH
patience. HS*
Concessions A sign of Weakness.
Support Trust. Help Close
GH > HS Reopen negotiations.
Relatively
Communication What does YES mean?
straightforward.*
Relatively static and Constantly changing.
Law
uniform Locally bypassed.
7. Management Assumptions
Parameter Israeli (Western) Chinese
Focus Strategy, Domain, Niche Profits. Now!
Source of Growth Technology Consumer-demand
Heart of Business R&D Operations
Low operating costs >>
Cost Structure* High margins highly profitable and
sustainable P&Ls.
Books 1 3+
Geography Global China
Due-Diligence Documents. Facts. People.
8. Entrepreneurs
Parameter Israeli Chinese
Self-made
Technology-oriented
Nature Centralist (Finance &
Can do mentality
Marketing)
Trust Trust themselves Trust their friends
Position Founder >> CTO Chairman & CEO
Alpha = Beta Risk averse with
Risk Taking
Beta = Commercial foreigners, Save face
Global perspective Key to China
Bring to the mutual
Technology Operations
table
Jewish Genius Guanxi
2nd round entrepreneurs. Building companies that
Experience
Global companies. make money.
9. What Israeli Companies Bring
Turning local companies into Global
Israel’s High tech Industry answers China’s needs
Experience in corporate governance and western legal and financial
methods
Access to global capital markets
Experienced Investors and mangers who went through the cycle
Entrepreneurship and Pragmatism
Mutual understanding based on similar cultural morals
10. The Chinese Entrepreneur
Built with 10 fingers
Very difficult to delegate and let go responsibility – bottle neck
Opportunistic
Holding companies
Need to distinguish between the old school management and new
school
Nothing communist about them
11. Building Partnerships
Choosing the right partner – trust, guanxi and
abilities*
Negotiations
− Room for concessions
− Set the red lines
− HS
− Use middle-men not always direct
− Plan the divorce
Listen to needs
Sales and Manufacturing – question and
understand. Seek information and transparency*
12. Things to remember
Hard to sell. Harder to collect.
No 2nd chance for 1st timers (new-comers).
Commitment.
Seek the unwritten rules.
Map government organization, semi government
and state-owned.
Finalizing negotiations is only the beginning.
If it progressed too fast...
Get the right partner.
13. nd
Navy SEALs 2 Law
Assumption is the mother of all fuck-
ups.
The 1st Law or motto is:
“The only easy day was yesterday”
14. feel free to contact...
Yariv Lotan
Value-Focused Investments Ltd.
yarivlotan@value-focused.com
P +972 (9) 958 9448
M +972 (544) 52 74 53
15. Issues
The Israeli Entrepreneur in the eyes of Chinese
- Save face
- must work - no second chance
- fear of mistakes with foreigners
- how not to fail in China
- seek chinese partner
- the essense of guanxi: trust of close network
- resouce committment
- beuruacracy, liquidity, tough terms to work
- vc industry: low-tech, consumer, in-chinese we invest, short-term roi and large irr
16. The China Paradigm Factor
Creative Solutions/early Adopting Consumers: A mix of consumer savvy
entrepreneurs and sophisticated consumers. Creating their own markets
(online gaming, Wireless instant messaging, range of consumer items, etc)
Risk-taking, Innovative Culture: Like Israel the Chinese culture is
comfortable with risk, and has developed innovative ways to solve
problems and create wealth.
Smart, Dedicated mangers, visionary and adoptive: Have absorbed many
western management concepts into China’s own unique approach to a
liberalized economy – “Growth of GDP with social harmony”
17. Why China – China, an
economic superpower
In 2007, China became the third largest economy in the world after the US and
Japan, surpassing Germany. It is also the fastest growing market with 7.9% growth
estimated for 2009.
China is better positioned than any other G8 nations to endure the financial crisis
(budget surplus, forex reserve, interest rate, swift $580B acceleration package…)
In 2006, China surpassed Japan as the world's No. 2 auto market, and in 2008
produced 10M cars (vs. 14M in USA).
In 2007, China also became the world's top producer of merchant ships.
China overtook the US in manufacturing output. As an industrial giant, China needs
to be taken seriously as an international economic force and a strategic and
military power.
Chinese banks have lent out nearly $1 trillion by Aug 2009, over full year 2008!
Over $2.13 trillion (Q2 09) foreign reserves.
18. Macro Overview
2007 2008 2009 2010
GDP growth, % 11.9 9.6 7.9 7.1
CPI, % 4.8 6.5 3.5 3.0
Current account, % of GDP 11.3 9.1 7.1 5.0
(USD bn) (372)
USD-CNY 7.3 6.78 6.73 5.7
FX reserves, USD bn 1,500 2,000 2,350 2,500
(increase) (500) (500) (350) (150)
One-year loan base rate, % 7.47 6.39 5.85 5.85
Source: SCB Global Research
19. The China Paradigm Factor
High Rate of Economic Growth: Evolving from an investment-
driven economy to a consumer driven economy, with a long lasting
growth forecast, projection of millions moving into the economic
urban circle
Capital Markets in Transition: Capital markets are still
underdeveloped, which enhances the importance of private equity
as a source of growth.
Abundant, Low-Cost Talent: High level education producing highly
qualified engineers, medical researchers, and other professionals,
in abundance and at substantially lower cost, lowering operational
costs tremendously.
Advantageous Business Models: Low operating cost advantages
(employees, manufacturing, R&D, G&A, Logistics) allow for highly
profitable and sustainable P&Ls.
20. China - Economic superpower
China to surpass Japan as 2nd largest world economy after the US in 2010.
It is also the fastest growing market with ~8.0% GDP growth in 2009.
China is better positioned than any other G8 nation to endure the
financial crisis (budget surplus, forex reserve, interest rate, swift $580B
acceleration package…)
Domestic Chinese car sales overtook those in the US for the first time in
Dec 2008, and this trend will continued, in 2009 China will produce over
12M cars with appox 10M cars sold in China.
In 2007, China also became the world's top producer of merchant ships.
Chinese Banks have lent out nearly $1 trillion by Aug 2009, over full year
2008!
Q2 09 Over $2.13 trillion foreign reserves.