Chinese Venture Capitalists Force Failed Founders On To Debtor Blacklist 44
An anonymous reader shares a report: Chinese venture capitalists are hounding failed founders [non-paywalled source], pursuing personal assets and adding the individuals to a national debtor blacklist when they fail to pay up, in moves that are throwing the country's startup funding ecosystem into crisis. The hard-nosed tactics by risk capital providers have been facilitated by clauses known as redemption rights, included in nearly all the financing deals struck during China's boom times.
"My investors verbally promised they wouldn't enforce them, that they had never enforced them before -- and in '17 and '18 that was true -- no one was enforcing them," said Neuroo Education founder Wang Ronghui, who now owes investors millions of dollars after her childcare chain stumbled during the pandemic.
While they are relatively rare in US venture investing, more than 80% of venture and private equity deals in China contain redemption provisions, according to Shanghai-based law firm Lifeng Partners estimates. They typically require companies, and often their founders as well, to buy back investors' shares plus interest if certain targets such as an initial public offering timeline, valuation goals or revenue metrics are not met.
"My investors verbally promised they wouldn't enforce them, that they had never enforced them before -- and in '17 and '18 that was true -- no one was enforcing them," said Neuroo Education founder Wang Ronghui, who now owes investors millions of dollars after her childcare chain stumbled during the pandemic.
While they are relatively rare in US venture investing, more than 80% of venture and private equity deals in China contain redemption provisions, according to Shanghai-based law firm Lifeng Partners estimates. They typically require companies, and often their founders as well, to buy back investors' shares plus interest if certain targets such as an initial public offering timeline, valuation goals or revenue metrics are not met.
What could possibly go wrong? (Score:3)
This insures that only the most confident founders will try anything!
Actually, it mostly confirms what scum of the earth the venture capitalists are. They want to gamble big on other people's ideas, and even though they want to take the money created by other people's innovations, they also want to claw back every nickel they can get when the ideas weren't as good as they sounded at the pitch meetings. "It's the founders' fault for not doing more! Certainly not our fault for throwing money at any crazy idea!"
So does anyone want to invest in transparent masks or smartphone fashions?
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Having worked in software development QA during the dotcom bubble and subsequent burst, I'm not entirely against penalties for those who establish companies and take in huge amounts of investment capital for failed projects.
I won't deny that the nature of how liability is assigned versus how it is limited would require an awful lot of care, but there were so many people who had no real workable business plans or products that were basically existing to take investor money for personal short-term profits wit
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Hmm... Now I see how I should have tried to steer the joke. You are talking about overt fraudsters (who deserve punishments and sanctions)--but I was talking about people with lots of confidence, even too much confidence. Of course the con artists are confident that they can get the suckers' money. I actually think that case is just funnier because the VCs are so sure (even overconfident) that they are smarter than everyone else, even the people with the real ideas.
But it's also a problem when people with t
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...I won't deny that the nature of how liability is assigned versus how it is limited would require an awful lot of care, but there were so many people who had no real workable business plans or products that were basically existing to take investor money for personal short-term profits with no long-term workable plans .
The investors should have examined the business plan carefully before investing.
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there were so many people who had no real workable business plans or products that were basically existing to take investor money for personal short-term profits with no long-term workable plans that I wouldn't object to there being some kind of curbs or penalties that make it hard for someone to retain profits off of that scenario
Its called contracts and structuring the deal appropriately. Investors are supposed to be getting rewarded for taking risks. If they are leaving the founder with most of the risk then they should not get as much report.
Investors that don't "believe" as strongly in the idea/business don't have to offer capital in exchange for equity, they could instead offer a loan. They could even insist said loan be collateralized with other assets. -You don't pay me back I get your house.
There is of course fraud, wher
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I don't know about the US, but in the UK, it is quite common for banks to require a personal guarantee for lending. Not Venture Capital though. Bank funding is much cheaper than VC funding, and that is the trade-off.
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Typically, though, venture capital is given when the banks won't lend as it is too high a risk. I would note that in the UK, too many business failures preclude you from starting new firms.
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This also indicates that the magic money tree in China isn't as fruitful as it once was.
That investors should be cutting off their own supply of potential futures in order to claw back some money in the short term seems like desperation as much as anything else. If an investment is not allowed to fail, then it's because the people holding the money can't afford to take a risk - that suggests some very tricky economics. Since nothing happens without The Party having some hand in it, this suggests the governm
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This insures that only the most confident founders will try anything!
Actually, it mostly confirms what scum of the earth the venture capitalists are. They want to gamble big on other people's ideas, and even though they want to take the money created by other people's innovations, they also want to claw back every nickel they can get when the ideas weren't as good as they sounded at the pitch meetings. "It's the founders' fault for not doing more! Certainly not our fault for throwing money at any crazy idea!"
So does anyone want to invest in transparent masks or smartphone fashions?
Erm... it's taken you this long to realise Vulture Capitalists are predatory?
Also this is in China, not the US or a developed nation... risks are already not taken there and those with the money and power are free to abuse those without it... OK, that does sound a lot like the US but not a developed nation.
Only a fool trusts a promise over a contract (Score:5, Insightful)
"My investors verbally promised they wouldn't enforce them, that they had never enforced them before -- and in '17 and '18 that was true -- no one was enforcing them,"
Honestly this is about as foolish as it gets. I'm not saying those clauses ought to be in there or not; I'm not saying the venture capitalists aren't lying scoundrels; but the contract is what you agreed to. If you didn't agree to it, change the contract before signing it, or don't sign it. I can't speak for the Chinese legal system specifically, but the reason we put things in writing, and then sign it, is so that we don't have to try to prove that the other party "promised" something.
Obvious Response (Score:5, Informative)
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Sometimes there are 3rd parties, or regulations, that require clauses that nobody intends to enforce.
I don't know if that's the case here. The appropriate thing is to get the "won't enforce" thing in writing, with a clear agreement that it supersedes anything to the contrary in the main contract.
If the founders were really promised the clause wouldn't be enforced, that should be binding on the VCs. But of course it's extremely difficult to prove.
As the saying goes "oral contracts aren't worth the paper they
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I had a business professor explain the cultural differences in Venture Capital, based on country:
- In the US, Venture Capitalist's won't take you seriously unless you have tried and failed at least once.
- In Canada, Venture Capitalist's won't take you seriously if you have failed previously.
- In China, if you fail, you won't ever try again.
I have heard stories that it can be very bad for a factory owner if his factory goes bust. I don't think China is like the US where you can get out of it via bankrup
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This seems to me the logical outcome of an _enforced_ "Corporations are people" type policy.
The opposite. The "corporations are people" idea says that when the business fails, you go after the corporation, not the people.
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Your verbal word is in most cases as good as the written word.. because your face, your honor, and your reputation are CRITICAL. (its why many people in China once you break the ice and make your connections, if you did good (and you don't screw up) the business relationship can last almost forever.
This breaking their verbal word is essentially "western" (everything must be written otherwise it doesn't matter/exist) mindset meets "easter
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I don't think this is a behavior unique to China or Asia at all. I've worked with lots of "western" business types who are more interested in the big picture and think that the agreement is made with a handshake; that the contract is just a formality. I've also seen those same people do an about face when one of their deals falls through and they realize the contract was basically written to rob them.
The issue here isn't culturally relativistic in any case... it's a matter of who the law will favor, and in
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But again, most of these never make it to court, as reconciliation and restitution is usually handled directly.. but ultimately as it is part of the contract, from a legal perspective, they are within their rights.. Hence why its such a shock..
If you've (and everyone else around you) has been doing business one way, and then someone comes along and uses the law to kick someone.. its a blow.. the pro
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I have a feeling that the government will decide these terms are unfair and void them soon. Bad for the economy, bad for the individual.
Bad deal (Score:2)
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In theory I suppose that's true. In practice, there would always be some risk when providing money to someone else. (See my signature on theory and practice.)
If I understand you right, assuming 100% of the risk and getting 100% of the reward is basically venture capitalists becoming lenders, getting back loan plus interest instead of a percentage of the profits if any, and nothing if there are no profits.
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The Old Deal (Score:2)
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The whole point of companies is to allow an inventor and investors to limit their liability to the money and property they have invested in the company. If China wants to undo that through these types of contracts then good luck maintaining any sort of innovation-based economy.
That is the argument for corporations, but I doubt its true. In fact, as the article points out, many lenders require (small) company owners to personally guarantee their company's loans no matter how innovative they are. What corporations protect is not innovation, but the owners and management of the corporation. It spreads the risk to a lot of other people who have no part in the rewards for success. The janitorial service gets stuck with the financial hit if they go out of business, instead of the owner
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What corporations protect is not innovation, but the owners and management of the corporation.
That's exactly how they encourage innovation. If I come up with what I think is a clever idea and I can convince someone with money to back it then I might be willing to setup a limited liability company to develop and sell the idea/product provided that my risk is limited to the money and effort that I invested into the company. However, if all my assets including by house, are at risk then I'm far more likely not to take the risk to develop it and to just carry on doing what I already am.
Innovation is
Re: The Old Deal (Score:2)
It sounds like a great way for the incumbents and cronies to be protected from competition. The only people investing are the ones who already have wealth and power, and they control who joins their club.
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The people who already have wealth and power always control who joins the club, no matter what system or society you live in. Limited liability companies do not offer anything special in that regard.
Look at history. Look at how much progress and innovation and how many people rise from humble origins to wealth in countries with Limited Liability Companies and compare that to the wealth and social mobility of Countries without it.
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That's exactly how they encourage innovation. If I come up with what I think is a clever idea and I can convince someone with money to back it then I might be willing to setup a limited liability company to develop and sell the idea/product provided that my risk is limited to the money and effort that I invested into the company.
There is no requirement that you have a "clever idea". Most corporations are not founded on clever ideas or innovation. They are organized to protect against failure.
The risk of failure doesn't go away. It gets transferred to other people. Many of whom had no idea they were taking on that risk and don't get any of the benefits of any success. The owners and managers get all those rewards while limiting their own risk.
Are they really "venture" capitalists? (Score:2)
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They are essentially representatives of the CCP who controls the banks. I'm sure this is in no small part a result of the VCs trying to save face by recouping the money they lost for the State.
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Surprise Surprise (Score:2)
Venture capitalists, hedge fund managers, financiers, and other investors are usually evil and also complete fuckwits at anything that isn't making money.
Bankruptcy is essential (Score:2)
Typical vulture capitalist (Score:2)
Re: Typical vulture capitalist (Score:2)
Do not let China in on IPO (Score:1)
Looks to me like China wants a situation where they either win big, or at worst, break even.
Screw that. I would look for other investors.
This will kill any technical leads they have... (Score:3)
Being able to do businesses and walk away from failed ventured is how the Western enterprises have gotten started. Every businessman with a successful venture has a trail of failed things behind them, things which they filed bankruptcy on. This is just a mechanism in finance because creditors will get paid something and can write it off their taxes.
China holding people personally accountable isn't going to help things much. It means they become risk-averse, and create a huge barrier to entry. Winding up on the debtor blacklist in China is about is bad as being on a sexual offender registry in the US because it means a horrible pariah status, where one can't use transportation, stay in good hotels, or other things.
Instead, what the Chinese government needs to do is make it easier for businesses to deal with failures. Something that isn't an obvious scam fails, let the businessperson walk away from it, and start something new. This is how stuff gets made, and if there is something of practical use, the government can always fund it, or maybe find another business doing parallel stuff, pay the businessman for their stuff and realign it with that business, which helps everyone else. China has a relative good thing going with a command economy + capitalism, as the government has the ultimate say in every company, so they should consider pressing that advantage, as opposed to punishing people who try to make cool things.
Think positive, China is handicapping its firms (Score:2)
This is a good thing!
What a deal (Score:2)
Capitalism at it's finest (Score:2)
Leave *all* the risk with the creatives/engineers/founders, take all the reward.
Perfect for people with lots of money to make more. Not so good for the rest of us.
Liars. (Score:2)
Gosh, holding people to their financial promises with a threat of financial punishment if they don't.
Shocking.
Could we have that for politicians and their manifesto promises, please?