中小企业

China Goes Shopping: The Compelling Logic of Doing M&A Deals in the US

1 Comment / April 7, 2013

Selling a business in the US?  Chinese can pay top dollar.

We are entering a golden age of Chinese M&A deals in the US. There is certainly a sharp pick-up in activity going on – not so much of announced deals yet, though there have been several, but in more intensive discussions between potential Chinese acquirers and US companies. There is also a lot more shopping and tire-kicking by Chinese buyers. I certainly see it in our business. We’re engaged now in several M&A deals whose goal is sale of a US company to a Chinese buyer. I expect to see more.

The reasons for this upsurge are many – including the recent appreciation of the Renminbi against the dollar, the growing scale and managerial sophistication of Chinese companies (particularly private as opposed to state-owned ones), attractive prices for target US companies, the launch in 2009 by the Shenzhen Stock Exchange of the Chinextboard for fast-growing private companies.

The best reason for Chinese buyers to acquire US firms is one less-often mentioned – to profit from p/e arbitrage. The gap between stock market valuations in the US and China, on price-earnings basis, are wide. The average trailing p/e in the US now is 14. On China’s Chinext board, it’s 45. For fast-growth Chinese companies, the p/e multiples can exceed 70. This gives some Chinese acquirers leeway to pay a higher price for a US business.

In the best cases, a dollar of earnings may cost $10-$15 to acquire through purchase of a US business, but that dollar is immediately worth fifty dollars or more to the Chinese firm’s own valuation. As long as the gap remains so large, it makes enormous economic sense for Chinese acquirers to be out buying US businesses.

This is equally true for Chinese companies already quoted on the Chinese stock market as well as those with that ambition. Indeed, for reasons unique to China, the incentive is stronger for private companies to do this p/e arbitrage. In China, public companies generally are forbidden from doing secondary offerings, nor can they use their own shares to pay for an acquisition. When a Chinese public company consolidates a US acquisition’s profits, its overall market value will likely rise. But, it has no way to capitalize by selling additional shares and replenish the corporate treasury.

For a private company, the larger the profits at IPO, the higher the IPO proceeds. An extra $1 million in profits the year before an IPO can raise the market cap by $50mn – $70mn when the company goes public on Chinext. Private Chinese companies, unlike those already public in China,  can also use their shares to pay for acquisitions. The better private companies also often have a private equity investor involved. The PE firms can be an important source of cash to finance acquisitions, since it will juice their own returns. PE firms like making money from p/e arbitrage.

In M&A, the best pricing strategy is to swap some of my overvalued paper to buy all of someone else’s undervalued paper.  At the moment, some of the most overvalued paper belongs to Chinese companies on the path to IPO in China.

Most M&A deals end up benefitting the selling shareholders far more than the buyers. That’s because the buyers almost always fail to capture the hoped-for savings and efficiencies from combining two firms. Too often, such synergies turn out to be illusory.

For Chinese acquirers, p/e arbitrage greatly increases the likelihood of an M&A deal paying off – if not immediately, then when the combined company goes public.

If the target company in the US has reasonable rate of profit growth, the picture gets even rosier. The rules are, a private Chinese company will generally need to wait three years after an acquisition to go public in China. As long as the acquired business’s profits keep growing, the Chinese companies market value at IPO will as well. Chinese acquirers should do deals like that all day long.

But, as of now, they are not. One reason, of course, is that things can and often also go wrong in M&A deals. Any acquirer can easily stumble trying to manage a new business, and to maintain its rate of growth after acquisition. It’s tougher still when it’s cross-border and cross-cultural.

Another key reason: domestic M&A activity in China is still rather scant. There isn’t a lot of experience or expertise to tap, particularly for private companies. Knowing you want to buy and knowing how to do so are very different beasts. I’ve seen that in our work. Chinese companies immediately grasp the logic and pay-off from a US acquisition. They are far less sure how to proceed. They commonly will ask us, investment bankers to the seller, how to move ahead, how to work out a proper valuation.

The best deals, as well as the easiest, will be Chinese acquiring US companies with a large untapped market in China. Our clients belong in this camp, US companies that have differentiated technology and products with the potential to expand very rapidly across China.

In one case, our client already has revenues and high profit margins in China, but lacks the local management and know-how to fulfill the demand in China.  The senior management are all based in the US, and the company sends trained US workers over to China, putting them up in hotels for months at a time, rather than using Chinese locals. Simply by localizing the staff and taking over sales operation now outsourced to a Chinese “agent”, the US company could more than double net profits in China.

The US management estimates their potential market in China to be at least ten times larger than their current level of revenues, and annual profits could grow more. But, to achieve that, the current  owners have concluded their business needs Chinese ownership.

If all goes right, the returns on this deal for a Chinese acquirer could set records in M&A. Both p/e arbitrage and high organic profit growth will see to that. Our client could be worth over $2 billion in a domestic IPO in China in four years’ time, assuming moderate profit targets are hit and IPO valuations remain where they are now on China’s Chinext exchange.

Another client is US market leader in a valuable media services niche, with A-List customers, high growth and profits this year above $5mn. After testing the M&A waters in the US, the company is now convinced it will attract a higher price in China. The company currently has no operations now in China, but the market for their product is as large – if not larger – than in the US. Again, it needs a Chinese owner to unlock the market. We think this company will likely prove attractive to quoted Chinese technology companies, and fetch a higher price than it will from US buyers.

The same is true for many other US companies seeking an exit. US businesses will often command a higher price in China, because of the valuation differentials and high-growth potential of China’s domestic market.

China business has prospered over the last 20 years by selling things US consumers want to buy. In the future,  it will prosper also by buying businesses the US wants to sell.

 


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Chinese Press Interviews

Leave a Comment / June 8, 2011

Back-to-back articles over the last several days in two Chinese dailies, Shenzhen Economic Daily (深圳商报)and Tianjin Ribao (天津日报). In both, I’m rather extensively quoted. You can read them here:

Shenzhen Economic Daily

Tianjin Ribao

For those whose Chinese is wanting (as is mine, some of the time), the Shenzhen Economic Daily article discusses the difficulties Chinese companies have run into after getting listed in the US stock market. One possible solution is to “de-list” these companies, by buying out all public shareholders, then applying for an IPO in China. Could it work? Perhaps, but my guess is that a Chinese company trying the Prodigal Son technique will likely meet with much skepticism from Chinese retail investors.

The article in the Tianjin Ribao is a general survey of developments in private equity in China. It discusses the shifting locus of PE investment towards inland China. This is a development I embrace. The vast majority of China’s vast population lives in places that have no outside equity capital, and no private companies on the stock market.

Over the last six months, I put in the time to prospect in regions that have thus far received little, to no, private equity. I’ve visited companies in Guizhou, Yunnan, Guangxi, Hunan, Sichuan, Qinghai, Henan, Liaoning, Xinjiang, Hebei, Shandong. We’ve taken on clients in quite a number of these. I hope to add more. The one constant in all these prospecting trips: there are outstanding entrepreneurs running outstanding businesses in every corner of this country.

 

 

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CFC’s Annual Report on Private Equity in China

Leave a Comment / May 2, 2011

2010 is the year China’s private equity industry hit the big time. The amount of new capital raised by PE firms reached an all-time high, exceeding Rmb150 billion (USD $23 billion). In particular, Renminbi PE funds witnessed explosive growth in 2010, both in number of new funds and amount of new capital. China’s National Social Security Fund accelerated the process of investing part of the country’s retirement savings in PE. At the same time, the country’s largest insurance companies received approval to begin investing directly in PE, which could add hundreds of billions of Renminbi in new capital to the pool available for pre-IPO investing in China’s private companies.

China First Capital has just published its third annual report on private equity in China. It is available in Chinese only by clicking here:  CFC 2011 Report. Or, you can download directly from the Research Reports section of the CFC website.

The report is illustrated with examples of Shang Dynasty bronze ware. I returned recently from Anyang, in Henan. Anyone with even a passing interest in these early Chinese bronze wares should visit the city’s splendid Yinxu Museum.

This strong acceleration of the PE industry in China contrasts with situation in the rest of the world. In the US and Europe, both PE and VC investments remained at levels significantly lower than in 2007. IPO activity in these areas remains subdued, while the number of Chinese companies going public, and the amount of capital raised, both reached new records in 2010. There is every sign 2011 will surpass 2010 and so widen even farther the gap separating IPO activity for Chinese companies and those elsewhere.

The new CFC report argues that China’s PE industry has three important and sustainable advantages compared to other parts of the world. They are:

  1. High economic growth – at least five times higher in 2010 than the rate of gdp growth in the US and Europe
  2. Active IPO market domestically, with high p/e multiples and strong investor demand for shares in newly-listed companies
  3. A large reservoir of strong private companies that are looking to raise equity capital before an IPO

CFC expects these three trends to continue during 2011 and beyond. Also important is the fact that the geographic scope of PE investment in China is now extending outside Eastern China into new areas, including Western China, Shandong,  Sichuan. Previously, most of China’s PE investment was concentrated in just four provinces (Guangdong, Fujian, Zhejiang, Jiangsu) and its two major cities, Beijing and Shanghai. These areas of China now generally have lower rates of economic growth, higher labor costs and more mature local markets than in regions once thought to be backwaters.

PE investment is a bet on the future, a prediction on what customers will be buying in three to five years. That is the usual time horizon from investment to exit. China’s domestic market is highly dynamic and fast-changing. A company can go from founding to market leadership in that same 3-5 year period.  At the same time, today’s market leaders can easily fall behind, fail to anticipate either competition or changing consumer tastes.

This Schumpetrian process of “creative destruction” is particularly prevalent in China. Markets in China are growing so quickly, alongside increases in consumer spending, that companies offering new products and services can grow extraordinary quickly.  At its core, PE investment seeks to identify these “creative destroyers”, then provide them with additional capital to grow more quickly and outmaneuver incumbents. When PE firms are successful doing this, they can earn enormous returns.

One excellent example: a $5 million investment made by Goldman Sachs PE in Shenzhen pharmaceutical company Hepalink in 2007.  When Hepalink had its IPO in 2010, Goldman Sachs’ investment had appreciated by over 220 times, to a market value of over $1 billion.

Risk and return are calibrated. Technology investments have higher rates of return (as in example of Goldman Sachs’s investment in Hepalink)  as well as higher rates of failure. China’s PE industry is now shifting away from investing in companies with interesting new technologies but no revenue to PE investment in traditional industries like retail, consumer products, resource extraction.  For PE firms, this lowers the risk of an investment becoming a complete loss. Rates of return in traditional industries are often still quite attractive by international standards.

For example: A client of CFC in the traditional copper wire industry got PE investment in 2008. This company expects to have its IPO in Hong Kong later this year. When it does, the PE firm’s investment will have risen by over 10-fold.  Our client went from being one of numerous smaller-scale producers to being among China’s largest and most profitable in the industry. In capital intensive industries, private companies’ access to capital is still limited. Those firms that can raise PE money and put it to work expanding output can quickly lower costs and seize large amounts of market share.

Our view: the risk-adjusted returns in Chinese private equity will continue to outpace most other classes of investing anywhere in the world. China will remain in the vanguard of the world’s alternative investment industry for many long years to come.


 

 

 

Entrepreneurship in China– The Fuel in the Economy’s Engine

1 Comment / April 26, 2011

Fish bowl from China First Capital blog

China’s only abundant and inexhaustible natural resource is the entrepreneurial talent of its people. Nowhere else in the world can match the number of talented businesspeople, both in absolute numbers and as a share of the active population. That’s what I’ve learned in a 25-year career working alongside great entrepreneurs in the US, Europe and Asia. Today’s China is the most entrepreneurially-endowed place in the world. What that means, above all, is that China’s economy, propelled by robust entrepreneurial activity,  will prosper for the next several decades at least.

Entrepreneurs everywhere seem to share a common gene, and have more in common with one another than they do with the rest of the population in their home countries. They are more tolerant of risk, more compelled to try or invent new things, more able to see opportunities for profit, especially when they are invisible to others.

But, in China, entrepreneurs have some unique characteristics compared to those in the US and Europe. For one thing, until comparatively recently, China’s economy was a near-perfect socialist vacuum in which entrepreneurship could not survive.  The economy was almost entirely in state hands. Laws giving equal treatment to private companies were only introduced in 2005. Decades of pent-up entrepreneurial energy were unleashed. More great private companies have been started in the last ten years in China than in any other place in history.

We are still in the early years of the Big Bang of Chinese entrepreneurship. Everyone in the world is feeling the effects. Within China, private entrepreneurs now supply much of what China’s vast consumer market buys. Outside China, much of what’s labeled “Made in China” is produced in factories started and run by these new entrepreneurs.

There are some other important ways in which China’s entrepreneurs are different than those in US and Europe. A very minor percentage of China’s entrepreneurs are university graduates. They build their companies with almost no capital, and no access to bank credit. They face daunting challenges unknown to entrepreneurs most everywhere else: an absence of clear commercial laws or intellectual property protection, very burdensome tax and labor rules, holdover policies that give state-owned companies significant advantages.

Despite it all, every year, more of China’s population are going into business for themselves. Not all will build billion-dollar businesses. But, more will do so in China over the next several decades than anywhere else.

Partly, it’s simple math: China has both a huge domestic market and is the world’s largest manufacturing and exporting nation. But, these factors are themselves the product of China’s earlier entrepreneurial success, not a precondition for it. Earlier entrepreneurs created the fertile environment for today’s new private companies to thrive. The process is cumulative, and very fast-moving.. I see this every day in my work. We are meeting more great entrepreneurs now, on a weekly basis, than we did three, six or twelve months ago.

Another fact stands out when I compare these Chinese entrepreneurs to others I’ve worked with in the US and Europe. Chinese entrepreneurs do most everything single-handedly. They build companies without relying on a big management team or a circle of advisors. Decision-making is mainly based on hunch and experience, not on market research or focus groups. Even large private companies in China are managed like sole proprietorships. Nothing of importance is delegated. One person controls all the decision-making levers, casting the one and deciding vote on any issue of importance to do with operations, marketing, finance, strategy, sales. They are lone navigators, steering their businesses through very tricky waters, dealing with government officials, suppliers, customers, as well as their own employees.

Since starting China First Capital three years ago, I’ve been fortunate enough to meet several hundred outstanding Chinese entrepreneurs from dozens of different industries. Most are cut from the same cloth — crisp, confident, charismatic. With few exceptions, most do not have college degrees or much experience working for anyone else. They are born entrepreneurs.

Take one boss I met recently. He began his working life 30 years ago, after high school, as a trader. He was good at it, and saved enough, eventually, to go into manufacturing one of the products he was selling as a wholesaler to others. He moved up quickly, from producing basic low-margin commodity products to investing in his own R&D. He kept plowing profits back into the R&D work, and then to build new factory lines to produce a range of unique, patent-protected products he invented. These products deliver higher margins and target a larger, richer market than anything he previously manufactured.

The business is now growing very swiftly. Also typical, his son has joined the business, after getting a college degree abroad.  This boss, like most others I have met, knows how to work the system to his maximum advantage. His new products let him qualify as a high-tech enterprise, and so pay a much lower corporate income tax rate. The local government has shown its further support by selling him a large tract of land to build a new factory on, at a fraction of its market price.

This boss, somewhat uncommonly, has a very strong management team around him to manage finances, factory production and marketing. He is the force of gravity holding whole business together. It’s hard to imagine anyone else, except perhaps one day his son, could run this business as well. That’s another characteristic shared by most good entrepreneurial companies in China – they are never quite as successful once the founder steps down.

Another distinguishing trait of entrepreneurship in China – there are far more women bosses here than I ever saw in the US or Europe.  The ones I’ve met, along with being successful entrepreneurs, are also all quite elegant, attractive, even seductive. Those aren’t words usually associated with entrepreneurs anywhere else in the world.

According to the magazine China Entrepreneur, there are currently more than 29 million female entrepreneurs in China,  or about 20% of the total number of entrepreneurs in the country. Overall, China has more entrepreneurs, male and female, than most countries have citizens.

China’s economy continues to perform at a level never achieved by a major economy. Can this continue? I believe it can. The most emphatic reason is the entrepreneurial genius of so many of its citizens.

 

 

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How Big Can PE Industry in China Grow?

Leave a Comment / April 12, 2011

Ivory carved vase

By one conventional measure, China’s private equity industry is still a fraction of the size of larger developed economies. The PE penetration rate calculates the total annual flow of private equity finance as a percentage of total GPD. In China, the PE penetration rate is currently 0.1% of GDP. In the US, it’s eight times larger. In the UK, the flow of PE funding 2% of GDP, or twenty times the size of China.

While this calculation of PE penetration rate correctly suggests China’s PE industry still has significant room for growth, it is also somewhat misleading. It’s an apples-and-oranges comparison. Private equity in the US and Europe is mainly used to take over large underperforming businesses or subsidiaries of big public companies. These are control investments, usually financed with heavy amounts of borrowed money and a relative sliver of equity. These deals routinely exceed $1 billion. Indeed, during the first half of this year, the ten largest PE deals, all involving US companies, had total transaction value of over $20 billion.

In China, these sort of leveraged buyout deals, for the most part,  are impossible. PE capital in China flows almost entirely into minority investments in profitable fast-growing private companies. Typical deal size is $10mn for 15%-20% of a company’s shares. Deals of this kind are far more rare in the US and UK.

The more accurate term for Private Equity investing in China is “growth capital investment.” The goal is to add fuel to a fire, providing a fast-growing company with additional capital to build new factories or expand its sales and distribution channels. This kind of investing has a far higher success rate than PE investing in the US and Europe. In China, PE firms support winners. In the rest of the world, PE firms generally try to heal the wounded.

If you measured the penetration rate of growth capital investment, I have no doubt China would now be number one in the world. Nowhere else in the world can match China in the number of great private companies that are growing by over 30% a year, have the scale, experience, management and market leadership to continue to double in size every two to three years. The only real limiting factor is a shortage of capital. That’s where PE firms come in. They invest, monitor, then exit a few years later through an IPO.

That’s another big difference between PE in China and the rest of the world. PE investors in China don’t work nearly as hard as they do elsewhere. In China, the hardest part is finding good companies and then agreeing on the size and valuation of an investment. After that, it’s usually smooth sailing. In the US and Europe, it’s not only difficult to find good investment opportunities. The big challenge begins after an investment is made, in designing and then implementing often complex, risky restructuring plans, including a lot of hiring and firing.

With so much bank borrowing involved, short-term cash-flow problems can prove fatal for the PE firm’s investment. Miss an interest payment and banks can seize the business, wiping out the PE firm’s equity investment. A notable example: Cerberus’s leveraged takeover of US automaker Chrysler. Within six months of the deal’s closing, Cerberus’s $7.4 billion investment was mainly wiped out when Chrysler’s sales plummeted.

In China, PE deals also occasionally turn sour. But, the most common reason is fraud or simple theft. PE money goes into a company and disappears, usually into personal bank account of the company’s boss. This isn’t very common. But, it does happen. The PE firm will usually have a legal right to take control of a company if its money is lost or misused. But, the legal process can be slow and the outcome uncertain. By the time a PE gains control, just about everything of value can be drained out of the company. The PE firm ends up owning 100% of a business worth far less than what they put into it.

In China, PE firms often play the role of a disciplinarian, setting up rules and doling out cash as a reward for good behavior. In the US and Europe, the PE is more like a doctor in a trauma ward.

McKinsey & Company, the global consulting firm, has estimated that China’s private equity fund penetration rate could more than quadruple in the next five years, to reach 0.5% of GDP.  If so, the annual amount of PE capital flowing into private companies could reach Rmb200 billion (US$30 billion.)  There are certainly enough good investment opportunities.

At this point, the main thing holding the industry back is a lack of strong, talented people inside PE firms. Great entrepreneurs vastly outnumber great investors in China.

 

 

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The Easiest Company in the World to Run

Leave a Comment / March 28, 2011

sancai19

If you could be the boss of any company in the world, with your pay package completely tied to performance, which would you choose? If you answered Kweichow Moutai Ltd., congratulations. You couldn’t have made a better choice.

For those who don’t know this company, it is the largest and by far most successful distiller of China’s favored prestige alcoholic drink. There is no faster-growing, large spirits company anywhere in the world. Better still, if you do become boss, there’s just about nothing you could do short of outright criminality that would in any way slow its stupefying growth rate.  In 2010, sales rose by about 20% to over $2.2 billion. So strong and constant is the demand for the company’s product that their major headache is preventing designated retailers from raising the price above the already sky-high levels fixed by the company.

During 2010, the street price of a bottle of Moutai’s highest-end brew, called Feitian, doubled from Rmb 700 ($105) to over Rmb1,300 ($200). The raw material cost? Probably under Rmb10 per bottle.  Getting a fix on its real level of profitability is hard to do. But, in my estimation, there is no more profitable liquid mass-produced anywhere in the world. Make no mistake. Moutai is not 25-year-old Courvoisier. Chinese love the stuff. But, it is a species of what Americans would call “rockgut”, distilled from a low-end grain called sorghum and then diluted with water drawn from springs surrounding the distillery in Guizhou province.

When I first came to China 30 years ago, a bottle of Moutai cost no more than a few dollars. It’s the same stuff today, brewed according to a Qing Dynasty formula. The main difference is that over 30 years, the price has gone up 30-fold. And no, that’s not because sorghum prices have skyrocketed.

So, what explains Moutai’s astounding success? Simple math. More and more Chinese chasing an insufficient supply of the country’s highest-end liquor brand. Consumption of bottled liquor has grown by 20% over the last five years, and shows no sign of slowing. Moutai plans to double its output over the next four years, then double it again by 2020. Overall, the plan is to increase output by 2.5 times in next nine years.

At the start of the year,  Moutai put in a price cap, to try to stop its retailers selling Feitian for over Rmb959 a bottle.  The price immediately shot up over Rmb1,200. Seeing the Moutai fly off the shelves, retailers then imposed limits on the number of bottles a customer could buy at one time. Supply restricted, the price just kept climbing.

Packaging and marketing are pretty much unchanged over the last 30 years. Along withTsingtao beer, it’s one of the few branded products in China to stick to the old and clumsy pre-revolution spelling of its name. The company is called Kweichow Moutai but no one knows it under that name. In China, it is pronounced “Gway-Joe Mao-Tai”.

Good, bad or indifferent, whoever is the CEO of this company (the current incumbent is Yuan Renguo) will certainly succeed in keeping things buoyant. As long as Chinese keep making money, they are going to spend a percentage on Moutai. The company has even achieved some success in export markets lately, with sales rising 55% to $50mn in 2010.

If Mr. Yuan chooses early retirement and wants to bring in some foreign blood at the top, I’m available to take over. I’ve been to Guizhou, most recently just two weeks ago,  and like the scenery and the food. I also know how (thanks to a Guizhou client)  to evaluate the quality of Moutai: you rub a bit between your palms. If it smells like soy sauce, it’s the real thing.

The only snag: I’m not much of a fan of the company’s product. Since moving to China, I’ve had enough of it to pickle a goodly portion of my liver. But, it’s still an unacquired taste. Drinking good cognac or Armagnac familiarizes you with the aromas of peat and oak. Drinking Moutai familiarizes you with how instantaneously alcohol can go from gullet to bloodstream. Most frequently, I can remember drinking Moutai but not how I get home afterward. Maybe that’s the secret to the brand’s success?

 

 

 

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Taxed At Source: Renminbi Private Equity Firms Confront the Taxman

Leave a Comment / March 15, 2011

snuff1

The formula for success in private equity is simple the world over: make lots of money investing other people’s money, keep 20% of the profits and pay little or no taxes on your share of the take. This tax avoidance is perfectly legal. PE firms are usually incorporated as offshore holding companies in tax-free domains like the Cayman Islands.

Depending on their nationality, partners at PE firms may need to pay some tax on the profits distributed to them individually. But, some quick footwork can also keep the taxman at bay. For example, I know PE partners who are Chinese nationals, living in Hong Kong. They plan their lives to be sure not to be in either Hong Kong or China for more than 182 days a year, and so escape most individual taxes as well. Even when they pay, it’s usually at the capital gains rate, which is generally far lower than income tax.

The tax efficiency is fundamental to private equity, and most other forms of fiduciary investing. If the PE firm’s profits were assessed with income tax ahead of distributions to Limited Partners (“LPs”), it would significantly reduce the overall rate of return, to say nothing about potentially incurring double taxation when those LPs share of profits got dinged again by the tax man.

China, as everyone in the PE world knows, is very keen to foster growth of its own homegrown private equity firms. It has introduced a raft of new rules to allow PE firms to incorporate, invest Renminbi and exit via IPO in China. So far so good. The Chinese government is also pouring huge sums of its own cash into private equity, either directly through state-owned companies and agencies, or indirectly through the country’s pay-as-you-go social security fund. (See my recent blog post here.)

Exact figures are hard to come by. But, it’s a safe bet that at least Rmb100 billion (USD$15 billion) in capital was committed to domestic private equity firms last year. This year should see even larger number of new domestic PE firms established, and even larger quadrants of capital poured in.

It’s going to be a few years yet before the successful Chinese domestic PE firms start returning significant investment profits to their investors. When they do, their investors will likely be in for something of an unpleasant surprise: the PE firms’ profits, almost certainly, will be reduced by as much as 25% because of income tax.

In other words, along with building a large homegrown PE industry that can rival those of the US and Europe, China is also determined to assess those domestic PE firms with sizable income taxes. These two policy priorities may turn out to be wholly incompatible. PE firms, more than most, have a deep, structural aversion to paying income tax on their profits. For one thing, doing so will cut dramatically into the personal profits earned by PE partners, lowering significantly the after-tax returns for these professionals. If so, the good ones will be tempted to move to Hong Kong to keep more of their share of the profits they earn investing others’ money. If so, then China could get deprived of some experienced and talented PE partners its young industry can ill afford to lose.

It’s still early days for the PE industry in China. Renminbi PE firms really only got started two years ago. I’ve yet to hear any partners of domestic PE firms complain. But, my guess is that the complaining will begin just as soon as these PE firms begin to have successful exits and begin to write very large checks to the Chinese tax bureau. What then?

China’s tax code is nothing if not fluid. New tax rules are announced and implemented on a weekly basis. Sometimes taxes go down. Most often lately, they go up.  Compared to developed countries, changing the tax code in China is simpler, speedier. So, if the Chinese government discovers that taxing PE firms is causing problems, it can reverse the policy rather quickly.

The PE firms will likely argue that taxing their profits will end up hurting hundreds of millions of ordinary Chinese whose pensions will be smaller because the PE firms’ gains are subject to tax. In industry, this is known as the “widows and orphans defense”. Chinese contribute a share of their paycheck to the state pension system, which then invests this amount on their behalf, including about 10% going to PE investment.

PE firms outside China are structured as offshore companies, with offices in places like London, New York and Hong Kong, but a tax presence in low- and no-tax domains. But, there’s currently no real way to do this in China, to raise, invest and earn Renminbi in an offshore entity. Changing that opens up an even larger can of worms, the current restrictions preventing most companies or individuals outside China from holding or investing Renminbi. This restriction plays a key part in China’s all-important Renminbi exchange rate policy, and management of the country’s nearly $2.8 trillion of foreign reserves.

The world’s major PE firms are excitedly now raising Renminbi funds. Several have already succeeded, including Carlyle and TPG. They want access to domestic investment opportunities as well as the high exit multiples on China’s stock market. When and if the income tax rules start to bite and the firm’s partners get a look at their diminished take, they may find the appeal of working and investing in China far less alluring.

 

 

 

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CFC’s Latest Research Report Addresses Most Treacherous Issue for Chinese Companies Seeking Domestic IPO

Leave a Comment / March 6, 2011

camelcover

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For Chinese private companies, one obstacle looms largest along the path to an IPO in China: the need to become fully compliant with China’s tax and accounting rules.  This process of becoming “规范” (or “guifan” in Pinyin)  is not only essential for any Chinese company seeking private equity and an eventual IPO, it is also often the most difficult, expensive, and tedious task a Chinese entrepreneur will ever undertake.

More good Chinese companies are shut out from capital markets or from raising private equity because of this “guifan” problem than any other reason. It is also the most persistent challenge for all of us active in the PE industry and in assisting SME to become publicly-traded businesses.

My firm has just published a Chinese-language research report on the topic, titled “民营企业上市规范问题”. You can download a copy by clicking here or from Research Reports page of the CFC website.

The report was written specifically for an audience of Chinese SME bosses, to provide them both with analysis and recommendations on how to manage this process successfully.  Our goal here (as with all of our research reports) is to provide tools for Chinese entrepreneurs to become leaders in their industry, and eventually leaders on the stock market. That means more PE capital gets deployed, more private Chinese companies stage successful exits and most important, China’s private sector economy continues its robust growth.

For English-only speakers, here’s a summary of some of the key points in the report:

  1. The process of becoming “guifan” will almost always mean that a Chinese company must begin to invoice all sales and purchases, and so pay much higher rates of tax, two to three years before any IPO can take place
  2. The higher tax rate will mean less cash for the business to invest in its own expansion. This, in turn, can lead to an erosion in market share, since “non-guifan” competitors will suddenly enjoy significant cost advantages
  3. Another likely consequence of becoming “guifan” – significantly lower net margins. This, in turn, impacts valuation at IPO
  4. The best way to lower the impact of “guifan” is to get more cash into the business as the process begins, either new bank lending or private equity. This can replenish the money that must now will go to pay the taxman, and so pump up the capital available to expansion and re-investment
  5. As a general rule, most  Chinese private companies with profits of at least Rmb30mn can raise at least five times more PE capital than they will pay in increased annual taxes from becoming “guifan”. A good trade-off, but not a free lunch
  6. For a PE fund, it’s necessary to accept that some of the money they invest in a private Chinese company will go, in effect, to pay Chinese taxes. But, since only “guifan” companies will get approved for a domestic Chinese IPO, the higher tax payments are like a toll payment to achieve exit at China’s high IPO valuations
  7. After IPO, the company will have plenty of money to expand its scale and so, in the best cases, claw back any cost disadvantage or net margin decline during the run-up to IPO

We spend more time dealing with “guifan” issues than just about anything else in our client work. Often that means working to develop valuation methodologies that allow our clients to raise PE capital without being excessively penalized for any short-term decrease in net income caused by “guifan” process.

Along with the meaty content, the report also features fifteen images of Tang Dynasty “Sancai“ ceramics, perhaps my favorite among all of China’s many sublime styles of pottery.



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Is US Right to Fear China’s Industrial Policy?

1 Comment / February 21, 2011

Yixing teapot 4

A particularly – and atypically – alarmist article ran recently in the Wall St. Journal titled “U.S. Firms, China in Tech War” . You can read it here ( WSJ Article) and decide for yourself. The thrust is that Chinese national policy has shifted in recent years, making it more difficult for Western government companies to win government contracts and protect their most valuable intellectual property. According to the Journal, it’s part of a new “Chinese industrial policy” to transform China into a hothouse of homegrown leading edge technologies, with companies able to challenge American supremacy.

It makes good copy. According to the article, the issues are of such portent that President Obama discussed them directly with China’s leader, Hu Jintao, during the latter’s visit to the US last month. The article cites a fretful report from the US Chamber of Commerce in China, titled “China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies”.  The report claims China is building an “intricate web of new rules considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before.”

To me, it seems that the Journal may be guilty of mistaking cause for effect. Is China pursuing a nationalist domestic procurement policy? Most likely, just as the US and virtually every other developed country does. Will this make it harder for non-Chinese companies to sell gear to China’s government agencies?  Quite probably. Are Chinese rules crafted in such a way to make it obligatory for Western companies to transfer their technology to Chinese partners? Seems to be the case.

But, will any of this actually achieve the stated goal? Here, I’m a lot less agitated than the Americans quoted in the Journal article. The reason is also found in the same article, which makes a passing reference to similar rules in place in Japan, Korea, Germany and elsewhere. Fat lot of good they’ve done those countries.  Their aggressive “buy local” rules, and other protectionist measures to “nurture” domestic innovation have done little to nothing to achieve their stated aim. In fact, the opposite is the case. If you want to draw up a list of the countries that have lost significant ground to the US in new technologies over the last twenty years, you can start with those that pursued similar regimes to China.

Twenty years ago, France, Germany and Japan all had large, well-known computer companies. Today, Bull, Nixdorf and NEC are either bankrupt or laughing stocks. Their governments’ passionate embrace turned out to be a kiss of death.

The same is true in the industries that the US government has chosen to support and nourish with subsidies and protection. Think about the billions wasted (or as our current US administration tabs it “invested” ) on “alternative energy” and “clean transport” in the US.

Industrial policy, in almost all cases, has a track record untainted by success. There are a lot of good reasons for this, but the most fundamental of all is that government officials, however well-schooled and well-meaning, have no competence to choose winning technologies, and certainly do so with far diminished effectiveness than an open, vibrant market of billions of customers.

Governments all love command and control. The problem is they can only do one of the two. Commanding your citizens to produce advanced products, and lavishing subsidies and protection on those who pay attention to you, is not the same as controlling which technologies will prove most useful, as well as most time- and money-saving.

Yes, this system can produce bullet trains in Japan and China, and maglev trains in Germany. Problem is, no one else wants to buy them, and your citizens are mainly too busy and happy futzing around on Facebook or Google to much care about any of this.

If China does favor domestic technology companies, the risk is these companies produce just enough innovation to please their government customers. But,  like Bull, Nixdorf and NEC, they will produce nothing that anyone else with free choice will care to buy.

Sure, I’d like US companies to have a better crack at the Chinese market. But, then again, I’d like some of my Chinese clients to have a better crack also at the Japanese, Korean and European markets they are often shut out of. Governments by their nature, sadly, are usually protectionist and nationalist. China is no different. The US has often tried to keep these malign instincts at bay. But, my homeland has all kinds of “buy American” favoritism in place for government contracts.

Innovation is important. But, often enough, it’s good marketing, pricing and efficient global distribution that wins customers, and generates the profits to reinvest in more new ideas and products. I don’t know of a single great technology company that relies on its national government as a main customer. Those that do so, like SAIC in the US or EADS in Europe, often end up falling behind the technology curve.

US companies have every right to complain about unfair procurement policies in China. There’s no solid ground, however, for believing that these same policies will result in China producing world-beating technology companies in the future. One of the surest way to find the failed technology companies of the future is to search for those whose main customers are their own nation’s bureaucrats.

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In Full Agreement

Leave a Comment / January 27, 2011

pyramid

I commend unreservedly the following article from today’s Wall Street Journal editorial page. It discusses US reverse mergers and OTCBB IPOs for Chinese companies, identifying reasons these deals happen and the harm that’s often done.


What’s Behind China’s Reverse IPOs?


A dysfunctional financial system pushes companies toward awkward deals in America.
By JOSEPH STERNBERG

As if China Inc. didn’t already have enough problems in America—think safety scares, currency wars, investment protectionism and Sen. Chuck Schumer—now comes the Securities and Exchange Commission. Regulators are investigating allegations of accounting irregularities at several Chinese companies whose shares are traded in America thanks to so-called reverse mergers. Regulators, and not a few reporters, worry that American investors may have been victims of frauds perpetrated by shady foreign firms.

Allow us to posit a different view: Despite the inevitable bad apples, many of the firms involved in this type of deal are as much sinned against as sinning.

In a reverse merger, the company doing the deal injects itself into a dormant shell company, of which the injected company’s management then takes control. In the China context, the deal often works like this: China Widget transfers all its assets into California Tallow Candle Inc., a dormant company with a vestigial penny-stock listing left over from when it was a real firm. China Widget’s management simultaneously takes over CTC, which is now in the business of making widgets in China. And thanks to that listing, China Widget also is now listed in America.

It’s an odd deal. The goal of a traditional IPO is to extract cash from the global capital market. A reverse merger, in contrast, requires the Chinese company to expend capital to execute what is effectively a purchase of the shell company. The company then hopes it can turn to the market for cash at some point in the future via secondary offerings.

Despite its evident economic inefficiencies, the technique has grown popular in recent years. Hundreds of Chinese companies are now listed in the U.S. via this arrangement, with a combined market capitalization of tens of billions of dollars. Some of those may be flim-flammers looking to make a deceitful buck. But by all accounts, many more are legitimate companies. Why do they do it?

One relatively easy explanation is that the Chinese companies have been taken advantage of by unscrupulous foreign banks and lawyers. In China’s still-new economy with immature domestic financial markets, it’s entirely plausible that a large class of first-generation entrepreneurs are relatively naïve about the art of capital-raising but see a listing—any listing—as a point of pride and a useful marketing tool. There may be an element of truth here, judging by the reports from some law firms that they now receive calls from Chinese companies desperate to extract themselves from reverse mergers. (The news for them is rarely good.)

More interesting, however, is the systemic backdrop against which reverse mergers play out. Chinese entrepreneurs face enormous hurdles securing capital. A string of record-breaking IPOs for the likes of Agricultural Bank of China, plus hundred-million-dollar deals for companies like Internet search giant Baidu, show that Beijing has figured out how to use stock markets at home and abroad to get capital to large state-owned or well-connected private-sector firms. The black market can deliver capital to the smallest businesses, albeit at exorbitant interest rates of as much as 200% on an annual basis.

The weakness is with mid-sized private-sector companies. Bank lending is out of reach since loan officers favor large, state-owned enterprises. IPOs involve a three-year application process with an uncertain outcome since regulators carefully control the supply of new shares to ensure a buoyant market. Private equity is gaining in popularity but is still relatively new, and the uncertain IPO process deters some investors who would prefer greater clarity about their exit strategy. In this climate, it’s not necessarily a surprise that some impatient Chinese entrepreneurs view the reverse merger, for all its pitfalls, as a viable shortcut.

So although the SEC investigation is likely to attract ample attention to the U.S. investor- protection aspect of this story, that is the least consequential angle. Rules (even bad ones) are rules. But these shares are generally held by sophisticated hedge-fund managers and penny-stock day traders who ought to know that what they do is a form of glorified gambling.

Rather, consider the striking reality that some 30-odd years after starting its transformation to a form of capitalism, China still has not figured out one of capitalism’s most important features: the allocation of capital from those who have it to those who need it. As corporate savings pile up at inefficient state-owned enterprises, potentially successful private companies find themselves with few outlets to finance expansion. If Beijing can’t solve that problem quickly, a controversy over some penny stocks will be the least of anyone’s problems.

Mr. Sternberg is an editorial page writer for The Wall Street Journal Asia.

US Government Acts to Police OTCBB IPOs and Reverse Mergers for Chinese Companies

1 Comment / January 5, 2011

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In my experience, there is one catastrophic risk for a successful private company in China. Not inflation, or competition, or government meddling. It’s the risk of doing a bad capital markets deal in the US, particularly a reverse merger or OTCBB listing.  At last count, over 600 Chinese companies have leapt off these cliffs, and few have survived, let alone prospered. Not so, of course, the army of advisors, lawyers and auditors who often profit obscenely from arranging these transactions.

Not before time, the US Congress and SEC are both now finally investigating these transactions and the harm they have done to Chinese companies as well as stock market investors in the US. Here is a Chinese language column I wrote on this subject for Forbes China: click here to read.

As an American, I’m often angry and always embarrassed that the capital market in my homeland has been such an inhospitable place for so many good Chinese companies. In fact, my original reason for starting China First Capital over two years ago was to help a Jiangxi entrepreneur raise PE finance to expand his business, rather than doing a planned “Form 10” OTCBB.

We raised the money, and his company has since quadrupled in size. The founder is now planning an IPO in Hong Kong later this year, underwritten by the world’s preeminent global investment bank. The likely IPO valuation: at least 10 times higher than what was promised to him from that OTCBB IPO, which was to be sponsored by a “microcap” broker with a dubious record from earlier Chinese OTCBB deals.

In general, the only American companies that do OTCBB IPOs are the weakest businesses, often with no revenues or profits. When a good Chinese company has an OTCBB IPO, its choice of using that process will always cast large and ineradicable doubts in the mind of US investors. The suspicion is, any Chinese entrepreneur who chooses a reverse merger or OTCBB IPO either has flawed business judgment or plans to defraud his investors. This is why so many of the Chinese companies quoted on the OTCBB companies have microscopic p/e multiples, sometimes less than 1X current year’s earnings.

The US government is finally beginning to evaluate the damage caused by this “mincing machine” that takes Chinese SME and arranges their OTCBB or reverse mergers. According to a recent article in the Wall Street Journal, “The US Securities and Exchange Commission has begun a crackdown on “reverse takeover” market for Chinese companies. Specifically, the SEC’s enforcement and corporation-finance divisions have begun a wide-scale investigation into how networks of accountants, lawyers, and bankers have helped bring scores of Chinese companies onto the U.S. stock markets.”

In addition, the US Congress is considering holding hearings. Their main goal is to protect US investors, since several Chinese companies that listed on OTCBB were later found to have fraudulent accounting.

But, if the SEC and Congress does act, the biggest beneficiaries may be Chinese companies. The US government may make it harder for Chinese companies to do OTCBB IPO and reverse mergers. If so, then these Chinese firms will need to follow a more reliable, tried-and-true path to IPO, including a domestic IPO with CSRC approval.

The advisors who promote OTCBB IPO and reverse mergers always say it is the fastest, easiest way to become a publicly-traded company. They are right. These methods are certainly fast and because of the current lack of US regulation, very easy. Indeed, there is no faster way to turn a good Chinese company into a failed publicly-traded than through an OTCBB IPO or reverse merger.


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The Greenest and Maybe Cleanest Vehicle on the Road

6 Comments / December 28, 2010

scooter

Is this the zero-emissions green vehicle of the future? For the masses, possibly not.  For me personally, maybe so. It’s a battery-powered electric scooter, with solar panels for recharging during daylight hours.

I’ve become a big fan, and a minor authority, on battery-powered electric scooters. I’ve owned a few. A Chinese-made electric scooter was my primary form of urban transportation while living and working in Los Angeles until moving to China last year.

Though I never saw another one on the road in LA, I’m a passionate believer in this mode of transport. In China, electric scooters are almost as common as passenger cars, with upwards of five million sold every year. The streets and sidewalks are crowded with them. They run on lead acid batteries, the same kind used in car batteries.

The electric scooters sold now in China rely on plug-in battery rechargers. That’s the biggest drawback of driving one. Lead acid batteries can take up to eight hours to recharge. This new solar-powered recharger should solve that problem. The battery recharges automatically as you ride around, as long as there’s sunlight. Assuming the solar recharger works, this electric scooter becomes a street-legal perpetual motion machine, never needing, at least during daytime, to stop for a recharge.

I met the inventor, Zhao Weiping, at a trade exhibition. I could barely contain my excitement. We discussed the science, the capacity of the solar panels, and the potential to upgrade the batteries to lighter, longer-lasting lithium batteries. He’s only built prototypes so far. He expects the cost, for a base model, to be around Rmb3,000 ($440).

With lithium batteries, the price goes up to around $750. Lithium batteries take half the time to recharge.

Another benefit of lithium: the batteries weigh less than half lead acid ones. Less weight means less drag and so farther range on a full battery and faster top speeds.  Engineer Zhao guesses top speed should be about 50kph (30mph) compared to 30kph (18mph) for lead acid models.

To me, it sounds like the ideal form urban transport: zero emissions, reliable, fast enough to keep up with traffic, and will rarely, if ever, require mains electricity to recharge. In other words, zero cost per kilometer traveled.

It gets better: in much of the US, including California, you don’t need a driver’s license or insurance to drive an electric scooter, and you can drive it legally in bicycle lanes. Of course, few traffic cops know any of these facts. I was pulled over routinely in California, while riding my electric scooter. Eventually, I created a plastic-coated car card with all the relevant clauses of the state traffic code. I’d present it to traffic police, and they’d usually let me head off after a few minutes.

In LA, I drove a Chinese electric scooter upgraded with lithium. Top speed was about 24 mph. Recharging time: four to five hours. As commutes go, my 9-mile trip to work was about as pleasant and relaxing as any could be. Most of my route was along the Pacific Ocean, and then through some of the hipper areas of Santa Monica and Venice. When the roads were crowded at rush hour, I’d switch into the bicycle lane. You can park anywhere on the sidewalk, just like a bicycle.

The biggest hazard is pedestrians. The scooters are so quiet that people don’t hear it coming. I had a few near misses.

I never understood why so few in California ride electric scooters. I never saw another one on the road. California is certainly one of the most environmentally-conscious places on earth. Motorized transport doesn’t get any greener than electric scooters. Zero emissions, zero fossil fuels, zero direct carbon footprint.

Those green credentials were never my main reasons for riding an electric scooter. I liked the convenience, the tranquility, the absence of traffic and the sheer exhilaration of riding it.

Exhilaration, however, is instantly transformed into despair when your battery runs out of juice.  It happened to me a few times, when I miscalculated the range. Open throttle riding, going uphill, lots of stops and starts can all drain the battery rather quickly. The meter showing battery life is, at best, unreliable. When the battery is empty, the scooter will shudder once, then conk out completely.

Run out of fuel with an internal combustion engine, you call the AAA or find a gas station. Run out of electricity with an electric scooter and your only real choice is to push the vehicle home for recharge. I’ve had to do it more than once.

Engineer Zhao’s solar-powered recharger should make that problem less common, if not eliminate it altogether. At worst, if the battery empties, you park it and in daytime, come back in a few hours and drive it away. Limitless range should make for limitless enjoyment.

Yes, but will Engineer Zhao’s machine work? Talking with him, it’s hard not to be confident it will. The solar panels are powerful enough to keep the batteries recharged and light enough not to create a lot of extra drag. The only way to find out, of course, is to get one. I’m thinking now of commissioning Engineer Zhao to build me one, with lithium batteries.

If it works, I’ll help Engineer Zhao get venture capital funding to build his company. My gut tells me I’m not the only one who’d ride around on one, and that there could be a very big market in the US, Europe and China for this solar-charged scooter.

I don’t particularly relish the idea of driving any sort of vehicle on Shenzhen’s streets. Driving is chaotic. Accidents common. Pollution awful. There are no bicycle lanes. But, I’m prepared to put my money – and perhaps my health – on the line to prove this is a vehicle with a future and perhaps even a mass market.

Wish me luck.

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CFC’s New Research Report, Assessing Some Key Differences in IPO Markets for Chinese Companies

Leave a Comment / December 7, 2010

China First Capital research report cover

For Chinese entrepreneurs, there has never been a better time to become a publicly-traded company.  China’s Shenzhen Stock Exchange is now the world’s largest and most active IPO market in the world. Chinese companies are also active raising billions of dollars of IPO capital abroad, in Hong Kong and New York.

The main question successful Chinese entrepreneurs face is not whether to IPO, but where.

To help entrepreneurs make that decision, CFC has just completed a research study and published its latest Chinese language research report. The report, titled “民营企业如何选择境内上市还是境外上市” (” Offshore or Domestic IPO – Assessing Choices for Chinese SME”) analyzes advantages and disadvantages for Chinese SME  of IPO in China, Hong Kong, USA as well as smaller markets like Singapore and Korea.

The report can be downloaded from the Research Reports section of the CFC website , or by clicking here:  CFC’s IPO Difference Report (民营企业如何选择境内上市还是境外上市)

We want the report to help make the IPO decision-making process more fact-based, more successful for entrepreneurs. According to the report, there are three key differences between a domestic or offshore IPO. They are:

  1. Valuation, p/e multiples
  2. IPO approval process – cost and timing of planning an IPO
  3. Accounting and tax rules

At first glance, most Chinese SME bosses will think a domestic IPO on the Shanghai or Shenzhen Stock Exchanges is always the wiser choice, because p/e multiples at IPO in China are generally at least twice the level in Hong Kong or US. But, this valuation differential can often be more apparent than real. Hong Kong and US IPOs are valued on a forward p/e basis. Domestic Chinese IPOs are valued on trailing year’s earnings. For a fast-growing Chinese company, getting 22X this year’s earnings in Hong Kong can yield more money for the company than a domestic IPO t 40X p/e, using last year’s earnings.

Chasing valuations is never a good idea. Stock market p/e ratios change frequently. The gap between domestic Chinese IPOs and Hong Kong and US ones has been narrowing for most of this year. Regulations are also continuously changing. As of now, it’s still difficult, if not impossible, for a domestically-listed Chinese company to do a secondary offering. You only get one bite of the capital-raising apple. In Hong Kong and US markets, a company can raise additional capital, or issue convertible debt, after an IPO.  This factor needs to be kept very much in mind by any Chinese company that will continue to need capital even after a successful domestic IPO.

We see companies like this frequently. They are growing so quickly in China’s buoyant domestic market that even a domestic IPO and future retained earnings may not provide all the expansion capital they will need.

Another key difference: it can take three years or more for many Chinese companies to complete the approval process for a domestic IPO. Will the +70X p/e  multiples now available on Shenzhen’s ChiNext market still be around then? It’s impossible to predict. Our advice to Chinese entrepreneurs is make the decision on where to IPO by evaluating more fundamental strengths and weaknesses of China’s domestic capital markets and those abroad, including differences in investor behavior, disclosure rules, legal liability.

China’s stock market is driven by individual investors. Volatility tends to be higher than in Hong Kong and the US, where most shares are owned by institutions.

One factor that is equally important for either domestic or offshore IPO: an SME will have a better chance of a successful IPO if it has private equity investment before its IPO. The transition to a publicly-listed company is complex, with significant risks. A PE investor can help guide an SME through this process, lowering the risks and costs in an IPO.

As the report emphasizes, an IPO is a financing method, not a goal by itself. An IPO will usually be the lowest-cost way for a private business to raise capital for expansion.  Entrepreneurs need to be smart about how to use capital markets most efficiently, for the purposes of building a bigger and better company.


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