I love it when I read something that tells me what I already knew, but simply had not realized. That happened to me today when I read a post on the Asia Healthcare Blog by my friend and fellow-Seattleite, Benjamin Shobert, entitled, “Life Sciences Companies Go to China to Raise Capital.”
Ben sets out the three main reasons pharmaceutical companies are going to China:
[F]irst, and most obviously, build market share in China’s high-growth market. Second, access China’s inexpensive R&D capabilities to complete drug discovery faster and less costly than what is possible in North America or the European Union. But, American pharmaceutical start-ups are beginning to take note of another opportunity in China: as a source of potential investors for their start-ups.
Though my firm has worked on/is working on a deals/potential deals involving Chinese investors in American tech (no pharma) companies, until I read Ben’s post, it had just not occurred to me that this is a trend. But it clearly is. Chinese companies are looking to put their money into United States based companies both in the United States and in China.
Of course, Chinese investing in foreign companies in China is nothing new as they have been doing that via joint ventures (JVs) for more than twenty years. What’s different about today, however, is that in the past foreign companies typically merely allowed Chinese investment when they had no choice. Today, foreign companies are actively seeking Chinese investment because they need the money.
Ben sets out the three key issues foreign companies face when taking in Chinese investment:
- Losing intellectual property to the Chinese investor
- Having to turn over the Chinese market to the Chinese investor
- Eventually having to turn control of the company over to the Chinese investor
Absolutely true. It has been over one (or more) of these three sticking points on which most of the deals on which we have worked have foundered.
The tension is obvious. The American (in our cases) company wants to maintain full control over its IP and is concerned about the Chinese investor taking that IP to one of its other companies. Some of the Chinese companies are quite up front in saying that one of their reasons for investing in the U.S. company is to have full access to the American company’s IP. Most American companies cannot abide by that. The turning over the Chinese market to the Chinese investor is usually the easiest of the three issues because compromise is usually possible by agreeing on a timeline and/or a market sharing arrangement. Surprisingly enough, the same is usually true with respect to turning over the company to the Chinese investor because that too can usually be resolved by agreeing on the preconditions for any turnover and the terms for if and when such a turnover situation is triggered.
Chinese investment in your company. Are you ready for that?
