Unique Insights from Silicon Valley Bank for Successfully Entering China

By Fusion by Fresco Capital,

Can you list the names of Silicon Valley companies that have succeeded in China? Can you list the names of foreign banks that have succeeded in China? There is only one name on both lists: Silicon Valley Bank (SVB).

SVB operates in China through a joint venture with Shanghai Pudong Development Bank (SPDB), and one of the senior leaders is Oscar Jazdowski, formally with the title of Deputy Head of Corporate Banking. I first met Oscar in 2013 while we were speaking on VC and startup ecosystem panel together and quickly realized that he wasn’t your typical banking executive. Seeing the success of the JV over the years, I recently had a chance to speak with Oscar and ask him to share some of the unique insights from the SVB experience in China.


Can you tell us some of the things that Silicon Valley Bank did before entering China as part of the preparation and how that preparation made an an impact on what happened after entering the market?

In 2005 we brought a delegation of about 10 top VCs from Sand Hill Road to China (Shanghai and Beijing). Folks like John Doerr from Kleiner Perkins, Don Valentine from Sequoia Capital, Dick Kramlich of NEA and other leaders of the VC community. For most of them, this was their first time in China. They all knew that China was growing and the likely future of technology. SVB set up a week of meetings with entrepreneurs and government officials and other related parties. Our goal was to get these US VCs to set up shop in China so that they would start investing in China and thereby build the ecosystem for us, into which we could lend to startups. It worked.

SVB also rented impressive office space in Xintandi, right in the center of Shanghai. We rented more space than we needed and built out a number of ‘guest’ offices which we offered to our US VC friends to use. That made their exploration and ultimate transition to China much, much easier because they did not have to go and look for office space in a foreign non-English (more so then) city. We made it easy for them to work out of our office, and that allowed us to stay close to them and see what they were beginning to do and explore in China. It helped us develop even closer relationships with them.

Silicon Valley Bank has been using a JV structure in China. What are the key factors that can make or break the results of a JV in China based on your direct experience and what you’ve observed in the market?

Always staff your JV with the most senior person you can from the parent company. In our case the first President of the JV Bank was SVB’s retiring CEO and Chairman, Ken Wilcox. By sending such a high level executive to China, you demonstrate (by action) to your joint venture partner, the regulators and to the government that you are 100% serious about China and that you are prepared to devote your absolute highest, most senior talent to make this JV successful. You also want those senior sponsors to stick around. This is very often the un-doing of JVs because the executive sponsors either get promoted to another part of the company or leave, thereby leaving the new JV bereft of a loving parent. The two key executives who brought our JV together are still around and even sit on our Board.

You need to have senior level backing, but that’s a given. The success of a JV is not determined at the executive suite, but in the trenches. You have to have a strong determined working group that gets things done. But the real success of a JV is defined at the working level. At the beginning of our JV, we would have monthly working committee meetings with our counterparts at SPDB in order to work on specific deals and issues.

Be aware that the two parties in a JV will have very different motivations. Understand what each party wants and then work to achieve that for them and have them do the same for you…even though each parties motivations might be polar opposites. As example, China and the JV bank is extremely important to Silicon Valley Bank from a long term perspective. If we are to remain the main bank globally to the technology/innovation/life science/ clean tech/ VC and PE industries, then we have to be in China. What is important to SPDB is that they can show the government that they formed a JV with this quirky bank from California and were able to stimulate and invigorate lending and financial backing of the Chinese innovation ecosystem. Two very different goals but both achievable so long as both parties understand what is important to the other and work towards these goals.

How did you find your JV partner in the first place, and what sort of due diligence process should foreign companies use when evaluating potential JV partners in China?

I wasn’t involved in the search for the JV partner myself but I spoke to many of my colleagues about the process at length. The story there is that we spoke to a number of Chinese banks, and we were looking for a partner who would be responsive, creative, risk taking, innovative, etc., and we found those qualities in SPDB. It was also chemistry, which is key in any JV. Our CFO connected very well with their CFO, who is now the President of SPDB, so that was very helpful in terms of building the relationship.

We also realized that when we entered a JV with a Chinese bank, we’re really entering it with the government because the government has to approve it and support it. So it was understanding that we needed to work with both the government and SPDB.

What about you personally? You didn’t live in China before and many foreigners who come to China don’t stay very long. What helped you make the transition?

When I first came to China, I was flattered, excited, and also a little bit apprehensive. I came over in late 2012 to meet the JV bank in Shanghai. When I went around the bank and met these individuals who were now all my colleagues, I asked them all the same question, “what brought you to SPD Silicon Valley Bank and why do you like working here?”

They basically all answered the same way, “we like the culture of the bank”. Culture in SVB is very important, and they answered in a way that an employee in our Seattle or Israel or Denver or San Francisco office would have answered. So as soon as they answered that way, I said to myself ‘wow, I know who you are’ because they answered exactly the same way that my other colleagues would from anywhere else in the world. That made me much more comfortable that I was coming into a culture that was very familiar to me because it was an SVB culture.

The other thing to succeed in any overseas environment, especially one as unique as China, is as an individual you have to be curious, like to get out of your comfort zone, like to take risk and that is my individual personal profile. Having said that, I knew by the answers from colleagues that I knew who I would be working with, so that reduced the risk factor dramatically.

On the topic of culture, one of the challenges that foreign companies have in China is finding, recruiting and retaining top talent. Can you talk about these issues?

On the corporate banking side, it’s relationship management and analysts, with an average age of late 20s to early 30s, bi-lingual, with many who finished universities in the US or UK, and then have worked with other international companies. We’ve got a big advantage with them because we are an innovation bank. That is clearly the drum beat in China today. We also have the words ‘Silicon Valley’ in our name, and those two words are very powerful and attract a lot of people.

We actually find that we attract a high calibre of talent because they’re intrigued by our bank. Our retention rate has been very good. In the case of losing people, we’ve lost people to people starting their own business or to join a VC firm. So we don’t lose people to other banks because they like the culture and the sector, but we can lose them to the lure of entrepreneurship or venture capital.

On the operation side, we are about to open our Beijing branch very soon subject to the final regulatory approval, and we had to hire more operations staff. We’ve hired more mature people who have been successful in their careers and see our bank as very intriguing and different. So there’s an appeal there for these more mature people who have worked in traditional banks for 15 years or more, and they’re saying that this is an interesting bank.

One of the things we’re criticized for is we put people through too many interviews. We also have written tests as well. We don’t do psycho-metrics type testing, it’s really based on understanding each individual as a person.

How do you think about the balance between the global culture of a company and the unique specifics of the local China market?

We put a lot of focus on culture. We focus on people who are creative and can enjoy an environment where everyone has a voice. So it’s a very similar culture to what is seen in our other locations. A lot of our employees in China like working for us and so our unique culture helps to differentiate. Of course, we’re very careful not to be arrogant about this and we recognize that we have to localize. We know many foreign companies have failed because they brought in their culture and they haven’t adapted and localized enough. It’s a balance, and that’s why the joint venture works well, because each side brings its DNA together. One thing I look back at now — had we had a local co-head, that may have been helpful to deal with local specifics. So even for us, it’s certainly possible we could have listened more to our local colleagues to understand the local marketplace.

Looking at localization in China, slogans are very popular. You have a new product, you give it a catchy name. You start a new year, and you have a slogan, like the ‘Golden Year’. Those sorts of slogans are important to employees for inspiration. It’s a very simple example but it’s important. We try and do things like sports days, hairy crab dinners, the regular Chinese New Year parties, and all the obvious things. We have social committees made up of Chinese employees who come up with ideas for building the culture.

In our early days, we would also ask the employees to put together skits, mini-plays, to our employees regarding things like ethics and customer relations. These would be funny skits but the underlying theme would be serious. The employees very much liked it. As we’ve scaled, there’s unfortunately not enough time to do it anymore, but it worked well.

Looking at the macro trends, are there specific themes that are particularly exciting?

The hot themes today are artificial intelligence, big data and virtual reality — those are hot everywhere, including China and Silicon Valley. People are noticing that China may be adopting virtual reality faster than other markets. Not just for entertainment and gaming, but also for enterprise applications.

The demographic shift in China is also driving a lot of themes as well. One venture firm is investing in amusement parks in shopping malls. Something we wouldn’t normally see but these are top tier VCs because families are going to shopping malls for entertainment.

In terms of business model, it’s now less about scale and more showing profitability over time. Not necessarily now, but at least the path to a profitable business model.

For the joint venture bank, what kind of company is interesting for you?

The same things that VC investors look for — a great team focusing on a large market with a defensible business, whether through intellectual property or some other unique edge, that can scale quickly. It doesn’t have to be deep technology.

For us, it’s also the quality of the investors and most importantly it’s management, management, management. You can have a great company and it can still fail with poor management. Our old CEO used to say to us that “cashflow doesn’t pay back the loan, people do”.

Most traditional banks are still focused on collateral, not people. What do you do differently?

It’s our focus on building relationships. We spend our time and energy deepening personal relationships.


Building a successful China JV starts with getting the people right. Oscar’s answers highlight that it is possible to have a strong and unique global company culture that also respectfully adapts to the local China market. While the specifics of each company are different, the lessons about finding the right partner and managing local talent are very relevant to all companies entering the China market.

Photo credit: Li Yang

  Category: Innovation
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Stop Trying to Imitate Silicon Valley

By Stephen Forte,
HBO's Silicon Valley

 

Planners from all over the world try to replicate the success of Silicon Valley with varying levels of success. Everyone from New York City (Silicon Alley) to London (Silicon Roundabout) to Hong Kong (Silicon Harbour) to Moscow (Skolkovo) has mimicked Silicon Valley in an attempt to build their own version of the lucrative startup hub.

The problem is that Silicon Valley has unique features that have allowed the region to become the world’s center of gravity for innovation. Simply copying the things that allowed Silicon Valley to become such a success won’t work, as some regions have already discovered. The tech hubs need to play to their strengths and evolve in their own unique ways.

Silicon Valley’s Recipe for Success

It’s easy to see why governments want to create their own version of Silicon Valley when looking at the valuations the California region is blessed with. There are now at least 74 startups there valued at more $1 billion each. The total value of these so-called “unicorns” is $273 billion.

The reasons for Silicon Valley’s success are many and most of them can’t be easily copied. Geographically, the region is perfectly located near San Jose, San Francisco, and Oakland. Historically, Silicon Valley has experienced decades of success with well-established companies like Google, Facebook, Apple, Fairchild Semiconductors, Intel, Tesla, and other esteemed companies.

In Silicon Valley, everyone knows somebody who has gotten rich off of stock options they think they’re smarter than…which in turn propels them to take a risk at a startup. Perhaps most important for the region’s growth is this competitive and creative culture that continues to allow so many companies to thrive. Not to mention, an endless supply of elite students from Stanford and Berkeley graduate (and dropout) each year to create the next crop of potential tech giants right in the Valley.

But this formula can’t be bottled upon and shoehorned in anywhere. The wealthy people in San Francisco might work at Google and the likes, yet in Hong Kong and New York, the upper class tend to come from finance, and in Los Angeles it’s Hollywoodhopefully you get the idea. This still doesn’t stop governments and business people from trying to replicate Silicon Valley without taking culture and demographics into account.

Being Unique: Playing to Your Region’s Strengths

Every would-be tech hub has its own unique characteristics and features that need to be taken advantage of. If you go to a Starbucks in Los Angeles, you’re likely to bump into a celebrity or similar entertainment personas. For Hong Kong or New York City, odds are high that you’ll fall into a conversation around recent market performance and SEC developments.

Playing to a specific region’s strengths helps lead to success. Modeling a hub exactly from Silicon Valley in areas that don’t carry the same characteristics becomes a major disadvantage. New York, Hong Kong, and London are better suited to be fintech startup hub than Silicon Valley. Los Angeles is better suited to be an entertainment startup hub than Silicon Valley. Playing to those unique strengths make more sense than trying to replicate Silicon Valley.

Fostering Growth

Government benefits are a welcome way to help foster startups, yet they’re only the baseline and not the endgame. All those helpful benefits (friendly tax policies, real estate deals, subsidies, incubators, etc) only go so far. The barriers of entry to create a tech innovation center in the vein of Silicon Valley are so high that these benefits are simply the table stakes. A bigger, greater hook is needed for regions to succeed.

Regions need to embrace what makes them unique and build off of that. With everyone trying to copy Silicon Valley, there’s plenty of room for new players with their own strengths. Any place that simply tries to do exactly what Silicon Valley is doing will pale in comparison to the original.

Don’t Waste Your Time on Startup Tourism

By Stephen Forte,

Going on a trip to Silicon Valley with your MBA program or government incubator? Don’t fool yourself into thinking that those weeklong Silicon Valley immersion programs are anything other than startup tourism. Spending a week visiting Facebook and Uber and attending talks and events, while interesting and potentially educational, will not teach you what it’s like to build a startup.

Sure, you might make some connections and come closer to figuring out what you really want to do for a living. But if you really want to benefit from a trip to Silicon Valley, you are better off reaching out to one of the several early-stage startups here and asking whether you can intern for a few weeks.

You’ll Understand How Startups Work

While immersion programs are designed to introduce you to the world of startups, they don’t go far enough when it comes to actually shining a light on the intricacies of Silicon Valley. Sure you can see the free food at Twitter, swimming pool at Google, and the hiking trail at Facebook, but that is like visiting Disneyland and thinking it is reality.

By reaching out to a startup instead and interning there, you will develop real relationships and potentially kickstart a career. You will understand how startups work behind the scenes, and you’ll be influenced by their way of doing business. Actual work experience is going to look a lot better on your résumé than spending a week hardly scratching the surface of the startup world.

Think of it like studying abroad. There are two ways to go about it. One is to study at a university where the classes are taught in English, you have no homework, and you can hop around to a bunch of different countries every weekend. You get a broad overview of another culture, but no lasting and profound understanding of it.

On the other hand, you could spend a year in another country, live with a host family, and learn the language. You’ll struggle and it will be challenging, but in the end you’ll have an in-depth understanding of that culture, and how it differs from yours. At the end, you’ll belong to two cultures, rather than just one.

It’s up to you, but I’d take the latter experience over the former any day.

You’ll Gain Unique Insights

When you attend a weeklong immersion program, you’ll get a light taste of what you could expect should you move to Silicon Valley at some point in the future.

But by interning with a company out there — and living and working in the environment itself — you’ll gain unique insights that you can’t get anywhere else. You need to experience them on your own, organically.

How to Find Startups to Work For

You might be wondering how you can actually get hired? Maybe you don’t have startup experience yet. Maybe you’re a developer who wants to work for Google, but you’ve only been coding for a year and you just don’t have the necessary expertise.

Head on over to AngelList, the best place to learn about which companies are hiring out in Silicon Valley. AngelList connects startups with jobseekers interested in working for them. The site provides you a clear view as to what you can expect should you land a gig (e.g., salary and equity is disclosed up front).

The best part? By sending out one application, you can apply to over 40,000 jobs in one fell swoop. Talk about efficiency.

How to Get a Startup to Hire You

Don’t think any startups will take you? Don’t be so hard on yourself.

Pitch attractive would-be employers a short project that utilizes your skills. For example, if you’re a communications major, offer to come in for two weeks to consult and intern with them for free, in exchange for a reference. Most startups don’t have any communications or PR plan, and are happy to take free labor.

Are you a political science major? Offer to come and do an analysis on the effects new policy or the upcoming elections will have on them. Think no startups care about this? Just ask Uber what they think.

If you don’t have any “practical” skills whatsoever? Offer to clean the coffee machines and work your way up.

Maximize Your Trip to Silicon Valley

Those weeklong programs aren’t the worst thing in the world. I’ve even hosted them before at my office in Palo Alto. But the payoff is much higher if you actually immerse yourself in the experience for an extended amount of time.

Remember, if you’re part of one of these programs, your trip doesn’t have to end once a week is up. Stay a little bit longer. You won’t regret it.

Photo by flickr user christian.rondeau

  Category: People, Startup Tips
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Sand Hill Road is Now the Wall Street of the West Coast

By Stephen Forte,

Everyone is talking about replicating and building the “next Silicon Valley” with the rise of Silicon “roundabouts” and Silicon “beaches” in several locations around the world.  While this is going on very few people are talking about how Silicon Valley is evolving: specifically that Sand Hill Road is now the Wall Street of the West Coast. 

The rise of the “Uber” Round

More and more tech startups are raising hundreds of millions or even billions of dollars in later stage “uber” rounds. (I call these the “uber” rounds as a play on the German for “super” or after the company Uber that has raised well over $4 billion in Venture Capital.) As of this writing, Lyft has just closed a $680 Series E. According to Crunchbase, Lyft is one of 20 startups that have raised $1B or more in venture funding in the past 5 years.

Companies are going public later and later, a trend started by Facebook; instead of rushing to an IPO, companies are staying private longer and are taking more and more uber rounds. (Some people think that these companies should be going public as the investing public can’t participate in the later stage growth, allowing the rich to get richer.) The average amount of money that companies have raised before going public has been going up, more than double since the 2008 downturn.

What is Going On?

Most pundits think that companies are staying private longer to avoid the hassle and expense of going public as well as regulations like Sarbanes-Oxley. While those are all reasons to stay private, the real reason is that Silicon Valley VCs on Sand Hill Road have evolved to grow larger and focus on late stage massive growth. 

Typically an IPO is for massive growth. A company will get to a certain stage of maturity and then raise anywhere from $300m to over a $100b at an IPO. The IPO accomplishes a few things: allows early investors and employees to “cash out” and sell their shares to the public as well as provide much needed capital for massive growth. 

Today companies are delaying the IPO and raising the growth capital with their uber rounds. On the surface this looks crazy. But in reality, it is genius. 

Lean Startup and Uber Rounds

Let’s take a made up startup LeanCo as an example. Assume LeanCo already took a Series A ($8m) and Series B ($30m). Now they are kicking butt and are growing at the same rate as the other high performing startups. Say they have well over $250m in sales, expanding market share, healthy margins, and are expanding internationally. This is the textbook case for an IPO.

What would happen is that LeanCo would go to a big Wall Street bank and raise approximately $5-$10+ billion in an IPO. After all the costs and fees and the Wall Street bank’s cut, the company would have a lump sum of money, let’s just say $5b. Now the company has the war chest it needs in order to grow. Typically LeanCo will acquire smaller rivals, enter new markets, and build out new products and services. 

Instead, the LeanCos are choosing to raise billions for growth before an IPO. Instead of raising $5b in an early IPO, they are raising $2-5b privately before a much later IPO (at a much higher valuation.) They are raising the money $400 or more at a time. Here lies the genius of this approach: LeanCo only raises what it needs, when it needs it in a private (closed) market that will provide a higher valuation than a public one. There are also other benefits to staying private during the growth stage, like not disclosing your financial health and spending to competitors. 

For the investors, this is actually a much more conservative approach. By only giving LeanCo the money when it is needed and doing it incrementally, LeanCo has to operate in iterative cycles similar to the Lean Startup and Agile Development. For example, if investors provided LeanCo with $5b in one lump sum, LeanCo may spend it unwisely feeling that they have a lot of capital on hand. If investors give LeanCo $400m or so at a time, LeanCo will have to take an incremental approach. If LeanCo were to go under after an IPO, investors would lose all of the $5b. If LeanCo were to fail after raising “only” $2b, investors lose far less money. 

The Post-IPO World

The VCs on Sand Hill Road in Menlo Park have changed the game. I remember in the .com bubble, the largest Venture Fund was $1b and the largest deal was around $75m. Now the VC funds on Sand Hill Road are all well over a few billon each and think nothing of leading a $500m round. 

Eventually the startup companies are going public, however, that is only because at some point they have to in order for the VC investors to sell their positions and the employees to cash in their stock options. I’m sure that over time, Sand Hill Road will evolve past the IPO, where companies stay private forever and large East Coast financial institutions buy back those positions from the VCs and earn returns via dividends, etc. You are already starting to see the signs of this when large pension and investment banks such as Fidelity, T. Rowe Price, and Goldman Sachs are part of the last round of financing for companies like Lyft, Box, and Uber. In the future, you won’t be able to buy shares in a Facebook individually, but you will buy shares in a Fidelity “Silicon Valley” Mutual Fund. Silicon Valley is disrupting Wall Street. 

What Does this Mean for Startups in Silicon Valley

We all know that New York City and Wall Street is the IPO center of the world. Did a startup have a competitive advantage by being located in New York? As a native New Yorker who built three startups in New York City, I can confidently say no. Mark Zuckerberg proved that when he showed up to his Wall Street pre-IPO meetings in his hoodie. When your company is ready and has the right numbers, the Wall Street Investment Banks will work with you, no matter where you are.

What about tech startups located in Menlo Park, Palo Alto, or Mountain View, close to Sand Hill Road? (Sticking to the geographical description of Silicon Valley.) Same thing, when your company is large enough to take the uber rounds, it does’t matter if you live in Menlo Park or Montana, or Mongolia, the VCs on Sand Hill Road in Menlo Park will work with you. You are already seeing this with startups being located in the City of San Francisco and not down south in Silicon Valley. The larger established companies such as Facebook (Menlo Park), Tesla (Palo Alto), Google (Mountain View), etc are down in Silicon Valley, but the young, early stage startups are up in San Francisco. This means San Fransisco is about the startups and Silicon Valley is about the money.

San Francisco is the new Silicon Valley. Silicon Valley is the new Wall Street. 

Raising Your Seed Round in Silicon Valley

By Stephen Forte,

I’m super lucky to be from New York City and have lived in both Europe and Asia before settling down in Silicon Valley two years ago. I’ve also been lucky to work at a startup in Eastern Europe that grew to be so successful that many of my former co-workers there have become either Angel investors in the region or left to do their own startups. Of course, Fresco Capital is geographically diverse with 2/3 of the partners overseas. Because of this I get to meet a large amount of startups from outside of Silicon Valley, particularly from overseas. 

Typically when they come to Silicon Valley for the first time, I am their first visit. (Honored!) That said, they all ask me the exact same question: “Steve, we are about to raise our Seed round of $1m, can you introduce us to some investors that will put our round together?”

This is when I have to give the founder “The Talk.”

 The Talk(TM)

I say that raising a $1m Seed round in Silicon Valley is easy, just go to a Starbucks in Palo Alto and trip a few people and when they fall down, $100k will fall out of their hoodie. Aim for someone with a Facebook or Google hoodie and maybe $200k will fall out. While this is a (slight) exaggeration, the point is that most seed rounds that are not lead by an institutional investor are pieced together by wealthy Angel investors usually $200K or so at a time. While a foreign startup has the potential to meet Silicon Valley Angel investors on a two week visit, typically, you raise this money via a personal network. (Your’s or your advisor’s.)  If you are not from the Valley, you won’t have this network and would need to stay and network for months and months, burning cash and wasting time (that should be used to build your startup).

I Know Nobody in the Valley, What Should I Do?

I always suggest to non-local entrepreneurs to go raise their seed round locally in their home market where they have a network of potential investors. It will be easier and faster than trying to raise money in the Valley where you don’t know anyone. You can then come to the Valley for your Series A from a  position of strenght after you have nailed your business model. 

This presents a problem insofar of the level of sophistication of the investors in your home market. While I agree that most markets are not nearly as sophisticated as Silicon Valley, there are “Valley” type investors in all markets these days, you just have to go find them. The easiest way: build an awesome business. I was talking with by buddy Pascal the other day about valuations in Europe compared to the Valley. Startups outside of the Valley tend to have less of the valuation inflation that the Valley startups do. If you build a sustainable, repeatable, scalable business with funding in your local market at a competitive valuation, when you come the Valley later on to raise a Series A, you will find it easy to raise money!

Good luck. 🙂