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How To Start Your Silicon Valleyesque Startup In China

By Dan Harris and Steve Dickinson

Cn Reviews, has a very informative post entitled, "AAMA Panel on 'Silicon Valley-Style' Startups in China: The Next Wave," on getting a startup going in China. The post is on a recent Asia American MultiTechnology Association dinner where a number of clearly qualified people spoke on China startup information. I really liked the following advice by Eric Chen, regarding using or avoiding government:

There really are two schools of thought. The first school is to avoid, and stay under the radar screen of the government. For some areas, like internet and wireless, you can start out small enough to fly under the radar. The second school is to use the government as a strategy to secure grants, land, financing, concessions. This makes more sense when there is larger capital to be raised....

However, I was less thrilled with this advice regarding how to get started:

Getting started can be easy. You can create a special purpose vehicle in BVI or Cayman Island for no more than a few thousand dollars. It's a cost-effective way to get started. Then do your fundraising. It's easy to start with a representative office in China. Can be fast and easy. If you are on a shoestring budget, you can just set up a cheap offshore structure to do preliminary activity. There is no need to set up a Wholly Owned Foreign Enterprise (WOFE). Don?t let people tell you that it costs $80k to set up a WOFE, you should be able to set it up for about $25k. Should be comparable to setting up a business here in Silicon Valley. There is also a registered Capital requirement of at least RMB100,000.

Not sure if this was actually the advice given, or just how it was recorded, but it definitely goes against the grain of how things really should be done in China, particularly in light of all that has transpired in the last few monhts. One should be very wary of going in as a representative office just because it is initially cheaper than a Wholly Foreign Owned Entity (WFOE). Representative Offices are simply not legal for all sorts of activities, including making money within China. It is usually not cost effective to start out as a Representative Office and then have to switch quickly to a WFOE. I also do not like the advice of going into China without a business entity. There are all sorts of reasons not to like this, but two spring quickly to mind. The first is that it will probably be illegal, which could lead to your business being shut down soon after it starts. My firm received a call from an American company just last week that had been ordered to shut down for not having registered. As everyone knows, China has really stepped up its law enforcement against foreigners in the last few months and now is not the time to be starting an illegal business. The second is that having a business entity has become nearly vital for securing a decent China visa. I agree that one should not be paying $80,000, but I also think one should not have to pay even as much as $25,000 either. It is somewhat misleading to say the minimum capital requirement is at least RMB 100,000. That is the written minimum for all of China, but in many of the most desirable cities like Beijing and Shanghai, it is virtually unheard of to get a WFOE going for anything less than USD$100,000 in capital. The post is also really good for Chinese Americans thinking of going to or returning to China.

Full post as published by China Law Blog on May 12, 2008 (boomark / email).