TEDA: Enabling Funding for China’s Next Generation of Tech Firms

TIANJIN, China--()--Cities, governments and industrial parks the world over are rushing to create tech industry hubs. The theory goes that by creating an infrastructure that nurtures talent, a critical mass of innovative companies can be attracted that support and stimulate each other.

But the potential pitfalls are many. How will firms in these hubs finance their ventures? And how do you go about creating an environment that lend agility and robustness to an economy without stifling the entrepreneurial spirit?

One enlightening place to look for answers to these challenges is the Tianjin Economic-Technological Development Area (TEDA). Tech firms are flocking to this top-ranked industrial park. According to the data disclosed from the park’s Annual Work Meeting on January 13, in 2013 alone, TEDA attracted 155 new high-tech firms, up 16.5% on the previous year, with a total registered capital of 1.33 billion yuan, 45.5% up on 2012. The average registered capital of each of the firms was 8.59 million yuan, a 24.8% increase year-on-year.

With an eye towards pushing even further ahead, over the past six months TEDA has implemented a number of initiatives that will keep it at the forefront of incubating talent. These are already showing signs of the success that makes TEDA the first choice as a base of operations for many tech-entrepreneurs.

One key hurdle for tech startups is funding. To address this, TEDA has implemented a funding pool that allows companies to find strength in numbers when seeking capital, and also draw on the experience of TEDA's administration team.

“The key point of this program’s efficiency is that the funding pool has a leverage effect,” says Li Hongliang, Deputy General Manager at TEDA’s Science & Technology Development Group. “We can use some money from the pool as a way to get further funds from banks or other financial institutions, which can then finance the start-ups.”

Li and his team had recognized that for banks in China, high-tech SMEs pose too much risk, especially against the backdrop of an economy in which there are larger, more-established players who are backed by the government and are effectively a sure thing in terms of return on investment. Small tech firms also lack the credit rating, collateral and proven track record that attracts the traditionally conservative banks. In addition, the size of loans that small tech firms are after are usually too small for banks to justify the costs involved.

TEDA's system, however, allows small and medium tech firms to sidestep these problems and access bank loans. TEDA can serve as both underwriter and broker to the firms, asking them to put up their IPR, future cash flows or equity as collateral. TEDA also groups together small firms looking for funding and brings them to banks as a group, giving banks a better return on their loans.

To date, the capital pool has allocated a total 20 million yuan, expected to leverage a total 150 million yuan in bank lending for about 80 start-ups each year.

Li says there are many examples of firms that have been helped by this method that would likely have struggled with financing. One case he gives is that of medical technology firm Tianjin MncTechnologies Co Ltd.

“We contacted them last year and in total six financial institutions had visited them, but still they could not get a loan,” said Li. “They had been in operation for three years with 10 million yuan sunk investment in R&D, and were almost out of cash.”

However, while the banks had passed them over, Li and his team saw a very promising prospect. The firm had recently been licensed to start selling its products, and expected to enjoy good cashflows. Its owner had also been identified as a top talent in China's “1,000 Talents” program. Li's team used the funding pool to secure 800,000 yuan for MncTechnologies, which, despite its modest amount, helped resolve the company’s urgent cashflow issue.

But, says Li, it is important to note that TEDA does not act like some kind of guardian angel for the small firms it funds. Indeed, for Li it is important that the companies are exposed to market forces and competition, and TEDA strives to do this.

“We have 'lifecycle engagement' with the start-ups,” said Sun Xinhao, an investment manager at TEDA’s Science & Technology Development Group. “From the incubator phase, our service team is immersed in the companies so we really understand their business thoroughly. In terms of due diligence, even in the post-lending phases, we follow through across the whole lifecyle of the business growth.”

Other ways TEDA ensures firms are exposed to market forces, according to Sun, include behaving as an active venture capital backer would by helping with training, troubleshooting and mentoring.

Initiatives such as the funding pool and letting companies put up their IPR as collateral are helping TEDA to build on its already impressive track record for funding tech firms.

Previous initiatives include TEDA's loan plus leasing. So far, TEDA has helped two companies acquire over 60 million yuan. Then there's the efforts of TEDA’s Bank-Loan Underwriting Center, which in 2013 helped underwrite loans for 91 companies, almost two-thirds of which were high-tech firms, involving total of capital of 748 million yuan. Meanwhile, TEDA has achieved zero-default record for four consecutive years on the loans it has helped broker.

TEDA is also home to China’s first-ever consumer financing firm, first-ever wholly-foreign-invested VC, first-ever commercial factoring firm, first-ever industry-focused private equity firm and China’s largest financial leasing company. It also has at least nine microfinance firms registered.

Such range of financial innovation and partnerships, according to expert views, has put TEDA on the right track in terms of building the critical mass to become a true innovation hub.

“Entrepreneurs do not function in a vacuum. An entire innovation ecosystem is required, with a flexible and fluid network of other actors, which nurtures, provides, guides and governs, and which can eventually integrate new ventures into the larger innovation value chains,” notes Dr. Olaf J. Groth, Managing Director of advisory firm Emergent Frontiers Group, based in Bay Area, and Professor of Global Innovation at HULT International Business School. He also works with the World Economic Forum on the project of “Europe’s Innovation-Driven Competitiveness 2.0.”

Of course, the funding initiatives are part of a wider system aimed at keeping start-ups in business and energized. TEDA has also created what it calls a “holistic service system,” which offers free support services to tenants, both directly and via third party specialists. Such services range from legal and public lab through to HR and IPR expertise. Sharing of entrepreneurial abilities is also enabled through CEO-forums, trainings and other informal exchange programs.

This chimes with the view of Cyril Ebersweiler, tech investor, mentor, advisor and founder of the first and only software accelerator program in China and the first worldwide hardware accelerator program based in Shenzhen.

“Entrepreneurs should seek counsel from people who have been there and done that, ” says Ebersweiler. “There is no harm in sharing what it is you are working on, because it's the only way to know if people care. And in turn people will share with you, making you better at what you do.”

Since 2000 TEDA has made investment in technology a priority. Subsidies amounting to 5% of the zone's revenues have been reinvested in tech infrastructure, a move that has produced over 2,500 patents. So far, there are 4,000 high-tech SMEs located in TEDA.

Li and his team see their efforts aligned with TEDA’s vision to be an internationally influential innovation hub.

“It's imperative for us to have a forward-looking mindset and view. Strategically, we need to have the capability to pinpoint the right strategic, future choices of what specific sectors and segments to focus our resources on,” Li said.

The main strategic areas of focus for Li's team are bio-science and pharmaceuticals, R&D outsourcing, cloud computing and e-commerce.

“Our goal is to become China’s leading high-tech commercialization base, able to incubate some top-level segments and businesses that are indeed world-class. Of course, there is still way to go -- looking forward, we will continue to follow creative and effective approaches to further nurture the tech firms and lasting innovation in the region,” Li concluded.

Contacts

Z. H. STUDIO
Lan Shen, (86)21-22311397
lan.shen@zhstudio.net

Release Summary

Cities all over the world are rushing to create tech hubs. But how do you go about creating an environment that lend agility and robustness to an economy without stifling the entrepreneurial spirit?

Sharing

Contacts

Z. H. STUDIO
Lan Shen, (86)21-22311397
lan.shen@zhstudio.net