Relationship 101 for Startups: Guanxi Matters
A recent conversation over beer with two friends – one a local venture capitalist and the other works for a Singapore startup that is currently expanding its operations to other countries in the region – prompted an interesting debate over the importance of guanxi for startups.
“Guanxi” (关系), which directly translates to English as “relationship” or “connection”, actually means a lot more than that. It is a concept that revolves around the dynamics and influence of personal networks and business relationships, and is an important and integral part of Chinese society. In fact, many business commentators will tell you, without guanxi you cannot do business in China.
Likewise in Singapore, a country with a large Chinese population and strong business dealings with China, guanxi will be a critical factor in deciding the success or failure for many local startups. The simple truth is that most young founders starting their business for the first time will not have the luxury of an extended personal and business network, nor do they have the requisite experience to fully leverage upon those relationships.
So it’s not just a case of what you know – it’s also who you know.
Managing partner of California-based North Venture Partners, David Brody, equates guanxi to a form of social capital. “Social capital can be very useful when used the right way. Build yours by identifying people that share your vision, have expertise where you don’t, provide you inspiration and can ultimately lead you to achieve things.”
Think of guanxi as an intangible asset that can bring great value to any startup. Nicholas Chan of local private incubator Azione Capital describes it this way. “Guanxi is like grease, it makes things smoother and a lot less noisier.”
The Value of Guanxi
And having good guanxi has its rewards.
“For funding, guan xi is 80 percent of everything,” Jeffrey Paine of private investment firm Battle Ventures explains. “If management is the major component for evaluation, then guanxi with the founders or the founders’ guanxi with their former employers and business partners matter a lot. One thing we do is we perform reference checks on management team we don’t know very well. Hence guanxi does matter a lot to a startup’s probability of raising capital.”
Says Chris Mottau, David Brody’s colleague at North Venture Partners, “I personally would not be where I am without the relationships I have developed over the years. My current work at North is the direct outcome of one such relationship, I was plucked from my position at an early-stage startup to come help North develop better and more meaningful relationships with entrepreneurs.”
Bernard Leong of private business incubator Thymos Capital tells of an example of how what goes around comes around. “I funded one company and helped the founders for an iPhone app from the start. It came back a virtuous cycle when the founder recommended his friend another interesting deal to me. By accessing his work attitude, I also know the quality of people he recommends.”
“Some start-ups grow fast via relationships through family and relatives in soliciting deals and getting partnerships to give the company a head start. Some relationships bring initial investors to the startups as well,” he adds.
So how do you build your guanxi? I’ve condensed some of the advice given by the VCs I spoke to into the following five points:
1. Be Humble.
Because of their intense passion for their product or idea, startup founders sometimes let such unbridled feelings overrule their senses and hence can come across as cocky, aggressive, or worse, downright rude. All venture capitalists I spoke to stressed the importance of humility.
Chris Mottau says, “Most entrepreneurs looking for funding are entirely too aggressive. Obviously they all think their company is an outstanding opportunity, but trying to jam it down an investor’s throat by means of every technology platform available is off-putting.”
“Almost all my deals are done via referrals or via my spotting of passionate individuals on the field,” says Nicholas Chan. “Rejects tend to be either too cocky or too intelligent for their own good, always expecting the investor to bow or beg them to be invested in.”
“Do not be arrogant. If you are seeking investment, do not piss off any investor, because word gets around and comes around,” says Bernard Leong. “Even if you do not want the money from (a particular) investor, you should politely tell them that you will keep them in mind, otherwise, the next time you go to them, be prepared for a no.”
2. Build Trust.
In fact, one of the investors I spoke to related a particular incident in which a startup who approached him for funding had taken his termsheet and went shopping for a better deal. “Never again,” he had said. As you can imagine, any trust between the potential investor and the startup is irrevocably broken.
“As startups, relationships are mainly based on trust,” says Jeffrey Paine of private investment firm Battle Ventures. “Startups have to have a culture of being humble, and focus on over-delivering. Talk less, do more.”
“Do not try to test the patience of the other party, be truthful and be confident to sometimes say ‘I don’t know’”, Jeffrey adds.
Azione’s Nicholas adds that trust is of utmost importance between startups and their customers and investors. “The wise customer (and investor) knows that a long term working relationship is based on the fundamentals that they are able to fully trust the startups they work with.”
3. Do your Due Diligence.
“They should do due diligence on the people who they are cultivating relationships, i.e. try to find out more about the people they are trying to cultivate a relationship”, advises Bernard Leong. “They should also be sure of why they want to set up this particular relationship, from investment to partnership.”
“Always maintain your standards, even if it ruffles the feathers of many,” adds Nicholas Chan.
On the flip side, David Brody advises some entrepreneurs to sharpen their bullshit radar. “The investment capital space is unfortunately crawling with unsavory characters. Avoid taking a long and expensive ride on the scam tram. If someone says they “know how to find you capital” but and they haven’t shown you any credible evidence that they know how, ask them how they intend to do that. Your business is your baby and shouldn’t drain time working on developing a relationship with someone that isn’t offering up transparent communication. Use your instincts. And if you follow these principles, your social capital will hopefully take the form of large bills, not small coins.”
4. It’s About Give-and-Take.
“Be honest, earnest and think of what they can offer of value to others first before asking for anything. Just as a typical boy-girl relationship involves sacrifice, it is about wanting to give of your best to ensure that the other party is totally and completely convinced of your goodwill and good intentions,” Nicholas says. “This is a two-way road; if the startup can see that the other party is only seeking to take and not to give, they must also know their worth.”
Bernard Leong agrees. “In every relationship, there is a give-and-take situation. If you are only taking and giving nothing to people who help you, it is not a good way to set up a relationship,” he says.
5. Be Patient.
North’s Brody shares that it is important to remember that real social currency is not created by getting a stranger to add you as a friend on Facebook or a connection on LinkedIn. “Strong relationships and trust are built over time, over multiple email exchanges, phone calls, and cups of coffee.”
“Investors are busy people. Use good judgement and be respectful of someone else’s time. Tip: don’t treat investor’s like “one night stands” that offer up nothing more than a fat check. If you’re an entrepreneur, don’t “rush to raise”. What you probably need more than anything is valuable feedback and insights on your business and economic model. Use these learnings, become more “fundable”, and the money will come. Be patient. Don’t burn a potential fruitful relationship by coming off as a irrational stalker.”
6. Be Human.
Ultimately, it’s all about being human. “If you don’t have any EQ, don’t waste your time. Just look at the number of failed ‘technopreneurs’ who only know how to program but does not know how to be human,” Nicholas Chan says.
Additional Reading Resources
Here are some recommended reading and resources with advice on “guanxi” for business and startups:
1. “Securing Venture Capital from China“, Businessweek
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