Wu Xiao rejected the dollar.

In the past three years, the Nanjing entrepreneur has only used Chinese funds to open a blockchain startup, and he intends to continue to reject foreign investors.

He described his position as a “strategic choice.” “If we are foreign, then we may not be able to provide services to some domestic developers,” Wu said. “We may gain some opportunities, but we will also lose some.”

For Chinese entrepreneurs in more and more industries, the funds they choose to raise from venture capitalists are a growing consideration. There are early signs that the preference for the yuan, which has long dominated politically sensitive sectors such as defense, is now expanding.

According to data from Beijing-based financial data provider Pedata.cn, as of August, Internet startups have conducted 23 RMB financings, but there have been no USD transactions.

Although a seemingly trivial decision to raise renminbi or U.S. dollars, two currencies that mainly fund a large number of start-ups in the country, entrepreneurs have taken two very different paths.

For start-ups funded in RMB, this is simple. Entrepreneurs establish Chinese entities that investors can buy directly, and their usual goal is to go public on domestic exchanges or occasionally in Hong Kong.

In contrast, raising funds will force Internet start-ups to create an offshore structure called a “variable interest entity” (VIE) to bypass China’s restrictions on foreign investment in the industry and set it up if all goes well. For the initial public offering in the United States or Hong Kong.

But China’s full-scale crackdown on technology companies is changing the calculations of some founders and investors.

In a turbulent July, some of China’s largest technology companies, including ride-hailing app Didi, were investigated about how they held and used data, forcing them to stop new user registrations.

Beijing subsequently stated that any company with more than 1 million users planning to go public overseas must first undergo a cyber security review. The storm disturbed foreign investors and prevented the flow of Chinese companies hoping to list in the United States.

“If you have a lot of data and personal data, it is really sensitive now. People are very concerned about investing in these companies,” said a Beijing lawyer who asked not to be named. “Whether VIE will be allowed in the future is not yet clear.”

Complicated VIE structures have long existed in regulatory gray areas. Last month, China’s new regulations for for-profit education companies emphasized this point. The regulations prohibit foreign investment, including investment through the VIE structure, and require that existing VIEs be implemented. “Rectification”.

Some investors say that China’s new country’s focus on data, as well as the new data security law and the prospect of expanding the protection of personal information, have led to changes in the financing ecosystem.

“As long as there is data, entrepreneurs will hesitate to accept the U.S. dollar,” said a Shanghai venture capitalist. “For the transaction process we entered, we are studying how to classify different types of data” to assess the level of sensitivity, he said.

A partner of a RMB fund said he is seeing a surge in demand. “Since the Didi Incident, US IPOs have become impossible, and many start-ups led by consumer products companies have turned to us,” he said.

But other investors, such as Duane Kuang of Qiming Venture Partners, said that they have not seen a significant change in the RMB’s preference for the US dollar. “The U.S. dollar does not necessarily mean an IPO in the United States. As long as the Hong Kong IPO window remains open, the U.S. dollar is still viable,” he said.

Although Qiming invests in more US dollars than RMB, it has had funds in two currencies for a long time. “The currency preference has fluctuated back and forth over the past ten years, and the preference for the renminbi may have increased slightly in the past 10 to 12 months,” Kuang said.

He pointed out that Qiming invests RMB in start-ups in sensitive industries, such as information security or healthcare companies that process genetic data, at the request of entrepreneurs.

The Beijing-based lawyer added that this year and last year, the US dollar fund has raised billions of dollars for Chinese investment, and eventually these funds need to be put into use, even if some groups such as SoftBank postpone the assessment of the regulatory environment.

They may not face the challenge of deploying it. Several early entrepreneurs who spoke to the Financial Times made it clear that access to funds in any currency is their only priority.

In the past three years, U.S. dollar financing accounted for about 70% of the total financing of China’s Internet start-ups, and the rest was in RMB. According to data from Pedata.cn, in July and August, as regulators initiated investigations into Didi and stopped its IPO in the United States, the situation reversed. Therefore, RMB accounted for 70% of total investment in Internet start-ups and US dollars accounted for 30%. %.

Sensitive industries have traditionally absorbed most of the RMB funds. Last year, nearly 90% of semiconductor funds were denominated in RMB, and biotechnology was close to 60%. Investors said that aerospace was entirely based on RMB, while U.S. dollars flowed into consumers and corporate Internet companies.

The latter also happens to be the technology sector that bears the brunt of China’s regulatory crackdown, because officials are dissatisfied with China’s large, high-profit Internet platforms such as Alibaba and Tencent, and focus on catching up with the United States in hard technology.Investment flow also started Follow Beijing’s preferences.

The billion-dollar bar chart shows China's start-up capital by currency and industry last year

The government-backed investor community, Beijing Fund City, has even held a seminar in recent weeks to help start-ups and investors understand the options for dismantling offshore structures.

“Many companies, especially those in the hard technology and healthcare sectors, are considering abolishing their VIE structure,” said a Beijing lawyer who specializes in this kind of business but asked not to be named.

“After the cyber security review draft came out, many entrepreneurs came to ask me what to do,” she said. “It did not trigger this trend… but it speeds up.”

But removing the VIE is not easy. Start-ups must either belong to an industry that allows foreign investment, and then either must establish a joint venture company or find new investors to acquire its dollar shareholders.

Blockchain entrepreneur Xiao said that being a fully domestic company without a VIE structure has already paid off. “For some government tenders or banks, they don’t want foreign companies to come in, because some projects may involve confidentiality. There are also projects that want to sign contracts with purely domestic entities,” he said.

He hopes that his company can become the first blockchain company to be listed on the Shanghai Science and Technology Innovation Board. This is China’s response to Nasdaq.

Authors: Ryan McMorrow, Nian Liu and Sun Yu in Beijing

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