Breaking Through the Great Wall of Guanxi: How Western venture capitalists initiate and build guanxi with founders of Chinese startups

Abstract: China is one of the world's fastest growing markets for venture capital investments, spurring Western venture capitalists' interest to invest in the region. However, China's institutional environment makes it difficult for Western venture capitalists to execute their due diligence. Transparency and reliability of information is low, and due to cultural norms Chinese founders are unwilling to share information with people they do not have established relationships with, or as the Chinese state it, guanxi with. Guanxi refers to a personal connection between two individuals, who follow the social norm of guanxi such as doing favors for each other. For a venture capitalist in China, possessing guanxi with founders becomes important to receive information during the due diligence process. Hence, this study explores how Western venture capitalists initiate and build guanxi with founders of Chinese startups during the due diligence process. This thesis tests A process model of interpersonal guanxi development through a qualitative study in a Chinese venture capital setting, to see if and how the model is applicable. A revised model, A process model of the venture capitalist's guanxi development, is proposed. In the initiating stage of guanxi, the objective for the venture capitalist and the founder is to identify commonalities that will be claimed as bases for developing guanxi. This study finds that venture capitalists mitigate risk through meeting with founders that they have been referred to by a third party, whom both parties have guanxi with. Hence, common third party is the most frequent guanxi base. Moreover, the venture capitalists involve other people that can reveal and verify the guanxi bases. Hence, background check actors are added in the revised model that support the initiating stage. In the building stage, the objective is to enhance quality of guanxi. This thesis finds that two of the factors leading to quality guanxi, sincerity and obligation, arises naturally when the venture capitalist and the founder are introduced by a common third party. The remaining two factors, ability and affection, the venture capitalist should actively demonstrate to establish guanxi with the founder. From a management perspective, this thesis concludes that an effective strategy to initiate and build guanxi is to establish a guanxi network of third parties that can provide referrals. This facilitates the process of developing guanxi on an interpersonal level with the founders.