A Chinese start-up tries to grow in harsh climate
Monday, March 26, 2007
Hundreds of miles north of here on the edge of the Mongolian steppes, Li Enhui is producing a “magic bag” to help China fight the fierce sandstorms that plague this city every spring.
Li’s water-saving pouch, which he says enables trees to thrive in desert conditions, was selected as a special technology project by the organizers of the 2008 Beijing Olympics. Hoping to host sandstorm-free games, the government is planting a “green wall” of trees around the capital to keep the desert at bay.
But the frustrated 41-year-old scientist said he couldn’t raise the $4 million he needed to turn his start-up operation into a full-fledged business.
“Though our project is very good and we have lots of support from the government, we only have technology,” said Li, president and chairman of Beijing Yusen Environmental Protection Technology Co. “In China, banks don’t think technology is worth anything. They want something else, like land.”
Li’s plight is common in China’s go-go economy, in which many entrepreneurs are rich in ideas and enthusiasm but sorely lacking in venture capital, business experts said.
Small businesses struggle everywhere, but the hurdles are particularly high in China. Though this Asian giant boasts one of the world’s fastest-growing economies and $1 trillion in foreign reserves, debt-laden banks are reluctant to put money into start-ups.
China also lacks strong intellectual property protections and is burdened by arcane regulations, according to American and Chinese business experts.
Li is relying on an unusual program launched by the Washington-based World Resources Institute, an environmental think tank, to nurture “green” entrepreneurialism in the developing world.
The goal of the New Ventures program is to identify the most promising environmental technology start-ups in the world’s poorest countries and put them through business boot camp, in the hope that they will be able to capture the attention of early-stage investors.
Since 2000, the program has helped raise $19 million for 140 companies in five countries, including a medicinal plant company in India and a waterless carwash firm in Brazil.
China, where the government has made cleaning up the air and water a national mantra, seemed like a perfect place to plant an eco-friendly flag in 2003. Sidewalk capitalism was thriving and the universities were churning out ambitious young people dreaming of taking their own companies public.
But China has fallen short of those expectations, in part because people are not yet willing to pay a premium for a greener world, said Virginia Barreiro, executive director of New Ventures.
“It’s an entrepreneurial country. You see them on every street corner,” she said during a recent visit to Beijing. But conditions are difficult for building businesses, she added.
New Ventures is making some headway. The group says it has helped six of the 30 companies in its Chinese portfolio raise $3 million. One company, Beijing Shenwu Thermal Energy Technology Co., produces high-efficiency combustion equipment that captures and recirculates heat from inefficient industrial furnaces. That company plans to go public early next year.
Others are also starting to see green in China’s environmental technology arena. Between June 2005 and June 2006, U.S. venture capitalists invested $100 million into China-based start-ups focused on clean technology, double the amount in the same period the previous year, according to Cleantech China, a newly formed joint venture in Beijing that matches up investors and companies.
Ye Weijia, the head of New Ventures’ China program, scours the countryside looking for promising technologies. He says he is often met with distrust by entrepreneurs who fear he is just another scam artist. Recently, one of their companies turned down a pitch from “JV Morgan” offering, for a hefty fee, to perform its due diligence.
A mutual friend introduced Ye to Beijing Yusen, which was operating out of a small suite on the third floor of the Xidan Hotel, an aging building tucked away in a courtyard in central Beijing.
After spending nearly $2 million to build a factory in Inner Mongolia last year, Li was struggling for additional capital to expand his business.
“The problem is he spent almost all of his money building the production line and he had almost nothing left,” said Ye, a retired chemical company executive who has become the company’s business coach and chief cheerleader.
With the Beijing Olympics less than a year and a half away, a government that once spray-painted its lawns green for visiting dignitaries now wants to provide millions of visiting athletes and fans with the real deal.
To prevent further encroachment by the desert, officials have restricted grazing and logging in northern China and launched massive tree-planting programs to prevent further erosion and flooding. But those efforts are being undermined by market forces. Spiraling demand for cashmere, for example, has increased the size of China’s goat herds, which strip the land of moisture-absorbing cover.
Li’s solution relies on a technology he developed a decade ago to stave off bacteria plaguing the algae-growing industry. He found that a membrane of finely crushed seashells and coconut shells prevented bacteria from penetrating the vats where the algae was cultured.
The business didn’t survive, but the idea did. A similar membrane in his magic bag keeps water from leaching out, enabling a tree planted in it to survive longer without rain or irrigation.
Li decided to put his factory in Hohhot, the capital of Inner Mongolia, because it was the center of the government’s anti-desertification efforts. Local officials agreed to give him a two-year tax holiday and a $773,000 interest-free loan. His factory can produce 100 million bags a year.
Li sells his bags for a dime apiece to Chinese forestry officials and tree and fruit farmers. But even that price is too high for cash-strapped growers in places like Inner Mongolia, where the average rural income is less than $400 a year.
So Li wants to export his product to Western markets, where he hopes to charge two or three times more than in China. That, again, requires capital.
Meetings with two Chinese venture capital firms and a U.S. technology investor have been encouraging but produced no funds, Li said. The Agricultural Development Bank of Inner Mongolia and the national government’s program to boost investment in the western region have pledged money.
Hanson Xu, the company’s marketing director, said the government required a lot of paperwork and was “very slow” to process requests.
A native of Beijing, Ye has been using his guanxi, or personal relationships, to try to find a banker willing to look at Li’s business plan.
“Since he has literally no credit history, the first bank to eat the crab is a hero,” Ye said, paraphrasing a well-known Chinese saying that praises the pioneer.