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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Revealing account of the struggles and surprises when forming a financial joint venture with China
The China Business Conundrum: Ensure That "Win-Win" Doesn't Mean Western Companies Lose Twice describes former CEO of Silicon Valley Bank (SVB) Ken Wilcox's firsthand challenges he encountered in four years “on the ground” trying to establish a joint venture between SVB and the Chinese government to fund local innovation design—and the Chinese Communist Party (CCP) efforts to systematically sabotage the project and steal SVB's business model. This book provides actionable advice drawn from meticulous notes Wilcox took from interviews with people from all walks of Chinese life, including Party and non-Party members, the business elite, and domestic workers.
Describing a China he found fascinating and maddeningly complex, this book explores topics including:
- Difficulties in transplanting SVB's model to China, from misunderstandings about titles and responsibilities to pitched battles over toilet design
- Ethics and practices widely adopted by Chinese businesses today and why China must be met with realistic expectations
- Wilcox's own honest missteps and the painfully learned lessons that came afterwards
Engrossing, enlightening, and entertaining, The China Business Conundrum: Ensure That "Win-Win" Doesn't Mean Western Companies Lose Twice is an essential cautionary tale and guidebook for all Western bankers, C-suite executives, consultants, and entrepreneurs seeking to do business within China.
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Seitenzahl: 553
Veröffentlichungsjahr: 2024
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
ACKNOWLEDGMENTS
ABOUT THE AUTHOR
ACRONYMS
INTRODUCTION
PROLOGUE: THE GREEN HAT AWARD
PART I: THE LONG LEAD‐UP
CHAPTER ONE: SILICON VALLEY BANK GOES TO CHINA INADVERTENT TECH TRANSFER
1.1 WHY SILICON VALLEY BANK? THE BANK FOR INNOVATION
1.2 WHY CHINA?
1.3 WHY ME?
Notes
NOTES
CHAPTER TWO: IT STARTS WITH
GUANXI
KISSING FROGS AND FINDING A PRINCE
2.1 A PRINCE AT LAST
2.2 REACHING THE KING
NOTES
CHAPTER THREE: ORIENTING OURSELVES THE STAFF, THE TEAMS, AND THE RUNAROUND
3.1 SETTLING IN: THE LOCAL STAFF
3.2 SETTLING IN: THE LOCAL EXPERTS
3.3 GETTING TO WORK: THE SECRET TEAM
Notes
NOTE
CHAPTER FOUR: PAINS IN THE NECK THE NEW BANK'S LOCATION, ORGANIZATION, AND IDENTITY
4.1 THE ORG CHART
4.2 ISSUES TO RESOLVE
4.3 THE LETTER AND WHAT I LEARNED
4.4 ACHIEVING THE IMPOSSIBLE
4.5 DECEMBER 2011
4.6 WRAPPING UP 2011
NOTES
CHAPTER FIVE: SLOGGING ALONG RESOLVING SOME OF THE MAJOR ISSUES
5.1 THE BREAKTHROUGH IN THE TEA HOUSE AT THE ZIGZAG BRIDGE
5.2 A TURNING POINT
5.3 PUT IN OUR PLACE
NOTES
CHAPTER SIX: THE GRAND OPENING AND YET MORE LICENSES WE DIDN'T HAVE
6.1 A LICENSE … TO WAIT
6.2 THE WORRY OF WARRANTS
6.3 GROWING ANXIETY
6.4 REGULATION
NOTE
CHAPTER SEVEN: STAFFING CCP OFFSPRING, PARENTS, AND CULTURAL DIFFERENCES
7.1 RECRUITING: SONS AND DAUGHTERS OF THE PARTY
7.2 RETAINING: THE BRAIN DRAIN
7.3 DEEPER IN THE JOINT VENTURE
NOTES
CHAPTER EIGHT: WHERE THE MONEY GOES, FINDING MY SUCCESSOR, AND MORE ABOUT CHINA
8.1 SEEKING A SUCCESSOR
8.2 ENTERTAINMENTS, 2012
8.3 REFLECTING
8.4 WRAPPING UP 2012
NOTES
PART II: AFTER THE LICENSE
CHAPTER NINE: HASTENING THE TIMELINE THE FOUR‐PRONG STRATEGY AND WHAT “LETTING THE CUSTOMER DECIDE” REALLY MEANS
9.1 COMPLEXITIES
9.2 MOVING FORWARD, MAYBE
9.3 THE DANGER OF HOPE
NOTES
CHAPTER TEN: THE NEW SHERIFF XI COMES TO POWER
10.1 THE PARTY COMMITTEE
10.2 BUILDING THE BANK'S CULTURE
10.3 BUILDING
GUANXI
10.4 THE CARROT OVERHEAD
NOTES
CHAPTER ELEVEN: IRRECONCILABLE DIFFERENCES THE MORE WE KNEW, THE WORSE THINGS LOOKED
11.1 THE SUCCESSOR IS NAMED
11.2 FILLING IN THE BLANKS
11.3 WRAPPING UP 2013
CHAPTER TWELVE: WRAPPING UP MY STAY STAFF CHANGES, MORE LESSONS, STILL NO RMB
12.1 I COULD HAVE GONE HOME
12.2 BECOMING VICE CHAIRMAN
12.3 WARRANTS AT LAST
12.4 CONVERSATIONS IN CONTEXT
12.5 BODY COUNT
12.6 REVOLUTION ON THE DOORSTEP
12.7 LEAVING
NOTES
CHAPTER THIRTEEN: SUCCESS IN A FASHION CHINA'S NEW TECH BANK (WHICH WASN'T US), AND BEING VICE CHAIRMAN
PART III: THE CHINESE COMMUNIST PARTY
CHAPTER FOURTEEN: THE CCP'S ROLE AND INFLUENCE
14.1 “PARTY, GOVERNMENT, MILITARY, CIVILIAN, AND ACADEMIC, EAST, WEST, SOUTH, NORTH, AND CENTER, THE PARTY LEADS EVERYTHING.”
1
14.2 THE CHINESE BANKING SYSTEM AND ECONOMY
14.3 OPINIONS OF OTHERS ABOUT THE CCP
14.4 ATTITUDES OF THE CCP
14.5 CHANGES WITH XI
NOTES
CHAPTER FIFTEEN: PRACTICAL GUIDELINES FOR WORKING WITH THE CCP
15.1 CONTRACTS AND THE CCP
15.2 CCP NEGOTIATION
15.3 THE CCP AND CONTROL
15.4 THE CCP AND HISTORY
NOTES
PART IV: THE OTHER 93 PERCENT
CHAPTER SIXTEEN: CHINESE BELIEFS
16.1 CHINESE BELIEFS
16.2 ATTITUDES TOWARD AMERICANS
16.3 OVERSEAS CHINESE
NOTES
CHAPTER SEVENTEEN: THE LIVES OF THE OTHER 93 PERCENT
17.1 THE LIFE OF XIAO HONG
17.2 NON‐CHINESE LIVING IN CHINA
17.3 STRANGE THINGS THAT HAPPEN
NOTES
CHAPTER EIGHTEEN: CONCLUSIONSEEKING TRUTH FROM FACTS, MAKING SENSE OF IT ALL, AND TRYING TO PREDICT THE FUTURE
18.1 HOW WESTERN COMPANIES FAIL IN CHINA
NOTES
PART V: FOUR YEARS OF LESSONS, CONDENSED
EPILOGUE
NOTES
REFERENCES
BIBLIOGRAPHY
INDEX
End User License Agreement
List of Illustrations
Chapter 3
Figure 3.1 Names and reporting relationships among the secret team.
Chapter 4
Figure 4.1 Ken's org chart.
Figure 4.2 Luo's org chart.
Chapter 5
Figure 5.1 Original office layout.
Chapter 8
Figure 8.1 Elements of “Artwork Landscape.”
Chapter 14
Figure 14.1 Exchange of foreign currency for RMB and vice versa.
Guide
Cover
Table of Contents
Title Page
Copyright
Dedication
ACKNOWLEDGMENTS
ABOUT THE AUTHOR
ACRONYMS
INTRODUCTION
PROLOGUE: THE GREEN HAT AWARD
Begin Reading
EPILOGUE
REFERENCES
BIBLIOGRAPHY
INDEX
End User License Agreement
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THE CHINA BUSINESS CONUNDRUM
ENSURE THAT “WIN‐WIN” DOESN'T MEAN WESTERN COMPANIES LOSE TWICE
KENNETH WILCOX
Copyright © 2025 by John Wiley & Sons, Inc. All rights, including for text and data mining, AI training, and similar technologies, are reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at http://www.wiley.com/go/permission.
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Library of Congress Cataloging‐in‐Publication Data
Names: Wilcox, Kenneth (Former chief executive officer of Silicon Valley Bank), author. Title: The China business conundrum : ensure that “win‐win” doesn’t mean western companies lose twice / Kenneth Wilcox. Description: Hoboken, New Jersey : Wiley, [2025] | Includes bibliographical references and index. Identifiers: LCCN 2024026891 (print) | LCCN 2024026892 (ebook) | ISBN 9781394294169 (hardback) | ISBN 9781394294176 (adobe pdf) | ISBN 9781394294183 (epub) Subjects: LCSH: Silicon Valley Bank. | Banks and banking—China. | Business ethics—China. Classification: LCC HG3334 .W54 2025 (print) | LCC HG3334 (ebook) | DDC 332.10951—dc23/eng/20240719 LC record available at https://lccn.loc.gov/2024026891LC ebook record available at https://lccn.loc.gov/2024026892
Cover Design: Jon Boylan
Cover Image: © ishpoka/Shutterstock
To Ruth Wilcox
Thank you for the adventures so far and all the ones to come.
ACKNOWLEDGMENTS
A writer friend told me that the problem with acknowledgments is that one is sure to forget some member of the throng of individuals who have supported a project like this book, which took almost a decade to create. So it is with great humility that I undertake the happy task of acknowledging people who contributed to this effort, and hope devoutly for the forgiveness of anyone I've inadvertently omitted.
First, of course, I want to acknowledge my wife and companion in adventure, Ruth Wilcox. Without her encouragement and company, there would be no book because we'd never have gone to China. Her patience, intelligence, quick eye, and joy added enormously to my insight and fun.
I also want to thank Ann Leamon, who worked with me to revise the book from its original diary form to a narrative describing the “thrills and chills” of our adventure. I still think she used too many endnotes. And many thanks to Felda Hardymon, venture capitalist and networker extraordinaire, who thought to introduce Ann, a poet, novelist, and former HBS case writer, to me, a banker undergoing his fourth reinvention, this time as an author. Indeed, it was a meeting of minds.
My sincere thanks to three people who provided critical information to revise or enhance my initial suspicions about working in China and who helped with earlier versions of the book. David Barboza of The Wire, John Pomfret, and Dana Pomfret, you positioned the document for its liftoff, and I sincerely appreciate all your work.
I send my warmest thanks and gratitude to all my colleagues at SVB and SSVB who have taught me so much, even when we disagreed. Looking at the bank's disintegration in 2023, we're all deeply sad. We never meant for it to end that way.
To all the delightful people I met in China, who shared with me their stories and dreams, my deepest appreciation. I hope I have not hurt your feelings.
And finally, I thank my early readers. Those who read the first version created the chorus that said, “This is great, Ken, but it needs a major rewrite.” As with many important pieces of advice, it was what I needed to hear, although not welcome news. Thank you to Pete Hart, Arman Zand, Michael Dunne, Chris Hunt, Coco Kee, Dennis Ziegler, Wes Okumura, Tim Hardin, and Ken Dewoskin for your perceptive feedback and clear insights. My second readers gave me further encouragement to move this project forward—thank you to David Barboza, Felda Hardymon, Jim McGregor, Ken Dewoskin (a second time!), Orville Schell, and Victor Wang. This book is so much better due to your comments.
ABOUT THE AUTHOR
Ken Wilcox spent 30 years with Silicon Valley Bank (SVB). Between 2001 and 2010, he served as its CEO and then, rather than retiring, moved to Shanghai where he lived for four years establishing SVB's Chinese joint‐venture operation (SPD SVB). He concluded his banking career in 2019 holding positions as vice chairman of the joint venture and chairman of SVB.
Along with serving as Chief Credit Officer for Columbia Lake Partners, a UK‐based venture debt fund, Ken is now involved with a number of boards and has written several books. His book about leadership, Leading Through Culture (Waterside, 2021) and its accompanying workbook, How About You? (Waterside, 2023), were well‐received. He has given more than 50 speeches, mostly about leadership, for audiences around the world.
Ken's experience includes seven years on the board of the San Francisco branch of the Federal Reserve, which afforded him a front row seat during the global financial crisis of 2008. He has received numerous honors and awards, including the Magnolia Award, Banker of the Year, Entrepreneur of the Year, and Yangpu District Innovation Award.
Prior to his business career, Ken taught German at the college level and wrote several books and articles on aspects of that language. He holds an MBA from Harvard Business School, a PhD in German Studies from Ohio State University, and a BA from Oakland University.
ACRONYMS
CBRC: China Banking Regulatory Commission
CCP: Chinese Communist Party
CSRC: China Securities Regulatory Commission
Fed (the Fed): The Federal Reserve Bank of the United States, the U.S. bank regulator
FTZ: Free Trade Zone
JV: Joint venture
JV Bank: The joint venture bank (SSVB/SPD SVB)
PLA: People's Liberation Army (Chinese national army). Also known as the Red Army.
RMB: Renminbi (also known as Yuan); local Chinese currency
SAFE: State Administration of Foreign Exchange
SOE: State Owned Enterprise
SPDB: Shanghai Pudong Development Bank
SPD SVB: Shanghai Pudong Development Silicon Valley Bank (the JV, name preferred by SPDB)
SSVB: Shanghai Silicon Valley Bank (the JV, name preferred by SVB)
SVB: Silicon Valley Bank
WOFE: Wholly Owned Foreign Enterprise (offshore shells for Chinese companies to allow them to raise foreign currency, usually U.S. dollars)
INTRODUCTION
This is a story about my experience setting up a joint venture bank lending to high‐tech start‐ups in China. The U.S. bank in the partnership, the bank I'd led for 10 years (to 2011) and was employed by, in total, for 30, was Silicon Valley Bank (SVB)—at the time, the world's largest lender to technology companies. These points would not require elaboration except that as I was wrapping up this volume, SVB collapsed. Its demise stemmed from dynamics set in place long after the events we discuss here and have nothing to do with the Chinese joint venture. On the other hand, you might say this book chronicles SVB's first failure.
This book recounts actual events as truthfully as possible, based on my own records and notes. Some names and details have been changed.
PROLOGUE: THE GREEN HAT AWARD
In 2008, I was invited to attend a celebration in Shanghai at the Crown Royal Hotel. As the CEO of Silicon Valley Bank, the California‐based bank that led the world in funding venture capital firms and start‐up companies, I was spending a lot of time in China at that point, trying to establish a branch there. We had operations in the other international innovation hotspots—London, Israel, and India—and China's explosive growth in that area was attracting our venture capital clients who wanted one‐stop banking services. The invitation came from Lao Ding, the Party Secretary and head of Shanghai's Yangpu District, who was helping us get the necessary banking licenses. Without knowing what to expect, I cleared my schedule and flew the 16 hours from California to China explicitly to attend this event honoring “innovation advisors.” Bleary and jet‐lagged, I found myself in a ballroom with 300 government officials.
In the middle of the ceremony, a high‐ranking government official called me up to the stage. To my astonishment, I learned I'd been nominated as one of the 10 honorees. I racked my brain, trying to figure out what I'd done to be qualified as an innovation advisor at such a lofty level. Finally, with the help of Lao Ding, it became apparent: my staff and I had unintentionally taught his team our business model. During the many months when we had detailed the model with great precision to Lao Ding's team so they could explain it to the government agency that might grant us a license, we'd been involved in a form of inadvertent (at least on our part) “technology transfer.”
It was only years later that I understood the whole picture. To see if our business model really worked as described, Lao Ding had transferred his CFO to the Shanghai Rural Commercial Bank where he set up a tech lending team and tested the model in the real world. In essence, I was being honored in front of hundreds of people for (from my point of view) having been snookered. Looking back, I felt like someone had just seduced my wife and then held an awards banquet to compliment me in public for having such good taste to marry her in the first place.
In China, men avoid wearing green hats. Superstition has it that wearing a green hat indicates you've been cuckolded. I firmly believe this award should be called the “Green Hat Prize.”
But in my defense, this sort of tech transfer was inevitable. It was how China did things. If we hadn't participated, it's unlikely we would have ever been able to set up an operation in China. Of course, in retrospect, one might wonder if that would have been a bad thing. But at the time, we felt we had no choice.
WHY I WROTE THIS BOOK
In this book, I tell the story of establishing a division of Silicon Valley Bank (SVB)—my bank, the bank I ran for 25% of its history—in China, and what went wrong. Because a lot of things went wrong, not least the inadvertent tech transfer that qualified me as an “innovation advisor.” Some of the missteps were due to my ineptitude and naiveté, but much came from cultural misunderstandings, even as I had four of the most amazing, informative, joyous, and challenging years of my life. I'd like to spare my readers the pain of my misunderstandings and missteps while allowing them the joy and discovery of those four years of cultural immersion.
This story primarily occurs between 2011 and 2015, predating the failure of the entire bank in 2023. In the Epilogue, I describe my perspective about the bank's collapse. I remain committed to SVB's original vision and to the work it did to support innovation. Its demise grieves me deeply. But that's not the story I'm telling here.
Countless Westerners have had experiences in China like those I describe in this book. Unsatisfying, confusing, and frustrating experiences. But they seldom admit it. They're afraid of disappointing their boards and engendering retaliation from the Chinese Communist Party (CCP). If they're critical, they worry that the CCP will find some way to punish the company they went there to build (assuming it still exists). Possibly, their egos won't let them admit that they've been taken for a ride. And perhaps, in some cases, China is still milking them for knowledge, and for that reason treats them well. Their time will come.
This reluctance to share our failures makes it difficult for Westerners to learn from others’ mistakes. As a result, everybody must reinvent the wheel. Western companies as a group could perform better, I believe, if they were more inclined to talk with others about what worked well in China—and what didn't. Collectively, we could make more progress more quickly.
As an example, I have kept careful note of the roughly 150 books I've read that would have been useful in my China journey—and as of late 2022, found only six with this type of unvarnished assessment of business experience.1 Discussions of this sort, sharing mistakes and successes and refining strategy, definitely take place in China, due to a higher level of cooperation among executives. As a result, Chinese businesses know a lot more about succeeding in America than Americans know about how to succeed in China. I'm hoping this book will help boost some of my colleagues up the learning curve.
Everyone, especially lately, has an opinion about China. Some people seem like “China‐bashers” and some people seem like “panda‐huggers.” Cynics and romantics. Of course, in my own mind, I am neither, but a realist—smack‐dab in the middle.
I believe that the West needs to move to the middle of the spectrum in terms of interacting with China. Now is the time for realism. Enough of the gratuitous China‐bashing, enough of the sentimental panda‐hugging. It's time for the West to face the facts objectively and to learn how to deal with them. “Seek truth from facts,” said Chinese leader Deng Xiaoping 40 years ago. Today, in the 2020s, we should do so as well.
Since Deng “opened up” China to Western business in the early 1980s, thousands of American companies, enticed by the prospect of gaining a putative billion customers, have sought to establish operations there. Many have failed and many others are in the long, slow process of eventually failing. Many who will eventually fail are not yet even aware of the fact that over the long haul, they cannot win. The obstacles are formidable. Chinese culture is completely foreign to Westerners, resulting in chasms that are difficult to bridge. Chinese business practices are opaque and, to the extent that we come to understand them, it is hard for us to adapt. The Chinese economy is structured differently from that of almost any other country, making it often impossible to replicate our business models there. Largely due to the CCP's incessant propaganda, many Chinese people are highly nationalistic, to the extent that they don't really want foreign companies playing a role in their economy. The current level of nationalistic fervor has been created and is being manipulated by the CCP for its own ends. The CCP only wants you to come, teach China everything you know, and then leave again, never to return.
Today, fewer Western companies go to China than was true 10 years ago, because the relationship between our respective governments has soured. Even if it improves over the next few years, Western companies that consider entering China should still be wary. The way that the Chinese government treats Western companies is not likely to change, due both to the CCP's overall gameplan and to Chinese culture as it is described here.
In this book, I relate both my experience in setting up a bank focused on lending to technology start‐ups in China and what I learned about business and life there. I was both well‐prepared, having studied Chinese diligently for the year before, and as ill‐prepared as every other Western CEO. I was, however, determined to make a systematic and, to the best of my ability, thorough study of the country and its people.
HOW I STRUCTURED THIS ACCOUNT AND GATHERED MY INFORMATION
A note on the structure of this book: The first half is a narrative account of my four years in China as I tried, in partnership with the CCP, to build a bank that would finance technology companies. The latter half is all about what I learned in that process. The emphasis is on the CCP, the Chinese government, and Chinese culture, and how all three have worked together to create the economic miracle of the past 45 years. In this section, I try to advise those who wish to take their business models to China how to deal successfully with this trio—the CCP, the Chinese government, and Chinese culture—to the extent that it is even possible.
You could, of course, skip the first half and go directly to the second. However, I would not recommend it. Understanding China requires on‐the‐ground experience and plenty of time. You cannot peel back the myriad layers of the onion in a single day. That effort can take years of trial and error. I think you will get the most out of this book by reading about my four years of trial and error. Vicariously experiencing those four years with me will make it easier to understand the conclusions and recommendations in the latter half of the book. Most books tell you what to do, if anything. I think you will benefit from reading what not to do as well. China is so complicated and so different that the potential for misinterpretation and misunderstanding is greater than in any other place I have either visited or read about.
In the second half, I'll describe the “theory of China” that I developed through my experience of starting the bank. It is fundamentally composed of two parts:
What the 7% of the 1,400,000,000 Chinese residents (roughly 98,000,000 people) who are members of the CCP want to accomplish and how they go about doing that; and
How the other 93% see the world and what they believe to be true.
In creating my “theory of China,” I did my best to go straight to the source and speak with the largest possible cross‐section of Chinese residents I could find. I did a lot of observing, took meticulous notes, and tried to reserve judgment. From time to time, I reviewed my notes and formulated “working hypotheses.” Then I would test my hypotheses through further experience on the ground, so to speak, as well as in discussions with both “Old China Hands” (Westerners with extensive experience in China) and Chinese acquaintances of all types.
The time I spent in China, from 2011–2015, was a period of enormous change in that country. Some observers see it as part of the ebb and flow of reform. I see it differently. In keeping with John Garnaut's insightful analysis,2 I believe my time in China coincided with Xi Jinping's initial moves to implement the Maoist version of Marxism‐Stalinism more openly, without concern for how the rest of the world might respond. And I was there as this was first happening.
The most important thing I learned in trying to understand China is the difficulty in shedding preconceived notions, or, colloquially, “jumping over my own shadow.” All of us have, in the course of our lives, developed a set of “mental models” that enable us to recognize and interpret things we're experiencing for the first time. By superimposing those mental models on new experiences, we use pattern recognition to understand things more quickly and easily. Otherwise, every time we encountered something new, we'd have to start from scratch.
But suppose those mental models are inadequate and the new things we're experiencing are not just new, but totally different from anything we've ever seen before. Perhaps our previous experience isn't applicable to these new situations. Our mental models may be inadequate precisely because we're applying them to something fundamentally different from anything we've ever encountered. But rather than replace them, we often insist on trying to force our new reality to conform. Which it won't.
For instance, as a young child, a friend moved from Michigan to Florida. Out for a walk, she encountered what she thought was a jump rope—her mental model at work—only to have it slither away, rattling its tail. Clearly, her initial mental model was inadequate! Similarly, one early example of such a disconnect occurred when I learned that the Chinese and U.S. interpretations of the roles of chairman and president differed dramatically. In short, a U.S. chairman manages the board of directors, while the president, often termed CEO, manages the company's strategic direction. In China, the chairman usually plays the role of a president in a U.S. company. Thus, for the first nine months of building the bank, the most senior executive from our joint venture (JV) partner and I—the most senior executive from SVB—both thought we were setting the organization's strategic direction, because he was named chairman and I president. Getting to the bottom of this misunderstanding and then resolving it took the better part of a year.
In China, my wife and I had this experience multiple times. Our mental models were so inapplicable that they had to be held in abeyance. And this is why the Old China Hands, savvy about the ways of the Chinese, often say, “The more time I spend in China, the less I know about it.” Welcome to my voyage of discovering—perhaps less about China than about my own ignorance of the place.
NOTES
1
In order of publication: James L. McGregor,
One Billion Customers
(New York: Free Press, 2005); Tim Clissold,
Mr. China
(New York: Harper Collins, 2006); Michael J. Dunn,
American Wheels, Chinese Roads: The Story of General Motors in China
(Hoboken, NJ: Wiley, 2011); Carl E. Walter and Fraser J.T. Howie,
Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise
(Hoboken, NJ: John Wiley & Wiley, 2012); Clissold's sequel,
Chinese Rules: Mao's Dog, Deng's Cat, and Five Timeless Lessons from the Front Lines in China
(New York: Harper Collins, 2014); and James Stent,
China's Banking Transformation: The Untold Story
(New York: Oxford University Press, 2017).
2
I discuss Garnaut's perspective at greater length toward the end of the book. For the reader who wishes to skip ahead, I highly recommend his 2017 speech, John Garnaut, “Engineers of the Soul: What Australia Needs to Know About Ideology in Xi Jinping's China” (subsequently reprinted in Bill Bishop's newsletter,
Sinocism
, on January 16, 2019).
PART ITHE LONG LEAD‐UP
CHAPTER ONESILICON VALLEY BANK GOES TO CHINA INADVERTENT TECH TRANSFER
In April 2011, I had just turned 63 and was supposed to retire after a long and successful career at Silicon Valley Bank (SVB), the final decade spent as CEO. Somehow, things turned out a little differently.
The bank was obsessed with succession planning as part of its organizational culture. Shortly after taking the CEO position in April 2001, I'd known that in April 2011 I would say goodbye to my colleagues and start doing the kinds of things people do when they retire: pursue hobbies; get involved with nonprofits; spend more time with my family. But fate had another plan in mind. In April 2011, rather than retiring to tend her garden, my wife, Ruth, and I moved to China. SVB's Board had asked me to found a brand‐new bank.
Three questions might arise at this point: Why SVB? Why China? Why me? And a fourth question for me personally: Why did my wife agree?
1.1 WHY SILICON VALLEY BANK? THE BANK FOR INNOVATION
By 2011, when I moved to China, SVB had become known as the Bank for Innovation. It was a uniquely U.S. institution, predicated on funding that uniquely American—but already global—industry, venture capital (VC) firms and the start‐ups they backed. As a member of SVB for 30 years, and its leader for a decade, I think of myself as an “SVBer,” which is reflected in the language I use. Regardless of its untimely demise, I still feel the same way.
SVB was founded in 1983 by four poker‐playing California businessmen who saw the need for a bank to fund start‐up companies. At the time, the successes of Tandem Computer, Apple, and Intel had illustrated the possibility of inconceivable success from very humble origins in markets and with products that many people had never imagined.1 Forty years later, this success is undoubted.
By 2011, SVB had banked such success stories as Amazon, Cisco Systems, Fitbit, and Square. The firm had assets close to $40 billion and offices in six countries, banking 65% of VC‐backed technology start‐ups globally.2 Our success was built on our enduring relationships with venture capital firms and our resulting willingness to lend to companies before they had revenue—in contravention to the typical banking model.
SVB's business model was simple to explain but complex to implement. We banked innovation across companies ranging from start‐ups through buyouts. We also had a venture capital division, which invested the money it raised from third parties (usually endowments) into private equity funds that we'd worked with for decades. In addition, we offered venture debt to carefully chosen companies, primarily start‐ups. While it might seem absurd for a bank to offer debt to a company that might not even have revenues, let alone profits, SVB's approach adjusted for this risk.*
Based on its long history and its ongoing relationships within the VC industry,† SVB had deep knowledge of how the VC firms operated. We made a concerted effort to track the records of their individual partners, focusing on their ability to choose and manage investments. As a result, we could fine‐tune the products we provided and the companies we provided them to. This analytical approach reduced our risk, which was critical due to the small margins banks typically earn. SVB bankers developed techniques to assess the creditworthiness of the start‐ups we lent to by talking to the venture capitalists and closely monitoring each investee company's spending—easily done, since we typically banked them.3 The three most important issues were: “Who are the venture capitalists and what are they like?”; “Can we count on the management team to deal with us honorably?”; and “In the event that the company fails, will it have developed intellectual property (IP) that the investors can sell and would those proceeds be enough to pay us back?”
Venture debt has been around for decades and is a helpful instrument for start‐ups, their founders, and their venture backers. It's a loan like a regular business loan but its collateral, instead of being the classic “revenues and assets” of typical business lending, is the track record of the company's venture backers and the company's intellectual property. That is, we expected the company to repay us based on the venture funding it received and would raise in the future—thus, to a certain extent, we based the loan on the venture capital firm's record. At worst, if the start‐up failed, we had senior rights to its technology, which might be sold to another company to pay back our loan.4
As background, a start‐up's value increases in discrete jumps as it hits milestones: after years of work, the technology performs as anticipated; the company gets a paying customer or lands an order or surmounts a regulatory hurdle. Achieving such proof points boosts the company's value when it raises more capital.5 Venture debt extends the business's runway to ensure it reaches a given value‐boosting milestone. Raising capital at a higher valuation means the founders and early investors keep a larger share of the company—one share of the company will be worth more than previously. SVB carefully structured the loan to ensure we'd be repaid should the company fail (technically speaking, the bank had seniority), but also took steps to avoid that situation. The company usually received its loan just after it raised capital, which meant it would usually have enough money on hand to pay us back.
Finally, SVB took warrants, the right but not the obligation to buy stock at a set price in the future. In some cases, the warrants would be useless—you don't want to buy the stock of a failed company or even one that's just so‐so. Because venture capitalists assume only 30% of their companies (if that many) will succeed, it was inevitable that despite the bank's continuous efforts to hone the model and lend only to the best companies supported by the best VC firms, the portfolio would include some losses.
But when the companies succeeded, the warrants allowed us to buy a certain amount of stock at a discounted price. We then immediately sold the shares. The gains from these transactions generally made up for any losses we suffered in this model. Over its history, Silicon Valley Bank was routinely among the most profitable banks in the United States.
Despite the efforts of other banks to adopt our model, SVB held a leadership position due, in part, to our history. We knew the venture capital landscape and were deeply engaged with many of the best firms, understanding in an intuitive way how they thought about their business. Everything we did, from locating our headquarters in Santa Clara, the heart of Silicon Valley, to our office attire, which was business casual before that became a buzzword, reflected our connection to the innovation industry.
In 2001, when I became the third CEO of SVB, we'd been pursuing the same fundamental strategy since our founding. To our customers, we were “the bank for technology start‐ups.” Internally, we considered ourselves “the three‐legged‐stool bank.” One‐third of our business involved technology start‐ups, one‐third involved real estate, and one‐third involved small businesses. But in our marketing, we emphasized the technology, for two reasons:
First, serving the needs of tech start‐ups made us unique. Virtually all of America's banks finance real estate and small business. But very few of them finance technology start‐ups.
Second, the three elements in combination represented a perfect symbiosis. VC‐backed technology start‐ups were—on average—cash‐rich because they raised money in discrete lumps (termed “rounds”) and spent it over two or three years; real estate developers and small business owners were typically cash‐poor. In effect, we used the excess cash from the tech start‐ups to finance the real estate developers and the small businesses.
As CEO, I wanted to both narrow the focus of the business and expand it. Over the first few years of my tenure, we eliminated all the real estate and small business lending so we could focus on the tech companies. We did this because tech lending was the only part of the market where we could uniquely add value to the customer and leverage the specific advantages of our industry knowledge. Most of the banking industry perceives start‐ups as risky, due to their uncertain business prospects. While start‐ups are risky, our model mitigated this risk, giving us a unique and defensible market position.
The defensibility came from two elements. First, banks that tried to adopt our model usually did it on a small scale. As with any new effort, people would make mistakes and the bank would suffer losses. Given banking's slim margins (according to the Federal Reserve, the industry's average net interest margin between the first quarters of 2009 and 2022 was 2.61%6), there was little tolerance for missteps and the project would be quickly shut down.
Second, SVB devoted significant resources to getting to know the individual venture capitalists, both their returns and their character. This deep understanding of the people we wanted to work with meant we could anticipate their behavior in challenging situations—and it helped us refine the risk we took. To support the investment in this time‐intensive undertaking, we needed to have a big portfolio. In fact, each of our bankers usually served 40 to 50 companies. By comparison, venture capitalists rarely had more than 10 companies in their individual portfolios.
In the mid‐2000s, we expanded our tech business in two different ways: We went from dealing only with start‐ups to working with tech companies of all sizes. This step itself reduced our risk, because tech companies at different life‐stages have very different levels of risk. Consider, for instance, the relative risk of a company developing electric aircraft and Pinterest, a venture‐backed company that is now publicly traded. By banking both, we established a much more balanced risk profile.
Then, we expanded our focus from the domestic U.S. market to the entire globe. By 2019, when I fully retired from SVB, it had technology clients of all sizes all over the world. This combination of strategies seemed to work: as of mid‐2022, our assets had reached $214.4 billion, putting us into the top 20 banks in the United States in terms of size, and our clients included 50% of U.S.‐based VC‐backed companies.7
Being global is both risky and rare for a bank. Few even make the attempt, but for us it was a necessity, because technology is one of the very few truly global businesses. My philosophy is that you can't be the most cutting‐edge business anywhere without being the most cutting‐edge everywhere, which is why Apple's iPhone dominates the premium smartphone market. The entire world works off the same global knowledge base, which becomes larger every day as scientists around the planet add to it. And the supply chains that support the manufacture of technology products are both global and highly intertwined.
Our clients, the VC firms that funded innovation, were expanding globally. In the early 2000s, as the VC industry and SVB both reeled from the Nasdaq crash (our stock price fell by 50%), we nonetheless followed our clients who were expanding into India, London, and Israel. In 2005, we followed them to China.
1.2 WHY CHINA?
Early in this millennium, SVB began building its business in Europe and Asia. Our first trips to the People's Republic of China (PRC) were in the year 2000. In fact, I was the featured speaker at the first meetings of both the Shanghai and Beijing chapters of the Chinese Venture Capital Association.
China's innovation industry was hitting the gas. In 2000, China and Hong Kong together were home to a third of all the private equity* capital under management in Asia ($29.3 billion) and 313 funds, or 22% of the total, most of it in Hong Kong.8 At that point, China's venture capital industry had raised $2.1 billion and its total private equity pool was $5.2 billion, up 39% from $3.7 billion the year before, due to China's steady 8% growth rate and its accession to the World Trade Organization (WTO). Major investors included corporations (of which a large number were state‐owned enterprises, or SOEs), followed by banks and government agencies.
Moreover, the Chinese population, in excess of 1 billion people, was an irresistible lure to any business. Very few nations offer the prospect of building a global company simply by serving domestic demand. China, the United States, the EU, and India come to mind, but few others. And in China, the middle class is the size of the entire U.S. population. Talk to almost any business owner about the Chinese market and they start looking like cartoon characters with dollar signs in their eyes in place of pupils.
Thus, even as the dot‐com boom in the United States and Europe imploded, the venture capital industry and our bank were keenly aware of the opportunities across the Pacific. In June 2004, SVB led a six‐day trip to China for many of the best‐known and most successful venture capital firms in Silicon Valley to give them the lay of the land. The 25 venture capitalists who came represented more than $50 billion under management and participated in 20 meetings with technology companies, regional venture capitalists, private equity firms, local entrepreneurs, and educational and governmental institutions.9 Virtually every firm represented on that trip established a beachhead in China in the next year or two. In Silicon Valley lore, that trip became legendary.
In December 2005, SVB set up our first Chinese office in Shanghai. Initially, it was difficult to accomplish much. First of all, we had no licenses, so we could only engage in activities that didn't require them, which means … almost none. Our Chinese office supported our venture capitalist clients as they invested in Chinese tech start‐ups that were owned by off‐shore companies (usually located in the Cayman Islands) for the sole purpose of raising money from dollar‐denominated funds. These Wholly Owned Foreign Enterprises (WOFEs, pronounced “woof‐fees”) were a government‐sanctioned (or at least ignored) work‐around of the ostensible prohibition on domestic Chinese companies receiving U.S. dollar financing.
Before we could move beyond financing WOFEs, we needed a banking license in China. But getting one was not easy. It wasn't like much of the Western world, where as long as you've met the legislative and regulatory requirements and paid the fee, you have a reasonable chance of getting the license. Instead, to get a license to do much of anything in China requires the assistance of one of the myriad government agencies. And these agencies are under no obligation to grant anyone a license to do anything, unless they want to.
And why might they want to? The answer can be summed up in a single word: guanxi, which is commonly translated as “mutually beneficial relationship.” It's one of those terms that Westerners learn as soon as they arrive in China, and then discourse on ad nauseum. But the operational meaning of guanxi is actually far more complex than that. Functionally, the term has elements of leverage—that is, mutual obligation—that an outsider would be wise to keep in mind. It involves knowing what your counterparty needs (both personally and professionally, which usually overlap) and advancing their goals with a shared understanding that you will call in the favor at some point. I found that I spent an enormous amount of time building guanxi by taking meetings, arranging introductions, and doing other things that appeared to be completely unrelated to the job at hand, but turned out to be essential.
The case of a foreigner trying to get a banking license presented all the challenges of guanxi. The benefit to you, the foreigner, is obvious: you want a license. The benefit to the license‐granting agency ultimately falls into at least one of three categories—and, at best, into all three:
Fundamentally, granting a license to you must be seen as benefiting China, meaning you're bringing something to China that the country needs. The license grantor may reap some personal gain from their help in getting you the license, but to all appearances, the license must help China succeed.
For the specific agency, whatever your license will allow you to do must further the achievement of one of its goals as defined by its key performance indicators (KPIs).
And for someone in the agency to take on the task of being your champion in getting the license, your line of business must help
that person
reach their goals as defined in their personal KPIs. Ideally, you'll also be able to help members of your champion's family achieve
their
goals as well. Therefore, you have to develop a “personal” relationship with that individual. This may take several meetings over an extended period. Actually, it may take years.
This is the case of getting a license to do almost anything in China. And this is not what Americans are used to.
In my case, the Chinese government wanted to learn from SVB how to finance the creation and application of technology. That is, the Party wanted us to teach them our secrets for success. And we were willing to do it—to what we hoped would be a minimal extent, just enough that we could get the license.
One may reasonably ask why. There are two answers: one is simple naiveté. We never thought, never even considered, that opening a bank in China would be much different from establishing operations in London, Israel, and Bangalore, all of which we'd done successfully. But the other reason is more fundamental to our business. I believe that even if we had known everything that would happen in the process of establishing the bank, we would have still done it. Differently, I'll grant you, but we would have built a bank in China because that's where our customers were going. And if we didn't go with them to China, they'd find someone else to serve them, first in China and then, we feared, in the rest of the world as well.
I call this the “reverse osmosis” theory. When I met the woman who became my wife, I soon learned she loved the symphony. I did not. I feared, though, that if I didn't accompany this beautiful, intelligent woman to the symphony she loved, some other eager young gentleman would fill my place. Therefore, I cultivated an appreciation of music, even if only as a place to take a nap. Similarly, if SVB could not handle the needs of our venture capitalist clients as they expanded into China, they would eventually turn to an organization that could, first in China and then across the globe. If we weren't there, eventually we wouldn't be anywhere.
And as the relationship between SVB and China's government, which we learned later was virtually indistinguishable from the CCP, evolved* we were courted assiduously—with the overblown flattery of a lovestruck swain. Mr. Yu, Party Secretary of Shanghai, whom I met in 2009 as we were still debating whether to build a bank in China, was highly complimentary of SVB. China was building its own innovation space, he told me, and among other things, needed to learn how to finance technology. He—which meant China, a country of 1.3 billion people at the time—had concluded that we, Silicon Valley Bank, my bank, was the best in the world at financing technology.
Yu made it very clear that this was no off‐the‐cuff judgment. His team had searched the globe and determined that we were indeed the best. He even made specific comparisons: we were better than Morgan Stanley or Goldman Sachs, he insisted. He greatly admired us. It would be an honor for China if we would build a bank, especially in Shanghai, the province (city–state) for which he was responsible. He would personally see to it that we'd be welcomed with open arms and that we'd be successful, which, it turned out, was more nuanced than we initially understood. This flattery got to the point that it was almost unbelievable—I knew we were good, but we weren't that good, although I did enjoy telling Goldman Sachs a few years later that we were deemed better than they.
How could I resist? How could my board resist? Back in Santa Clara, the board decided to commit $100 million to establishing SVB's operations in China. But a fundamental question quickly arose: Who would lead the effort? It needed to be someone with deep knowledge of the SVB model and its culture, someone senior enough to command respect and make decisions, and someone willing to uproot themselves and their family to move to China for a substantial period. In 2010, the board made its decision: it would be me.
1.3 WHY ME?
As I noted earlier, I had long known that I would be retiring in 2011 at the age of 63. I had certainly been looking forward to retirement and the time it offered to immerse myself in subjects I'd been unable to pursue during my career. But in discussions with the board, it became obvious that I was a logical choice to lead SVB into its new beachhead in China.
I was one of the most senior and longest‐tenured individuals at a bank known for the long tenures of its staff. Once people settle into SVB, they become absorbed in the multifaceted nature of its business and the constant exposure to innovation. It's a place for people who don't think like stereotypical bankers. Its culture is one of its strengths, and so valuable that I wrote a book about it. Who would be a better standard‐bearer of SVB culture than I?
As the soon‐to‐be‐retired CEO of the operation, I possessed both internal knowledge and external prestige. I had spent decades getting things done as the bank survived crises, honed its business model, and expanded internationally. People within the bank and even on the boards of other companies took my calls. My age was an advantage in China, which reveres its seniors. And my title gave me the all‐important “face,” or standing.
I'd also been the literal face of SVB to China since our initial forays there. I had addressed the inaugural meetings of the Beijing and Shanghai Venture Capital Association meetings. From an organizational perspective, I was the only logical person to lead this effort.
Personally, the project thrilled me. I have always loved reinvention. After earning a PhD in German and landing a tenure track position at University of North Carolina, I had left academia to earn an MBA at Harvard Business School. I had worked at Bank of New England only to reinvent myself as president of SVB's East Coast division. But since moving west, it had been almost a decade since I had reinvented myself. It was time.
But there were other, less lofty reasons for me to lead this effort. I was on the verge of retirement. My career prospects would not be resting on the outcome of a risky project, much though I wanted it to succeed. After the China adventure, I could travel, spend time with my family, do all the things I'd planned as I contemplated this next phase of my life. I didn't have to worry about moving a family because both boys were on their own. Ruth, my wife, was as eager for this adventure as I. And I believed in the bank and the critical importance of funding innovation to make the world a better place. In taking this model to China and deploying it to finance Chinese start‐ups, I would not only be expanding the bank, but I'd also be supporting innovation, possibly breakthroughs that might save the planet.
Oh, and finally—I was the only person at the bank who wanted to go. Due to spousal obligations or children in school or fear of the unknown, no one else could do it at that time. But Ruth thought it would be a grand adventure. I suppose we had a greater spirit of adventure than the rest of SVB—or maybe the stars were aligned for us in a way that they weren't for anyone else.
A year before we moved, Ruth and I signed up for weekly Mandarin lessons and committed to daily practice sessions. We were to establish SVB in China to bank innovation. Little did we know that it would not be so easy.
Takeaways from the Trenches
The Chinese market looks tantalizingly attractive, from a distance. But be prepared: even though China's 1.4 billion consumers may want your product, you may need to take a different approach to marketing it in China than you are accustomed to elsewhere.
You might not even have to look for an entry to China. China may find you before you find it. Researchers in China comb the globe, looking for Western companies that have something China wants. The CCP may come to you with an invitation. This should make you wary.
The CCP controls China in many ways. Licensing is a primary one. The CCP trades licenses, usually with strings attached, for knowledge. Both possibilities—that China comes to you and that you're allowed into China—are mesmerizing, and both are fraught with risk. You may end up chasing China until it catches you.
Guanxi
is all about tit for tat. Usually you will give much more than you will get.
Notes
*
The risk that did in SVB in 2023 was interest rate risk, not the failure of any of its companies.
†
Terminology in the VC industry can be confusing. By “venture capital,” we mean young, private, fast‐growing, and often loss‐making companies. We continue to provide banking services to these companies as they go public, but our initial interaction with them stems from a connection made during their venture‐backed youth.
*
A note on terminology: private equity refers to stock that doesn't trade on public markets (that is, the companies are private). Private equity investments range from early‐stage technology start‐ups, termed venture capital, through medium‐sized companies (growth equity) to leveraged buyouts, which are acquisitions of entire companies in transactions that use debt. The term private equity is used, confusingly, to refer both to leveraged buyouts in particular, and to the entire spectrum of investments in private companies (venture capital through buyouts). We use it in its broad meaning here, but most of China's international private equity scene has historically involved early‐stage investments, hence the interest of our clients in the region. Leveraged buyouts of large companies would inevitably have shaken up state‐owned enterprises, making non‐Chinese firms leery of such transactions even if they could get permission, which was extremely unlikely.
*
Throughout this section of the book, I will refer to the Chinese government as China or the CCP fairly interchangeably. Please be aware that the CCP is not a single or even a consistent actor. It is monolithic with respect to its ideology, but not in terms of the members’ immediate goals or how strategy is implemented.
NOTES
1
Felda Hardymon and Ann Leamon, “Silicon Valley Bank,”
Harvard Business School Case No. 800‐332
(Boston: Harvard Business Press, 2000), 1.
2
Nathaniel Popper, “Silicon Valley Bank Strengthens Its Roots,”
New York Times
, April 1, 2015,
https://www.nytimes.com/2015/04/02/business/dealbook/silicon-valley-bank-strengthens-its-roots.html
.
3
Popper, “Silicon Valley Bank Strengthens Its Roots.”
4
Hardymon and Leamon, “Silicon Valley Bank,” 3.
5
For an accessible source for how venture capital works, see Josh Lerner and Ann Leamon,
Venture Capital, Private Equity, and the Financing of Entrepreneurship
, 2nd ed. (Hoboken, NJ: Wiley, 2023).
6
Federal Reserve Bank of New York, “Quarterly Trends for Consolidated U.S. Banking Organizations First Quarter 2022,”
https://www.newyorkfed.org/medialibrary/media/research/banking_research/quarterlytrends2022q1.pdf
.
7
Silicon Valley Bank, “ Facts at a Glance,” n.d.,
https://www.svb.com/newsroom/facts-at-a-glance
.
8
AVCA, “The 2002 Guide to Venture Capital in Asia,”
