For many Chinese startups, IPOs' are the exit strategy

(iChinaStock News) There are still too few billion-dollar Chinese Internet companies to make acquisition a viable exit strategy for startups, shared Hurst Lin, a general partner at venture capital firm DCM. China’s market today does not have serial acquirers like Cisco, HP, Oracle, Apple, or Google, which means the exit strategy for Chinese startups is an IPO, usually in the US.
To move the needle for institutional investors requires $300-400 million to start, said Lin in an interview at the TechCrunch Disrupt Beijing conference. At present, there are simply to few Chinese Internet firms who can swallow an investment of that size.
Even the Chinese companies who could make acquisitions don’t often do so. Hurst Lin, who was also on the founding team of Sina (NASDAQ: SINA) said there were two psychological barriers for Chinese companies, most of whom are still run by their original founders:

First, founders, because they start off scrappy, tend to be very cheap in how they pay. Professional managers are willing to pay far higher because they’re building their ‘strategic track record’… It’s much easier for a person who’s playing with other people’s money–meaning a hired CEO–than a person who actually started the company with just three people. When I was at Sina, it was very very difficult for all of us–the founding team–to really be willing to pay a lot for a company.

And second, we [the founders] have the lion’s share of the company. And then we have a bunch of early employees who have been with us 5-10 years–and if you look at their stock options, it doesn’t work out. Here’s a guy who followed me for the last 5 years and the most he’ll make is about one or two million bucks… and if a company you want to acquire is going for $300 million, then there’s this other guy, who just started his company 3-4 years ago, and he’ll become a division of SINA. His take-home pay, with the acquisition, will be a minimum of $70 million.

What does that do to the morale of your rank-and-file employees? You basically force the rank-and-file out of your company. So that psychology works in reverse because we don’t want them to leave.

An alternative explanation, commonly heard in the industry, is that Chinese Internet giants don’t acquire because they would rather hire away an engineer and copy the service themselves.
One promising sign for the industry is that Chinese Internet companies like Tencent and Baidu are now making more strategic investments, although acquisitions are still rare.
Hurst Lin also shared that there are currently at least 10 Chinese Internet companies who have made confidential filings with the SEC and are waiting to IPO in the US.
By Kai Lukoff, iChinaStock.com