How to build the perfect China business

China’s one-party rulers contain domestic dissent by allowing Chinese to permanently reside in more liberal countries with secure property rights.

What do Facebook, Google, eBay, Amazon and Uber have in common? Each has failed in China. Being successful in China is not just difficult for foreigners. It’s difficult for Chinese. It’s a hard market, says long-term Tokyo resident, entrepreneur and investor, Ray Klein. “Everybody has a story about doing business in China,” he says.

Klein built the perfect China business helping wealthy foreigners — mostly Chinese — get US permanent residence under the US Government EB-5 investor Green Card program. He got into the business early in the curve in 1996, when laws governing the program were still unclear. When he finally exited aptly named American Life, Inc. in December 2012, the company managed $1bn of debt-free assets.

Klein’s story begins with the Japanese girl he met at Michigan State. “It always starts with a girl,” says the middle-class suburbanite from White Plains, New York. Before meeting her at grad school, he had no interest in anything Japanese. She got him interested. Soon after, they married, packed, and moved to Japan. He was 27 years old. It was 1990, one year after the peak of the Japan bubble.

To learn the language, Klein avoided all foreigners. A kindly boss at Otsuka Shokai, a large Japanese computer systems integration company where Klein then worked, helped him learn polite, formal business Japanese. The boss grew up in post-war Japan loving America just like eight-year-old kids running behind jeeps in war movies who yell, “Give me chocolate! Give me chocolate!” He understood just enough English to teach Klein the words he needed to conduct business in Japanese.

Klein’s next job was at the Tokyo office of a US boutique consulting firm. It didn’t go smoothly. Tired of hearing his constant complaints, his wife said, “You know, Ray, it’s really not them… It’s you.” In truth, Klein doesn’t like following other people’s rules. “You had better start a company to make your own rules,” she advised. And so he did.

His first assignments at the consulting firm he founded paid a quarter of that previously earned. But he learned many lessons, the most important which was to be humble. “Being right doesn’t matter, because if you’re right but don’t have a customer, you go hungry,” he says, adding, “I learned to eat my pride many times.”

Klein helped many startup companies enter Japan, sometimes taking equity positions in client firms. He bought, rather than bartered, slices of ownership because he lacked any track record. “I was a ‘nobody’,” he admits.

One day Klein bought the Japan rights to a little known US startup, NetRatings. To make the purchase, he put together an investor syndicate. After securing the rights, he made a joint venture with a Japanese partner. Together, they built the company and then sold it back to NetRatings in 2000 (now part of Nielsen Group). “It was a good deal,” he confesses.

Earlier, Klein had met a seasoned Japanese businessman who wanted to invest in North America. The businessman said, “You find the deals; I’ll invest twice as much and let you keep part of my upside.” Klein spotted an entrepreneur touting a plan to develop software which identified broken website links. The two met in a coffee shop at LaGuardia Airport. The entrepreneur explained his idea to email website owners with broken links telling them, “You’ve got a problem. Fix it.” Klein liked the idea and invested $50k alongside his Japanese partner’s larger sum. Twelve years later the investment paid off big, reportedly earning the two investors a collective $6m.

By the turn of the millennium, Klein had made some well placed bets. He had capital to invest and protect. As a child, he recalled his mother’s stories about fortunes made and lost in real estate during the great depression. People got rich buying suburban property by the acre, up until the crash. When disaster struck in 1929, people, including his granddad, lost everything. Klein’s mother recounted his grandfather saying, “If I had the chance to do it over, I would have put everything into paying off one property to own it free and clear. Then, I could lose the rest without being beholden to anyone.”

That message resonated with Klein, who set out to follow his grandfather’s advice. He made several trips to Seattle, hooking up with an attorney he already knew and who bought property for a living. Together, they bought a building across the street from where Starbucks eventually moved its headquarters. “We bought first,” says Klein. “Then Starbucks grew the area.” They still collect rents from that property today.

The two partners wanted to build on their success. They decided to form a company based on the venture capital model, taking a slice of the upside profits on real estate investments funded by limited partners. At first they reached out to friends and family. Then they struck on the idea of raising funds from foreigners wanting to secure an American passport under the US Government investor Green Card program.

The program allows foreigners to ‘buy’ a Green Card by making a sizable $1m investment in the US that creates 10 or more jobs. In practice, a real estate investment of $.5m was enough to qualify for a Green Card, provided funds were channeled into areas of high unemployment. “Everywhere magically became a high unemployment area,” says Klein. Indirect employment was also conveniently counted as ‘job creation’, further lowering the investment hurdle.

The partners named their real-estate investment company, American Life. The firm helps wealthy Asians get their Green Card. Sales efforts focused on Japan and then expanded to Korea, Taiwan and eventually to the biggest market of all — China. While a typical Japanese client had an average net worth of about $5m, Chinese clients had an average net worth of $20m or more. “The wealth was phenomenal,” says Klein.

Every year the US grants approximately 10,000 EB-5 visas to rich foreigners. About 85% are issued to Chinese. The Boston Consulting Group reported China’s rise had lifted Chinese millionaire households from 1.5m in 2012 to 2.4m in 2013, surpassing those in Japan. “China is the most entrepreneurial and capitalist country on earth, bar none,” says Klein.

A typical client was an entrepreneur who wanted passports for their family and US education for their children. Strong demand exists because China lacks personal liberties and property rights which are available in America. Ideally, wealthy Chinese get US passports and then go back to China to live. “It’s an escape option,” says Klein, especially for the wife and children, as often the entrepreneur is too busy working in China to personally qualify under the program.

Clients came from all walks of life. One made windows, another gum tape. Yet another owned a chain of English schools. Some clients were entertainers. Most were local businesspeople who gave up much of their personal lives to achieve success in difficult, fragmented markets.

Klein sold his interests at the peak of the market, after the firm raised close to $400m from 800 investors over a two year period ending December 2012.

He had built the business by partnering with high-end consultants in local markets. They, in turn, provided clients with an entire personalized migration service, of which real estate investments were only one component. “It was the perfect model,” explains Klein, because his company didn’t need to set up offices in China.

Recent articles:

Beacon Reports reveals Japan through the lens of thought leaders. Subscribe free!

,

Leave a Reply

Your email address will not be published. Required fields are marked *