Huatai United Securities Unveils Common Financing Traps Facing Entrepreneurs in Newly Filed Prospectus

For all entrepreneurs today, the most critical priority is not monetization or profitability, but rather how to continuously secure substantial rounds of financing from investors. However, there is no such thing as a free lunch; behind the allure of capital lie numerous conspiracies and hidden complexities that often catch entrepreneurs off guard.

On December 8, at the WISE 2.0 Entrepreneurship Ecosystem Conference hosted by 36Kr, Ms. Liu Xiaodan, President of Huatai United Securities, candidly revealed the unspoken secrets weighing on the minds of capital investors.



The Dilemmas and Confusion of Entrepreneurs

Ms. Liu believes that for many entrepreneurs, the past two years have been marked by dramatic changes and deep dilemmas. For many founders and venture-backed companies, a major question is whether to raise RMB-denominated financing or US dollar funding. For enterprises that have already established red-chip structures, the key issues are when to dismantle such structures and whether dismantling is necessary at all. Should they list on the National Equities Exchange and Quotations (NEEQ), or capitalize on government incentives associated with tiered market segments introduced under the registration-based IPO system, such as the Beijing Stock Exchange or the ChiNext board? Should they pursue mergers and acquisitions with strategic investors, or continue to develop independently?

As a result, entrepreneurs face many uncertainties. In fact, the internet sector used to primarily engage with U.S. dollar funding and overseas markets, but now an increasing number of companies are interacting with the RMB market and China’s A-share market. However, compared with the past, there is a significant gap between the RMB and U.S. dollar markets—they are essentially two different worlds operating in distinct contexts.

Currently, there is significant overlap between the two sides, yet conflicts persist as part of an ongoing process of integration. Amidst these dynamics, Huatai United Securities made a strategic investment in 36Kr, driven by such considerations. Huatai possesses deep expertise in China’s A-share market and the RMB-denominated capital market. However, we aim to build a bridge that facilitates dialogue among entrepreneurs, entrepreneurial platforms, and the RMB capital market. Therefore, our investment in 36Kr was entirely strategic rather than financially motivated.

Today’s core focus is to share our perspective on the aforementioned concerns.

Current Characteristics of the Renminbi Market

Entrepreneurs often encounter numerous issues when dealing with RMB. In fact, the RMB market has several key characteristics. First, there is abundant capital, a situation that is unlikely to change in the short term. The high level of asset allocation is a long-term issue; in layman’s terms, there are too many wolves chasing too little meat. This constitutes the broader landscape. Many people worry whether the RMB market can be sustained. There is no need for such concern—the RMB market is indeed sustainable.

The second characteristic is the fragmented and heterogeneous nature of capital. In the past, when dealing with U.S. dollars, one could identify professional, reputable, and well-branded fund institutions with long operating histories, albeit with varying investment preferences. In the current RMB market, however, entrepreneurs often feel overwhelmed by the sheer variety of investors approaching them. There is a saying that if you throw a brick down, it is bound to hit many investors, which underscores the fragmented nature of capital. This phenomenon is, of course, linked to the distinct pathways of RMB wealth accumulation in the past.

Some have speculated in real estate, others have traded stocks in the secondary market, and still others have engaged in practices such as loan impairment provisioning. Today, there has been a shift from the past focus on single-asset allocation to the current era of “Mass Innovation and Entrepreneurship,” as people seek to uncover new wealth opportunities within this landscape. Consequently, a significant characteristic of this environment is the heterogeneous and complex nature of capital sources. Amidst this, many individuals appear wealthy—whether genuinely or superficially—and numerous brokers have emerged. There is an excess of intermediaries and transient players facilitating capital flows, with some deceiving both investors and entrepreneurs. Therefore, entrepreneurs must be able to distinguish between genuine and fake financial backing.

Third, capital is extremely impatient. Investment institutions often fail to properly plan the path to an IPO, instead relying on valuation adjustment mechanisms (VAMs) or share repurchase agreements with entrepreneurs. In the past, within the mainstream RMB investment market, there was an intense pressure for companies to go public immediately; currently, the urgency has shifted to listing on the New Third Board (NEEQ). Compared to US dollar funds, RMB capital lacks sufficient understanding of industries and is unwilling to accompany companies through five- or eight-year growth cycles, which may be related to the overly rapid accumulation of RMB capital. Consequently, it is extremely difficult for enterprises to raise angel investment with a 10-year horizon in the RMB market, whereas raising funds with a two- to three-year horizon for the New Third Board is very easy. Thus, the impatience and short-term orientation of capital are another significant characteristic. However, I do not believe this is a negative phenomenon; rather, it may be a normal occurrence given that the market is still in its early stages.

Fourth, aesthetic standards differ. Investors have yet to form mainstream values or firmly adhere to their own perspectives, leading to pronounced herd behavior in investment. Against this backdrop, entrepreneurs face numerous dilemmas and pitfalls. In this process, it is crucial for entrepreneurs to accumulate experience in engaging with capital, making the selection of pathways and directions particularly important.

The New Third Board is a good choice.

Many people are asking whether companies should list on the New Third Board. I believe the advantage of the New Third Board is that it can very easily address the issues mentioned earlier. The New Third Board will partially or even fully replace the RMB-denominated Series C and D financing markets. Therefore, listing on the New Third Board is more suitable for enterprises at an earlier stage than those ready for the main board.

The New Third Board currently operates entirely under a registration-based system. Can companies seeking Series A or B financing list on the New Third Board? While it is feasible, securing suitable investors remains a significant challenge. The New Third Board serves as an effective bridge between the primary and secondary markets. How can companies attract capital attention? If you encounter difficulties in financing or the private equity market, consider listing on the New Third Board to enhance your visibility.

However, after listing on the New Third Board, avoid being overly impetuous. This is not a short-term endeavor, and one should not assume that market-making activities can inevitably inflate the market capitalization to any specific level. Since the New Third Board does not operate on a continuous auction trading mechanism, market capitalization can rise and fall rapidly. Therefore, it is essential to maintain a balanced mindset and there is no need for excessive anxiety.

Some companies express interest in going public on the NEEQ through a backdoor listing, or waiting to list on the ChiNext Board or the Emerging Board. This is because we adhere to the logic of the capital markets: early-stage enterprises typically start on the NEEQ, then progress to specialized segments such as the ChiNext Board, followed by the STAR Market, and ultimately the Main Board. Although the requirement for sustained profitability has been waived for internet companies seeking an IPO, our focus for the Main Board, STAR Market, and ChiNext Board remains on more mature enterprises.

Therefore, it is still premature for companies that are currently burning cash to list on segments with continuous auction trading, as the registration-based IPO system does not quite align with the investment preferences of A-share investors. In fact, companies with a certain level of revenue—though not necessarily profitable—can still craft a compelling narrative in the A-share market, provided they can demonstrate sustainable profitability. Investors should make clear distinctions among these sectors, and companies must avoid rushing their IPO processes prematurely.

Avoiding M&A Risks by Identifying Pitfalls

Another issue is that many startups possess compelling concepts or operate in trending sectors, prompting numerous listed companies to proactively seek mergers and acquisitions (M&A) with these startups for transformation or other reasons. In reality, M&A is a far more perilous path. The closing of a deal often signifies a transfer of control, with the greater risk lying in post-merger integration.

Internet marketing and advertising companies find it relatively easier to monetize. Some investment institutions have proposed valuation adjustment mechanisms (VAMs) with these enterprises. However, this path is not suitable for all startups. Signing stringent VAM agreements indicates that you may have lost a certain degree of freedom in controlling the company’s future and determining the direction of its industry development.

Therefore, from the perspective of mergers and acquisitions, one must be more selective and think more clearly about what you truly want. If your goal is simply to cash out and embark on a second entrepreneurial venture, that represents a different path altogether. There are many pitfalls in this process; failing to see them clearly can easily make you prey to capital.

Capital’s Return to Domestic Markets Is a Foregone Conclusion

The broader trend of capital repatriation is undoubtedly irreversible. Since the United States lacks a Chinese bond and equity market, this return is an inevitable momentum. The underlying logic is straightforward: first, in the domestic market, investors understand your narrative. For instance, O2O companies must repeatedly explain their business models to U.S. investors, whereas such explanations are unnecessary in the Chinese market, where the investment landscape—characterized by a structure with 80% retail investors—is much clearer. This is a significant reason why many B2C companies ultimately choose to return.

Second, it is a matter of competitive necessity. It matters little whether companies are listed on the U.S. stock market or China’s A-share market. Even with the implementation of the registration-based IPO system, valuation disparities between China and the United States will persist over the next two to three years. Bridging this gap and gradually converging toward similar valuations is a long-term process, and full convergence is unlikely. Why? This is largely attributable to differences in investor structures between the two countries, and aligning these investor profiles will take considerable time.

Third, for entrepreneurs, beyond the competition of future products, capital competition is also a harsh reality. This is another reason for returning to China. Some entrepreneurs have said, “I didn’t return, but my competitors did so before me,” thus facing competitive pressure. Therefore, returning to China has become a major trend.

Key Advice for Entrepreneurs

In this process, I have three pieces of advice for entrepreneurs: First, do not place undue faith in excessively high valuations. Because the RMB market is awash with abundant yet fragmented capital, it can easily inflate valuations to mythical levels; in reality, our market still requires a considerable period of maturation. There is no such thing as a free lunch; high valuations are often driven by short-term pressures from subsequent listing requirements or valuation adjustment mechanism (VAM) agreements associated with RMB funding.

Second, avoid falling into the trap of valuation adjustment mechanisms (VAMs) too early. This is not to say that mergers and acquisitions are impermissible; rather, one should refrain from entering into VAM agreements. A VAM is akin to swearing a severe oath: if the stipulated targets are not met, the resulting penalties can be extremely harsh.

Third, it is essential to clearly define equity allocation and maintain control. Aside from the obvious valuation differences between the Chinese and U.S. markets, another significant distinction lies in corporate governance structures: U.S. corporate law permits dual-class share structures with super-voting rights, whereas China’s A-share market and its forthcoming Securities Law reforms do not currently accommodate such mechanisms. This makes control rights particularly critical. Since the A-share market is primarily driven by secondary-market investors and offers companies limited anti-takeover protections, the design and arrangement of equity control become paramount when raising RMB-denominated capital. Without careful structuring, companies may find themselves lacking adequate safeguards after going public.