If your startup fails in China, investors can seize all your assets. Why would any ambitious young person start a company in China today?

Chinese venture capitalists are going after the founders of struggling startups, trying to get their money back. They’ve taken apartments and bank accounts, according to an incredible report in the Financial Times.

This is the final blow that will kill the Chinese startup ecosystem.

Not a Big Success? You’re Screwed.

If your startup fails or simply doesn’t become a high performer, Chinese VC’s will go after you. They use what’s called “redemption rights.”

This lets them pursue you for the entire investment amount, plus interest.

There’s no asset these VC’s won’t try to take. Worse yet, if you can’t pay, you can be added to the national debtor blacklist.

This is where China’s creepy social credit system comes in.

If you’re on the blacklist, you cannot start another company. You can’t even take a high speed train or airplane.

And you can’t leave China.

Big Success? You’re Still Screwed.

Let’s say a miracle happens and your startup makes it big. And it would be hard to make it bigger than Jack Ma, founder of Alibaba.

Everything was going great for Jack, until he criticized the Chinese government. Then he disappeared for several years to “paint”.

Even if you don’t criticize the government, you’re not safe. China effectively banned ed tech companies in an effort to enforce some bizarre notion of equality.

Ed tech was a huge category of startups there. Imagine being told one day that your business is suddenly illegal.

The Silicon Valley Way

In America, we do things differently. When a company fails, the founder is free to walk away and start again.

Legally, they’re in the clear. And culturally, we do not look down on failure.

Being able to start again is critically important.

If people know that it’s not the end of the world when a startup fails, they’ll be more likely to start one. Reduce the cost of something, and you get more of it.

Never forget, many successful founders (like Travis at Uber) took several tries to hit it big.

When investors are true risk capital and entrepreneurs are free to try and fail and try again, you get big outcomes. Otherwise, you don’t.

Wrap-Up

Chinese entrepreneurs are in an impossible position.

If their startup doesn’t become a unicorn, they face asset seizures and a lifetime in debt. If they do hit the big time, the government will imprison them or regulate them out of business.

If I’m an ambitious young person in China today, all I’m thinking about is how to get out.

Get to Singapore, get to the UAE or the US. Then start a company.

China has some incredible tech companies: Alibaba, Tencent, ByteDance. But these may be the last.

The next great company founded by a Chinese person will not be in China.

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