Vancouver Sun by Chuck Chiang | September 4, 2015

SFU professor Zhang Jaiwei speaking at an event in Richmond.

A Chinese twist on the North American crowdfunding phenomenon has landed in the Lower Mainland, and organizers hope it will revolutionize the way start-ups attract investment.

The “Chinese crowdfunding” model, or “zhongchou” in Mandarin, replaces a website like Kickstarter with a bricks-and-mortar establishment to gather funding for entrepreneurial projects. In Richmond, Cafe 1029, spearheaded by North American Crowdfunding CEO Jason Liu and others, opened in March.

Zhang Jiawei, one of the 100 initial investor-owners of Cafe 1029 and a visiting professor at SFU’s Beedie School of Business, studied the crowdfunding when first came to Beijing in 2013. Zhang said a small group of business acquaintances, each putting up about $10,000 to buy a coffee shop, used the establishment as a “entrepreneurial incubator” where each investor could bring in ideas to present to the group and solicit funding.

Related: China: Equity-based crowdfunding and its supervision in China today

While the café still operates like any other, depending on food and beverage sales to make money, the key is to create a place that entrepreneurs and investors frequent, thereby attracting more coffee-shop business.

“The traditional Western crowdfunding model like Kickstarter is hitting a bottleneck in China, because the Internet is an abstract platform, whereas face-to-face relationships — especially in business — are crucial in Chinese culture,” Zhang said. “In China, if you try to solicit $1 of investment over the Internet, it is easy to do. But $1,000 would likely raise eyebrows and not be nearly as successful.”

The crowdfunding café idea originated with Beijing University alumni Yang Yong. Yang and a group of about 140 investors launched 1898 Cafe near the university campus. (1898 was the year the school was founded.)

A wave of similar shops popped up across China over the next two years. But while 1898 Cafe and others have succeeded, the concept is sometimes dismissed by the traditional investment community as a gimmick. Some of the first crowdfunding cafes (in the southern Chinese cities of Hangzhou and Wuhan, for example) have closed after losing money.

Zhang, who wrote a book on the Chinese crowdfunding model published earlier this year, said that the failed businesses put the café’s operational profits first, instead of focusing on the core idea of platform-building.

He noted 1898 Cafe’s investors first established what the cost would be to run a café without a single customer for three years, then divided that up between the small investor group as the initial buy-in fee. Members were not guaranteed any return on their investment.

Related: 

• Accessing capital in China and solutions for crowdfunded companies

• Equity Crowdfunding FAQs in Canada

• A good policy on crowdfunding will enhance Hong Kong’s role as global financial centre

Since the coffee shop still depends on sales for its revenue, the goal is to increase the number of patrons coming in to discuss start-ups and business deals. As the café’s brand improves, so does the operational revenue, Zhang said, but the process takes time.

“The failure comes when you pursue the operation of the café as your chief focus,” Zhang said, noting Cafe 1029 hires people to run the café and uses the facility as a meeting place for entrepreneurs and investors. “When the café doesn’t make money in its first year, investors pull out and it fails.

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