[TechCrunch Shanghai] Early Stage Investment in China & US

Four guests joined us at TechCrunch Shanghai in a panel,  moderated by Bruno Bensaid, founder of Shanghaivest and Mobile Monday Shanghai, chatting about differences in early-stage startups and investment in China and the U.S. Rui Ma is venture partner for Greater China of US-headquartered 500 Startups. Matt Cheng is a founding partner of Cherubic Ventures that invested in A-li.com.cn. Scott Zheng is managing partner of Buttonwood Capital which invested in location-based mobile communication app MoMo. Zhao Hong is founder of Ameba Capital which is early investor of social shopping service Mogujie.

Rui Ma with 500 Startups found that Chinese early-stage tech startups don’t have international plans while many of their peers, especially those working on mobile, in the US would either reach out to Ms. Ma on setting up an office in mainland China or have plans to expand to Asia.

Matt Cheng with Cherubic Ventures pointed out that startups in the US do data analysis with investors from early on; i.e. when they have had 50,000 users while the Chinese startups would only do so when they have 500,000 to one million users. Zhao Hong from Ameba agrees here saying they’d suggest startups they have invested in use data to determine directions from early stages.

Mr. Cheng also found that many Chinese entrepreneurs, being very capable of taking care of other things, are not experienced in running a business; for instance, they don’t feel comfortable to report quarterly or monthly financials. Early-stage investors, Cheng thinks, should educate them.

When it comes to preferences. Ms. Ma with 500 Startups said now they’d like to judge a service by metrics about performance, such as retention rate or engagement rate, rather than downloads or traffic.

According to a reportreleased by ZhenFund, in 2012 there were 309 Chinese angel investors that did at least two deals, making the total to 747 deals, and committed over one million yuan in startup funding. For 20% of those deals, some of them took more than 50% of the company. ZhenFund, however, saw the strategy declining as Chinese angel investors were becoming more savvy. Mobile Internet, e-commerce and consumer services are still the top areas. 50% of them report returns of 30% and 18% report 200+%.

60% of angels would exit by selling shares to VCs. However, VC/PE market saw 40% – 50% YoY decline in both deals and amount of investments in 2012. The causes include poor performance of Chinese tech stocks on US markets, exit bottleneck, changes in macroeconomic and political climate, and that investors stopped burning money through in hot sectors such as group buy, according to ZhenFund.