As China’s market grows, internet giants Baidu, Alibaba and Tencent have put out feelers in virtually every tech vertical, making it difficult for newcomers and VCs to crack into existing online markets.
According to Zhu Xiaohu, managing partner at GSR Ventures, targeting offline businesses is the best way to avoid competition from BAT. Zhu spoke on a panel at Techrunch Shanghai this Monday, alongside Zhang Xuhao, founder of online food delivery company Ele.me.com, one of GSR’s early investments.
“Chinese venture capitalists have to cooperate with BAT, because they are taking a dominant part of China’s internet market. But we choose to do venture capital investment in China differently by cooperating with startups that have a more extensive offline presence, where the BAT’s influences are weaker.”
The fierce competition in China’s O2O (online-to-offline) industry has made it a high money-burning sector where players compete for an increasingly larger market share. However Ele.me founder Zhang Xuhao says that O2O has only recently become a late-ROI industry, requiring larger amounts of early investment.
“That’s not the case when we first start Ele.me seven years ago,” said Zhang. “On the contrary, we were making money from the business back then”, he said.
The online food delivery service Ele.me has become one of the biggest startup success stories in China so far. He noted that the early days were more difficult for O2O services, claiming that while companies had a sooner ROI, getting funding itself was incredibly difficult.
“Bringing offline businesses online is costly and needs a lot of capital support. On the positive side, burning money can change users’ behaviors quickly, but it is not a healthy development path,” said Zhang.
Ele.me is now exploring high-tier markets and to construct an in-house logistics system. To further the expansion, the site is building a system where the restaurants can check the food ingredient sources in an attempt to change the industrial chain of food and catering industry.
“Entrepreneurship is a process of learning and improving yourself,” said GSR Managing Partner, who injected the very first round of angel investment in Ele.me back in 2011. “Not everyone suits entrepreneurism or finds this process inspiring and it is good to have the opportunities to test whether being an entrepreneur is your thing at an early age.”
Zhang Xuhao put together the Ele.me concept with his classmates when studying at Shanghai Jiaotong University. Started as a site targeted at university students and the low-end catering market, the company now provides services in more than 200 cities across China. The startup has received several hefty financing rounds from Chinese Internet giants like Tencent and Dianping.
In China, O2O is expanding into every industry ranging from on-demand massage to manicure. Zhu thinks services with high usage frequencies, at least once a week, are more likely to be successful.