The rise of China’s pan-entertainment industry: A conversation with Creation Venture Partners

Jia Ke excuses himself from the afternoon tea break with colleagues and gestures me to a glass-enclosed office: “So, what are we talking about today? The pan-entertainment industry?”

The 34-year-old investor is the founding partner of Creation Venture Partners, a three-year-old Chinese venture firm focused on investing in the so-called “pan-entertainment” industry, a term coined by Cheng Wu, chief executive of Tencent’s filmmaking arm, back in 2011. The concept refers to multi-level products developed from intellectual property, such as games, anime, drama, films, and fiction. By its three-year anniversary in September, 70% of Creation Venture’s portfolio companies have completed follow-on investments, 35% have raised two rounds of funding, and 15% have raised three rounds.

The two-dimensional space

Jia grabs the cartoon cushion from his desk and sits in a chair across from me.

“Are you an erciyuan (二次元) fan?” I asked, pointing to the row of anime model figures lined up by the office window overlooking Shenzhen Software Park. The term erciyuan literally means the “two-dimensional space,” but comes to a concept originated from Japan referring to the subcultures of anime, comics, games (ACG), and sometimes light novels and plastic model figures. The term also alludes to the 2-D fictional world ACG fans reside in, in contrast to the 3-D “real” world.

“No, no, I’m far from that. At best, I’m a shouban (手办) fan,” Jia says, using the word for garage kits in Mandarin. “I’m too old for the two-dimensional space. She’s not,” Jia grins at Phoebe, his 20-something colleague who is taking notes for our meeting. The eleven-people venture firm has quite a few employees like Phoebe—ACG fans born after the 1990s.

Jia goes on to caution me not to oversimplify the definition of erciyuan. “Media outlets and amateurs today tend to lump things together as erciyuan, which has become a buzzword in the tech world in recent years. Not all manga belong to erciyuan, and not all post-90s Chinese are erciyuan users. My shouban are characters from Dragon Ball, but Dragon Ball doesn’t belong to erciyuan, and post-90s youngsters can be fans of hip-hop, which are completely different from erciyuan.”

The two-dimensional subcultures, once marginal in China, are gaining momentum as its core users grow up and their purchasing power increases. The term “two-dimensional economy” was coined in 2015 to refer to the consumption environment based on content from the 2D world.

“[Erciyuan] grew rapidly in 2016 and underwent a phenomenal explosion in 2017,” writes the China News Service, China’s second largest state-owned news agency, of the new trend. “China’s erciyuan population reached nearly 219 million in 2015 and 300 million in 2016. Each user is spending an average of RMB 1746.3,” the paper writes.

“Avoid calling the young generation two-dimensional fan, even if they are,” Jia adds. “You got to be more specific. Which sub-genre do they like? Which artist? Which author? They want to be perceived as unique. Entrepreneurs building a business in this industry should respect them and not confuse one vertical with another, otherwise, they will fail to win over the independent-minded young Chinese.”

Pan-entertainment and IP

From the onset, Creation Ventures has focused on the gaming industry; its initial funding came from Ourpalm, the $4-billion-valued mobile and web gaming company best known for a series of mergers, acquisitions as well as investments, including in Bilibili. Just as erciyuan started to enter China’s mainstream media, Jia and his team have started to venture away into other assortments of entertainment IP. “We thought erciyuan was getting obsolete and cliched. We’ve made enough investments in the field. What we are looking at now is content, or IP, in general.”

According to the Ministry of Industry and Information Technology, China’s pan-entertainment industry is worth about RMB 415 billion in 2016 and growing at 15% to reach RMB 480 billion in 2017 (in Chinese). Jia compares the investment strategy in pan-entertainment to a tree. At the root is content, which grows into IP (the trunk), and finally branches out into the development of these IPs. The third level doesn’t only refer to merchandise, but can be industry crossovers such as the Porsche-inspired Huawei Mate 9 smartphone, or the application of IP in VR/AR like Pokemon Go, Jia adds.

Chinese tech giants are also clamoring to capitalize on the fast-growing, lucrative industry. Like investors, they seek to build an “IP empire” through acquisitions, partnerships, and in-house projects across the production chain. At the upper level are anime and online literature, which can be adapted into film, TV dramas, music, and finally turned into games, offline shows, and merchandising products at the bottom.

For example, Tencent, the original brain behind pan-entertainment, has a foothold across all verticals: literature, making waves in the capital market through a successful IPO via China Literature; film and TV, taken care of by one of China’s largest video streaming platforms Tencent Video; music, where Tencent claims the biggest share of China’s music streaming market; and finally games, the tech giant’s most lucrative business.

“One of the earliest IPs to monetize in China is games,” said Jia at Creation Venture’s three-year anniversary in Shenzhen. “When I think about what the core of IP is, I conclude with three qualities. A good IP is an imprint on users, a medium for feelings and aesthetics, and a magnet for traffic… Ma Dong once said that people’s anxiety gives rise to the need for content,” Jia added, quoting the veteran media producer-turned iQIYI’s chief content officer. “I want to add another point: The inefficient use of time [commuting or waiting for public services] gives rise to big consumer spending in the content economy. In other words, people are bored.”

IP made in China

All content creators in China must face the issue of government control. Jia, however, seems unconcerned about the impact of media regulation on creators. “The bottom line is if you are going to make vulgar content, of course, the government will ban you. Like those live streaming platforms that direct users to so-called ‘beauty shows’ after midnight.”

“You have to understand China well. Media regulation has always been in place, not just because of the Congress this year,” Jia says when I ask for his view on the tightened media oversight ahead of the Communist Party’s twice-a-decade leadership reshuffle in October. “We are different from most of the countries because we have the so-called propaganda department, which prefers to see positive, uplifting thinking. Chinese might resemble Japanese on the surface because erciyuan is getting popular, but at the core, we are more like Americans—both countries embrace positivity.”

Jia gives the example of funv, a term originating from the Japanese fujoshi, which literally means “rotten women.”

“We have a portfolio company that produces content for funv. Morally there is nothing wrong with funv. It’s neither illegal nor propagating LGBT. Funv is simply a social phenomenon—some women fantasize about beautiful men falling in love. But content creators should have their bottom line. We’ve seen really disgusting funv content, which has definitely crossed the red line and should be banned. If you produce things that are positive and healthy, why should you be afraid of the censors?”