China presents a fascinating nation for tech entrepreneurs. The speed at which China’s technology grows and transforms is perhaps the most important aspect in defining what’s happening in the country’s startup industry: The Middle Kingdom is now the second largest arena for entrepreneurship with one startup is set up every seven minutes.
To highlight the changes, virtually every very period of the past few years has its own theme: smart hardware for 2013-2014, cross-border e-commerce and ride-hailing for 2015, VR and bike sharing for 2016-2017, and unmanned store and new retail for 2017. In China’s tech market, the only thing permanent is change itself.
China’s tech companies pivot and change at an amazing speed to catch up with the market evolutions. Venture capital—those firms financiers behind the scenes—are also experiencing its own paradigm shifts.
Chinese VC is more about RMB than dollar now
“There’s been quite a lot of changes over the past decade. China used to be a predominantly US dollar market. Although dollars is still very active here, it’s more RMB than dollars now.” said Jeff Chi, Vice Chairman of Vickers Ventures, at a panel held on Chinaccelerator Demo Day.
We saw budding signs of this trend as early as 2010, but this year has recorded the full transition of this phenomenon. A total of 3,418 VC funds were established in the first eleven months of 2017, raising a combined RMB 1.61 trillion funding ($243 billion), according to data from research institute Zero2IPO. Of the total, a 95% or 3,339 VCs—managing RMB 1.5 trillion worth of capital—are RMB funds, as compared to 79 USD funds which manage the equivalent of RMB 100 billion.
State-backed entities play an important role in this shift, the firm notes. Overall 439 state-backed funds with a capital size of RMB 756.8 billion were founded in the first three quarters of this year. The state VC coffers topped $336.4 billion as of the end of 2015.
“Also, the flavor has kept changing,” Jeff noted. “The market in 2005 and 2006 were predominantly USD because US IPOs was the only avenue for exits. As domestic IPO opens, the local RMB exchanges has become more dominant and that’s why the past few years has seen privatization of US listed Chinese companies and seek for a relisting here. The interesting thing in the last six months is that we see a reheating of the US IPO market happening. So we live in an interesting time.”
Globalizing and diversifying venture models
The intensifying favor of VCs towards RMB does not necessarily underline their exclusive preferences for local companies. In fact, it’s quite the opposite. More Chinese VC firms are developing a global or focus, partially in line with the globalization strategies of domestic firms.
Chinese tech giants BAT, the once startup steamrollers, are playing an active role in driving this trend by investing in a massive line of rising verticals across the world. For example, Alibaba has invested a total $21 billion in M&A in the past two years, of which overseas market and O2O are the two top fields in this effort, Alibaba Vice President Joseph Tsai disclosed at an investor conference held in mid-2017.
Compared to tech startups, however, the VC business model hasn’t changed that much, but that doesn’t means VCs are not trying their best to reinvent themselves.
“Ventures has been around for quit long now, we have been talking about the new business ideas that would be considerable replacing the venture model, and incubators and accelerators come to the scene. But if you drill down deeper, it’s still a model that works, the cost and production for investors show it is still a viable model,” said Jeff.
Despite the hiccups in China, the recent rise of ICOs is providing a new way of fundraising for startups worldwide, but it will remain an interesting alternative rather than a mainstream funding channel in the long run. “I don’t think ICOs will replace venture capital; it will just play a different role. If you are a company going for ICO or an investor planning an ICO, I recommend being cautious because there’s very few regulation to protect this,” said Jeff.
Melody Zhang from Artesiann Capital Management echoed Jeff’s opinion. “ICO has lowered the barrier for very early-stage investments from incubators and it will be an interesting alternative for fundraising,” she said.
Deep technology is sexy again
The time and age for the “me-too” concept where we copy US companies, innovate behind similar concepts and create a Chinese version is gone. “Companies and investors are shifting to a strategy that is going deeper and deeper into tech. Technology as a competitive advantage and having very deep technologies is becoming increasingly important,” Jeff pointed out.
The government has recognized this. As of June 31st, 2017, Chinese AI companies received RMB 63.5 billion or 33.18% of the world’s AI funding. President Xi Jinping has said that China not only tries and aspires to be, but will be a globally AI country by 2020. The government have very bold ambitions for technology, which is well reflected in its rising presence in the VC arena.
“As a firm, we soon move away from consumer industry where you focus on acquiring user cheaply. The cost for user acquisition is increasing. . . therefore we take technology as a competitive advantage. There’s really the way that you upgrade yourself,” Jeff said.
“There’s a few barriers, one is you have to understand the technology, you need people onboard to have a deeper understanding of the technology before, rather than someone who just got a general understanding of how the market goes. Invite some PhDs and researchers on the team. Also, technology is a global phenomenon, you can’t just say that I have this best technology because we are in China. You need to have a view point as to how similar technologies are developing across the world.”
The team is still the top
The team is what every investor talks about when being asked to give a recipe for their successful investments. Panelists at the discussion gave their own definitions of an amazing team.
“[An awesome team] combines a lot of things. Integrity, capability, passion, drive are some of the major attributes that we look for. But a lot of this is about being able to connect. You are going to be partner with this guy for the next five years. If we don’t like each other that would be an disaster. Is there a chance to have a decent conversation and messages across each other, is there a level of mutual trust, the likability and whether can we connect and work together are the most crucial matters,” according to Jeff.
Nicholas Ducray from Cathay Capital cites Pinduoduo, a social e-commerce platform which creates WeChat Groups to buy goods at discounts, as an example. “There are two co-founders of the team. One is from the mobile game company and the second is from a Taobao Partner company. What’s amazing is that they come across the idea by merging what they are good at together.”