The vibrant Chinese tech and startup ecosystem is attracting huge attention from investors and institutions hoping to grab a place in the heated innovation competition. According to Crunchbase’s latest analysis, in the second quarter of 2018, Chinese startups raised 47% of all reported VC dollar volume whereas North American companies raised 35% of the whole pie.
James Chou, CEO at Microsoft for Startups Shanghai, Garnett Ge, Head of Cross-Border Ventures at Plug and Play, and Vivian Law, Corporate Innovation Director at Chinaccelerator, talked about incubation investment yesterday at TechCrunch Hangzhou.
However, according to the panel, among the over two thousand VCs in China, a few are genuinely into acceleration and incubation.
The accelerators and incubators on the panel independently hold different investment philosophies and follow their own capital deployment strategies.
Chou introduced that Microsoft for Startups Shanghai is not taking return as the priority of an investment. This Microsoft-based incubation VC’s wealth and intelligence is built on Microsoft’s technology background and diverse range of resources. Its cloud Azure and 25 active globally connected incubators allow for a flexible design of portfolios that don’t take Internal Rate of Return (IRR) as a major short-term concern.
“Getting into Microsoft for Startups Shanghai can be as hard as getting into Harvard, considering our acceptance rate is below 2%.” He added that Microsoft for Startups Shanghai takes few startups that haven’t completed their Series A financing.
Chinaccelerator receives over 1,000 pitches each year. The team has achieved an IRR of 28% and is now maintaining the strong growth by seeking quality projects including early-stage startups demonstrating potentials. Chinaccelerator’s portfolio company includes BitMEX, a financial platform and one of the bitcoin exchange platforms with the biggest trading volume.
“A trend known in the insiders’ circle is the ‘financial institutions becoming retail investors (机构散户化)’, meaning that institutional investors are increasingly demonstrating unprofessional or random investment behaviors similar to retail investors,” said Ge, referring to the boom of new tech concepts and fierce competition from the investors’ side which together increase emotional investment. He added: “Many VCs [without core competitiveness or clear investment strategies] will die.”
Based in Silicon Valley and specializing in cross-border ventures, Ge said the Chinese startup investment field is still developing. This demands flexible localization strategies including designing interactive mechanisms to allow startups, incubators, and LPs (investors of VCs) to build a win-win relationship. He added that Plug and Play does have IRR concerns, but investment techniques consider a project’s real capability and resources that can be leveraged.
In 2017, Plug and Play’s retail acceleration project in China attracted companies including conglomerate Wanda Group, and real estate leader China Resources (华润).
The panel expressed optimism towards the near future where opportunities for VCs in China’s startup ecosystem still hold potentials. As liquidity in China’s macroeconomic environment triggers increasing concerns, VCs will be more cautious when picking up projects, and only startups addressing pain points and demonstrating practical solutions can survive