The opportunities and pitfalls of investing in Asia: VC panel

2 min read
GGV’s Yu Hong, DCVC’s Kelly Chen, TechStars’s Cody Simms, and TechCrunch reporter Kate Clark at TechCrunch Shenzhen. (Image credit: TechCrunch)

Asia markets—including China and India—have seen growing interest from global investors and venture capital (VC) firms in recent years. Asia-focused VC assets under management have doubled in just three years. And despite the volatility of the macroeconomic and geopolitical environment, the number of VC deals in the continent still booked robust growth in the third quarter.

“Close to one-third of all VC dollars in the world are deployed in China,” Cody Simms, partner at TechStars, said at TechCrunch Shenzhen on Tuesday. His firm focuses on becoming a community in which entrepreneurship happens and thrives, he said. “Even a city like Shenzhen, which has its origins in hardware, is starting to see a booming software economy starting to take shape,” Simms adds.

Simms noted that two general trends are playing out in the global investing space over the past five years.

The first is the liquidity bubble. A decade of booming economies in western markets has led to unprecedented sums of capital flowing into early-stage startups.

Some strategies of large venture funds, later adopted by public markets, were to overpay for a deal, anticipating that if enough funds are injected, the target will succeed. “Fundamentally that might be a good strategy. The problem is almost every major venture fund started to do that, which resulted in a large bubble around venture for growth-stage companies,” said Simms.

The second issue that we are seeing is “tech-enabled companies” that still have a lot of physical infrastructure valued like software companies. “I do believe the phrase software is eating the world. We’ve seen a lot of companies getting large valuations because of their software businesses.”

As these companies have now gone public, and the public markets started realizing that these businesses—like smart scooters and co-working spaces—are different from pure software firms in terms of operating margins and capital expenses. Some of them have been punished because their operations were not as healthy as they were painted out to be. A case in point is Softbank-backed WeWork.

TechCrunch Reporter Kate Clark asked a panel, including Kelly Chen, partner at deep tech investor Data Collective and Yu Hong, vice-president at GGV Capital, whether the WeWork debacle could play out in the same way in China. Co-working spaces have popped up across major Chinese cities in recent years. 

Yu of Shanghai-based GGV said that what happens to a single company is not likely to influence the primary market in China, but WeWork’s woes can serve as a cautionary tale for investors in the country. Yu added that China’s firms are “timid” and, therefore, less likely to spend lavishly, reducing the likelihood of a Chinese WeWork story.

China has seen massive growth in hardware innovation over the past decade. Speaking on where the next opportunity in China would arise, Simms said that that the next wave of innovation in China would come from enterprise technology as companies have started embracing tech when optimizing existing operations.