VC Roundup: Chasing opportunity in China’s SaaS scene

Software as a service (SaaS) has become a huge deal in China’s startup and venture capital world this year. Driven by demands of team collaboration amid the Covid-19 outbreak and increasing labor costs, venture capitalists and tech giants in the country are scrambling to put money behind SaaS startups.

In 2020, some 96 Chinese SaaS companies have received a total of RMB 12 billion (around $1.8 billion) from VC firms as of Sept. 30, according to VC market data provider Itjuzi. In 2019, VC firms injected a total of RMB 18.4 billion into 158 SaaS companies.

Looking at the US, it’s no surprise to see enthusiasm about the sector. Publicly listed companies like Slack, Zoom, and cloud data warehousing firm Snowflake have earned early investors substantial returns with subscription-based software targeting corporate users. 

But for Chinese investors betting on SaaS, the local equivalents of these products may not be the right answer. The market is different from the rest of the world, investors said. The country’s economy is dominated by big, state-controlled corporations, which are not so tech-savvy and prefer customized services. Meanwhile, would-be SaaS entrepreneurs have to compete with big tech offerings such as Alibaba’s Dingtalk and Tencent’s Wechat Work, which are already popular and free to use.

Read more: Where are China’s SaaS giants?

The SaaS market

The SaaS market in China is still small compared to other major markets. It was worth RMB 19.4 billion in 2019—just 0.26% of the $109.5 billion global SaaS market in the same year, according to a July report (in Chinese) by the China Academy of Information and Communications Technology (CAICT). According to the report:

• Despite its small scale, the Chinese SaaS market grew 34.2% year on year in 2019 from the previous year, faster pace than the global market’s 20.9% last year.
• Chinese SaaS companies are concentrated in areas such as customer relationship management (CRM), finance management, team collaboration, customer service, and marketing.
• SaaS companies tend to serve customers like the government, financial institutions, and schools and education firms.

Policy push 

Since 2018, multiple central and local government policies have encouraged enterprises to adopt cloud-based services. SaaS startups have benefited from policies to promote cloud computing, the natural habitat of SaaS.

• In 2018, China’s Ministry of Industry and Information Technology (MIIT) issued a set of guidelines dubbed “enterprise going to the cloud” (in Chinese) and set the goal of reaching 1 million companies that use cloud-based services by 2020.
• In March, the MIIT launched a campaign to encourage small- to medium-sized enterprises (SMEs) to leverage technologies such as cloud computing, artificial intelligence, and big data as part of their digital transformation processes.
• Also in March, the National Development and Reform Commission included cloud-based services in China’s massive “new infrastructure” investment plans.

Read more: INSIGHTS | China’s new infrastructure projects, explained

Big deals

• June 3: Jushuitan, an e-commerce enterprise resource planning SaaS company, raises $100 million Series C from investors including Goldman Sachs China and China International Capital Corporation.
• Aug. 26: Xiaoman, a Shenzhen-based startup that focuses on providing CRM services for cross-border e-commerce, raises RMB 100 million Series D from e-commerce behemoth Alibaba.
• Sept. 16: Healthcare SaaS company Kyee closes its RMB 430 million Series D led by Tencent. The company said its customers include more than 13,000 Chinese hospitals and grassroots health facilities.
• Sept. 18: Beijing-based account management service Yuannian receives more than RMB 100 million from investors including China Renaissance and Jiayu Capital. The deal values the company at RMB 500 million. 

More SaaS examples

To flesh out the picture, I chose a few more companies listed as SaaS by Itjuzi as examples: 

• Recurrent AI is a Beijing-based company that uses voice recognition and natural language processing to help banks and insurance firms manage customer service. The company’s products evaluate customer service phone calls and offer advice. The company was last valued at $100 million after closing a $12 million Series B led by Sequoia Capital China in September.
• Jushuitan is a Shanghai-based SaaS company that provides services such as order management, warehouse management, and supply chain management to e-commerce companies. According to Jushuitan’s website, it serves approximately 600,000 Chinese e-commerce companies.
• Ibeidiao is a Hangzhou-based company that offers on-demand background check services. The company’s website says that it can help human resource departments check job candidates’ legal identity, diploma, credit history, traffic offense history, and past job experience within one to four days. In May, the company raised several tens of millions of RMB from investors Legend Capital and Future Capital.

A unique market

A typical Chinese SaaS company doesn’t look much like something you’d find in Silicon Valley. American SaaS players often provide a fixed set of services—think of the regular fees you pay for access to Slack or Microsoft. Chinese companies provide more tailored solutions—so much so there isn’t a pricing page on their websites. Potential customers have to sign up via an online contact form to book a call or for a demonstration of their offerings. 

Startups have had to rethink basic assumptions to succeed in the Chinese market—even the idea that SaaS has to run in the cloud. The investor who told me about BATs competition also told me about a startup which offers database-as-a-service, but found that major state-owned enterprises (SOEs) didn’t trust a public cloud to hold their data. So they installed servers in a client’s office buildings and charged them a subscription fee to use and maintain them on-site—essentially reinventing IBM’s original business model. The client loved it—and now the company has a thriving business with SOEs.

“The environment of the Chinese enterprise service market is extremely different from that of the rest of the world, so applying the business models of foreign publicly listed SaaS companies in China doesn’t work,” Jixun Foo, managing partner at GGV Capital, wrote in an article in June.

Foo said that large enterprises in China tend to adopt tailored services and medium-sized firms are more willing to pay for SaaS products because of their flexibility. He predicts that medium-sized enterprises will be the main consumer of China’s SaaS services.

However, Zhai Jia, managing director at Sequoia Capital, warns that China doesn’t have enough mature small and midsize businesses (SMB) to support SaaS. He told Chinese tech news site Huxiu in September that only China’s largest companies are able to spend on software—SMBs’ margins are mostly just too tight. 

“As a result, SaaS companies are not able to offer standardized and fast-growing products… companies have to give up the SMB customers and serve only large clients,” he said.

• Zhai said that Chinese SaaS companies instead rely on “heavy customization,” and that Chinese players don’t necessarily have to see subscription fees as the only source of revenue: they can also earn money from sources like commissions on clients’ sales, “supply chain surpluses,” and outsourced services, he said.

For Chinese companies, the US approach to SaaS—retaining customers with standardized cloud-based service using recurring payments—“only looks good,” he said.