I’m excited to share a conversation with Joshua Wu of GGV this week. As discussed previously, Chinese software-as-a-service (SaaS) is shaping up to be a big investment trend in China tech. Joshua has a seat at the front lines through his work at B2B-focused venture capital firm GGV, one of the top global VC firms in China, whose partners regularly make the Forbes Midas list. Joshua led or contributed to GGV’s investments in PingCAP, Black Lake, Moka HR, Meicai, Smartmi, WPS, and more.
We spoke about the range of B2B and SaaS companies in China, key challenges facing Chinese SaaS companies, and its potential to converge with the trajectories of Western SaaS companies, among many other things. Some of the key takeaways include:
- The Chinese public sector dominates total spending on software, and its attitudes influence how much can be fully cloud-native and standardized.
- Chinese organizations often don’t conceptualize their issues as software problems, which leads to a lack of concrete inbound and outbound sales channels for SaaS sellers.
- Horizontal SaaS, or software that is universal rather than customized, is hard in the Chinese market, since there’s so much diversity among enterprise clients. Specialized products have a much higher chance of delighting customers.
- But Chinese companies are very willing to change and adopt new software if they see high ROI.
Lillian Li: I’m trying to figure out whether China’s B2B is in an earlier development stage relative to the West, or there are some Chinese-specific characteristics that we need to be mindful of. For example, Western companies also went through a phase of using private cloud, and then upgraded to SaaS once they realized the cost benefits and features upgrade that it provides. Will the same happen in China?
Joshua Wu: The Chinese-specific aspect is that the Chinese public sector dominates total spending on software, and that influences how much can be fully cloud-native and standardized.
For the private sector, industries like tech, real estate, and retail are standardized in their processes. Their concerns are partly development stage-based but also partly Chinese specific. For example, their concern with public cloud and SaaS isn’t against the model itself, but whether it provides value. Either that’s because their data hasn’t been fully digitalized, or they are using labor to solve these pain points today.
These companies’ need for organizational efficiency and collaboration also hasn’t reached a stage for software yet. These capabilities are not must-haves for them today; they don’t feel like everything should be collaboration first, digital, or on a platform. But I think this mindset will change soon.
The second barrier for the private sector’s adoption path is a price ceiling for SaaS. For an enterprise buyer, RMB 100,000 (around $15,000) per year is the upper price limit they are willing to consider. A typical white-collar worker’s annual salary is RMB 100,000 per year. It only makes sense to them if you’re pricing on a basis that’s lower than RMB 100,000 per year.
The third aspect is related to the customer’s trust in the privacy of public cloud, which is a matter of time. It’s not a significant matter for the private sector, so I’m not too worried about this.
LL: Do you think B2B companies will develop and follow the same paths as Western companies?
JW: That’s a good question, and I don’t know the answer. A pure SaaS model (which uses public cloud and recurring revenue) will never dominate in China. Hybrid clouds are huge in China, partly enabled by the government. In the rest of the world, the public cloud is eating the world. In China, the cloud is eating the world. There’s a difference.
LL: What are the differences between Chinese SaaS and Western SaaS companies?
JW: This starts with terminology. In China we talk about “enterprise services,” or “to business” (2B), which includes many sectors that are not included in SaaS in the West.
The first sub-category is B2B platforms, such as Manbang for logistics, Meicai for grocery supply chain, Baibu—in which I invested alongside GGV partner Eric Xu—for clothing supply logistics. These offerings could be called B2B marketplaces, but they also facilitate transactions on the platforms with tools. For example, an artificial intelligence (AI) image search which enables better matching for textiles. So it’s not quite SaaS, but the tools allow the seller to have more transactions. So this is a substantial sub-category in what we call enterprise services.
Another sub-category is called the industrial internet, which is a vertical sector solution. They aren’t exactly SaaS, but they are B2B and they focus on servicing the needs of a sector with a variety of hands-on help if needed.
For pure SaaS models, there’s a fair amount of infrastructure tech and middleware technology. We invested in a company called PingCAP, which is an open source database. In the SaaS category, there are the typical horizontal SaaS offerings, such as customer relationship management (CRM), human capital management (HCM), and applicants tracking system (ATS) such as our investment in Moka HR.
The last category is vertical SaaS, which is not completely standardized software. These companies try to charge recurring fees, and use their software as the wedge into an industry. The lack of standardization increases as the customer base moves from small and medium businesses (SMBs) to large enterprises.
These enterprise customers tend to be very particular. They prefer licenses over recurring payment. They also want hands-on support from on-premise implementation all the way to configuration. While these enterprises have large budgets, it’s difficult for startups to serve them economically. As a result, pure SaaS companies are scarce in China right now.
LL: What do you think are the biggest challenges facing B2B companies right now?
JW: The biggest challenge is the lack of suitable sales channels for SaaS, as customers aren’t coming in through inbound marketing. If an organization is having issues tracking candidates from different channels in a recruitment process, they wouldn’t know to search for an Applicant Tracking System (ATS) on Baidu. They don’t think this is a software issue. Tech companies are the only customers who conceptualize problems this way, and they are a minority. There’s no concrete way to reach customers from a sales channel perspective.
Most target customers don’t know the use of software products, and also have unrealistic expectations. When you’re deploying a product in a company, you’re also deploying a new management process. These new processes will solve the same issues but will do so with different approaches, they wouldn’t give the customer exactly what they want.
Similar to B2C examples like Apple, if you ask consumers what they wanted, you wouldn’t be able to get a breakthrough product from their response. The same principle applies to B2B products: you can’t give the customer exactly what they want. Navigating this well is down to sales capabilities. The sales, solution, and customer success team needs to find a balance between current customer needs and the future. Bridging this gap is very difficult for most, but easier for vertical SaaS, which is why they’ve been successful.
LL: Do you think Chinese companies are resistant to change?
JW: Chinese companies are happy to change if they see the value of changing. This is especially true for the pragmatic private sector. If they see high ROI, then they’ll do it. Even in public sector organizations, there’s a relatively quick turnover of the central decision-makers. They change about every two to three years. When a new decision-maker comes on board, it’s normal for them to adopt a new system. Reality is also forcing them, since the legacy tech in these organizations can’t fulfill their current needs.
The critical issue is the right value proposition. If you have a general product, the addressable market is more prominent. But this is going to be a shallower product which doesn’t solve the customers’ issues. If you make a specialized product, that’s a smaller target market but more likely to have an impact on the customer.
LL: So it sounds like you prefer to invest in a software that solves a specialized problem as a general starting niche to tackle the enterprise?
JW: Yes, I think it’s a good zero-to-one process that’s suitable for today’s Chinese market. If you look at the customer relationship management market, Fengxiang and Xiaoshuoyi are not bad, per se, but they should be doing much better given that category.
Horizontal SaaS is hard for the Chinese market, since there’s so much diversity among enterprise clients. It’s hard to make something that pleases everyone. Specialized products have a much higher chance of delighting customers.
LL: Do you think the Chinese SaaS founders realize this?
JW: Yes, there is a growing realization. It might not be explicit, but they are finding out through experimentation. They get a sense that they need to find their niche, find the right product-market fit, and then get investment from VCs like us. So it’s a space that’s influenced by both market needs and investors.
Though everyone’s endowment is different, some people might have a background in serving big enterprises. If they came from Microsoft or IBM, they are naturally apt at this. We also have the example of Palantir in the US, whose customers are predominantly government.
LL: Out of market, team, and product, which aspect do you give the most weight to when you invest?
JW: That would be the product, since that’s reflective of the capabilities of the team as a whole. They can pivot to find the market, but they have to have sound business logic behind it all. If a team is good at making a product, then I can assume that you have good organizational structure and collaboration style. These capabilities can be leveraged for any market and any product.
LL: What area of investment interests you currently?
JW: Similar to [investors in] the US, I’m interested in next generation cloud native infrastructure. I think these will have a lot of room in China. Their architecture structure is very on par with the US, since these infrastructures tech is technology-neutral. Apart from that, I’m interested in industrial internet enabled by AI.
LL: What’s your advice to Chinese SaaS entrepreneurs?
JW: I think this is a great time to start a business in this category. Focus on the product and deliver value. Look at what the US is doing and read up on SaaS metrics too. A lot of CEOs are good at making a product, but don’t have the best practice benchmarks for a company as it scales. They should study this aspect, and there’s a lot of public companies in the US for them to learn from.