Zhang Qiyu, a Shenzhen-based founder, turned down a funding offer just hours before talking to TechNode on Dec 22. He said that it was not a good “match,” and that he was worried about being forced into rapid expansion by investors.

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Zhang is the founder and CEO of Balanx, a manufacturer of electrode workout suits that help burn calories, which ships to mainly Europe and North America.

“They want the company to reach revenue of RMB 100 million (around $15 million) and complete another financing round in the near future, which was not my plan,” he said. “Manufacturing is not like the internet industry, where you can create a giant by simply burning cash.” 

Zhang’s idea of tech success isn’t Google or Alibaba. During the interview, he expressed his admiration for some of his fellow Shenzhen-based founders who have never raised VC money. He mentioned as an example a company owned by an acquaintance, a dashcam manufacturer with around 40 employees and around RMB 700 million in annual revenue. 

“I think this is what a typical Shenzhen startup looks like,” he said.

Shenzhen is famous for entrepreneurship. The southern Chinese city is home to some of China’s most important tech companies like Huawei and Tencent, and is a global manufacturing hub. It is said to have the “highest density” of entrepreneurs in China with more than 10% of its population running their own businesses. 

But Shenzhen’s venture capital (VC) scene doesn’t match its importance as a tech hub. Most of the country’s leading VC firms, as well as the Chinese branches of international private equity firms, are based in other metropolises like Beijing and Shanghai. In 2019, only around 9.4% of the country’s private-equity fundraisings went to Shenzhen-based companies, according to Chinese VC activities data provider Itjuzi. The city is home to some 32 unicorns, tech startups valued at more than $1 billion. By comparison, Beijing has 101 and Shanghai has 51.

Local sources told TechNode that Shenzhen has an active VC market, but fund managers in the city are low-profile and don’t tend to make investments that have high valuations. Meanwhile, local government wants to build the city into an “international hub” for VC investment and has injected real money into the market. 

But many founders like Zhang still prefer to bootstrap their businesses rather than take money from VCs.

Shenzhen has an active, but cool-headed, VC market, said Jia Ke, founding partner at Shenzhen-based Creation Venture Partners. Most major players are low-profile and seldom catch press attention, he said. 

One reason, he said, is because Shenzhen VC firms tend to put their money in startups that are likely to bring in moderate rates of return, unlike stereotypical internet investors who look for high-risk, high-reward bets, counting on a small proportion of their portfolio companies bringing high multiple returns.

“It is not easy for Shenzhen VCs to access US dollar funds, compared to Beijing or Shanghai VCs,” said Jia. The first Shenzhen VC funds were raised “in a market-driven way” from limited partners (LPs) mainly consisting of Chinese wealthy individuals and big corporates, he said. Fund managers used to go door to door asking potential funders for money, he added.

“The first question LPs ask is always: ‘Can I break even with this investment?’” he said. “While US dollar fund managers may have nine to 11 years to exit from their investment, Shenzhen VC firms are usually given five to seven years.”

As a result, said Jia, Shenzhen VC firms may “miss startups with high rates of return.”

But Jia cautioned against over-emphasizing the differences. While VC firms in Shenzhen may have some unique characteristics compared with their Beijing counterparts, at the end of the day they all try to do the same thing, he said.

Private investors are cautious. The 2015 Chinese stock market crash was a turning point in how Shenzhen VC firms raise money, Jia said. The stock market turbulence wiped out a third of the value of shares on the Shanghai Stock Exchange in less than a month.

“Following changes in the A-share market in 2015, high-net-worth individuals, who are mainly bosses of public firms, become cautious with their money,” said Jia. 

But state-run funds will back ambitious plays. “Then the ‘national team’ entered the market,” Jia said, referring to state-backed policy and strategic funds that underwrite private-equity firms.

In 2018, the municipal government of Shenzhen set up a RMB 5 billion policy fund, dubbed the Shenzhen Angel Fund of Funds (SAFOF), to back local general partners. The fund doubled (in Chinese) its size to RMB 10 billion in August.

Shenzhen is determined to make itself an “international hub for venture capital and innovation investment,” according to a government initiative (in Chinese) announced in January 2019 that encourages fundraising. The municipal government has pledged to offer startups backed by local VCs RMB 500,000 to RMB 1 million in subsidies if they go public on domestic stock markets.

While state-backed funds in China are known for a top-down approach, the Shenzhen government fund is known for its “market-driven” approach, said Jia, whose firm is also backed by the SAFOF. “They are very efficient and make decisions very quickly.”

But it is not totally driven by the market. SAFOF said on its website that its aim is to guide “social capital,” or private money, into Shenzhen’s “strategic emerging industries” and promote “industrial transformation.” The company didn’t specify what are those “strategic emerging industries,” but the Shenzhen municipal government said in a 2018 filing that they include next-generation digital information technology, high-end equipment manufacturing, biotech, and new material. They are largely in line with the similar list made by China’s National Development and Reform Commission, which makes macroeconomic planning.

The fund has injected around a total of RMB 6.7 billion into 51 VC firms, which together raised RMB 16.7 billion, as of Dec. 11, according to TechNode’s calculations. The fund takes a 40% stake in every single deal. Shenzhen-based unicorns that have received funds from SAFOF-backed VC firms include chipmaker BYD Semiconductors, smartphone display manufacturer Royole, artificial intelligence firm 4Paradigm, and robot maker Ubtech.

Big deals: Shenzhen edition

Dec 22: Shenzhen-based Lalamove, a Uber-like platform that connects truck drivers with customers, announces a $515 million Series E led by Sequoia Capital China, valuing it at $8 billion.

Nov 31: Wangyun Wangdian, an e-commerce logistics firm, raises RMB 6 billion from investors led by Shenzhen Capital Group, a government-backed VC, valuing the company at RMB 25 billion.

Nov 14: Shenzhen-based Jmgo, a consumer projector maker, raises RMB 100 million from Yuanda Venture Capital.

Oct 28: SmartMore, a smart manufacturing firm, raises $100 million from investors led by Green Pine Capital, a SAFOF-backed VC firm.

Oct 21: Shenzhen-based Xiao’e Tech, a software-as-a-service company, raised a Series C funding round of an undisclosed amount from Tencent Investment, which valued the startup at RMB 1.5 billion.

Writing about semiconductors and telecommunications.