What technology investors are looking for in China


After two years of struggling to raise money, Chinese start-ups see the interest of resource capitalists pick up, when the boom in the United States crosses the Pacific.

“The capital winter is over, the competition for business is fierce,” said Ming Liao of Prospect Avenue Capital. “You need to bring something on the table more than just cash to get into business now.”

The number of venture businesses in China rose 56 percent in the first quarter from a year earlier, the fourth consecutive quarter of growing activity, as start-ups pulled in Rmb354bn ($ 55bn) in investments, according to the provider. data ITjuzi.

Floating public markets and a flood of foreign money have helped. Tencent, the most active investor, has cashed in some gains that its listed investment portfolio tripled in value last year. VC companies such as GGV Capital, Qiming Venture Partners and Matrix Partners China have raised large new funds.

In some ways investing in China and the United States is similar; the two markets are large enough to favor the creation of large technology groups and Chinese investors say start-up ratings are now comparable to their U.S. counterparts.

But investing in China also has its peculiarities. Each new idea often sparked a slew of copycats, as well as competitive incursions from the country’s technical giants. Different culture and government regulation add to the challenges.

Cultural differences extend to the type of business models that work. Unlike the United States, which has seen high ratings for companies selling software-as-a-service (SAAS) to large companies, this sector has not yet developed in China. Shaun Lim of Hopu Investments said it may be a struggle for software companies to sign up for subscription clients.

“People here don’t value intangible services very much.” They’re more willing to pay for something they can see and touch, ”Lim said.

Other factors that have prevented the adoption of SAAS include a history of free pirated software and low-cost labor to manage some of the features that the software can automate.

Chart on China’s initial investments over the past six years

Consumer technology has historically attracted the most VC funding and produced the largest returns, bringing the hot sectors of the day into booms and busts. While copy ideas are everywhere, they can be of a different magnitude in China.

During China’s famous “Thousand Groupons War” in the early 2010s, research firms say 1,880 start-ups copied Groupon’s group purchasing business model. The ride-hailing wave has pitted 214 competitors, at least 20 companies engaged in bicycle sharing, and 208 have launched companies that lease portable power banks to recharge electronic devices.

With such fierce competition, investors say that execution and hard work can be overcome by not being the first driver in a new field.

For GGV Capital’s Jixun Foo it was the faith in founder Yang Lei that helped put him behind Hellobike’s push into the bike-sharing space when a rainbow of orange, yellow and blue bike-sharing bikes were parked. already clogging the streets of China’s largest cities.

“I was convinced that [Yang] could handle this in a more efficient way of operation, “Foo said.” The first engine gives you a head start…[but] how efficient are you in class compared to your peers? That advantage will definitely show over time. ”Five years later, Hellobike reported nearly $ 1bn in sales last year with reduced losses. Many of its competitors have failed.

In the equally competitive space of portable power banks, Wanlin Liu who focuses on technology investments for Carlyle in China, decided to invest when a winner came out of the first wave of start-ups that came into play. the activity. Even then, while weighing in on an investment in Energy Monster, she was worried about China’s Big Technology companies.

“We really need to understand all the key players and any potential competition from the biggest technology giants before we can make the call,” he said. Energy Monster held its head even after the $ 240 billion Meituan delivery company entered. “It’s about execution,” Liu said.

To help assess which teams have what it takes, Nathan Zhong of M31 Capital sometimes makes unannounced visits to the offices of night-time start-ups before investing. In a recent release, he found the office of a start-up data analysis vacant.

“Their product iterations weren’t very fast – the CEO’s determination to continue to struggle is weakening,” he said. “Getting out of work early represented that.” M31 decided not to invest.

Patrick Zhong leads one of M31 Capital’s weekly Monday meetings

Patrick Zhong, at M31 Capital’s weekly meetings, says unorthodox evening visits are a way to judge the suitability of potential investment targets © Ryan McMorrow

Unorthodox evening visits are part of what M31 founder Patrick Zhong calls “feeling the temperature” of potential investment goals. “Everyone in China is smart; if you fall asleep behind the wheel, your competition will get back to you soon. ”

Government policy can also be a source of uncertainty. In January, China’s central bank proudly said it had cracked down on every peer-to-peer online lender in the country – from a peak of 6,000 – wrapping up a campaign that wiped out a wave of VC bets.

“You should always be aware of,‘ Is this society on the right side of China’s long-term government policy? , ”Said Gary Rieschel, who founded Qiming Venture Partners 15 years ago. “China’s employers have to deal with great ambiguity,” he added.

VCs say there are smaller differences throughout the investment process. Start-ups often employ financial advisors or FAs, as they are colloquially called, to reach out to investors. References for CEO candidates can be hard to find. And investing in a start-up company that may one day need a new boss may not end well. Rieschel said he expects senior executives to “replace the trust they had in that original founder.” “It’s an environment of little trust.”

Although SAAS companies are yet to take off in China, Zhong of M31 Capital believes the software is the future and finds it valuable to review current trends in the United States. At a recent weekly meeting, his team spent an hour studying how growth accelerated in the MongoDB database company as its use cases expanded and examined its assessment.

“Over the next 20 years, China will monitor the United States in the use of software to improve the efficiency of the enterprise,” Zhong said. “We’re not saying it’s going to be exactly the same road as the United States, but it’s a benchmark.”



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