What are tech investors looking for in China?

After two years of struggling to raise money, Chinese start-ups are starting to see the interest of venture capitalists rise again as the US boom crosses the Pacific Ocean.

“The winter in the capital is over, the competition for deals is fierce,” said Ming Liao of Prospect Avenue Capital. “Now to enter into a deal, you need to bring more to the table than just cash.”

In China, the number of venture transactions in the first quarter increased by 56% over the previous year, the fourth quarter of growing activity, as start-ups attracted investments of Rmb354bn ($ 55 billion), according to data provider ITjuzi.

The turbulent public markets and the flood of foreign money helped. Tencent, the most active investor, cashed in on some of the profits as its listed investment portfolio tripled last year. VC firms such as GGV Capital, Qiming Venture Partners և Matrix Partners China raised large amounts of new assets.

In some ways, investments in China and the United States are similar. Both markets will be big enough to boost large tech groups, with Chinese investors saying start-ups are now comparing to their American counterparts.

But investing in China also has its peculiarities. Each new idea often generates a lot of duplicate material – even competitive invasions by the country’s technology giants. Different cultures և Government regulation add to the challenges.

Cultural differences extend to the types of business models that operate. Unlike the United States, which has seen high ratings for companies selling software (SAAS) to large enterprises, the industry has yet to develop in China. Shaun Lim of Hopu Investments says software companies may be struggling to register subscribers.

“People here do not attach much importance to intangible services. “They are more willing to pay for what they can see and touch,” he said. Lim said an AI software company he supports has increased its sales by placing its software on the servers it sells.

Other factors that have hindered the adoption of SAAS include the history of free pirate software և cheap labor to regulate some functions that the software can automate.

Overview of start-up investments in China over the past six years

Consumer tech has historically raised VC funding to provide the highest returns by turning hot hotspots into ups and downs. Although copying ideas are ubiquitous in China, they can be very different.

During China’s infamous “Thousand Groupons War” in early 2010, research firms say 1,880 start-ups copied Groupon’s group-buying business model. The surge has spurred 214 competitors, with at least 20 companies moving to bicycle exchanges, with և 208 launching companies that rent mobile power units to recharge electronic devices.

In the face of such fierce competition, investors say that performance and hard work can be overcome without being the first engine in the new industry.

For GGV Capital’s Jixun Foo, faith in founder Yang Lei helped keep him from pushing Hellobike into space, as a rainbow of orange, yellow and blue bicycles already blocked the streets of China’s largest cities.

“I was convinced [Yang] “It can work more efficiently.” “The first engine brings you forward. ,,[but] How effectively do you run compared to your peers? That end will definitely show in time. ” Five years later, Hellobike reported sales of nearly $ 1 billion last year, narrowing losses. Many of its competitors have failed.

In the competitive field of portable electric banks, Wanlin Liu, which focuses on technology investments for Carlyle China, decided to invest when the winner appeared from the first start-up channel. Even as he weighed his investment in Energy Monster, he was worried about being pushed by China’s Big Tech companies.

“Really, you have to understand all the top players, any potential competition from the bigger tech giants, before we can call,” he said. Energy Monster remained the leader even after the arrival of the $ 240 billion shipping company Meituan. “It’s all about the death penalty,” Lew said.

To help assess which teams are in need, M31 Capital’s Nathan ong ong sometimes makes unannounced visits to start-up offices before making his investments. During a recent walk, he found the data analysis office vacancy empty.

“Repetitions of their products were not very fast. “The executive director’s determination to continue the struggle was weakening,” he said. “Getting out of work early was what it was.” M31 decided not to invest.

Patrick ong ong leads one of the M31 Capital meetings on Monday

Patrick ong ong, during M31 Capital Weekly Meetings, says non-Orthodox evening visits are a way to assess the eligibility of potential investment goals © Ryan McMorrow

Illegal evening visits are part of what M31 founder Patrick onng calls “potential temperature sensation” for potential investment targets. “Everyone in China is smart. If you are asleep at the wheel, your competition will reach you quickly. ”

Government policies can also be a source of uncertainty. In January, the People’s Bank of China proudly announced that it had pushed the peer-to-peer out of every 6,000 peers in the country, ending a campaign that wiped out a wave of VC bets.

“You always have to know, ‘Is this company on the right side of long-term Chinese government policy?'” Said Gary Richel, who founded Qiming Venture Partners 15 years ago. “Chinese entrepreneurs have to deal with a lot of uncertainty,” he added.

VCs say there are smaller differences in the investment process. Start-ups often hire financial advisors or FAs, as they are commonly called, to connect with investors. The CEO’s honest references are hard to find. And investing in a start-up company that may one day need a new leader may not end well. Rachel says it is very difficult for officials to “replace the trust they had in the original founder.” “It’s an environment of low trust.”

Although the SAAS business in China has yet to launch, M31 Capital’s Zhong believes the software is the future և valuable to review current trends in the US. During last week’s meeting, his team spent an hour researching how growth in the MongoDB database accelerated as its use expanded և to study its evaluation.

“Over the next 20 years, China will lag behind the United States in using software to improve enterprise efficiency,” Chong said. “We do not say it will be the same way as the United States, but it is a reference.”

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