In 2016 China’s venture capital (VC) market exploded to US$50 billion — almost equal to the US.
In 2017 KPMG reported that this number cooled to US$40 billion; but China still accounted for 26% of global VC investments.
In April 2018 INSEAD released a report that predicted China’s VC market will exceed the US to dominate the world in 2019 or 2020.
Despite all these, the world’s focus is still on Silicon Valley as the driver of startups and venture capital. Mainstream media seldom report VC deals and trends in China.
‘Behind the Great Wall’ will attempt to fill part of that gap by kicking off 2019 with a look at what China’s top VCs are thinking about. PEdaily.cn asked 30 of them for their thoughts on 2019 and published a 10,000 words article based on the responses. The following is condensed from the original Chinese version.
Industry outlook — Startup funding ‘winter’
“Fund raising in the whole venture capital industry is falling off a cliff, so funding panic will hit in 2019.”
— Addor Capital Chairman and Founding Partner Wenlu Ying
In 2018, most market observers felt that China’s VC market was cooling. In part due to the explosive growth in the years before, in part due to investors coming off the ‘burning money to acquire users/data’ fad and focusing more on startups with proper revenue models.
Top VCs generally expect China’s economic outlook to be uncertain in 2019 and the funding ‘winter’ for startups to continue.
The ones who were lucky enough to raise ample funds before the pessimism set in saw this as an opportunity to be more aggressive and expand market share — since valuation and competition for deals will be lower.
“In the last two US economic crises, the VCs that met with difficulties really struggled. But the ones who found opportunities grew rapidly. The same goes for entrepreneurs.”
— Sinovation Ventures Chairman and CEO Kaifu Lee
However, many of those interviewed cautioned local startups to be financially prudent and pragmatic for their road ahead.
Startup advice — Cashflow, discipline and conservatism.
“Most Chinese enterprises have never experienced an economic cycle. They have never experienced a total drought in funding and general market cooling. So entrepreneurs should view these few years as a very good opportunity in their entrepreneurial experience.”
— 58.com CEO Jinbo Yao
Given the funding ‘winter’ most Chinese VCs expect, many of them said local startups should be mindful of the following:
- Watch the cashflow! VCs will be looking to invest in startups with healthy financials, especially those that are cashflow positive. Pure ‘money burning’ ideas are out!
- Don’t be greedy with valuations. Many advised startups to raise money early to prepare for the ‘winter’ and not be too greedy with valuations. “Don’t wait until cash runs out,” one cautioned!
- Focus on building the real deal. Instead of doing PR and spending too much time on fundraising, founders should focus on building a great product/company and generating revenue. Investors will come to you if you are an attractive venture.
New Sci-Tech Innovation Board will drive growth
In November 2018, President Xi Jinping announced that the Shanghai Stock Exchange will be launching a new Sci-Tech Innovation Board to “encourage small and medium-sized investors to participate in science and technology investment through public funds”.
Several VCs commented that the introduction of this new listing board will help drive the local tech startup scene to even greater enthusiasm and heights since it will provide a new avenue for exits.
While the exact timing of the launch is not known yet, the industry consultation process has already kicked off. Given China’s usual administrative process and efficiency, most VCs expect the new board to begin trading in 2019.
Investment picks — Basic needs and cutting edge tech
In terms of demand, a few VCs commented that basic consumption, especially for niche consumer groups such as infant mothers, will remain resilient to an economic slowdown.
Most VCs are also optimistic on the growth of the medical and healthcare sectors despite the funding ‘winter’. One cited education and training as a industry he felt was recession proof.
Sector wise, most are focusing on cutting edge technology. The usual suspects AI, computer chips, new materials, green technology, smart manufacturing and industrial robotics were all frequently mentioned.
Many VCs also expressed interest in life sciences and biotechnology.
Interestingly, Jing Hong, Founding Partner of Gaocheng Capital, observed that in the US, half of all VC and private equity funds were invested in enterprise services. The proportion is only 5% in China, indicating an underserved opportunity for money managers.
However, she also noted that investing in enterprise services requires deep industry insights and patience. VCs expecting high return multiples in short time frames will not find it attractive.
Yet much of what goes on within its startup world gets overlooked by western media.
Did you know that the world’s most valuable AI company is from China and that 48% of the world’s funding in AI startups came from China in 2017? Or that three big China tech companies alone accounted for 44% of equity investments in US AI startups between 2014–2018?
Quietly, it is set to become the world’s largest startup ecosystem, building a new generation of large VC funds and high tech companies. Many have their sights not just on dominating the Chinese market, but also the world.