The VC Landscape in China

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Learnings Per Share

11 min readFeb 11, 2021

A look into the strategies and motivations of VC firms in China (Sequoia, Tencent, IDG, Qiming, Sinovation)

Hi all,

This blog post is about the key Venture Capital firms in the Chinese VC landscape – focusing on their investment theses and predictions for the future of Chinese tech companies. What’s interesting is that their strategic vision is usually indirectly articulated through interviews or blog posts rather than listed plainly on their websites. I formulated their theses from pieces of information I acquired from these ‘indirect sources’. This blog post will analyze how some Chinese VCs use their local advantage to fund successful unicorn companies.

Current VC Trends in China

According to FT:

“China’s tech sector has been chilled by a “capital winter” that began in late 2018 as a venture capital boom deflated. Last year, the number of investment deals fell for the fifth consecutive year, though start-ups’ cash haul ticked upwards, rising 12 per cent to Rmb815bn ($126bn).” (Financial Times, 2021)

However, according to The Diplomat, China still represents over 40 percent of global VC investments, with Silicon Valley still leading the world at 44 percent.

Top players in China

From the Hurun report on Chinese “unicorn catchers” (Hurun, 2019)

Ranking sorted by how many unicorns in investor’s portfolio. 1. Sequoia China 2. Tencent 3. IDG 4. Alibaba 5. Qiming 6. Matrix 7. Hillhouse 8. Zhenfund / Shunwei / Morningside 11. Sinovation / Warburg Pincus / GGV

Overarching VC Trends in China

VCs in China tend to back companies less on technology breakthrough and more on business model innovation enabled by proven technology. In China, traditional retail and services industries have had a much shorter history compared with those in the West and are much less entrenched as a result (“Examining the State of the VC Market in China — EMPEA”).

On average, a startup in China reaches unicorn status about 18 months quicker than its U.S. equivalent (Pitchbook).

However, there is a “flight to quality” investment trend whereby PE and VC funds have been accepting lower exit returns by allocating less funds towards riskier investments and preferring later stage and closer to IPO options (“VC in China”).

The ‘Why’ behind Chinese VC successes

The sheer number of bets they are making allows them to capture potential unicorns very early (as seen through Sequoia’s aggressive seed-stage strategies (setting up Zhenfund, and also the newest Seed Round).
Collaborations with US partners/Collaborations within China are usually made (presumably to bolster name, and also add to a larger fund size) — example being IDG + Breyer Capital
The development of the VC market driven by Government Guidance + Tech companies (Baidu, Alibaba, Tencent are huge VCs in China)

Internet and foreign exchange controls keep capital in China: reasons for unicorns such as Baidu, Alibaba.
Lower levels of income does not necessarily correlate with less use of internet or mobile phone: 74% of Chinese Internet users make less than $500/month and are students, blue-collar workers or jobless. (This is why some social internet platforms are very successful at targeting the rural population that can still be reached via mobile app — see the company ‘KuaiShou’) and as a result, there are more opportunities overall in the mobile space.

Cultural Advantages to the Chinese Startup Landscape

The Chinese value learning via repetition. Rather than careful analysis and customer development, they favor a “brute-force” method that combines ShanZhai strategy (bandit — copy + innovate) and rapid execution to deliver validated learnings in record time. This results in platforms that are not UI/UX Centric — WeChat was one of the first interfaces to increase design considerations in app usage.

Traditional retail and services industries have had a much shorter history compared with those in the West, and are much less entrenched as a result. This makes it easier for technology-enabled disruption to take place and fundamentally alter the distribution model or other key aspects of an industry value chain.

Government Guidance Funds: serve as seed or anchor capital for the establishment of one or a group of funds-of-funds, which incubate a cluster of subsidiary funds with the participation of private capital to make direct investments in companies
Protective Economy: China has strict foreign exchange and capital controls, as well as internet control

Tencent

Strategy

Rather than wholesale acquisitions, Tencent prefers to buy minority stakes in companies whose products can bolt on to its WeChat and WeChat Pay platforms. One tech lawyer described the process as “feeding the empire”.
However, this is a key part of their strategy to stay on top of ‘emerging trends’ — they want to stay up to date with the world trends and for that reason also invest in the US, stating their aim to ‘learn from co-investors Google’.
Regional Variation: In China they source early-stage bets as compared to their strategy in the US where they take late-stage bets.

They have 3 main strategies for different regions

Strategic Acquisition — in industries that can tie on to their WeChat platform (China)
Attaining Knowledge about Foreign Spaces and Trends — (U.S.A, India, UK)

3. Generate Returns — late-stage companies in the U.S (U.S.A)

Focus: O2O/Platform based services

Focuses capital on ‘Computer Vision’ eg: AutoAi, NIXIE, Diffbot
But doesn’t really say that they have a ‘strategy’, they just prefer Online to Offline (O2O practices)

“I believe that there is an emergence of a new breed of platform companies, and now is the right time to find them,” — Forest Lin (SCMP).

Preference for platform companies that successfully integrate online e-commerce with offline services, and enterprise software driven by artificial intelligence. Eg: Offline + Online integration — Tulu, Enterprise Software with Blockchain — MiningLamp.
Example Investment: Sugarbeans (TangDou) — dancing + social networking platform for elderly women (April 2019)
This follows their platform strategy — online videos + hosted offline classes, meetups, events. Acts as an e-commerce platform to sell dance clothes etc.

IDG

Strategy

“Most of our funds are 10 years. Tourism and health care projects require long incubation periods and are unlikely to succeed with a five-year investment rule”

Do not target immediate returns
Healthy cash flow is more desired
Long-term investment in tourism projects
Focus in areas linked to domestic demand such as apartment and co-working space operators.
Healthcare, especially aging
No real ‘stage focus’, instead go from Series A all the way to Pre-IPO

Pivot — They started off very strong in mobile internet companies (2012) , but have since then diversified into multiple sectors

They have been working with US partners since 2008 (Accel) up until now (2019), and one of their main selling points to startups is advice on ‘overseas expansion’ — strategic collaborations.

Sequoia Capital China

Main fund: $8Bn global growth fund (2019)

Most recent fund is the Principles Seed Fund (150M)

Sequoia and JD also set up a fund focusing on late-stage tech startups — Starquest Capital

Sequoia’s strategy is mostly just to reach as many startups as possible with a small ticket size and see if any of the bets pay off.
Star Investments : Alibaba, Toutiao, Kuaishou, DJI, Ele.me, Mobike, Dianping, Sina, Meituan, Jumei, Qihoo 360, Vipkid, Douyu TV

Strategy:

2019 updates; Sequoia China has raised a small $150m fund specifically to make very early calls on Chinese start-ups, either offering them seed funding or Series A investments. (Financial Times)
“For Sequoia, what matters is to be first and to be the most important investor. You have to lead each round, and today you can’t lead with $10m or even $100m sometimes.” — Neil Shen

Started in 2005 → traditionally early-stage funding and diversified its focus to include pre-IPO funding.
“We help founders from Day Zero” — Sequoia China Website
Spread bets: few rounds with more than 50M, more rounds under 1M
Example: new 2019 investment into Math Planet — Series A Lead
“Scouts” Initiative.

Zhenfund

Zhenfund is a seed fund, established in 2011 by co-founders Bob Xu and Victor Wang in collaboration with Sequoia Capital China.

10+ companies with valuation of more than 1 billion USD including Meicai, VIPKID, RED (Xiaohongshu), UCommune, Yitu Technology, Hero Entertainment, Horizon Robotics, ZhaoGang, Luojisiwei, Momenta, Mia, Mobvoi, 17zuoye etc.

Services include biannual demo days to top Chinese VCs, ZhenHR services, marketing and PR consulting, as well as fundraising

Strategy

Only do around seed stage
Believe consumer upgrade is a really important area of growth
B2B, ecommerce, O2O
Common theme is fast growing

Interested in investing in:

Companies developing technology for the agriculture sector in China
Named XiaoHongshu as one of Anna Fang’s most successful investments.

Qiming Venture Partners

Area of Interest: Internet and consumer (“Intersumer”), healthcare, information technology and clean technology sectors.

20 private companies in the Qiming portfolio are now valued at $1 billion or more: Xiaomi, UBTech, We Doctor Group, Face++, APUS, Mobike, Tujia.com, Tuhu.cn, TutorGroup (VIPABC), Zhihu, Luojisiwei, Gan & Lee, Meituan-Dianping, Wacai.com, Musical.ly, Meili Inc. and Sinocelltec

Intersumer: Meitu, Zhihu (unicorn)
Healthcare: Sanyou, Tiger Med (unicorn)
Info Tech: Xiaomi (unicorn), Face ++ (unicorn)
Clean Tech: Air Quality

Strategy

Qiming Venture Partners invests in early-stage and expansion-stage deals, Over 50% of its investments in early-stage companies.

Rated 3rd “Most active in healthcare services & systems” by Pitchbook

“We were very early in healthcare in China and that has paid off very well for us. We were maybe either too early or too late in clean tech but we have some good companies. Our timing on the Internet-related fields was good, although there is still angst internally over not doing Didi or Kuaidi back in their series A round.” — Gary Rieschel

Focusing on booming Middle Class
Sees potential in environmentally-conscious investing
Particularly like cross border, cross-industry deals — eg: internet + healthcare

Core areas US arm focuses on:

Therapeutics — Cell & Gene Therapy, Neuroscience
Digital Health — AI-enabled connected devices
Med-tech — Minimally invasive solutions for gap between drug and open surgery, Neuromediation, AI-enabled connected devices with the
Qiming set up a US base with the intent to bring some aspects of joint-ventures with US companies into China — in their words, ‘close strategic links’.

Sinovation

About: technology-savvy investment firm focusing on developing the next generation of Chinese high-tech companies run by Kaifu Lee who has a blog here: https://aisuperpowers.com/blog

Their billion-dollar AI companies include crypto firm Bitmain, image recognition company Megvii (known as Face++), fintech-focused 4th Paradigm, autonomous driving AI company Momenta and chip outfit Horizon Robotics.

Areas of Focus: AI, Content, Consumption Upgrade, B2B, Education

Outreach programs:

The Founders Society: A custom program for the CEOs of portfolio companies to supercharge their growth.
The CXO Club: provides entrepreneurs with a series of lectures and workshops focused on the critical matters for building a start-up
The New Power Club: aims to gather top-notch founders and to serve the next generation of billion-dollar companies. Through exclusive workshops and invite-only demos

Strategy

Education; The Chinese way to monetize education is through parents.

Edtech Investment Thesis: To build a profitable, consumer-facing education business, the model needs to either address a mass-market problem by offering a standard experience at a low price (“content-centric”), or cater to a niche market with defensible, quality services coming with a premium price tag (“service-centric”)
In China, focusing more on family and student needs. Include Qinbaobao (“Dear Baby”, a family-centric app dedicated to socializing while sharing baby photos), IvyDad (a Wechat-native product offering rich educational resources and information for Pre-K families), and ClassBox (a curriculum and class calendar-based social networking tool for millions of college students).

Particularly interested in investing in :

Products powered by advanced technologies such as natural language processing and machine learning that can unlock the potential of the existing data in education
Modern learning solutions that empower career discovery and enhancement
Pain point-driven technology tools for either school administrators, or teachers, or parents, or students, that are 10x better than incumbents that can become the industry’s “new normal”
Products and tools that serve international students in the U.S.

The best education product is one that 1) delivers a good result assuaging the parents and students’ anxiety, a product which is inevitably always backed by strong pedagogy and solid teaching; 2) uses technology to leverage high-quality supply, such as through interactive live-streaming and the dual-teacher system; and 3) is highly scalable and has the growth potential of building a venture-backed business around it (Sinovation blog).

Artificial Intelligence

China will become a world leader in three out of four core AI applications: China’s capabilities in Internet AI, Perception AI, and Autonomous AI will not only be very strong, but world-leading or co-leading.
Business AI will lag in China: China’s capabilities in Business AI will develop more slowly due to a lack of enterprise software and data warehousing.
Differentiation — One major factor that does separate Sinovation from other VCs in china: they created its own AI “institute” last year, and today Lee said it counts around 60 employees, of which half are engineers and a quarter are Ph.D. graduates — They spin off their own companies.

Four waves of Tech Thesis

Internet AI
Business AI
Perception AI
Autonomous AI: “we invest in scientists and frontier technology”

Blog on 4th Wave Autonomous AI: https://aisuperpowers.com/blog/fourth-wave-autonomous-ai

AI is not just about autonomous driving – they think that they will most likely first have the capabilities in highly structured environments
Will be able to ease the burden off tasks requiring dexterity — like strawberry picking
Create direct economic impact for its users
They think Human-like robots in the home are unlikely in the near future