China, the place to be !
8 years after his involvement in the creation of the first European fund in China, Ventech China, Alain Caffi, Ventech Europe founder, shares his feelings and learning curve about this country, which now draws all the attention!
Two attempts to launch a VC firm in China
1994: Too early! China is still the factory of the world
First time I went to China was in 1994 as I was involved in launching a new fund called the Sino French Capital Fund which was a joint-venture between Walden and Sofinnova. China business practices were still very bureaucratic at the time and the various factories we visited reminded me of Charly Chaplin movie, « The Modern Times », except that all the workers were wearing the same clothes like an army and were living in the factory workers village. It was far too early and the interesting place at the time was still Taïwan while China was more and more becoming the factory of the world.
2006: Just in time! China is catching up the gap with western economy at high speed
I went back to China in 2006 and it was a totally different story at least in large cities like of course Beijing, Shanghai or Shenzhen… The venture capital was already well established ($1.17 b raised in 2005 versus $325m in 2002) with many funds coming from the US, like Sequoia, IDG, DCM, Morning Side or GGV…. Most start-ups I met with at this time were launched by US Chinese returnees. At the time the Chinese middle class (defined as more than 25 000 RMB/year) was already above 100 million persons. The digitalisation of the economy to address this market eager to close the gap with the western world consumption was creating an incredible opportunity. Back from China we decided with my Partners to focus our efforts on this part of the world rather than on the US and try to help our European portfolio companies to take advantage of this tremendous high growth market.
2 First lessons
how to deal with “a very unfair market”?
First we set up a very light organisation focused on corporate development, meaning finding way to address the Chinese market through all types of partnership. We quickly learnt that the Chinese market was a very « unfair market » meaning that without a Chinese network it’s not even worth trying ; we also learnt how to structure a basic deal where our interests were totally aligned with our Chinese Partners whatever the case may be. Our first deal in China was Tianji, a Professional Social Network we identified and then introduced to Viadeo which ultimately bought the company through an exchange of shares (everyone on the same boat!). Since then we did several operations, like introducing Curse (MMOG portal) to YY in 2009, $ 10m revenues at the time, now public on the Nasdaq (Mkt Cap $3.6b) ; YY and GGV invested in Curse and were quite instrumental in the strategic move towards services to gamers.
Investment: just like the US in the 90s
In 2008, my Partner Eric went to China and we set up our first fund. Eric as the Founder and Managing Partner of Ventech China focused on early growth companies in the digital space (e-commerce, media, gaming, fintech…). We had the opportunity to raise rapidly a second fund and to merge it with the first one thus being in a position to manage $ 200+m. To make a long story short Ventech China II will return between 4 times and 8 times the money to its investors. There is no rocket sciences there, just companies addressing the local market like www.Jumei.com, an online cosmetic shopping platform ; we were the first investor in Jumei, the company went public in May 2014, it is worth $ 3.7b and it almost reimbursed the entire fund! In a way it reminds me of what I saw in the US in the late 80s where at the time I had the feeling to be on a different scale compared to France, here everything was X10 times bigger. No miracle in China, very good local entrepreneurs, no longer US returnees though but locally well educated people, a lot of money available for VC investments, but above all an estimated middle class of more than 300 million -already larger than the entire population of the United States.
Much more to come
In the next articles, with the support of my Chinese Partner James Jin, we will try to give you a flavour of the innovation space today and what is coming next:
- The innovation ecosystem as of today
- The investment major trends
- The largest trade buyers coming from China