Venture investors in the U.S. have long held a fascination with China’s tech and venture markets, and recent months have been no exception. But while the country’s massive market of internet (especially mobile internet) users continues to climb, and its research and development (R&D) spending grows, U.S. investors and consumers have largely watched from afar, uncertain when – or if – the signs would read in their favor.
Now, however, the stars seem to be aligning.
On our latest expedition to China, we spoke with a number of Chinese venture capitalists and entrepreneurs, and brought home five key observations on the country’s burgeoning venture and technology market.
In general, we found that despite the slower growth in the broader Chinese economy, tech is alive and well in China (particularly within a couple key sectors), albeit heavy in competition and price. And although success is spread in cities throughout the region, the Chinese technology market is large enough that it can, as a country, afford to be insular in the global economy.
#1 China tech has (finally) arrived.
Even with Chinese powerhouse Alibaba filling most of last year’s headlines, there’s been a large outcrop of Chinese companies equally worth watching: photo-beautifying and sharing app Meitu, for example, has been downloaded 650 million times and boasts 184 million monthly active users; Xiaomi, now the world’s third-largest smartphone maker behind Samsung and Apple, sold 15.8 million smartphones in China in Q3 of 2014 alone; and, even at the same age as its American counterpart, LendingClub, Chinese peer-lender CreditEase is nearly 10 times its size.
The story continues to unfold not just in China’s next generation of technology but also in its next generation of tech users. Once the idols of young Chinese students, business financiers and moguls Steve Schwarzman, David Bonderman, and Jamie Dimon are quickly phasing away, as entrepreneurs Mark Zuckerberg and Jack Ma emerge into the spotlight. Meanwhile, BAT (China’s Big Three Internet companies, Baidu, Alibaba, and Tencent) continue pumping out millionaires who often go on to return the favor, pouring money into existing companies and/or starting companies of their own. And these large, established Chinese tech companies themselves have become extremely acquisitive of new tech, as well as major investors in China’s future heavy hitters. According to CB Insights, Tencent acquired 34 companies in 2014 (the same number as in the prior three years combined), while Alibaba invested in at least 19, on top of its 4 known acquisitions. As you’ll see in the next observation, the participation of these Chinese tech stars is just one source of fuel for the booming enthusiasm – and competition – among the country’s venture investors.
#2 The Chinese venture market is extremely competitive—and expensive.
Whereas VCs in the U.S. are often slower to submit their term sheets, reserving that time to conduct due diligence, in China, VCs are quicker to the draw, typically firing off their term sheets and then performing diligence before closing. After more than a week in China, for example, we heard multiple stories of ten term sheets all vying for the same deal. In one instance, it was said that a company had signed three term sheets before ultimately closing on the venture capitalist who completed the registration process fastest.
But even with allowance made for the difference in term sheet customs, the Chinese venture market proved competitive, with a powerful deal velocity that has driven up valuations. According to China Venture, more capital was invested in Q2 2014 than in any of the prior 13 quarters, and at least one venture manager suggested that the pace of investment and valuations in TMT (technology, media, and telecommunications) is rising to unsustainable levels. According to VentureSource, 685 companies raised capital in China in 2014, a whopping 63% and 110% more than in 2013 and 2012, respectively. Median valuations also jumped 140% from 2013 to 2014, a conclusion that – though the data itself is sparse – is likely directionally correct.
#3 In China, copycats persist, and the tech ecosystem prospers.
Just about every tech giant most loved by Western consumers – such as Google, Facebook, Instagram, and Twitter – remains blocked or significantly limited in China, thanks to the government’s ban against the exchange of any info that it cannot see or control.
But while frustrating to visitors firmly anchored in these U.S.-based platforms, the insularity of China’s tech landscape has left plenty of room for Chinese companies like Baidu (substituting for Google), Tencent (Facebook), Meitu (Instagram), and Weibo (Twitter) to copy the business models of those companies and fill in the gaps. As a result, and perhaps an intentional side effect of the Chinese government’s information monitoring and censorship efforts, the wealth and success generated from these Chinese “me too” platforms stays pooled within the region, instead of leaking into Silicon Valley.
#4 Within an insulated VC economy, Chinese tech is geographically dispersed.
Reports continue to peg Silicon Valley as the once and future king of U.S. technology, while New York, LA, Boston, Chicago, Atlanta, and Austin remain in competition for second place. As of today, a whopping 70% of the 56 or so U.S.-based “Unicorns” (i.e.privately held, venture-backed companies valued north of $1.0 billion) are based in California. Going by VentureSource data, the story in China seems similar: in 2014, Beijing was home to 49% of Chinese companies that received venture funding, Shanghai 18%, and Shenzhen and Hangzhou (where Alibaba is based) just 8% and 5%, respectively.
But unlike in the U.S., where San Francisco or Silicon Valley clearly dominate as the home of VCs, Chinese venture capitalists do seem to spend more time on planes, on average, and almost always have multiple offices around the country.
#5 FinTech (“online finance”) and O2O (“offline to online”) are hot sectors in China.
Similar to investors in the U.S., plenty of VCs in China are excited about the future of FinTech, as consumers get increasingly more comfortable on mobile devices. For many newcomers to FinTech/online finance, it is their first experience with financial services of any kind.
In 2014 alone, venture dollars funded 22 FinTech businesses, according to CB Insights and Venture Source (as of 1/13/15). As for the O2O (“offline to online”) sector, businesses such as Didi Dache (commonly known as the Uber for China) and Douguo (a marketplace connecting neighbors through their kitchens) have grown large online and mobile audiences within industries that have traditionally operated solely offline. According to CB Insights and VentureSource, there were 20 such marketplaces funded in China, many at significant dollars, including Mogujie and eLoancn (as of 1/13/15).
Privately, one prominent Chinese venture capitalist working with a global firm asserted his firm’s belief that China will generate as much value as the U.S. over the next 10 years. And after many years of exposure to Chinese venture, we are more likely than ever before to agree: this latest trip has left much to anticipate in Chinese venture, and reinforced the value of those firms able to plant a foot in both China and the U.S.
What did we miss? Which of the above trends are off base?
Tell us in the comments below (and don’t forget to follow us @TrueBridgeCP).
This article was written by TrueBridge Capital from Forbes and was legally licensed through the NewsCred publisher network.