Investors for startups in China

The venture capital business didn’t really get off the ground in China until the late 1990s, with just a few, mainly international companies managing US dollar funds. This has changed radically since then. There are now more than 1,000 venture capitalists (VCs) active in China, the majority managing renminbi (RMB) funds.

Major venture capital investments

According to the Wall Street Journal, investments by Chinese VCs now represent 40 percent of the worldwide total (Silicon Valley still leads the field at 44 procent) and China’s share is 15 times greater than in 2013.

VC investment in China grew by 3,000 percent – from 1.1 billion dollars to 34.1 billion dollars – between 2006 and 2016, with the fastest growth occurring between 2013 and 2016 (up to 2013, average VC investment in China was 4.3 billion dollars a year). This rate of growth continued after 2016.

Chinese startups attracted more VC money than their American counterparts – 56 billion dollars as opposed to 42 billion dollars – for the first time in the first half of 2018. However, that has not proved to be all good news. Due to the availability of VC money, and pressure by owners and shareholders of VC funds to invest, even less promising startups can secure funding relatively easily in China.

Chinese tech companies invest actively

Big Chinese tech companies are also very active investors. Baidu, Alibaba and Tencent (BAT) and JD are major corporate VCs in the Chinese startup ecosystem, and also increasingly active investors in foreign startups. Given their seemingly unlimited financial resources, these companies can invest continually in promising startups. If the startups are unsuccessful, the impact on the financial performance of these major companies is negligible.

This is of course very different for genuine VCs, which have to operate with caution. Tencent is the leading corporate investor in China and has backed more unicorns than top-ranking VCs like Sequoia Capital China, GSR Ventures and Matrix Partners China. Practically every Chinese unicorn has received backing from Baidu, Alibaba, Tencent or JD. Apart from money, this can bring added value in the form of strategic cooperation with these companies’ platforms.

Venture capital companies are stricter

Traditional VCs active in China include IDG Capital Partners, Qiming Venture Partners, Shunwei Capital, GGV Capital, ZhenFund, Sinovation Ventures, Lightspeed China Partners, Morningside Venture Capital, Northern Light VC, Legend Capital (part of the same holding as Lenovo), Sequoia Capital, GSR Ventures and SBCVC.

Investors are of course unlikely to continue investing in startups that ultimately have little chance of success. A change seems to be taking place in the Chinese VC landscape. Investors are taking more account of startups’ survival prospects and they are exercising better due diligence. Fewer Chinese startups are surviving investors’ more rigorous screening.

Opportunities for foreign startups

This presents opportunities for foreign entrepreneurs and startups to enter the Chinese market, particularly those offering deep-tech solutions. China has many highly trained engineers and talented people with a background in the tech sector, but they often lack soft skills and management experience. This presents good opportunities for Chinese nationals returning with management experience from the West, or foreigners with this experience. This is because investors also seek to buy what they can’t find or build locally.

Lack of information on Chinese startup and investment market

The startup and investment market in China cannot be compared to the ecosystem in other countries. Even market leader Crunchbase admits that ‘the Chinese startup market is a bit of a blind spot’. The major investment rounds usually make it to the news, but many smaller investments go unnoticed, except on a number of specialised websites in Chinese.

This lack of information works both ways, so Chinese investors often have little idea how to deal with a foreign startups. Though due diligence for example may prove to be a challenge, Chinese investors are now looking more frequently to invest in foreign businesses. They will want to know whether the foreign startup understands the Chinese market and which channels they will use to sell their products and services. It is thus essential to be thoroughly prepared.