As China’s domestic innovations have thrived in recent years, the argument that Chinese entrepreneurs are cloning Western startups is no longer solid.
Ubiquitous mobile payments, convenient bike-sharing and highly competitive drones are a few strong examples of how China’s innovations and its entrepreneurial landscape are at a turning point.
Competition among Chinese startups at home is becoming extremely fierce and more entrepreneurs are eyeing to expand abroad.
Venture capital (VC) firms backing these startups need to not only know the Chinese market well, but also need to have a global vision so that they can help the startups in their investment portfolios grow and thrive.
A vision for doing this better is what inspired Zhou Wei, former Managing Partner at Kleiner Perkins Caufield & Byers (KPCB) China, to leave the American venture capital firm after working there for 10 years, and founded his own VC, China Creation Ventures (CCV).
Tech innovation and young generations show new chances in China
The rise of China’s tech firms has stunned the world in recent years. Tencent and Alibaba were among the world’s biggest 10 companies in terms of market capitalization by June, as reported by Financial Times.
Five Chinese startups, including Alibaba finance branch, Ant Financial, ride-hailing company, Didi Chuxing, and smartphone maker Xiaomi, are among the world’s top 10 unicorns (a startup valued at USD 1 billion or more).
A plethora of innovative startups and 170 million burgeoning young consumers, who are tech savvy and willing to spend on online products, make China a lucrative market for investors.
“I see starting my own VC as a true opportunity to make more happen,” said Zhou.
He went on to say, “as China’s innovations spring up, if VCs, especially early stage investors like us, don’t have an efficient and localized policy-making system, we will be forced into a very unfavorable situation.”
A veteran team from a top American VC
Founded in April 2017 by a team of former venture capitalists and other staff members, CCV intends to invest in the most promising Chinese startups in technology innovation. In less than six months, they raised 10-year RMB funds amounting to more than USD 200 million. CCV operates both RMB and USD funds.
Zhou explained that even though the firm is quite new, the founding team is experienced and complete, since nearly all of the members are former TMT (technology, media, and telecom) group members of KPCB China.
Zhou, Managing Partner of CCV, was a seasoned entrepreneur for 10 years before becoming an investor in 2007. Recently, he was selected as one of the 30 most influential Chinese investors by Fortune China in 2017. He holds an M.B.A. from the Wharton School of the University of Pennsylvania. Tang Xin, another CCV partner, has 20 years of investment and operational experience. He identifies interesting business models and has a strong track record of investing in projects which have gained quick exits. Liang Yu, the third CCV partner, has 16 years of investment, technological and operational experience.
Investing in the ‘big guy’ of the future
CCV’s main investment focus is in the TMT area. Specifically, startups in fintech, big data, artificial intelligence, and broader entertainment industries will be its investment targets. Zhou is also interested in internet startups that expand their business outside of China.
Moreover, CCV prefers to invest in early-stage-startups which have the potential to become large platform conglomerates with positive social impact.
Zhou said that more than 75% of the invested companies were in their Series A funding round when he invested in them. He invested less in companies undergoing Series B funding, and seldom in companies in Series C financing rounds.
Zhou values quality over quantity, and has an appetite for startups that have a chance to become big platform companies.
“We don’t invest in companies which are ‘small and beautiful’. We prefer those who might be a big guy, a platform like company,” said Zhou. “Our principle is smaller quantity but better quality. Among all the companies in which we have invested, about 30% of them have become a unicorn.”
In the Chinese online-wireless-content field, Zhou and his team have invested in Ximalaya FM, an audio content giant which has attracted 400 million users. Another winner backed by them is the short-video app Miaopai. Miaopai’s parent company, Yixia Tech, gained a valuation of USD 3 billion after its latest financing round at the end of last year. In the fintech space, they have invested in CreditEase, a large financial services company in China whose P2P branch was listed in the New York Stock Exchange in 2015. They have also invested in JD Finance, the finance branch of the second largest Chinese e-commerce site JD.com.
Group-hunting instead of individual-chasing
CCV differentiates itself from other VCs by not only having a funding team with a unique background but also in how their team works.
“Investors in most of the VCs work independently. They put up their own investment proposals and the investment committee will decide which ones to invest in or not,” said Zhou. “But here at CCV, we do group hunting instead of individual working.”
He said that CCV members would sit down to discuss future trends rather than chase current hot sectors like many other VCs. If the team concludes that a certain sector will thrive in the near future, they will meet with every top team they can find in the sector to identify the best startup. Their next step is to invest in startups and build a relationship with those founders to figure out ways to help their startups grow.
Zhou believes that the group-hunting strategy is efficient and will help young colleagues grow.
“We make sure that everyone has a deep understanding of the industry to be invested and makes their own contributions. We do not rely on a certain celebrity investor and our team is stable,” added Zhou.
Zhou also believes that what matters most in investment dealings is the people who are engaged. Because, as per Zhou, investment is all about people, especially because there are no physical products to sell. He said it’s very hard for companies without physical products to succeed in China unless they have their local Chinese team making the investment decisions.
“It’s more pragmatic for limited partners to give money to those who really understand Chinese markets and manage those investments for them,” said Zhou.
(Top photo from 58pic.com)