This boom is supporting a new kind
of startup investment in China—
earlier-stage and riskier. The number of investors
has grown, but so too has their sophistication, says Jeongmin Seong, a senior
fellow at the McKinsey Global Institute
in Shanghai. In 2009, early-stage investment in China accounted for 16 percent
of total venture capital and angel investment, says Seong. By 2014, it had nearly
doubled, to 31 percent. Investors are putting more money into early-stage deals
because the competition for safer investment opportunities has become fierce.
“The risk-to-reward calculation is changing,” says Rui Ma, a 500 Startups venture
partner who splits her time among Beijing, Shanghai, and Silicon Valley.
Venture capital began to be available
in China 10 to 15 years ago, when overseas funds started opening offices in the
country to scout investment possibilities.
Until then, options for would-be entrepreneurs were limited: many founders
used their own savings, or pooled money
from relatives living both inside and outside mainland China. Historically, China’s state-owned banks have strongly
favored lending to state-owned companies, because of a widely held assumption
that the government would step in to save
even failing ones. That’s still true today.
Zennon Kapron, founder of the finan-
The burgeoning Chinese venture capital scene includes company founders and
cial industry research firm Kapronasia in
Shanghai, attributes the rise in venture
capital to the class of Chinese entrepre-
neurs who have grown wealthy from their
own companies’ public offerings. These
business founders offer more than money
to the startups they fund, says Kapron:
“The knowledge, network, and experience
that a Neil Shen can bring to the table as
well is very powerful. Chinese business is
still very much driven through relation-
ships, and having that in place can be crit-
ical for any startup.”
Other Chinese tech giants that have
gone public in the past decade—Baidu
(2005), Alibaba (2014), and Tencent
(2015)—had founders who, like Shen,
went on to manage VC firms. Often called
the “first generation” of China’s Internet
titans, they include Alibaba’s Jack Ma,
who founded Yunfeng Capital; Xiaomi’s
founder Lei Jun, who launched Shunwei
Capital Partners; and Pony Ma, who has
overseen Tencent’s transformation into
an investing powerhouse in its own right.
Their impact extends beyond their
direct VC investments, inspiring the
swelling ranks of both entrepreneurs
and investors in China by legitimizing
the startup dream. “Before, there was a
huge pressure for young people to gradu-
ate college and immediately go work for
a stable established company and begin
to send money back home,” says William
Bao Bean, a Shanghai-based partner at
venture capital firm SOSV and managing
director of Chinaccelerator. “Today the
kids who want to launch startups can tell
their parents they have role models.” In
Key Venture Capital Players
KATH Y XU
Founding and managing partner, Sequoia Capital China. Major investments include
antivirus software maker Qihoo 360 and discount retailer Vipshop.
Founder, Capital Today. Major investment is BeiBei, a site selling baby products.
Founder and CEO, NewMargin Ventures. Major investments include mobile ad firm
Panshi and Internet apparel retailer Vancl.
General partner, IDG Capital Partners. Major investments include the picture and video
app Meitu and Royole, which makes displays for smartphones and other devices.
Founder, ZhenFund. Major angel and VC investor funding the Minerva Project, an ed-
tech firm, and Nice, which allows you to embellish photos on social-media networks.
a survey of graduates from Peking Uni-
versity, one of China’s top colleges, only
4 percent identified as entrepreneurs or
self-employed in 2005; by 2013, the pro-
portion had grown to 12 percent.
Bob Zheng grew up in Shanghai and
then went to college in Canada, where he
stayed to work for consultancies for eight
years. In 2008, he came back to Shanghai
to launch an online education startup. At
that time, it was “still a bit early for VC,”
he recalls, and the initial funding came
from his cofounder’s own savings. When
his team sold the company in 2010, he
plowed his earnings into a new business
model that wouldn’t have been possible
even a few years before: launching and
managing co-working spaces for other
entrepreneurs, called People Squared.
Today, Zheng’s team runs 15 co-working
spaces in Shanghai and Beijing, hosting
about 250 startups, most of them tech-
focused. He plans to open spaces in Hang-
zhou, Nanjing, and Shenzhen soon.
China’s great size is both a blessing
and curse for startups: there’s opportu-
nity to scale up quickly, but also plenty
of competition. “In the U.S., if someone
has an idea, maybe three other startups
are working on the same idea,” says Rui
Ma of 500 Startups. “In China, maybe
10 or 20 funded companies or more are
competing on the same idea.”
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