VC in China

The numbers talked about in this VentureBeat post really caught my eye:

IDG Ventures was the first VC firm to begin investing in China back in 1993. Since then, it has plowed $450 million into 180 companies... By 2020, IDG’s money for early-stage investments will grow to $3 billion, up from around $950 million now

And on the performance of some IDG investments:

... [IDG] paid $2 million for a 20 percent stake in Tencent, which is now worth $1.2 billion. It invested in search engine Baidu at $2 a share, and it is now $350 a share. It invested in Sohu at 22 cents; it’s now $45. He invested $6 million into Ctrip, and got a $800 million profit.

There is also some discussion on IDG getting favorable tax treatment in China and the possibility of this significantly increasing the overall flow of money into China (if other firms manage to get it as well).

Thinking about this led me to some thoughts on current Chinese successes and to future startups. First, current successes:

1) So far, the big Chinese success stories have started as copies of western companies (Baidu/Google, CTrip/Expedia, Tencent/ICQ, Taobao/eBay, etc.). But, to be fair, they have done a very good job of adjusting the concepts to their own markets and soundly beating western competitors.

2) The next test for these big Chinese players will be to continue growing by expanding internationally. The Chinese market is big enough that they will have their hands full just focusing domestically for the next 3-5 years - but then things will get interesting. World-class western companies (e.g., MS, GOOG, EBAY) have a large % of revenue coming from non-US markets now (Google just hit 51%). My guess is that Chinese companies will find it relatively much harder to grow organically outside of China.

3) This leads me to think that some of these Chinese companies will become acquisitive in the US and Europe. US and European startups have been acquired by MS/Google/Yahoo and a few other smaller guys - but I bet that in 3-5 years we will see Baidu/Tencent/etc come out aggressively and become exit alternatives for western startups. I would think that seeing first-hand how western companies failed in their market the first time around, they will be smart about how they enter western markets (e.g., by not trying to impose their vision on acquisitions).

As for future startups in China:

1) Those IDG performance numbers are obviously great and they are a real testament to IDG's foresight in entering the China market early. But it will be extremely tough to replicate them. Just like in any other market, the inflow of so much money will drive up valuations and reduce returns

2) It will be interesting to see if China will start producing their own set of innovative startups or will just keep on churning out Chinese versions of western success stories. The future will obviously be brighter if they do the former. I bet they will, but they are not there yet.

3) While I am a big believer in China, I am very wary of projections that have their GDP growing at 10% for another 10-15 years. I think that pace of growth will become unsustainable, especially if commodity prices keep rising and China starts having to spend more money to fix their environmental issues. Both these issues together could be a real downer for their economy and slow things down for a few years, further reducing returns.

In any case, what happens over the next few years in China will be fascinating. I spent half of last year in Beijing, and the energy there is amazing. I hope they can keep their momentum going.

Comments

[LIU WEIJIE]

IDG invest preference in China:
1, Projects in their early-stage, relatively simple shareholder structure, and need not so large investment.
2, Projects innovative in technology or business mode.
3, Most unique and important, when begin to invest, to satisfied the need and ability of expansion is the priority, not profit making mode. Even there is no specific profit mode, IDG will still invest if the project can satisfied some needs. Tencent, Thunder, Kaola, for instance.

This feature shows that although the online video website user increasing in a dramatic speed, there is no one good profit mode emerged. Especially when YouTube been purchased by Google. Many Chinese video website like Tudou, Youku, lost their exemplary model. However IDG seems did not lose their faith in this field.

Investments in 51edu(education online), YOKA(fashion online), Competitor (Sports nutritive supplements producer) represent the diversification strategy that IDG recently adopted.

And more, IDG always keep a close relationship with start-ups and their circles. And, they do not mind hold for a long term. (for example, a famous real estate portals, soufun.com, 1995-2005)

The success of IDG can be concluded as follows:
1, they are the early birds; IDG is the first VC firm investing in China. In this period of china, all the industries is upgrading, the need of financing is changing a great deal. When other firm is still biding their time, IDG entered wisely.

2, the personal contribution of Xiong xiaoge. Xiong xiaoge is now the Senior Vice-President and being referred to as majordomo of IDG China. Xiong worked as an English teacher，then a journalist in China in1970s. In 1980s he studied in Boston University and Fletcher School of Laws and Diplomacy. Introduced by his tutor, he worked for Canas Corporation for 3 years that is also where he meets Patrick McGovern, the founder of IDG.

3, IDG in China enjoy a continuous success. The successful investments IDG made have wide social influence which inspiring the potential entrepreneur and graduates. That is the reason IDG keeping have opportunities to meet new business ideas. Xiong was also the judge of a famous CCTV reality show “Win in China” which enlarge his influence, even if people don’t know about IDG in China they know about Xiong.

The real “Innovation” may not clearly emerge yet, China never lack of the motive power of being innovative and the social foundation of starting new business. The strategy of IDG is specific and appropriate; highly follow the trend to satisfy the Chinese economic situation and the need of entrepreneurs.

[LIU WEIJIE]

hi,David,I'm glad to find VC in chicago keeps interest in China!
I come from China and I'm MBA student in UIC now. Then I will back to China and work for a chinese VC after graduate.

If we can exchange our ideas or share some information, it will be helpful.

my email:
szxsff@hotmail.com

thank you!