China LGBTQ investments: Pink power

After several years of silence, China’s pink economy – a catch-all term for commercial activity involving the LGBTQ community – is making a noise in the venture capital world again. Blued, the country’s largest gay social network app, is pursuing a US IPO that could deliver exits for CDH Investments, Shunwei Capital, Vision Knight Capital, Ventech China, and Crystal Stream Capital.

It may not be a coincidence that earlier this year, China’s National People's Congress publicly acknowledged petitions to legalize same-sex marriage. Homosexuality was decriminalized as recently as 1997 and removed from an official list of mental disorders in 2001. The most recent development has triggered nationwide discussion of a topic still widely considered taboo.

However, the VC relationship with LGBTQ is more complicated. In 2017, regulators released general rules for the review of internet-based audiovisual content that classified homosexuality as "abnormal sexual relations." It explains why start-ups have struggled to raise capital in recent years, even though VCs are often open-minded supporters.

Most businesses in the space were established between 2013 and 2015. At least 17 received VC backing. They include social networking apps GeeYuu and Lesdo, which were funded by Sinovation Ventures and GSR Ventures, respectively, in 2014.

Blued, China’s oldest LGBTQ platform, didn’t suffer a post-2017 drought. It received a $100 million Series D in 2018 anchored by CDH. But David Wei, founding partner at Vision Knight, offers a different explanation for the investment patterns.

“Internet traffic stopped growing as quickly after 2016 and Alibaba, Tencent, Baidu and ByteDance accounted for more than 75% of it. There are few investment opportunities in the pure internet and the pure TMT [technology, media and telecom] sector," he says. “Blued is the only internet company we invested after 2016. LGBTQ is a field the giants haven’t yet paid attention to.”

Lucrative market

Wei suggests the Blued IPO could give impetus to other large players in the LGBTQ space. It is an attractive target market. Blued has a registered user base of more than 49 million and six million monthly active users (MAUs), half of whom are overseas. But China is responsible for 90% of revenue, which came to RMB758.9 million ($107.2 million) in 2019, most of it from live streaming. The company remains unprofitable, though its losses are narrowing.

The global LGBTQ population is expected to increase from 450 million in 2018 to 591 million by 2023, representing 7.4% of the population, according to Frost & Sullivan. Asia and North America combined will make up 75% of that. This population is generally above average in terms of disposable income and propensity to spend. By 2023, the LGBTQ market will be worth $580.4 billion, more than double the 2018 figure.

Wei Zhou, founding partner at China Creation Ventures, tells AVCJ that LGBTQ social platforms are much better at retaining users than general social apps. “When one platform builds a barrier, it’s hard for others to compete,” he says.

Blued’s MAU total is six times that of the next largest player in the market, suggesting an entrenched advantage, but the lack of profit is an issue. A live streaming audience usually offers digital gifts to the broadcasters or content generators. These digital gifts are Blued’s revenue but 60% goes to the broadcasters and the talent agencies that represent them. Third-party payment service providers get another cut.

“I prefer a content subscription model to a live-streaming model. Live streaming shows are often hormone-based and they cultivate a ‘big brother’ culture since only the large-gift givers matter. This makes the platform's targeted group even narrower, a very small portion of an already small circle,” the CEO of a large social networking company tells AVCJ.

Another risk of live shows is that broadcasters may ask for a larger revenue share once they build up a loyal base of followers and leave if their demands are not met.

Then there is WeChat, China’s dominant social networking tool. Many specialty social networks effectively generate traffic for WeChat: broadcasters allow followers to add them on WeChat in return for a “red pocket”; couples who meet through a dating app often delete it and transfer to WeChat as confirmation of their relationship.

“A location-based WeChat group can basically meet the demands of same-sex social networks. As society becomes more tolerant, same-sex relationships will return to ordinary social channels like WeChat and the advantages of Blued will fade,” the CEO adds.

However, some start-ups are going in the opposite direction by offering services tailored to the LGBTQ community. HOTR, a same-sex e-commerce platform, and Candy Can, a same-sex travel business, have received VC funding. Rela, a female social network backed by Sequoia Capital China, even offers a LGBTQ long-term apartment sharing service.

Safety first

Security is perhaps the biggest challenge facing start-ups in this space. Last year, Caixin reported that a spate of HIV infections had emerged among minors who registered for Blued using false names and ages, and made initial contact through the platform. User registration was suspended for a week as Blued promised to clamp down on underage use. The company’s prospectus identifies this as a potential reputational and regulatory risk.

It is difficult to block all kinds of abuse, though. There are three levels of security controls for the internet industry in China: telephone number authentication, which is carried out by all apps; identity card verification; and telephone and ID card verifiation plus facial recognition. The latter is too costly for social networks, industry sources say. Vision Knights Wei adds that security measures are fundamentally imperfect: “Taobao cannot eliminate all fake products; a social network cannot block all abuses."

Blued’s approach is to commit considerable resources to monitoring content, using humans and machine learning. Of the company’s 488 full-time staff, one-quarter specialize in monitoring while roughly the same number handle technology development. There are also rules of conduct. Broadcasters are not allowed to wear white socks, because these are said to have sexual cues; they cannot appear topless, and they cannot broadcast while lying on a bed or from a bathroom.

It’s possible this has saved Blued from misfortune suffered by some of its competitors. For example, Zank was established in 2010 and launched a gay dating app in 2013. Three rounds of VC funding followed with Matrix Partners China among the participants. Then in April 2017, China’s State Cyberspace Administration closed the company down due to live broadcasts involving pornography.

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• Topics
• Greater China
• Early-stage
• Technology
• Consumer
• China
• Vision Knight Capital
• CDH Investments Management
• China Creation Ventures
• TMT