Tech investors leverage changing Chinese consumption patterns

Technology is now directly or indirectly driving the expansion of China’s economy, with massive growth potential in areas such as financial technology, online-to-offline business, B2B enterprise software, consumption upgrades, and cross-border technology transfer, GPs told the Hong Kong Venture Capital & Private Equity Association's (HKVCA) China summit. 

“We certainly have seen the new generation of Chinese consumers migrating from focusing on purchasing goods to purchasing services, from looking for product functions to looking for experiences. And their understanding of brands has evolved from simply a logo to a linkage with personality and self-identity,” said Xing Liu, a partner at Sequoia Capital China. “These three factors drive the whole consumption upgrade, enabling new consumer brands and new forms of retail businesses to emerge.”

Bike-sharing is a recent prominent example of a shift in consumption behavior - young people prefer riding a bike to taking a taxi because it is seen as healthier - enabling start-ups to achieve scale in a short timeframe. Ofo and Mobike could potentially pose a threat to dominant transportation players like Didi Chuxing, Liu added. Sequoia is also targeting new retail concepts, such as bookstores with lifestyle elements, established by a new generation of founders who are more attuned to consumer needs.  

On the innovation side, while service-oriented business models have been created over the past few years based on existing technology, there have also been new breakthroughs in areas like healthcare and manufacturing.

“In China, there are a lot of very interesting software innovations that a lot of US companies are now copying. For example, YY has been copied by Google to a certain extent; Facebook is copying somewhat what Tencent is doing with the WeChat function,” said Alexander Chan, a partner at cross-border VC firm Q Ventures.  “But the US still has a bit of an edge in deep technology.”

As such, the firm is currently investing in US-based companies that are developing new technology for hardware devices, with a view to transferring the intellectual property to China. For example, Q Ventures has backed a start-up that is working on solutions to extend battery capacity and use body heat to generate electricity. Chan said there aren't many Chinese players are focused on core technology, but he anticipates that “true innovation” could happen within three years driven by the growing domestic talent pool. 

While technology continues to evolve, it is also important that start-ups identify addressable markets and develop defensive business models – which means they create barriers to entry, said Richard Peng, founding partner at Genesis Capital.

“In terms of putting up barriers to entry for competitors, we're looking for companies that are involving in a long value chain, which requires domain knowledge and experience, as well as to create large scale,” he said. He cited Genesis' investment in Today's Headlines, a Chinese news reader app. It has a large amount of user-created content on its platform, which means it is harder for the likes of Tencent and Baidu to replicate the model.

 

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• Topics
• Greater China
• Technology
• Consumer
• Early-stage
• China
• TMT
• Venture
• Sequoia Capital
• HKVCA