China VCs get more selective - AVCJ Forum

The historical trend has been one of generalization, but there is now a growing appreciation that a concentrated focus can translate into better returns. “It’s proven to be a bad idea in the Chinese context to invest in any kind of index," said Xiaodong Jiang, a managing partner at healthcare-focused Long Hill Capital, drawing parallels with the public markets. "Just look at the Shanghai and Shenzhen indexes over the last 10 years.”

This is being accompanied by a shift towards enterprise services. The China venture capital story was built on consumer-facing business models such as e-commerce and social networking. While these remain popular areas, investors are increasingly seeking opportunities in software, financial technology, and industry 4.0, according to Haiyan Wu, a partner at China Growth Capital. 

“When we got started in 2014, we were almost the only investor looking at SaaS [software-as-a-service] in China. We couldn't even find a co-investor at that time. But in the past two years, everyone in China has started looking at enterprise services," Wu said.

Expansion in scope is also leading to a wider variety of exit options. Technology giants such as Alibaba Group, Tencent Holdings and Meituan-Dianping are increasingly acquisitive, with Anna Xu, a partner at Hike Capital, observing that corporates - acting directly or through dedicated VC arms - now account for 50% of investments. Sales to other financial investors represent another exit route. According to Ben Cheng, a partner at C Ventures, these deals can provide a helpful buffer for companies facing lower-than-expected valuations at IPO. 

“In the consumer internet space, the game is all or nothing because of the network effect. If your start-up didn't make it big, it had little acquisition value, so there wasn't much M&A. Now, even for start-ups that don't make it big, there are acquisitions," Wu added.

For all the excitement about enterprise, there has nevertheless been a pullback in valuations across the board. On one hand, capital is not as abundant as it once was, with government-linked funds - previously a key factor in the market - noticeably less active. On the other, appetite for high cash-burn businesses has dwindled as investors focus more on profitability and sustainability.

Long Hill's Jiang noted that his firm now considers price-to-sales ratios when assessing portfolio companies. “What is the capital efficiency of that growth? The price-sales ratio needs to continue to go down," he said. "Some start-ups think that financing will always be there when needed, but that mindset must change.”

 

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• Topics
• Greater China
• Buyouts
• Early-stage
• Exits
• Technology
• China
• TMT
• Long Hill Capital
• China Growth Capital