VCs worried but enthused by frothy China tech sector - AVCJ Forum

"It scares me from a GP point of view," Raymond Yang, co-founder and managing partner at Westsummit Capital, told the AVCJ Forum. "But we are in a unique position in that the entire IT industry is undergoing transformation."

Jixun Foo, managing partner at GGV Capital, agreed that the mobile economy is having a disruptive impact, which can create investment opportunities. At the same time, there are a lot more people with the ideas and training to turn ideas into businesses. "Back in 2000-2001 a lot of the people were returnees but over the last 15 years a lot more people have been trained by Alibaba Group, Baidu and Tencent. Now they are doing their own thing," Foo said.

There is no shortage of entrepreneurs that are looking to become the next Alibaba or Xiaomi, but Yang estimated that only 1-2% of them warrant such lofty valuations. The onus is on GPs to sort the wheat from the chaff.

Many of the best prospects are expected to be found in verticals within the e-commerce space, essentially focusing on niche areas that offer services that go beyond those of broad-based platforms like Alibaba. Kathy Xu, founder and managing partner of Capital Today Group, said that once a strong start-up has been identified, it should be backed to the hilt.

"If you bet on a first mover, give them a lot of money and let them run as fast as they can, then they will become a huge company. If that happens, it doesn't matter what price you pay, you will make a lot of money," she said. "In Chinese we say, ‘If the typhoon comes, the pigs can fly.' It is very important to do all your work and make sure this is the right pig."

The challenge venture capital investors face in doing this is the level of competition for deals. Sometimes extensive due diligence is just not an option.

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