China GPs wary of inflated unicorns – AVCJ Forum

"Over the next 5-10 years, there will be more unicorns emerging in China," said Xiang Gao, founding partner at Banyan Capital. "In the past, internet companies relied on advertising to generate income, but that pool of capital is limited in size. In today's world, start-ups are generating fees from each transaction. The more they transact, the more they can get. So unicorns will emerge from a variety of large sectors, such as real estate, given each industry is worth trillions of renminbi."

David Wei, chairman and founding partner at Vision Knight Capital, agreed that there will be massive growth in a limited number of industries - citing automobiles, home furnishing and weddings as well as real estate. But he argued that there are also a lot of unicorns in markets that are very small with valuations that have become over-inflated.

"There are two types of bubble - soap bubbles and beer bubbles," said Wei. "Soap bubble-like companies look beautiful. They could raise a large amount of capital, but they burn a lot of cash too. When the bubble bursts, it leaves nothing. The second type is the overvalued company, which looks like a glass of beer with a large head of foam. But after clearing the foam, it's still drinkable."

For example, online healthcare would be classified as the second type of bubble - valuations are high, but the market potential is undeniable.

For late-stage investors, it takes a long time to find the right unicorn. Richard Ji, co-founder and managing partner at All-Stars Investment, said that candidates should demonstrate the ability to be "category leaders" or "category killers."

"There are three types of companies we won't invest in. First is if they rely on a large supply of labor. China's population declined 20% between the 1980s and 1990s, and 15% between the 1990s and 2000s. That means there will be a lack of supply in labor," Ji said. "The second type is the company that relies on intensive fundraising but can't generate cash organically. Third, we avoid companies that depend too much on government policy."

At the earlier stages, predicting the future is even harder. GPs therefore tend to back serial entrepreneurs who have found success with previous businesses, said James Mi, co-founder and managing director at Lightspeed China Partners.

Vision Knight's Wei identified a founder's age as another important consideration: people born from 1985 onwards will make almost all their consumption decisions online and business models must take this into account. He also sees a higher succes rate among male than female entrepreneurs.

"It's very controversial. But that's shown by the statistics, whether it's in the US or China," Wei said. "However, if there are females among the top three to five in a management team, then the company's success rate will be higher than those without woman."

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• Topics
• Greater China
• Venture
• Expansion
• China
• Venture
• TMT
• Banyan Capital
• Vision Knight Capital
• Lightspeed Venture Partners
• AVCJ Private Equity & Venture Forum