China tech: Speedy returns
The emergence of a younger generation of Chinese consumers willing to pay for online content and services has shortened the path to profitability - and perhaps to IPO as well - for some start-ups
Three years ago, Inke did not exist. Now China’s second-largest video-streaming platform, which has several VC investors, is listed in Hong Kong following a HK$1.16 billion ($148 million) IPO. The importance of staying on trend in venture capital is well-known, but China’s fast-evolving technology sector is entering blink-and-you’ll-miss-it territory.
“It is easier to be profitable now, and to grow faster,” Wei Zhou, founding and managing partner at China Creation Ventures, told the AVCJ USA Forum last week. “We would expect to wait 7-8 years for a company to list, but now it’s four years.”
By comparison, Baidu completed the same journey in five years, Tencent Holdings took six years, and Alibaba Group listed part of its business in Hong Kong eight years after launch, with a full US offering not coming for another seven years. There is a tendency for some of the larger unicorns to stay in private hands for longer – the two component parts of Meituan-Dianping were founded in 2010 and 2003, respectively – but others are not holding back.
Even then, a strategic or secondary sale might deliver a swift payoff to an early-stage investor. Bike-sharing start-up Mobike launched in early 2015 and Panda Capital backed the company’s Series B round later the same year. An exit came in April when Meituan-Dianping bought the company. Peter Mao, a partner at Panda, said there was little interest in Mobile when he invested, underlining the importance of getting in early on ideas before they become mainstream.
But the key factor behind Inke is demand for media content. Monetization was a priority from day one as users were encouraged to make in-app purchases of virtual items that could be gifted to streamers in recognition of quality content. Huya, a game streaming business launched by social networking platform YY in 2014 and which went public in the US in May, has a similar business model.
As of December 2017, Inke had over 194 million registered users, streamed 3.3 billion minutes of live video, and facilitated over 7.8 billion messages between users. Revenue came to RMB3.94 billion ($588 million) in 2017, while adjusted net profit (which excludes non-cash losses on financial instruments with preferred rights and share-based compensation expenses) reached RMB792 million.
Mobile culture and entertainment spending is projected to hit RMB727.1 billion in 2022, up from RMB189.2 billion last year. Mobile video-based entertainment is expected to rise from RMB46.4 billion to RMB128.8 billion, while the number of live streamers increases nearly threefold to 501.3 million. Of that total, 19.8 million will be monthly paying users.
Rising smart phone penetration and lower bandwidth costs have and will continue to play a role in this growth story, but there is another consideration: youth. Nearly 60% of Inke’s viewers and more than two-thirds of its streamers are aged between 18 and 27.
It tallies with accounts from investors of a substantial shift in online consumer behavior dating from about two years ago as a younger generation – typically categorized as those born after 1990 – became the dominant demographic for many internet companies. Internet user growth and mobile sales growth might be slowing in China, but these users are willing to pay for services.
Video streaming is an obvious beneficiary of this trend, but not the only one. Any business with a subscription-based business model and a pipeline of compelling content – audio streaming services, online education providers – could feasibly see a clearer path to profitability. The power of entertainment is also visible in the rise of social e-commerce businesses like Pinduoduo, which has built up substantial users and revenue in the space of three years and recently filed for a US IPO.
“I visited a friend who is worth more than $1 billion and he was working on his laptop trying to download pirated movies. I said, ‘You can pay $3 a month on iQiyi for everything,’ but he said it should be free,” China Creation’s Zhou added. “That is the older generation.”
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