TERM SHEET: Give me a general sense of China’s investment landscape.
TUNG: The Chinese venture capital space started in the mid-1990s. Back then, money was invested in anything that could make money — anything from retail to natural resources. After about a 10-year period, people started to realize that more and more of the exits were coming from technology-related investments, in particular around Internet-related sectors.
Internet access and smartphones turned a lot of people into shoppers. People were willing to spend a lot of time on a good product like WeChat, for example — even more so than the people in the U.S. The mobile payment market in China is 11x the size of the mobile payment market in the U.S. because there are so many users on mobile in China. Now, there are 700 million in smartphones on a population of $1.4 billion. That’s only 50% penetration with a lot more room to grow. People willing to spend time on mobile makes it easier for entrepreneurs to build new apps serving consumers and small businesses. It makes the country more efficient because there are users, consumers, suppliers, and channels developed on the Internet, which is much more efficient than anything that could be developed offline.
Where are people investing their money?
TUNG: People are investing more in education to build the next generation of Internet companies leveraging mobile internet or distance learning. We invested in Liulishuo, which has an AI learning algorithm allowing users to speak to it, and it is able to tell them what areas they need to improve in order to be better English speakers.
Another trend is transportation. Didi Chuxing bought Uber’s China operations, and it’s investing aggressively into other areas of transportation. Bike sharing is the second hot category after ride-sharing with a suite of companies that are receiving VC money, PE money, and now strategic money, from investors like Tencent and Alibaba.
We’re also seeing the disruption of retail. E-commerce companies like Alibaba are moving offline to build new convenience stores and supermarkets that are powered by Internet technology. For instance, when you go into these stores, every item has a QR code that you can scan with your phone and gives you all the details you need to know about the product you’re considering buying. You can either buy on the spot or buy online.
Chinese search engine giant Baidu announced a 10 billion yuan ($1.52 billion) autonomous driving fund. NIO Capital is in talks to raise up to $500 million in a dollar fund aimed at the country’s auto sector. It seems there is an increasing interest in the electric vehicle and autonomous driving market. What are some of the reasons for this?
TUNG: In China, traffic congestion is a huge problem. About 20 to 25 million people on any given day live in Beijing. In a city of that size, roughly 20% of people own cars. Traffic is terrible — even worse than New York. It’s gotten so bad that the government mandates, by law, people cannot drive their car for two days out of the week depending on the last digit of their license plate. That’s why people are looking for solutions around ride-sharing and cars that don’t emit as much pollution.
In what time frame do you foresee autonomous vehicles being a mass phenomenon in China?
TUNG: I would probably say within the next 5 years.
TUNG: Every category that we have invested in since 2000 until now has been called a bubble. Before the bike sharing bubble, it was the ride-sharing bubble. Before that, it was the take-out delivery bubble. Before that, it was the e-commerce bubble. What people from outside of China don’t realize is that there is a period of rapid growth with lots of money being poured into a category. And then after the first three years, typically only two to three category leaders emerge. In e-commerce, you have Alibaba and JD.com. In ride-sharing, there’s Didi. In bike-sharing, you have three right now — Mobike, Ofo, and Hello-Bike.
If you invest early, the organic growth through M&A will eventually build a sizable business that you can monetize later when you have that market share position.
We actually see startups in China grow at a faster pace the first three to five years than they do in the U.S. It’s not uncommon to see Chinese teams working from 9 a.m. to 9 p.m, six days a week. And the reason for this is because they know they need to get to one of the top three position in their sector in a three-year span. They all gear to get to that point as fast as possible. In the U.S., we see more entrepreneurs who are doing things for fun, so whether you do it today, two days from now or a week from now, it doesn’t matter — it’s a marathon. In China, it’s whatever it takes in those first three years.
TUNG: I don’t see that changing anytime in the future. A lot of times we tell investors to invest in different financial assets — right now, it’s mostly the domestic stock exchange and the property market. To get yields, they’re willing to speculate on new things including ICOs. So the government sees that as money that should be invested in increasingly better companies that exist on the Chinese stock exchange.
What should we expect to see in the Chinese VC space in 2018?
TUNG: There will be more education companies that will get funded. Consumers have a huge demand for better service yet the quality and the spread of teachers is very uneven in China. So through distance learning and mobile Internet, that problem will be solved over time.
We will see that AI will be applied across many more industry sectors to make them more efficient. We don’t think AI should exist for its own sake, but it should exist for various use cases — whether it’s in enterprise customer service or whether it’s in helping e-commerce companies.
In the U.S, we have very few innovations in social media beyond Facebook, Instagram, and Snap. In China, we’re seeing a lot more fragmentation of uses in different pockets across many interests. There are mini-social networks emerging in the form of mobile apps that target specific interest groups across China. We will see a lot more innovation around consumption for content, consumption for knowledge, and consumption for entertainment happening much more quickly than we will see in the U.S.
Finally, more U.S. companies should be learning from China given the innovation happening in the space and apply more of the principles in what they do. We’re seeing our own porfolio companies taking lessons from Chinese e-commerce companies. I think U.S. teams can globalize much quicker than anyone else around the world if they are more open to being inspired by what’s working well in a market that’s as huge as China’s.
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