What are technology investors looking for in China?

After two years struggling to raise money, Chinese companies are seeing the interests of venture capitalists rise again, as the U.S. boom crosses the Pacific.

“The capital winter is over, the competition for bids is fierce,” Ming Liao of Prospect Avenue Capital said. “You have to bring something to the table more than just money to get into deals now.”

According to data provider ITjuzi, the number of risky operations in China increased by 56% in the first quarter compared to a year earlier, the fourth consecutive quarter of increased activity.

Prosperous public markets and a flood of foreign money have helped. Tencent, the most active investor, made some gains as its listed investment portfolio tripled in value last year. Venture capital companies such as GGV Capital, Qiming Venture Partners and Matrix Partners China raised new funds.

In a way, investing in China and the United States is similar; both markets are large enough to favor the creation of large technology groups and Chinese investors say the valuations of start-ups now compare to those of their US counterparts.

But investing in China also has its own peculiarities. Each new idea often springs up a number of copiers, and even competitive forays from the country’s tech giants. A different culture and government regulation are added to the challenges.

Cultural differences extend to the type of business models that work. Unlike the US, which has seen high ratings for companies selling software as a service (SAAS) to large companies, this sector has not yet developed in China. Shaun Lim, of Hopu Investments, said it could be a struggle for software companies to register subscribing clients.

“People here don’t value intangible services so much. They’re more willing to pay for something they can see and touch, ”Lim said. A backed AI software business company increased its sales by incorporating its software applications into the servers it sold.

Other factors that have made it difficult to adopt SAAS include a history of free pirated software and cheap labor to manage some of the functions that the software can automate.

Consumer technology has historically secured most of the venture capital funding and produced the highest returns, which has turned the hottest sectors of the day into growths and ups and downs. Although copier ideas come from everywhere, they may have a different magnitude in China.

During China’s famous “Thousand Groupons War” in the early 2010s, research firms say 1,880 emerging companies copied Groupon’s group purchasing business model. The wave drove 214 competitors, at least 20 companies that shared bikes, and 208 launched companies that rent portable power banks to recharge electronic devices.

With such fierce competition, investors say that execution and hard work can overcome the fact of not being the first engine in a new field.

For GGV Capital’s Jixun Foo, it was faith in founder Yang Lei that helped him get behind Hellobike’s push into space to share bikes when a rainbow bike orange, yellow, and blue were already clogging the streets of China’s largest cities.

“I was convinced of that [Yang] could run it more operationally efficiently, “Foo said.” The first engine gives you an advantage…[but] How effective are you in relation to your peers? That advantage will definitely show over time. ”Five years later, Hellobike recorded sales of nearly $ 1 billion last year, with reduced losses. Many of its competitors have failed.

In the equally competitive space of portable power banks, Wanlin Liu, who focuses on technology investments for Carlyle in China, decided to invest when a winner came out of the first wave of start-ups that entered the business. Even then, while weighing on an investment in Energy Monster, he worried that Chinese high-tech companies would boost his momentum.

“You really have to understand all the best players and any potential competition from the biggest tech giants before you can make the call,” he said. Energy Monster has maintained its leadership even after the entry of the $ 240 billion Meituan delivery company. “It’s about execution,” Liu said.

To help assess what equipment they need, M31 Capital’s Nathan Zhong sometimes makes unannounced visits to start-up offices at night before investing. In a recent outing, he found that the office of a data analytics company was empty.

“Their product iterations weren’t very fast: the CEO’s determination to keep fighting weakened,” he said. “Leaving work early represented it.” M31 decided not to invest.

Unorthodox night visits are part of what M31 founder Patrick Zhong calls “feeling the temperature” of potential investment goals. “Everyone in China is smart; if you are asleep behind the wheel, your competition will recover quickly ”.

Government policy can also be a source of uncertainty. In January, China’s central bank proudly declared that it had eliminated all peer-to-peer online lenders in the country (from a maximum of 6,000), ending a campaign that ended with a wave of betting. venture capital.

“You should always be aware of,‘ Is this company on the right side of China’s long-term government policy? ’” Said Gary Rieschel, who founded Qiming Venture Partners 15 years ago. “Chinese entrepreneurs have to deal with great ambiguity,” he added.

CVs say there are minor differences throughout the investment process. Emerging companies usually hire financial advisors or FAs, as they are colloquially called, to reach investors. CEO candidate references can be hard to find. And investing in a start-up company that may one day need a new leader may not end well. Getting top executives to “replace the trust they had in that original founder” is very difficult in China, Rieschel said. “It’s a low-trust environment.”

While SAAS companies have yet to take off in China, M31 Capital’s Zhong believes the software is the future and finds it valuable to review ongoing trends in the United States. At a recent weekly meeting, his team spent an hour studying how growth in the database company MongoDB accelerated as use cases expanded and examined its valuation.

“In the next 20 years, China will continue to use US software to improve business efficiency,” Zhong said. “We’re not saying it’s exactly the same path as the US, but it’s a benchmark.”