Outside of the U.S., the largest and fastest growing market for VC remains firmly to be China. VC investment activity in China dominated the Asia market in 2016, accounting for 79% of all deals, far outpacing India in second place with just 8%. Compared to the U.S., venture investments in China grew by 19% in 2016, compared to a decline of 13% in the U.S. This growth does not happen by accident – it is the result of the deep Chinese consumption market still in the early stages of growth, the improving fundaments of China’s start-up environment, and through the support of China’s VC and regulatory communities.
One of the most significant drivers of growth in the Chinese VC market has been the surge of local talent. We have seen an unprecedented number of entrepreneurs from three main sources: firstly, China’s leading universities such as Tsinghua and Peking University, which have already created a vibrant start-up community adjacent to Beijing’s financial district. Secondly, repeat entrepreneurs who have found early success in their previous businesses are taking the lessons they’ve learnt and channeling them into new start-ups. Thirdly and unique to China compared to any other Asian markets, is the deep pool of talent from the incumbent tech giants such as Baidu, Alibaba, Tencent, Xiaomi, JD, etc. Some of the best and brightest CTOs, COOs and product managers are leaving these corporations to start their own businesses, leveraging the market knowledge and growth experience they’ve harnessed.
China dominates many tech-enable sectors through its pioneering innovations, the incredibly rapid rate of consumer adoption, and leveraging maturing data models from its huge user base. Chinese companies were the first to introduce virtual gifts, popularize live streaming and created one of the world’s largest mobile payment markets with apps such as WeChat and AliPay. This enables Chinese companies to monetize their businesses quickly, and allows them to influence the new industry standard.
We are undeniably operating in a time of heightened macro and geopolitical risks. However, by any metric, the China start-up landscape is growing fast and finding new ways to serve global markets. There are more than 700 million Chinese smartphone users of which 100 million are serious gamers with vast potential for monetization. Further category leaders are beginning to emerge. For example, Didi Chuxing acquired rival Uber China to cement its position as the world’s largest ride-sharing provider. Another example is Alibaba’s Single’s Day on Nov 11th in China where online sales reached $17.8bn in one day resulting in the delivery of 467 million parcels. When China wins, it wins big.
However, there is more in China than just the consumption story – there are significant improvements and modernization that need to take place in the industrial sectors. Only 5% of China’s manufacturing is currently served by industrial robots. As cost of labor increases, there will be a focus to use Artificial Intelligence to automate many processes and applications through data mining and deep learning. China also has the opportunity to lead the charge in developing industry standards for technologies such as Perception – facial recognition and tracking at customs, in crowds, etc., and Natural Language Processing to automate customer service at airlines, banks, etc.
It is not only Chinese entrepreneurs that want to expand globally; President Xi Jinping mentioned at this year’s World Economic Forum in Davos (the first time a top Chinese leader has attended) of economic globalization, a contrarian but welcomed stance in today’s geopolitical environment. President Xi points out that “Pursuing protectionism is just like locking oneself in a dark room. While wind and rain may be kept outside, so are light and air. No one will emerge as a winner in a trade war.” Perhaps in the current global environment of fear and doubt, China will leapfrog over its peers to create more global leaders.