The article was first published on LinkedIn written by Jimmy NG and edited by Jake Newby and Zinan Zhang.

2023 was a tough year for early-stage founders and VC funds around the globe, and Hong Kong was no exception. Hong Kong has been in an even trickier position than other cities, given its highly outward-facing economy and connectivity with China, meaning it was naturally impacted by the sentiment of global investment around China turning so sharply after the huge bull runs in the country for the past 20-plus years. While the fundamentals of Hong Kong have shaken and shifted, 2023 was a year where much of the foundational work of building an innovation scene was done.

Here are my two cents on what to expect in Hong Kong for 2024 in the early-stage startup scene, organized by opportunities and challenges:

Opportunities

1. RAISe+ Scheme – first batch of innovative university startups to be unveiled

A HK government-led program with an allocation of HKD 10 billion, the RAISe+ scheme will, on a matching basis, fund 100 high-potential research teams in eight universities. Each team can get up to HKD 100 million in non-dilutive funding. This is the biggest funding scheme available for university-originated startups in HK. The scheme was a core focus for many knowledge transfer offices in HK universities in 2023, where professors and their fellow researchers/project leads were busy writing proposals, while university staff jiggled with all the letters of intent from investors/industry partners and requirements set forth by the Innovation and Technology Commission. The first batch of recipients is expected to be announced within Q1 2024 after screening.

We met some of these projects with interesting underlying IPs. How the universities, professors, project leads, and investors handle the rest of the difficult parts of starting a venture – hiring, fundraising, productization, fundraising, and more – is the next set of questions to be answered.

2. HK remains the go-to hub for Greater Bay Area (GBA) startups going global

We spent quite some time in 2023 meeting China-based early-stage startups related to advanced manufacturing (semiconductors, new materials, ESG materials), industry 4.0 (robotics, automation, innovations in traditional industries), and cross-border e-commerce. Chinese founders shared their firsthand experience facing the lowered spending power of local corporates and consumers. As a result, many of them have taken their products abroad, selling at a higher price point than what they could ask for in China. Over time, China has built up top-of-class manufacturing and operating know-how and trained skilled labor that is irreplaceable by other geographies. 

China startups that possess unique R&D and manufacturing know-how and operate in non-sensitive industries will still utilize Hong Kong as the hub for initial funding and landing their first batch of overseas customers.

3. Lots of dry powder waiting to deploy in HK

In 2023, local and global GPs secured fresh funding to be deployed specifically to companies with a Hong Kong nexus, thanks to the setup of the Hong Kong Growth Portfolio. Last year, many of them were setting up their teams and understanding the ecosystem in HK. On the other side, CVCs and universities are increasingly active in either direct investment or fund investment in HK as well. There is pressure to deploy for these investors, which should help to drive more deal activity in 2024.

Having said all this, the HK startup ecosystem is faced with the following fundamental challenges.

Challenges

1. Opex – cost of operating, and funding gap between Seed to Series B

While GPs are loaded with cash, there is a lack of startups with a valuation range of $200 million – $500 million that can digest a round of $20 million – $100 million in HK. On the other side, there has been a funding gap that remains unfilled for startups looking for Series A/+ lead investors.

Rent and labor costs continue to be the two biggest headaches for HK-based startups.

2. Talent — lack of startup operators, and operator-turned-founders

While there has been strong growth in the number of startups in HK over the past decade, the ecosystem of operators who are willing to take the risk and be the first 10 employees of a fresh HK startup is still nascent. We are still building the flywheel where early employees of successful startups become founders or operators for another early-stage venture. Not to mention the challenge of the tech brain drain in the city since 2020.

3. Exit pathway – billion-dollar question for both VC and startups

With many corporates cutting their spending, the incentive for larger players to acquire startups has decreased, especially when M&A activity is already low in the region. Coupled with a stagnant IPO market, HK startups are faced with an even tougher market compared to other comparable startups in other regions.

Prepared by North Ridge Partners and contributed by TechNode Global, this 2019 Southeast Asia Internet Trends Report aims to provide a concise view of the regional technology market – a short ‘one-stop’ guide on regional technology strategies, geographies, investors and companies. You will find the lowdown on what’s happening (including the rules and miracles in SEA), who are the key players and insights into which companies to watch out for. It also gives a comprehensive comparison between the US, China, and SEA in the areas of technology and investments.

“From a macro perspective, as investors and technology professionals, we can allow ourselves to get consumed by Western challenges like Brexit and trade wars or we can look to Southeast Asia as a highly prospective alternative destination for investment capital.”

– Chris Tran, Head of Asia at North Ridge Partners

Of course, not everything can be covered in detail, hence if you have any questions, please reach out to Stanley Chong, head of Southeast Asia for TechNode Global.

You can download the 2019 Southeast Asia Internet Trends Report HERE for free.

This report is for VCs and those who want to have an overview of the Southeast Asia market, as well as corporates and startups who seek updates on the current investment trends in the fragmented regions/markets of Southeast Asia.

If you can’t see the YouTube player above, try watching here instead.

Since last year, tech funding in China has undergone a ‘capital winter’—referring to the significant slowdown in investment and fundraising activities. However, areas such as cloud, AI, and blockchain, are still generating excitement among investors, representatives from multiple domestic venture capital firms told TechNode at TechCrunch Shenzhen on Monday.

“This year’s capital winter is colder than usual, but the cycle will likely soon pass,” said Duane Kuang, founding managing partner of Qiming Venture Partners, during a fireside chat at the event. Kuang explained that venture capital funding in China’s tech space has always followed the natural cycles—cooling, freezing, heating up, and overheating. But each cycle is becoming shorter. The Shanghai-based venture capital firm is a prominent backer of Chinese tech giants including Xiaomi, Meituan Dianping, and Bilibili.

The current capital winter can be attributed by factors in the current macro environment—the economic slowdown and the US trade tensions. On a microscopic scale, however, the past few years have seen a huge flow of capital into the tech startup space with many companies securing substantial sums. These results of these investments will take time to emerge, he said. “We are at a place where the advancements in technology will continue to gradually seep into the previously more developed and mature applications.”

Despite the slowdown in tech startup funding, investors have still been drawn to some areas, including social networking, enterprise software, education technology, as well as cutting-edge technology like artificial intelligence (AI) and blockchain, Kuang said.

He pointed out that Chinese companies, in general, have been slower to adopt enterprise software technologies partly because many choose to invest their resources into expanding their offerings instead of investing in software to optimize the existing business operations, but they are catching up.

Liu Erhai, founder and managing partner at Joy Ventures, shares similar optimism toward China’s tech startup space.

There are many opportunities for tech startups with traditional industries, such as food and beverage and mobility, and this opens up many opportunities for startups, Liu said during his fireside chat on investment and entrepreneurship in the era of the “new species” of tech firm. This group refers to those startups that have emerged from the rise of technology infrastructures like mobile internet, mobile payments, and the internet of things (IoT). For example, startups like Luckin and Mobike are the “new species” in their respective industries that operate more efficiently.

Qiming’s Kuang is also paying more attention to the developments in China’s blockchain space, which he believes have the potential to fundamentally change a lot of industries. “Although blockchain technology is used universally across different countries, in China, its applications will likely adopt strong Chinese characteristics,” said Kuang.

Blockchain’s promise of decentralization has a strong appeal in other countries, but perhaps less so in China where the focus is more on encryption, immutability, and facilitating the exchange of digital currency.

However, there remains a lot of challenges, said Liu. “Startups not only need to know how to attract decent traffic but also understand their products and services. Not a lot of entrepreneurs can manage both,” he said.

Speaking about emerging markets that have attracted more attention among investors. “I would attribute the increasing attention from Chinese VCs to that region less so to the slowing of the Chinese investment space and more so to the increasing opportunity [in the region],” Kuang told TechNode in an interview on the sidelines of TechCrunch Shenzhen.

Rightly or wrongly, he said, a lot of Chinese investors are seeing certain patterns repeating in Southeast Asia—rising middle classes, as well as rapid mobile internet penetration. This could be an advantage for China-based VCs to deploy capital in new and emerging markets or help Southeast Asian and Chinese firms find success in China and overseas.

With contributions from Coco Gao.

Unlike general funds that invest in various industries, Baidu Ventures is a $500 million independent venture fund focused only on artificial intelligence investments. Vice-president Felix Fang recently told TechNode that this focus has helped the firm to gain strong experience in the field.

As vice-president, Fang is responsible for AI investments and how the technology can empower and transform traditional industry. He told TechNode that Chinese AI first took root in the security and surveillance market because of government policy. High importance is attached to the sector as it can save lives, he added. In fact, China’s four leading AI companies—Sensetime, Megvii, Yitu and Cloudwalk—are all present in this field.

Fang said that in the future, AI technologies would expand to other fields gradually dependent on the basic datasets available and the digitization of different industries.

“For example, AI in the medical, retail and industry fields will develop incrementally because the ability for commercialization will not be as strong and its uses will be less widespread,” he said. “But we do think these industries represent potential markets for future AI applications and will have better development prospects in the future.”

Valuation bubble

Fang believes that there is a valuation bubble in terms of AI investment. He cites the lack of talent in the sector as a key reason. While funds are abundant in the market, companies will pay more when choosing investment targets, thus further inflating the value of the AI industry.

“So, I think we have to go back to the value of the investment itself,” Fang said. “We should consider a firm’s valuation from a more quantitative perspective, rather than over-scoring some projects that come with a lot of hype.”

As an investor, Fang said they could provide help in several ways. The first is to provide crucial talents for early-stage companies. Secondly, the VC can provide industry partners to help them better understand the real application scenarios, and thirdly, it can help with ideas on how to bring a product to market.

Fang contends that entrepreneurs often overlook pain points associated with doing business in the real world. He suggests they remember to carry out enough market research before pushing ahead with commercialization efforts, which can help them to know the actual drawbacks of their plans.

“We also need to have a clear road map on how to grow into a $1 billion or $2 billion unicorn,” he said. “It’s a process that requires constant adjustment throughout the whole entrepreneurship.”

Prior to joining GGV Capital, Chao Luo was the co-founder and CSO of Laiye, an AI platform offering intelligent assistants to consumers and enterprises. After experiencing the dual roles of both an entrepreneur and an investor, Luo described the two as a revolving door, meaning you need to gain perspectives on both sides.

“Now I define myself as a venture capitalist,” he said. “To me, it is not like a real transformation but more like I’m learning different things at different stages.”

Luo is now vice president at GGV, a global venture capital firm with $6.2 billion in funds that invests in entrepreneurs in the US, Asia and other emerging economies.

In January, Chinese authorities called for the formulation of a relatively complete top-level design for an industrial internet network by 2020. According to a report by bg.qianzhan.com, the average annual compound growth rate of China’s industrial internet in the next five years is about 13% with its value hitting RMB 1 trillion in 2023.

Luo told TechNode that he believed tech companies who can empower the secondary industry will form a new force, which is also what he is focused on now.

“In fact, there are many pain points within the industry area,” he said. “A large number of devices used in industrial scenarios are yet to be digitized. From meter devices to industrial operating systems, the majority of them are still operating offline.”

Maintenance issues

A lack of digitization in industrial sectors causes two main problems: The first is operational issues and the second is maintenance, which all require a lot of manual work. However, by introducing useful IoT devices, coupled with background data analysis capabilities, Luo expects 90% of these scenarios to no longer need people in the long term.

The market is full of opportunities, along with challenges because platforms should be able to deal with different types of devices, models, and API interfaces. This requires that those who want to work in industrial internet have more patience and are okay doing the dirty work needed before products can roll out.

Black Lake Technologies, a software-as-a-service (SaaS) company that provides digital applications for manufacturers, is a successful GGV investment. The company has already empowered many traditional manufacturing companies with its cloud-based data collaboration and analysis tools. In the future, Luo contends that companies with a strong combination of software and hardware will be more competitive and prepared for long-term survival.

He explained that by combining software and hardware services, the company could increase the value generated for customers and also boost their stickiness so that the relocation costs for customers will be relatively high. “Only by developing the hardware can the data be digitized,” he said. “If the company only provides software, it’s very possible for customers to find a replacement.”

When asked about how to intelligize one specific industry, Luo said there are three key factors. The first is to build an infrastructure for digitization, the second is to have robust data analysis and processing capabilities and the third is to have the ability to facilitate the application, which requires a team with multi-talented individuals.

“We’re seeing lots of excellent teams that are not just made up of PhDs but more mixed teams with all kinds of talents,” Luo said. “And teams like this will have a better chance to succeed.”

If you can’t see the YouTube player above, try watching here instead.

China’s luxury goods sector has received a steady stream of investment money in recent years.  TusStar is one such capital investor to pour money into the sector acting as angel investor for second hand high-end goods marketplace operator Ponhu-Luxury back in 2015.

Building an integrated offline platform for second-hand luxuries is what the market needs in the future, TusStar Venture General Manager Liu Bo told TechNode.

“In Japan, the penetration rate for second-hand luxury goods has reached 1:1, which means that every time a new bag is purchased, an old one will be resold,” she said. “In China, when I carried out due diligence in 2015, only 3% of goods are sold on. Basically, no one bought second-hand luxuries,” Liu said.

Liu expects to see growth in the market for selling on used high-end products in China.“But you have to think that one day if economic recession hits in China, second-hand luxuries will maintain their value as has happened in Japan in the past,” she said. “East Asian cultures are similar. We see promising growth points in China’s second-hand luxury business.”

In her current role, Liu keeps an eye out for investment opportunities in TMT, energy saving and environment, as well as the new economy and new services.

TusStar invests in high-tech, high-growth start-ups, mainly focused on TMT, mobile internet, cleantech, new material, healthcare, advanced manufacturing, education, intelligent hardware and consumption area. The firm has inked deals with more than 300 startups and invested over RMB 2 billion so far, according to its website.

Some say digitalization is the major engine powering luxury sales in China, but Liu contends that offline is the real arena. “Only outsiders will consider buying luxuries online,” she said. “Most customers care little about discount, they crave brands and quality.”

According to a report published by Bain Analysis in 2019, even though online luxury sales outgrew the overall market in 2018, online penetration in other luxury categories remains very low, with the exception of cosmetics.

JD.com sold its luxury e-commerce platform Toplife to its biggest partner Frfetch in February for $50 million in February this year after two years of operation. The deal raised the question of whether or not the Chinese market is ready for establishing platforms for the luxury sector.

“There are still plenty of opportunities to build platforms in this industry,” Liu said. “But it’s not the kind of e-commerce platform on the internet that people talking about today, but actually an offline platform which knits every key node together in the entire trading chain.

”This platform can then provide a variety of services to different roles in this industry,” Liu added.

Signs indicate that Southeast Asia is becoming a hotbed for growth among startups and opportunities are plentiful in the region, Kenneth Tan, Vice-president of Gobi Partners, told a packed house at TechNode’s ORIGIN conference, held during Malaysia Tech Week 2019.

“A lot of startups in Southeast Asia are growing positively and this is very encouraging because it shows that the whole ecosystem is progressing,” he said during a panel discussion moderated by Navin Danapal, the SEA Director of accelerator venture capital SOSV.

As Southeast Asia’s digital economy is forecasted to triple in size to reach RMB 1.2 trillion ($240 billion) by 2025, according to TechCrunch, it has become a highly scrutinised and favoured region among both investors and businesses considering expansions. The panel discussion took off with a focus on the tech landscape synergies between China and SEA.

Chinese boom

“Firstly, there is a need to understand the reason why companies in China will consider SEA,” said Tan, adding that the situation is very much like that of China many years ago. With a young population, increasing GDP per capita and rising internet penetration rate, this region is very attractive, said Tan.

However, for Chinese companies that are planning to expand their operations down south, Tan emphasized the importance of localization and a change of mentality towards running a business in this region.

“SEA has ten countries, each with different policies and regulations and are at different market stages,” said Tan. He stresses that due to these differences, it is vital for foreign companies to pay ample attention to understanding the local market that they intend to expand into –  i.e user behaviour and income levels across different markets. Tan also shared that companies must understand that strategies that have worked back home may not work in SEA.

Key to SEA Success  

“At the end of the day, it is all about how much effort and energy you put into listening and understanding the consumer’s problem statement,” said Sai Kit Ng, Chief Executive of multi-stage technology and venture capital firm Captii Ventures. Emphasising the importance of understanding the needs of the market, Ng advises companies to always analyse the problem statement and be prepared to redesign their product to suit the customers. “Focus on the customers who are willing to pay you, this will provide you with a lot more opportunities to improve,” said Ng.

However, Ng also encourages businesses to look beyond the ASEAN market at times because through his observations, he realised that businesses from the region do produce solutions that attract a significant amount of consumers in other countries such as the US.

Ultimately, Ng encourages founders to strive to improve and to benchmark themselves against industry giants.

Local focus needed for startups

“The speed of growth of the markets, the capital investment in this region, the pace of business and the number of startups are all growing tremendously,” said Tan. However, Ng also shared an ironic observation with our audience that local startups find it easier to sell their product to a foreign market than to their own. Hence, Ng urges firms to give more opportunities to local players for them to prove themselves.

Ng shares that trends are often set in China and the US. Currently, he says, artificial intelligence is on top. “I think what is next will depend on who is able to come in and identify the key problems in the different markets and solve them,” he said.

“The short answer is the industries that the unicorns are in,” said Tan. He elaborates that given the rigour needed to start a business, for them to be able to reach the unicorn or even decacorn stage, it would signal good business operations, strong potential, market opportunities in the region and ultimately exit opportunity for investors to make money.

If you can’t see the YouTube player above, try watching here instead.

In China’s increasingly convenience-focused economy, venture capital investor Linda Li says a more efficient healthcare is on the horizon.

“It’s hard to imagine that in this day and age we can so easily use Meituan [food delivery app] to order lunch, but still have to wait for five hours at the hospital to see a specialist,” said Li, managing director and partner at Vickers Venture Partners in Shanghai. “I think e-health is the next step.”

Li is responsible for the firm’s investment business in China and focuses on consumer internet, mobile applications, financial services and precision medicine.

Vickers invests in China, the United States, and Southeast Asia, and believes that new technology and business models can be transferred from one area to another. The company has offices in Singapore, Shanghai, Hong Kong, Kuala Lumpur and New York, according to its website.

In the past, Li says, those ideas have flowed from the US to China and then to Southeast Asia, but in today’s e-health industry, there has been a reversal. Chinese ideas are spreading.

Li said when it comes to e-health China and the US each has their own strengths. “The US may be slightly better than China in terms of innovation, but China is better than the US in optimizing service technology,” she said.

Some say China’s next hurdle is to standardize health data, but Li doesn’t believe this is the best approach. She believes an influx of new, third-party companies, that provide health services will bring more competition, more modes of collecting data, and ultimately, better services for Chinese consumers.

“I am really optimistic about these third party companies,” Li said. “They are really able to collect data for consumers who are willing to pay.”

Li believes a successful e-health company requires strengths in four areas: online services, mobility, doctor relations and multiple patient services.

Li joined Vickers in 2005 and has grown up alongside the firm’s investments. “2005 was a booming time in China’s VC history,” Li said. “I joined in this industry at the right time.” In her experience, she’s found that the biggest industry breakthroughs come from outsiders.

“The [healthcare] industry hasn’t done very well for many years,” she said. “So why don’t allow people to use another way to solve the problem?”

China has become addicted to debt. Now, its tech industry is hooked too.

It started innocently enough. Back in 2008, when the fallout of America’s own debt binge was giving the whole world a hangover, China engaged in a decisive and robust economic stimulus, injecting RMB 4 trillion into key sectors of its economy. Banks, mostly state-owned in China, were directed to lend more, particularly to other state-owned firms. As a result, China recovered quickly from the global financial crisis, even as the US and Europe struggled to get back on their feet.

However, even as the Chinese economy recovered, the banks continued to lend, and Chinese companies continued to invest, most notably in infrastructure projects. Not only did they invest, they invested A LOT.

China’s lending firehose has injected more cash into the economy than the quantitative easing measures of the US Federal Reserve, European Central Bank, and Bank of Japan combined. While this lending has kept the economy growing, it has had detrimental side effects as well. Here are just a few of the most notable:

Low-productivity investments 

As often happens when credit is too readily available, borrowers have tended to be less prudent about the feasibility of their investment projects. The necessary, practical roads and bridges may get built, but so do inefficient and wasteful projects like 100-story skyscrapers and the hundreds of “ghost cities” across the country, massive residential districts where houses are purchased, but few actually live.

Corruption and waste

When money flows freely, it becomes easier for business or political leaders to cut a few pieces off for themselves. This is not necessarily a bad thing. Corruption becomes more of a problem, however, when it incentivizes unproductive investment. After all, the companies must pay back the loans that they took out for the project in the first place. The corrupt executives and government officials keep their money, but the company is left with the bill.

A vicious cycle of corporate debt

As high-productivity projects have become scarcer and the heyday of China’s infrastructure boom is in its past, more and more companies have found themselves with far more capacity than they can reasonably use, so they borrow money to stay in business, or to complete unproductive projects. When those projects do not yield the returns they were hoping for, they borrow more money, to embark on another project, or simply to keep the lights on, or service the interest of their existing debt. Once that money is spent, they have to borrow more, and the cycle continues.

The level of total debt in China is now officially approaching 300% of GDP, with the bulk of that coming from ballooning corporate debt, although household debt is rising sharply as well. Considering the cost at which these loans are being taken out, servicing the debt alone takes up roughly 18% of GDP. That’s almost three times the country’s official GDP growth rate.

With all that lending to unproductive companies (usually state-owned enterprises), the banks need to find other sources of returns.

Shadow banking surge

With the state-owned companies underperforming, but with monetary expansion placing inflationary pressure on the economy, both investors and banks demand higher returns on their investments. So the banks sponsor “trusts,” off-balance-sheet entities which make higher-risk/higher-reward loans, securitize them, and then sell them to investors as wealth-management products (WMPs).

These shadow banking institutions include hedge funds, VCs, private equity, and other entities that are not required to comply with the same strict regulations as China’s traditional banks. Chinese shadow banking has expanded rapidly over the last decade into a massive, $10 trillion ecosystem that connects financial institutions with companies, local governments and hundreds of millions of households.

With all that money sloshing around the Chinese economy, looking for high returns, the result has been a surge in asset bubbles. Most notable is housing, where apartments sit empty, held as investments, while—as a ratio of the average wage to average apartment price—China’s major cities have some of the least affordable housing in the world. We’ve also seen asset bubbles in liquor,  Tasmanian lavender bears, and even illicitly-traded animal products like ivory and rhino horn.

Shadow banking in China has created an economic environment where not much genuine value is created, although GDP keeps going up. Wages and living standards do not particularly increase, but prices for assets do. Most people and companies are unable to build wealth in the traditional way, so many do so by bringing on debt, and investing it in speculative ventures, usually based around asset bubbles. In this environment, “working” is something that suckers do, because no matter how much a worker saves, they will struggle to make as much money as those playing financial games. As long as these bubbles keep inflating, the irresponsible gamblers get rich, while prudent, hard-working people see others pass them by.

Tech’s debt addiction

China’s speculative bubble-riders, like those from anywhere in the world, move in stampede-like herds. “Hot money” rushes into assets on one day, and then out again just as quickly the next, most evident in the financial roller-coaster rides that are China’s stock exchanges.

This phenomenon becomes even more extreme when the government gets directly involved. By investing aggressively in the technology sector and strongly emphasizing innovation, the Chinese government has been injecting cash both directly and indirectly into tech ventures.

“Much of the VC money in China is government money, from state-owned companies or institutions,” explains Christopher Balding, Bloomberg contributor and former associate professor of business and economics at the HSBC Business School in Shenzhen.  “The government is pumping money into the tech sector. They are directing the herd, but also part of the herd as well.”

The result has been a historic surge in venture funding. In Q2 2018, China accounted for up 47% of global venture capital, surpassing even North America. However, it is unclear how the reality on the ground can support this level of investment. China certainly has strong engineering and technical talent but is unlikely to be currently on par with that of North America. The same goes for managerial talent, venture investment expertise, corporate governance, or access to global consumer markets.

An economy full of asset bubbles seems to have created quite a large one in its tech sector, to both the benefit and detriment of its tech firms. But as with just about any major bubble, there are some common characteristics which stand out.

Ponzi schemes

China’s tech industry is seeing more than its fair share of Ponzi schemes, although branded in different ways. This has become evident through the recent collapse of China’s P2P (peer-to-peer) lending industry.

The rise and fall of China’s online P2P lending

As Martin Chorzempa thoroughly explained, peer-to-peer lending should theoretically be very difficult to suffer a run and collapse. After all, if the lending is truly peer-to-peer, a P2P lending platform simply serves as an intermediary between a borrower and a lender. That, however, is not what these platforms actually were. As Chorzempa put it:

True P2P lending means lenders are only paid if and when borrowers repay the loans. For example, investments in a 12-month loan cannot be withdrawn after three months if the investor panics, because it is not yet due, and the lender cannot ask the platform for reimbursement if the borrower stops making payments. A “run” on P2P platforms that precipitates its failure should therefore not be possible. These attributes are critical in distinguishing a P2P platform from a bank. The credit risk and maturity mismatch of bank loans means they tend to be more strictly regulated.

Sadly, a “run” on P2P platforms is happening anyway. In practice, P2P platforms in China provide guarantees, meaning that investors get no hint that risk is piling up until suddenly the platform cannot meet its obligations and goes offline. These platforms also issue wealth management–type products that have maturity mismatches, putting them at the risk of a run if spooked investors pull out their investments. The China Banking Regulatory Commission (CBRC) issued rules in August 2016 making these practices illegal, but the turmoil over the last two months indicates that numerous platforms have ignored them.

P2P platforms, unfortunately, are not the only Ponzi startups out there. As excitement has risen over the potential of blockchain technology, fraudsters have taken advantage. In May, police in Jinan, Shandong province arrested a gang of more than ten suspects involved in a $47 million scam under the guise of a “blockchain” project.

Cases of blockchain or cryptocurrency-related fraud have skyrocketed, according to a government report released in July, and although Chinese authorities have taken decisive action to limit such fraud (they banned ICOs, and have even cracked down on cryptocurrency discussion forums). However, it is a tricky balancing act, since they would also like to encourage the development of blockchain technology, and many legitimate projects need to fund themselves through ICOs. The problem is, therefore, how to discourage the fraudsters without alienating the legitimate actors.

2VC Business models: “Ponzi-lite”

While there are some con artists out there, scheming to defraud investors out of their money, there is a far more frequent, and possibly more harmful phenomenon. In this scenario, entrepreneurs often begin with a legitimate idea for a startup. However, with funding so readily available, and valuations soaring based more on speculation than tangible results, entrepreneurs are perversely incentivized to spend their time, effort, and funds building hype rather than focusing on the core of their business.

The result is an epidemic of cash-burning and “2VC” business models, in which a startup’s operations are oriented towards the pursuit of funding, rather than delivering value to its users. In these situations, a startup may ostensibly hold on to an original mission or purpose, while in essence, the financial model is very Ponzi-esque. We can call these startups “Ponzi-lite.”

Chinese tech giants burn cash and users are paying for it

One of the clearest examples of this is what has occurred in the bike-sharing industry. With an appealing concept and strong support from the Chinese government (branding them as one of China’s “four new great innovations”), bike sharing exploded, and funding poured in. The flood of cash prompted a race for market share, with millions of bikes hitting the streets of China’s cities in an attempt to acquire users, as more users would mean higher valuations, and garner more investment.

The combination of access to capital as well as the urgency and competition to get more market share and funding created a perverse incentive structure, in which those in charge of the companies developed unrealistic expectations for what was possible, and made decisions which placed their firms and stakeholders in unsustainable situations.

ofo’s young founder and CEO, Dai Wei, was known to have been particularly detached from reality. He stated an ambition to turn the company into the “next Google,” and feuded with investor-appointed managers at the company. A long-time acquaintance of his, in the summer of 2017, observed a disturbing loss of humility in the young entrepreneur, saying “his ego is out of control.” A former ofo employee recalled being astonished by the flippancy of his decision-making, saying “there seemed to be no rhyme or reason to the company’s strategy, it was just doing everything at once, based on his whims.”

As bike rentals cool, ofo chooses to stand alone

As access to capital allowed bike-rental firms to expand, their costs ballooned as well, requiring even more investment. One method of attracting investment was through highly-publicized global expansions, which in many instances seemed to be more of a form of marketing to VC funds, as opposed to actually serving overseas users. One manager appointed to run a Chinese bike-sharing expansion in the US shared a case in which they were pressured to deploy bikes on a prestigious university campus, despite not receiving approval from campus authorities. “[The managers in China] didn’t seem to care if all the bikes were removed the following day. They just wanted to get a photo of the bikes at [the university] and publish some PR to promote that they were there. They didn’t care about building a business, just scamming some investors out of more funding.”

As the flood of cash in bike-sharing has dried up, and the firms have returned to reality, some have faced harder landings than others. Bluegogo’s bankruptcy left investors angry and users unable to get their deposits back. Rumors have also been swirling that ofo is on the verge of bankruptcy, as they pull out of international markets, place bikes for sale, are unable to pay vendors, and are laying off workers. While the future is still not entirely certain for Mobike, they have attempted to stabilize their business, after being acquired by Meituan-Dianping, eliminating the requirement for user deposits, and emphasizing a renewed focus on “responsible growth.”

As the bike-share frenzy dies down, many are now expressing concern over the expansion practices of long-term housing rental platforms like Ziroom and Danke. These platforms take advantage of collateral-free loans offered by state banks to renters, which can be as high as RMB 1 million (approximately $150,000), which renters can pay back over a maximum of ten years. The platforms act as an intermediary between homeowners and renters, providing some management services as well, and take the entirety of the loan amount from the renter, and take a percentage for themselves before paying the homeowner.

One way that Ziroom and others have raised funds for expansion is through selling asset-backed securities, based on rental income.  As they expand and compete for market share, they aggressively offer homeowners attractive terms to lease their homes, which many have claimed is driving up rental prices in some of China’s largest cities. What’s of greater concern, however, are the risks that these companies pose to renters and state banks.

Like the bike-rental companies, they are rapidly expanding, and dependent on external funding. If they cease to be able to raise money from the sale of securities or are unable to make good on paying back investors, they could experience the same fate as Bluegogo and ofo. However, the results, in this case, could be far more severe for the users. While users of a failed bike-rental company may lose a deposit of few hundred yuan, the users of a failed long-term rental platform would be forced to find new homes, but still be on the hook to repay the entirety loan they’ve taken out, which could be years’ worth of salary. In many cases, the banks would have to write off those loans and add them to an already-massive stack of bad debt.

As genuine value growth in China’s economy has slowed and consumers are squeezed, financial games are seen by many startups as the only way to ensure that they stay in business. Even for China’s most established names in e-commerce, much of their growth seems to be coming from financial services, rather than core business.

“When looking at the growth from the e-commerce world [Alibaba, JD, VIPshop], my brief point of view is that actually, it’s banking, it’s not the sale of goods. . . [I]t’s investment-driven, but the key motivation of these companies is to aggregate capital using these payment systems that they control, and the ability to move that capital into investment vehicles,” explained Anne Stevenson-Yang, Co-founder of J Capital Research, at a 2015 event for the Center for Strategic and International Studies.

This trend seems to have largely continued since then, as the crown jewel of the Alibaba ecosystem over recent years has been Ant Financial, which reached a valuation of $150 billion in an April funding round. For many of these companies, the bright spots are coming through financial services based on asset valuations, while their core businesses struggle. Once asset values slump, these firms are likely to struggle as well.

Non-tech businesses, turning into VCs

With weak consumption, government restrictions of real estate investment and outbound capital flows, and promotion of its tech industries, China’s traditional firms are finding themselves with few other options than to get into the tech venture investment business. Real estate conglomerates like Wanda and Evergrande have sizeable VC funds, and it seems just about every other real estate giant in China has as well. However, one must wonder as to the productivity of the investments that they are making, as the highly-tangible business of real estate development operates by very different principles than that of tech entrepreneurship. Real estate developers in China are often known to be synonymous with corruption and waste as well, but when there is corruption and waste in the real estate business, apartment buildings and malls still get built. When there is corruption and waste in the tech sector, there is often nothing but vaporware and broken promises in the end.

Good firms become overvalued and overfunded

To be sure, there are many legitimate tech firms in China that produce valuable products and services. However, in a cash-bloated environment full of investors looking for safe places to park their money, these companies often are valued at higher levels than is justified. Take Xiaomi, for example. The smart-device maker, known as “China’s Apple,” was expected to be this year’s star Chinese tech IPO. The company, as well as some bullish analysts, expected them to go public with a $100 billion valuation. At the time of IPO, however, Xiaomi shares hit the markets with a total capitalization of only $50 billion. At the end of last month, the shares were trading below the IPO price.

This gap between inflated private valuations and weak performance on public markets, according to many analysts, stems from the gap between what Xiaomi bills itself as vs what it is. Its bulls invested in it with images of a Chinese version of Apple, with excellent hardware margins, an addicted and wealthy user base, and robust revenues from internet services. However, at this current point in time, Xiaomi’s hardware is mostly low-margin, its “Mi fans” are minuscule in size, loyalty, and spending power compared to the “cult of Mac,” and it has failed as of yet to achieve strong monetization from its internet services. It claims that it will one day become Apple, but at the current moment, it bears a stronger resemblance to Lenovo.

Xiaomi is not the only overhyped tech firm to experience a rough return to reality when going public. After hitting the market with a share price of over $26 in late July, social e-commerce start-up Pinduoduo has spent most of its time trading under $20 after reports surfaced of ubiquitous counterfeit products on its platform. EV-maker NIO, after announcing an IPO earlier this summer, has seen Japan’s SoftBank, who had earlier planned to buy 200 million USD worth of its shares, back out. News aggregator Qu Toutiao, who plans to IPO in the US this month, recently announced that it was cutting its financing volume by nearly 50%. All three of those companies are backed by Tencent.

Tighter credit means tougher times ahead

As debt levels in China approach a crisis point, its central bank has been attempting to curtail lending, walking the precarious tightrope of tightening credit while avoiding a major economic collapse. However, as the cash is getting increasingly difficult to come by, tech firms are starting to feel the pain.

Other vulnerabilities are also showing. After accounting for 60% of the world’s AI investment since 2013, many once-promising start-ups in the field may soon find that their days are numbered, with one of China’s top venture investors predicting that 90% of Chinese AI start-ups will encounter “great difficulty” over the coming two years, as the tightening of funding becomes “especially obvious this year”.

The growth of China’s tech industry over the past few years has truly been impressive. As liquidity begins to dry up, it can serve as a corrective mechanism, allowing the underperforming and irresponsible firms to fail while the strong, well-managed ones can thrive. However, given the vulnerabilities in the rest of the Chinese economy, it may not work out so neatly or fairly.

In the financial crisis of 2008, imprudent homebuying and real estate investment decisions of families and firms, coupled with highly-leveraged financial institutions, were the guilty parties. While some irresponsible homebuyers lost homes that they never should have had in the first place, and investment banks like Bear Sterns and Lehman Brothers collapsed as a result of poor management, there were many for whom justice was not served. Many of the banks who caused the crisis were bailed out, while countless hard-working people lost their savings or their jobs for no fault of their own. As China’s tech bubble bursts, there are likely to be many good companies—and good people—who suffer as well.

The speed at which Chinese tech companies are burning cash is disturbing. In order to maintain its dominating position, China’s massive service platform Meituan has spent over $4 billion in the past seven years. But O2O is not the only field that witnessed a fierce land-grabbing battle. Similar subsidy-fueled wars are going on in virtually every emerging market from ride-hailing to bike rental.

The prevailing model for a startup to prosper in the Middle Kingdom is to snap up market shares as fast as possible, often luring customer by providing massive subsidies and extensive marketing campaigns. Once they build their brand and clear up major competitors, they will have a final say in monetizing its users.

Before reaching a critical mass, in Didi’s case over 95% of China’s ride-hailing market, these companies are largely funded by venture capital and private equity firms, along with larger internet companies like Tencent and Alibaba. The rise of a raft of emerging tech verticals draw capital in and billion dollars investments are constantly hitting the headlines of local media.

Spoiled by abundant capital, the entire marketing strategies of some companies are formed around losing money. “2VC model” was jokingly coined in the craziest days of China’s fundraising extravaganza. Like customer-targeted business is shorted as 2C or ToC business, 2VC is  a term created for cash-burning startups that survive only by raise funding from venture capitalists instead of a sustainable profitability model.

However, two recent scandals surround China’s tech tycoons show that “VC welfare” is coming to an end in some of the more mature fields. Ultimately, users are going to pay for the tech unicorn’s sprawling growth.

Renting a home in China’s megacities like Beijing and Shanghai are becoming increasingly costly. The possible roles Chinese online real estate brokerage platforms have played in driving up the skyrocketing home prices sparked national outrage recently.

A Beijing landlord surnamed Cheng recounted his experience on a Chinese bulletin board about how Ziroom and Danke, another operator, had engaged in a bidding war for leasing out his apartment in the Beijing suburbs. While Chen had planned to rent out a 120-square-meter apartment for RMB 7,500 ($1,098) per month, the price was eventually raised to RMB 10,800 after the competitive bidding.

As one of the proptech unicorns in China, Ziroom takes out long-term leases of existing homes from individual landlords. The houses are then sublet to tenants, coupled with weekly cleaning, wifi, and other services. The company raised a whopping RMB 4 billion ($622 million) in January at an RMB 20 billion valuation. Its parent Lianjia, a residential brokerage, reportedly received RMB 2.6 billion in January 2017.

With abundant capital, Ziroom easily got a larger budget in striking deals with landowners in a bid to gain a larger market share. As the company gradually gain supremacy in the sector, however, they are under increasing pressure to show its profitability capacity. That means raising rents, but this will put the costs on the shoulders of their users.

Hu Jinghui, the former vice chief executive officer of another real estate agency Woaiwojia criticized competitors like Ziroom for acquiring apartments at above-market-value prices and then renting them out at even higher prices, Sixth Tone reported.

Ziroom denied its role in rising home prices in Beijing, claiming that the rental apartments only account for less than 5% of the rental market. It promised to put an additional 120,000 apartments on the market in an effort to stabilize prices.

In more extreme cases, the VC-backed fast growth and hasty monetization approach not only cost money but also lives. China’s ride-hailing giant Didi comes under fire recently after a second female user was being raped and murdered within four months. To worsen the case, a local report shows that there are at least 50 sexual harassment and assault incidents by Didi drivers over the past four years. The public backlash against Didi peaks when angry users called for the mass to delete Didi’s app.

“We raced non-stop, riding on the force of breathless expansion and capital through these few years, but this has no meaning in such a tragic loss of life. Throughout the company, we start to question if we are doing the right thing; or even whether we have the right values. There is an enormous amount of self-doubt, guilt, and soul-searching,” said Didi CEO and founder Cheng Wei and president Liu Qing in an apology released four days after the incident, admitting the company’s misstep in pursuing fast expansion and return while partially sacrificing user benefits.

Controversies about Didi’s measures to achieve profitability are nothing new. Earlier this year, the company was accused of charging higher prices to customers who it thinks will be willing to pay more, a kind of personalized pricing, or price discrimination, targeting at premium members.

But the company refutes price discrimination claim, saying that “Didi has never used its big data capabilities to disadvantage or bully regular passengers and will never allow price discrimination.”

While lots of China’s emerging markets are quickly maturing and vertical dominators are reaching the critical point to monetize. The experiences of Ziroom and Didi serve as cautionary tales for why we need to balance profitability and public goodwill.

China presents a fascinating nation for tech entrepreneurs. The speed at which China’s technology grows and transforms is perhaps the most important aspect in defining what’s happening in the country’s startup industry: The Middle Kingdom is now the second largest arena for entrepreneurship with one startup is set up every seven minutes.

To highlight the changes, virtually every very period of the past few years has its own theme: smart hardware for 2013-2014, cross-border e-commerce and ride-hailing for 2015, VR and bike sharing for 2016-2017, and unmanned store and new retail for 2017. In China’s tech market, the only thing permanent is change itself.

China’s tech companies pivot and change at an amazing speed to catch up with the market evolutions. Venture capital—those firms financiers behind the scenes—are also experiencing its own paradigm shifts.

Chinese VC is more about RMB than dollar now

“There’s been quite a lot of changes over the past decade. China used to be a predominantly US dollar market. Although dollars is still very active here, it’s more RMB than dollars now.” said Jeff Chi, Vice Chairman of Vickers Ventures, at a panel held on Chinaccelerator Demo Day.

We saw budding signs of this trend as early as 2010, but this year has recorded the full transition of this phenomenon. A total of 3,418 VC funds were established in the first eleven months of 2017, raising a combined RMB 1.61 trillion funding ($243 billion), according to data from research institute Zero2IPO. Of the total, a 95% or 3,339 VCs—managing RMB 1.5 trillion worth of capital—are RMB funds, as compared to 79 USD funds which manage the equivalent of RMB 100 billion.

State-backed entities play an important role in this shift, the firm notes. Overall 439 state-backed funds with a capital size of RMB 756.8 billion were founded in the first three quarters of this year. The state VC coffers topped $336.4 billion as of the end of 2015.

“Also, the flavor has kept changing,” Jeff noted. “The market in 2005 and 2006 were predominantly USD because US IPOs was the only avenue for exits. As domestic IPO opens, the local RMB exchanges has become more dominant and that’s why the past few years has seen privatization of US listed Chinese companies and seek for a relisting here. The interesting thing in the last six months is that we see a reheating of the US IPO market happening. So we live in an interesting time.”

Globalizing and diversifying venture models

The intensifying favor of VCs towards RMB does not necessarily underline their exclusive preferences for local companies. In fact, it’s quite the opposite. More Chinese VC firms are developing a global or focus, partially in line with the globalization strategies of domestic firms.

Chinese tech giants BAT, the once startup steamrollers, are playing an active role in driving this trend by investing in a massive line of rising verticals across the world. For example, Alibaba has invested a total $21 billion in M&A in the past two years, of which overseas market and O2O are the two top fields in this effort, Alibaba Vice President Joseph Tsai disclosed at an investor conference held in mid-2017.

Compared to tech startups, however, the VC business model hasn’t changed that much, but that doesn’t means VCs are not trying their best to reinvent themselves.

“Ventures has been around for quit long now, we have been talking about the new business ideas that would be considerable replacing the venture model, and incubators and accelerators come to the scene. But if you drill down deeper, it’s still a model that works, the cost and production for investors show it is still a viable model,” said Jeff.

Despite the hiccups in China, the recent rise of ICOs is providing a new way of fundraising for startups worldwide, but it will remain an interesting alternative rather than a mainstream funding channel in the long run. “I don’t think ICOs will replace venture capital; it will just play a different role. If you are a company going for ICO or an investor planning an ICO, I recommend being cautious because there’s very few regulation to protect this,” said Jeff.

Melody Zhang from Artesiann Capital Management echoed Jeff’s opinion. “ICO has lowered the barrier for very early-stage investments from incubators and it will be an interesting alternative for fundraising,” she said.

Deep technology is sexy again

The time and age for the “me-too” concept where we copy US companies, innovate behind similar concepts and create a Chinese version is gone. “Companies and investors are shifting to a strategy that is going deeper and deeper into tech. Technology as a competitive advantage and having very deep technologies is becoming increasingly important,” Jeff pointed out.

The government has recognized this. As of June 31st, 2017, Chinese AI companies received RMB 63.5 billion or 33.18% of the world’s AI funding. President Xi Jinping has said that China not only tries and aspires to be, but will be a globally AI country by 2020. The government have very bold ambitions for technology, which is well reflected in its rising presence in the VC arena.

“As a firm, we soon move away from consumer industry where you focus on acquiring user cheaply. The cost for user acquisition is increasing. . . therefore we take technology as a competitive advantage. There’s really the way that you upgrade yourself,” Jeff said.

“There’s a few barriers, one is you have to understand the technology, you need people onboard to have a deeper understanding of the technology before, rather than someone who just got a general understanding of how the market goes. Invite some PhDs and researchers on the team. Also, technology is a global phenomenon, you can’t just say that I have this best technology because we are in China. You need to have a view point as to how similar technologies are developing across the world.”

The team is still the top

The team is what every investor talks about when being asked to give a recipe for their successful investments. Panelists at the discussion gave their own definitions of an amazing team.

“[An awesome team] combines a lot of things. Integrity, capability, passion, drive are some of the major attributes that we look for. But a lot of this is about being able to connect. You are going to be partner with this guy for the next five years. If we don’t like each other that would be an disaster. Is there a chance to have a decent conversation and messages across each other, is there a level of mutual trust, the likability and whether can we connect and work together are the most crucial matters,” according to Jeff.

Nicholas Ducray from Cathay Capital cites Pinduoduo, a social e-commerce platform which creates WeChat Groups to buy goods at discounts, as an example. “There are two co-founders of the team. One is from the mobile game company and the second is from a Taobao Partner company. What’s amazing is that they come across the idea by merging what they are good at together.”

TechCrunch Shanghai 2017 gathered over 110 VCs and 400 entrepreneurs at the VC Meetup, where each startup had 10 minutes to chat with a single VC. Watch what they have to say before meeting the VCs.

If you can’t see anything, try QQ video instead.

Despite the rumors and speculation surrounding a possible merger between Mobile and ofo, Mobike co-founder and CEO Davis Wang has made it clear again at TheYearAhead Summit that a “merger is not an option for the company,” local media is reporting.

Similarly, ofo founder and CEO Dai Wei also expressed previously that the company would not consider a merger.

Rumors about Mobike and ofo merger have been around for a while. It can be dated back to months ago when we joked about the same issue with our April Fool’s joke. Different reactions from the two companies sparked speculation about what was the real sentiment internally.

Half a year has passed and the current situation has made a merger more likely as more companies go out business and investors are looking for an exit.

What’s more interesting, the attitude of investors behind these companies are growing more favorable towards a merger to end the costly competitive battle and create a single dominant player, like the case in the merger between Didi and Kuaidi, and then Didi and Uber China.

Zhu Xiaohu, an early stage investor of ofo, said in September that the landscape in China’s bike rental industry has been settled with Mobike and ofo accounting for 95% share of the market. Both firms still need huge operation investments and only a merger could make them profitable. This statement is largely translated as investors are pushing the merger. Bloomberg reported that the investors of the two firms are in talks.

While we need to wait to see who wins this debate, but the situation sure reflects the conflicts between entrepreneurs and investors. Entrepreneurs prefer independence, but investors place profitability as their top priority.

The Taiwan Turnaround series explores how Taiwan’s internet tech scene is playing catch-up after being left in the dust compared to others in Asia. In part 1 TechNode visits the island to see how the Asian Tiger plans to stimulate its startup ecosystem.  Next, in the series, we talk to more accelerators, VC funds, and entrepreneurs about how they are changing mindsets and helping Taiwan startups to go global. Read Part 2, Part 3 and Part 4.

Taiwan has had a head start in its economic transformation and building a strong hardware sector over the mainland, gaining the moniker “Asian Tiger” in the process. So it is surprising that it hasn’t caught onto the internet sector boom as some of its neighbors in Asia have. It’s got all the right ingredients: a strong technical foundation, a highly educated workforce and a penchant for creativity as seen in some of the top entrepreneurs the island has helped nurture, Dr. Kai Fu Lee and Steven Chen of Youtube. So what’s missing and how can the Asian Tiger catch up?

Crouching tiger, hidden dragon

Along with the three other “Asian Tigers”—Hong Kong, Singapore, and South Korea—Taiwan saw accelerated economic growth from the late 60s until the early 2000s. Its investment in manufacturing helped to create a world-leading semiconductor and hardware industry. TSMC, which is the world’s largest dedicated semiconductor foundry, Foxconn, Acer, Asus, and HTC are some successful enterprises to have been born out of the boom.

With this strong technical foundation, a highly educated workforce and successful entrepreneurs such as Dr. Kai Fu Lee and Youtube’s Steven Chen, it is surprising to see that Taiwan’s startup ecosystem still lags behind its neighbors in the region.

“I’m not saying unicorns are the most important thing, but looking at some of the other countries, [despite] Singapore being tiny in terms of population and geography, they managed to produce three unicorns [Garena, Lazada, and GrabTaxi],” Taiwan Startup Stadium VP of Operations and Startup Development Jeffrey Ling told TechNode. Taiwan Startup Stadium or TSS is a government-funded initiative that coaches Taiwanese startups on going global.

“Taiwan has one [unicorn]. It’s called Tutor ABC which was 13 years in the making,” Jeffrey told TechNode. Launched in 2004, Tutor ABC is an online English learning service from TutorGroup.

Early success stories

Tutor ABC was part of the wave of early internet successes in Taiwan to come after the dot com bubble crash, though mostly in the e-commerce vertical.

Serial entrepreneur Steven Ho founded e-commerce platforms Bid.com.tw, which was sold to eBay in 2002 and Monday Tech, which was acquired by Yahoo in 2008. Ho, a serial entrepreneur and investor, also founded 91app, a service that helps vendors to set up online e-commerce stores, and NineYi Capital to invest in other e-commerce startups.

The Kuo brothers are another pair of entrepreneurs who have made it big in e-commerce. Their first company was bought by Groupon in 2010 and became the now defunct Groupon Taiwan. The brothers have since gone on to found nine more e-commerce platforms. Four of which are doing particularly well, including Fresh Market (formerly Haoyu Net).

However, insufficient seed funding and venture capital in Taiwan mean that startups rarely moved beyond series A and this hindered many from scaling up and maturing.

Show me the money

In the 2016 Taiwan Startup Ecosystem survey compiled by BusinessNext, fund raising was cited as the most significant challenge faced by nearly half of all entrepreneurs surveyed while only 13.8% had received venture capital funding.

“After the dot com bubble crash in 2000, [it was] low key in Taiwan from the VC investment perspective. There were very few VCs focused on investing in internet-related startups,” AppWorks Ventures Associate Jessica Liu told TechNode. AppWorks VC funds and its accelerator program was one of the earliest established in Taiwan and has now grown into the largest accelerator network in Asia with more than 320 startups and 720 founders amongst its current members and alumni.

Looking to help Taiwanese startups to gain funding and grow, Jamie Lin, a National Taiwan University and NYU Stern-educated entrepreneur returned to Taiwan to start AppWorks in 2009.

According to Taiwan Venture Capital Association (in Chinese), 2002 to 2005 saw a peak in investments in startups and new businesses. Following the global financial crisis in 2008, investments only started to grow again from 2011. In 2015, investments received by new businesses and startups were around $421 million as reported by the National Development Council. A small amount, but still a big jump from 2014’s $130 million.

Adding to the growing pool of investment is government funding, the Taiwan Silicon Valley Tech Fund looks to fundraise and invest $300 million into local startups between 2015 and 2017, of which $180 million is expected to have been raised from the private sector. The more recently announced Asia Silicon Valley Development Plan aims to promote innovation specifically in the IoT sector and stimulate the local startup ecosystem.

What’s next

Apart from the relatively small amount of venture capital available to entrepreneurs in Taiwan, other factors that have slowed the growth of the internet industry are the small-market mentality of entrepreneurs, the difficulty of attracting talent, and strict government regulations.

“The biggest problem we see among entrepreneurs here in Taiwan is the lack of this global mindset,” Jeffrey Ling from TSS told TechNode. “A lot of startups, they don’t draw the bigger picture so investors won’t be able to know if you can go bigger or not.” He went on to explain that TSS helps startups to understand investor’s perspective and what they are looking for.

“‘If you don’t even dare to want it bad enough, I’m not sure if I want to put my money in you,’ ” Jeffrey explained.

Trying to educate consumers about food technology is often a waste of time, says Joseph Zhou, an investment partner at China’s first food technology VC and accelerator. He says that it’s better tasting food that will solve China’s big food issues – safety, waste, and sustainability. 

Bits x Bites (the “x” is pronounced as “and”) is a Shanghai-based technology accelerator and VC  firm that focuses entirely on food technology, but finds in China that it is best not to mention the technology to the eaters of the final products.

“Food is emotional. Food has the power to convince people, so you don’t want to have tech overpower the food,” Joseph explains.

The VC firm has set its sights high: using food technology to tackle China’s chronic food safety concerns, to reduce waste right along the supply chain and to ensure the future sustainability of the country’s food (and perhaps diverting a little investment away from China’s burgeoning O2O sector along the way). 

The tech itself has to take a back seat. “We realized that consumer education takes forever. Your money dries up before you can educate the market,” said Zhou, “So for food, the most important thing is that you have to make it tasty. Only by making it tasty can you start telling your story. Only then people will listen.”

The food-focused approach to problem-solving also informs how the VC selects startups for potential investment. “Food is always the first priority. When people approach us with a new idea our first question is ‘Is it tasty? Can we taste it?’ Then we talk about production, sourcing, safety,” said Zhou.

Food safety

Ensuring that what you eat in China is safe is almost impossible. Even the government has found that a fifth of farmland is dangerously polluted and 80% of groundwater – used by farmers – is contaminated. However, further down the supply chain are even bigger problems: from negligence and outright criminality in food processing that have caused scandal after scandal, most notoriously the baby formula catastrophe, to poor management of fresh food storage during distribution and in stores.

The founder of Bits x Bites previously founded Yimishiji (一米市集), an online farmers’ market, still running and sometimes used to collect data for marketing strategies and launch products. 

It started with a focus on safety via transparency. Almost all the food was grown on Chongming Island near Shanghai and produce was labeled with each farmer’s name. In fact, customers could see 19 different facts about the food even including the total carbon footprint. This helped build trust but was too small and only covered a small section of the supply chain.

Bits x Bites’ most extreme solution so far is container farming startup Alesca Life. The units don’t even use soil. They’re totally controlled in terms of temperature, moisture, and lighting. The containers can be placed anywhere and are connected to and controlled via the cloud.

“You don’t need a farmer’s 20 years of experience, just the technology,” explains Zhou. A few are popping up in China, such as in Beijing’s new Hotel Jen. Alesca cannot yet supply the mass market, but one major client so far is the Dubai government, where the attraction is more for sustainability and for improving the health of the citizens with fresher produce.

Food waste

“Food waste happens at many different phases along the supply chain – at the farm or in the fridge,” says Zhou. One solution they’re looking into is the cold supply chain, which sees a large overlap with food safety issues. There are cold supply vehicles – trucks that refrigerate the produce – but around half an hour after picking up the produce from the farm or warehouse, the haulage companies switch off the refrigeration to reduce costs. They then turn it back on in time for the food to be cool when it arrives at the warehouse or store.

Remote cold sensors that track the temperature of produce along the journey is something the team is hoping to invest in.

Another is at the end of the food journey – people’s fridges. An Israeli company called Phresh has developed a powder to put in the fridge that slowly vaporizes to kill bacteria, making produce last up to three times longer. 

Food sustainability

“Lots of people in the food industry are very conscious that there will be 9 billion people in the world by 2050. Protein is of particular concern,” said Zhou, explaining how this creates opportunity. While Silicon Valley is pushing ahead with lab-grown meat – known as “clean meat” – others are looking into plant- and insect-based proteins.

China has a long history with plant-based protein such as soybean products and mushroom-related foods. Buddhism had a part to play in these, as did food scarcity. Insects are already part of people’s diets in China’s northeast, south, and southwest.

“But they haven’t innovated, which means there’s an opportunity,” said Zhou. Bits x Bites are looking for plant-based products as part of the “consumption upgrade” (消费升级 in Chinese) they’re seeing in China. One of their startups is Bugsolutely; they make snacks out of silkworms and pasta out of crickets.

Again, it’s about the food. “We take out the [insect] shape, take out the yuk factor, make it tasty. And it provides the sustainable protein which we see as the future of food for Chinese consumers.”

Upgrading demand and the government

“We want the consumer to demand more. Only if they demand more, from the factories and the food giants, will they care more about bringing high quality, safer foodstuffs to the end market,” said Zhou. “We call that a ‘consumption upgrade.’”

This has been seen in markets around the world such as Chobani yogurt entering a market that had been saturated for 15 years and then taking 15% of it by pushing its Greek-style technique. Craft beer has been a similar success, quickly surging to take 12.5% of the US market with breweries being bought up by the mega-breweries that were losing market share.

“We’re confident Chinese consumers will ride the wave of consumption upgrade. Consumers are willing to pay a premium which is encouraging to entrepreneurs,” said Zhou. The government also appears to be confident.

The Chinese Academy of Agricultural Sciences (中国农业科学院, “农科院”) has even approached Bits x Bites for some early stage discussions. They have a huge number of patents related to food production and are hoping to commercialize some of these patents and get help building teams. Nothing is confirmed, but it shows the potential willingness from a government agency.

The process

The first Bits x Bites “harvest” of startups has just finished its four-month program that culminated in a demo day in Shanghai where media and potential investors and customers came to see the future of the food.

The accelerator only deals with early stage seed startups, pre-A round startups, and those with A round funding. The startups pitch to Bits x Bites for a place, with the VC’s limited partner Shinho (欣和) – the condiments manufacturer – helping to make final selections from the shortlist. The team is currently reviewing applications for the second cohort and accepting applications until 30th June.

The team also proactively looks for potential incubatees by examining the food supply chain and looking for gaps then approaching people they think can solve a problem.

“Bits x Bites is an open platform for anyone to bring the best products and technology to disrupt the current supply chain,” said Zhou, “Nutritionists, designers, farmers, foodies are all welcome.”

As well as 120 days of training, startups get to use their co-working space as well as access to labs, kitchens and a lot of mentors and money. Bits x Bites can put up to RMB 3 million into a startup, for no more than 15% of the equity. 

The money comes from Bits x Bites’ limited partner, Shinho. The founder of Bits x Bites, Matilda Ho, fellow Taiwanese and MBA peer of Joseph Zhou, used to work for design agency IDEO in Shanghai where Shinho was one of her food clients. Shinho realized that it needed to go beyond just using good ingredients to make an impact on improving China’s food outlook.

“They knew they had to open their capital to attract talent,” said Zhou. They became the limited partner when Ho established Bits x Bites. The accelerator shares a space with IDEO whose senior leadership in Shanghai also serve as mentors to the startups and advisors to Bits x Bites.

When products are ready, they are launched across various platforms such as Yimishiji, Benlai Shenghuo (本来生活) and Tencent-backed MissFresh. While the VC has the money to pay for supermarket listing fees, they encourage the startups to get user feedback from e-commerce sales and use new media to push out the story before looking at supermarkets and convenience stores. 

Food technology can lead to safer, more sustainable food, but if it doesn’t good it won’t sell. China, and the rest of the world, could have a more secure food future if demand for these foods grows. However, China is starting with some of the most serious food safety problems. As Bits x Bites already know, the proof is in the pudding, literally.

TechCrunch Shenzhen is just around the corner along with its most popular session during the conference: VC Meetup. For entrepreneurs who are still shopping about from one venture capital institution to another with your business plan, we offer you the opportunity to meet a stack of VCs for 10 minutes face-to-face communication.

VC Meetup has become a signature part of TechCrunch Summits since its launch in 2015. At TechCrunch Beijing last year, a total of 150 venture capital institutions joined and over 750 entrepreneurs pitched their projects at the event.

Opportunities come to those who are prepared. In order to make your 10 minutes more efficient, we have compiled a cheat sheet of funds and their preferred industry.

IDG Capital

As one of the most prestigious venture capital companies, IDG focuses on internet/mobile/tech, modern service & brand, healthcare, industrial technology & resources, media, tourism & real estate. It has a pretty wide investment range from seed round to post C round with funding amounts varying from million to hundred million dollars. They have supported many exceptional companies such as Tencent, Home Inn and Ctrip.

Tips: IDG Capital is adapting more conservative investment approach with primary focus on startups in early and expansion stages. They have their own understandings of the founding team and the market.

Bertelsmann Asia Investment

BAI is primarily engaged in investing in mobile, online education, fintech, m-healthcare, and enterprise services. It’s focused on seed round to B round. It also has a Beta Fund to cover early stage and angel investments. The portfolio companies include ifeng.com, Lagou, Mobike (Beta Fund included: Keep and Kapbook) with investment size ranging from million to hundreds of million RMB/eight-digit USD.

Tips: Focusing on early stage startups, BAI is a prudent investor, which values following characteristics in projects:
1. Making the best use of the team’s exiting resource to outrun the rivals

1. Finding differentiated position in the market

2. Making best use of data accumulated through the product, network and supply chain data

4. Effective team management

SB China Capital (SBCVC)

SBCVC is a leading venture capital and private equity firm that manages both USD and RMB funds. Its investment focuses are on high-tech, high growth companies in TMT, clean technology, healthcare, consumer/retail, and advanced manufacturing sectors. It invests across all stages of companies. The portfolio companies include Alibaba, Best Logistics, Quicktron.

Tips: Established in 2000, SBCVC is a prudent venture capital institution with preference in high tech companies in new energy and manufacturing. Startups connected with the real economy are going to win their attention.

ZhenFund

ZhenFund is a Beijing-based seed fund that focuses on internet, mobile internet, gaming, enterprise software, O2O, e-commerce and education. It has supported in Jumei, Ehang and Xiaohongshu. The investment size ranges from million to tens of million RMB.

Tips: A business is nothing without the people who work behind the scenes. ZhenFund is seeking entrepreneurs with passion, dreams and vision.

Qiming Venture Partners

Founded in 2006, Qiming is a leading China venture capital firm with focus on healthcare, consumption, IT and clean technology. Currently Qiming manages five US Dollar funds and four RMB funds with US$ 2.7 billion assets under management. Its portfolio companies include Guahao, Zhihu and Mogujie.

Tips: Qiming is looking for entrepreneurs with their own judgment of the market, technology and products.

Chinese investment in Israel rose tenfold in 2016, with tech a key sector, according to data from Thomson Reuters. We spoke to someone on the ground in Tel Aviv to get the full picture and heard how cultural similarities, governmental ambitions, and legal changes are all at play – and how the good times may already be over.

Chinese VCs and tech firms have long been investing in the US and increasingly in southeast Asia, and just last week Xiaomi announced it was pushing its brand in India opening its first store there this month with a 100 to follow. Investment in Israel has also been growing fast. From 2011 to 2016, Chinese investment in Israeli tech has seen 50% year-on-year growth.

According to a new report by Reuters, Chinese investment in Israel, in general, was up tenfold in 2016 to $16.5 billion, with money being poured into internet, cyber-security and medical startups. The report cites increased protectionism in the US in late 2016 as one of the factors for the switch in target countries, as the data shows a surge in investment in Israel just when the US regulations kicked in. In 2016 Chinese investors dropped $26.3 billion of previously-announced deals in the US.

So why Israel? One of the key points is that Israel is great at innovation but less good at developing and monetizing, creating opportunities for cash-rich Chinese firms and VCs.

“There’s real innovation happening due to Israeli-specific factors… There’s a lot of people here being trained in the military to be very technical, very innovative and independent with how they apply that,” says Sean Coyle, a British-Israeli now working for an Israeli cybersecurity startup after a decade in management consulting in China for tech clients.

“They’re very good at developing technology here, not so good at scaling up. You see a lot of early exits in Israel as a result. IPOs like Check Point or Mobileye getting bought by Intel aren’t the norm. But they tend to exit early. Israelis are very good at developing innovative technology with limited resources, but they don’t have as strong a track record at creating polished products and scaling the business so tend to want to sell out early, which is why you get a lot of companies that essentially are being acquired for their technology and are then incorporated into other companies,” Coyle tells us.

More investment-minded startups are proactively courting the Chinese. “I know a number of people who are actively looking for investment from the Chinese. China’s a huge market – an Israeli company can scale massively by getting into the Chinese market,” says Coyle.

As well as the availability of innovative technologies, there are cultural and political conditions conducive to Chinese-Israeli deals. “There’s a cultural angle,” according to Coyle, “I think you could argue that there are significant commonalities between Israeli and Chinese culture. Both come from a very dynamic and disruptive environment where you kind of need to try a lot of things very quickly and maybe not do everything properly, but you find a way to do things – it doesn’t always look pretty.”

Politics are also important, having both a positive and negative effect. “Israel is very big on relationships, like China, and there’s probably a little bit more respect for that here than in America,” says Coyle. Reuters cited Israeli Prime Minister Benjamin Netanyahu as claiming Israel is the “perfect partner” for China in technology development.

And the money has rolled in, to various effects. “In the last couple of years, there’s been a noticeable influx of Chinese money into Israel. It’s pushed up the deals valuations considerably, making it more expensive for all the other VCs, local or otherwise, to invest,” says Coyle. “And that’s not necessarily a good thing – it depends on the company and how smart that money is. If you’ve got someone who’s not knowledgeable and putting down a large heap of money, you’re going to end up with a lot of companies that are over-inflated and they’re going to struggle to justify their valuation. That’s already a problem as one thing you’ll see in Israel is that [founders] tend to exit early.”

However, despite the knock-on effect of investment being redirected away from the US due it putting up the barriers, Chinese regulation has also put brakes on the flow of Chinese money into Israel for acquisitions, meaning the peak may already have passed. In November 2016 the State Council first announced plans to curb overseas investment as part of a plan to reduce capital flight and downward pressure on the yuan.

Sean Coyle has seen the impact first-hand: “I’ve heard of at least one company here that got bid for by a Chinese tech firm against another VC. The Chinese were putting significantly more on the table, but the deal ended up not going through partly because of the regulations and now valuations are starting to go down, it would appear.”

A bit of breathing space in the Israeli investment spree may not be amiss as, according to Coyle, “[t]he Chinese haven’t been that nuanced at early-stage investment, haven’t been that people-oriented and have just put in a lot of money. Early stage tech is all about people because you need to be able to work with the entrepreneurs. If they walk around putting large sums on the table, the Chinese investors are risking both self-selecting bad investments since good entrepreneurs will choose others and raise valuations in the whole market.”

Despite what has been said and written about the capital “winter” in China, there’s enough evidence to show that China is still an investment hotspot globally. With over 3,000 funds managing more than 1 trillion RMB, the country is world’s second largest destination for venture capital, next only to the United States.

As one of the first foreign venture capital firms seeing the potential of this market, Redpoint Venture set up its China team in 2005 and has invested in over 35 Chinese companies, including Qihoo 360, iDreamSky, Yixia, and APUS. The firm adopted a more aggressive strategy despite slowing market growth with the launch of a dedicated 180 million USD fund this October to back innovations coming from China.

At  the Integral Conversation hosted by Esquel Group, we had the pleasure of speaking with Geoff Yang, founding partner of Redpoint Ventures, on a range of topics from his insights on China’s VC market, his investment philosophy, and the traits of successful investors and entrepreneurs.

Geoff co-founded Redpoint Ventures in 1999 and has backed trailblazing consumer and communications platform companies from their founding including Arista, Ask.com, Bluefin, Calix, Efficient Frontier, Foundry Networks, Excite, Juniper Networks, MySpace, and TiVo.

Redpoint Ventures has been in China for more than 10 years, what do you think are the biggest changes in China’s venture world?

The biggest change is probably how good the entrepreneurs are. Over the last 11 years, we have experienced three generations of entrepreneurs, which is extraordinarily fast. When we first came to China it was “copy-to-China”, local companies basically looking at what works in the U.S. and do a Chinese version. Today some of the things in the U.S. are copied from China. It’s about things that really best suited and almost unique here.

There are very few exits when we first came and almost all of them were U.S. listed exits. Now, there’s lots of U.S.-listed exits but also China-listed exits as well as M&A. One decade ago, it was all about whether a company we developed could be one of the few U.S.-listed Chinese companies. Now the number of exits is quite large. If you look at the top-15 valuable technology companies on the NASDAQ, my guess is six or seven of them are Chinese companies.

Like you said, U.S. market is the top option for Chinese companies to get listed. But now China becomes their No.1 choice and a series of U.S. listed tech stocks choose to seek a relisting the in domestic market. Two of Redpoint Venture’s portfolio companies: iDreamsky and Qihoo 360 chose this path. Why do you think companies are doing this?

There are a couple of reasons for this trend. Firstly, certain industries are almost deemed strategic, for certain businesses, they might not access the government businesses or certain company businesses because they are an U.S. listed company. The other is because there’s an arbitrage value of what the company was worth as a U.S-listed company versus what it could be worth on the China’s stock exchange. Some companies explained it as we are not understood in the U.S. market. But I think the main reason was the arbitrage value in the two markets. Entrepreneurs felt their market value is under appreciated in the U.S. and more properly appreciated in China.

Redpoint Ventures announced a new fund dedicated to China’s market this October. What’s your plan for the funding and what possible verticals are you aiming for?

We have invested in Chinese companies out of our core fund and China represents only 15% of the portfolio in the past. We decided to raise a separate China fund because the number of opportunities in China has skyrocketed in the past few years and there are more opportunities in China than we had capacity for.

I think the opportunities we will go after are still the same ones we have been looking at. Stage wise, it will be early-stage series. In terms of industries, it will be largely consumer, but enterprise is becoming an increasingly important part of the portfolio.

The fund comes at a time when Chinese startups grapple with the so-called “capital winter” or funding shortage. What’s your opinion on this issue? Is China’s VC market going to warm up in the near future?

I think there’s more normalization. For the attractive deals, we still see a very competitive market and there’s still lot of people who are interested in putting money behind great entrepreneurs in various interesting spaces.

A few years ago, China was very hot and a lot of LPs were putting money in China funds. I think everybody is chasing the potential of China and now that things are normalized, people have pulled back some because they are a little bit concerned with the growth rate of China; some funds didn’t get great results. But we still think it’s a very attractive market.

What do you see are the most important characteristics in a successful entrepreneur or startup team?

The biggest is definitely being able to see patterns where other people see chaos. The opportunity comes when nobody know which way to go and one or two people see where the world is going and they move forward in that direction. The second is the ability to articulate to others. If you can’t, you can’t convince others to come joining you.

The third is to be able to adjust on the fly and not to give up. Along every entrepreneurial journey, there’s time when you think you should give up. However, the best entrepreneurs are the ones that can wheel a company into existence. Last is probably the ability to hire people who are smarter than they are and not compromise on hires. It’s very difficult to hire above you, but great entrepreneurs can hire the best people and they are not afraid to hire people that are even smarter than they are.

What have you learned from your past investments that weren’t successful?

One of the things I have learned is that you could be right but timing may be wrong. The second is management makes all the difference in the world. You can never act too early on making management changes. The last is that there are outright failures, stuff that just doesn’t work, but it’s rarely the technology doesn’t work; it’s that the market wasn’t ready and poor management wasn’t addressed quickly enough.

What makes a great venture capitalist? How is it different between China and Silicon Valley?

It’s the same in some aspects. In both places someone sees what there is and imagine what it could be. Someone who has the contacts and network with entrepreneurs and convinces them to partner. Someone who always looks less at what could go wrong and focuses more on what can go right.

In China, understanding of the local landscape is really important. You have to live in the market and understand the dynamics and culture of the market. In China, more than in anywhere else in the world, you really have to have a strong network. You have to know the right people to ask the right questions in order to figure something. Whereas in Silicon Valley, they can talk to people they don’t know as well. People in China tend to do business with someone they’re comfortable. You can usually get a straighter answer if you have the right connection.

What do you think will be the biggest opportunities in the next 5 years?

I think the venture business has been a great business since 2007, when the smartphone revolution really started to take off. We rode that wave until 2014 to 2015. Right now, people are looking to see what’s the next wave, but nothing is really obvious. Machine learning/AI and data analytics are the most obvious candidates.

The real question is: what’s the next platform? I think it’s probably autonomous vehicles and AI, but I am a bit skeptical about VR/AR, which has been seen as a new platform by many people. For applications, it’s digital health and fintech. But, on the whole, it’s a lot less obvious than it was in 2008.

While Chinese venture capitals feel winter chill, the Southeast Asian startup scene rather looks optimistic. Silicon Valley venture capitals who once targeted China or India are now increasingly setting their eyes on Southeast Asia. 500 Startup, praised as one of the leading Silicon valley VCs investing in the region, is now boasting its own unicorns such as Singapore-based ride hailing app Grab as fruits from local investments into more than a hundred startups with its 25 million-dollar fund, named Durian Fund, raised in June, 2014.

Mainland-based VCs are also poised to target assets in this fast-growing region and are making aggressive expansion. Gobi Partners which was born in 2002 in China and entered SE Asian market in as early as 2010 recently launched a $14.5 million fund dedicated to early-stage SE Asia startups, partnered with Malaysia Venture Capital Management Berhard (MAVCAP), the country’s largest venture capital firm. This was after Gobi Partners successfully finished their $50 million USD fund for Series A investments.

Why are Chinese VCs investing in SE Asia?

“Most of firms in Asia are still heavily focused on China and India, so Southeast Asia is a gem for early-stage investors as it has yet to reach the hype levels of China and India’s startup markets,” Kay Mok Ku, the Singapore-based partner at Gobi Partners said, during the talk at TechCrunch Beijing 2016.

According to Ku, there are three main incentives for Chinese VCs to invest in SE Asia. First is for diversification of investment portfolio that otherwise would be too focused solely on Chinese market whose saturation is expected to come sooner or later. So, by investing in startups in SE Asia region, the portfolio gets much more diversified which effectively lowers the risk and creates room for potential synergy between SE Asia and Chinese startups. Another incentive is the market conditions in SE Asia. Southeast Asia’s intenet economy could worth as much as massive $200 billion annually within ten years according to a new report released today by Singaporean sovereign wealth fund Temasek and Google and furthermore, region’s population is not only big but also relatively young which brings huge potential for entrapeunership. The last but not least, SE Asia has less competition, compared to Chinese market where intense competition is evident.

On top of that, for Chinese-born VCs, SE Asia is a region that feels closer to home. Indeed, current status of Southeast Asian market recalls what Chinese market was like ten years ago. And this means its development may also follow the footsteps of China. “A lot of services and Apps released in SE Asia often resemble the successful ones in China. In SE Asia, with less innovation and less risk, it is possible to yield successful cases in SE Asia.” said Adrian Li, the managing partner at Convergence Ventures.

As a matter of fact, at this very moment, population of about 600 million people, many of whom are under the age of 40 are entering the internet economy via low-cost Chinese smartphones. “With young generation becoming much familiar with many of new trends, using China-born, silicon-valley-born Apps, the technology gap between China and SE Asia is disappearing.” Ku emphasized.

Challenges of investing in Southeast Asia

Although SE Asia investment scene is looking rosy, practical challenges faced by the ones already jumped into the region do exist. The two main challenges are as follows.

1) Fragmented market
Southeast Asia consists of six different countries, each using different language and embodying different culture. Because of this, it is hard for a particular startup to penetrate their platform markets of neighboring countries. For instance, as reported by the survey by consulting firm Bain & Co. released in April, the region’s e-commerce platforms, while being well-funded, have been struggling to grapple with disparate languages, regulations and consumer preferences that varied largely from country to country. Jeffrey Paine, the founding partner at Golden Gate Ventures, confessed that SE Asia is, unlike India or China, very hard to expand although its size is about a quarter of China. This challenge places a greater importance on localization ability of the service and requires a more strategic movement when expanding cross border, for example, acquiring a local firm just as Tencent bought Sanook.com, the Thailand portal and Alibaba bought Lazada, the Singapore-based e-commerce firm.

2) Deal size
While SE Asia market is evidently vibrant, size of the investment deals closed in SE Asia actually are relatively smaller than what we often see in China market. “It’s still quite hard to raise a Series B, C or D round, and the size of the average round is not as big as people expect. In China, there are cases where tens of millions of dollars is raised for a seed round. But, this kind of huge deal is not very rare or even none in Southeast Asia.” Ku commented. Therefore, when considering the SE Asia investments, size of the deals should be distinguished from those in China. “In Indonesia, Series A are between $1.5 million to $3 million,” Adrian Li added.

However, Chinese investors and Chinese IT giants do not seem deterred by such challenges. According to a survey by law firm Herbert Smith Freehills, acquisitive Chinese corporations are eager to follow Alibaba’s lead in making presence in the region. More than 45 percent of Chinese sizable corporations surveyed identified their top priority to pour their money into over the next three years as SE Asia.

The strategies of SE Asia investment vary from company to company. Some are entering in a form of investment/acquitision just as Alibaba acquired Singaporian e-commerce platform, Lazada, while some are more aggressive in launching their products in this market by setting up local teams. “Baidu has set up a local team and released a completely local product specifically for Indonesian market,” Adrian Li said. JD is another Chinese company that is pushing relatively agreesively into this region and already set up the local team for ‘localization’ of their service.

The fact that the number of Mainland VCs being bullish on SE Asia is increasing with speed and more and more Chinese companies are devising strategies to pierce into SE Asia proves the potential of Southeast Asian market to be real. “There will soon appear a Southeast Asia-born unicorn and sooner or later an IPO in US exchange.” Jeffrey Paine answered in an assertive tone to the question of how he sees the SE Asia market in three years. However, due to challenges, both expected and unexpected from this yet immature market, it is hard to forecast where the next unicorn will be bred out from.

This is the second post in our series: Meet China’s Midas, where we will talk to a mix of Chinese investors who have made successful investments in China’s growing tech space. Stay tuned over the coming one month as we talk to Chinese investors from Beijing to Shanghai about what it take to be a Midas in China. You can follow our updates at @technodechina for new stories in the series. 

Li Feng, once the youngest partner at IDG-accel, was the talk of the town when he left IDG to start his own firm last August. It was feared then that the daunting “Capital Winter” was not even near the end of the beginning. He’s now the founding partner of FreeS Fund, managing 2 billion RMB ($279 million USD), with special focus on early stage companies in e-commerce, education, fintech and lifestyle businesses.

Li Feng believes that it’s unfair to call the changes underway a “Winter”, rather, it’s rather more like a transitional phase, uncomfortable and upsetting–for different reasons depending on the individual perspective–as it may be, there’s no real shortage of cash. Now a year later, Li Feng has got some big names under his belt, adding to a dazzling portfolio, including:

• Uber Global–no introduction necessary here.
• Three squirrels-one of the best known brands grown from an e-commerce platforms, vendor of nuts and teas.
• Unity -a third party game development software with over 5.5 million users registered and claims to have helped make a third of the world’s most loved games.
• Zhubajie-a platform for freelancers from webpage designers legal consulting to personal tailors. It’s now valued at over one billion USD.
• Creditease– a wealth management company and consumer lending platform. Its subsidiary Yirendai went public on the NYSE in December last year.

We were lucky enough to have him share his insights on some FAQs:

Q:One year ago, you left IDG to found FreeS fund. What has been the most profound change in the climate this past year?

A: People keep moaning over the “capital winter”, but there is really still sufficient cash, if the past is what you’re comparing to. Everyone says it’s winter, but what they are really feeling is just a low tide during transition–we just need to learn to cope with different expectations.

There’ve been some of changes in the climate. One example is that RMB investments are increasingly favored. This means when seeking an exit, companies and VCs need to adjust to the expectations of China’s secondary market, which is more focused on profitability and better financial figures, as opposed to USD centric standard, which attaches higher value to cash flow and potential for growth.

When there was an influx of USD investment, startups were encouraged to burn cash, to attain scale and marketshare, and put profitability temporarily aside. But for RMB, because of listing requirements, companies have to come up with a clear and profitable model early on. So if you accept RMB investment, you need to compromise and adjust your development blueprint.

Q:What is your advice to entrepreneurs, with this backdrop in mind?

A: Each investor is different, even those who invest in the same stage, those from the same firm, each has their individual management style. Try to find someone who visions the future of your company as you do. When you don’t have much of a choice, just try to get cash when you can.

Try to push for a profitable model early on. Traditional models can profit more quickly, and its easier for them to get on the right track without having to find a base of users (burn marketshare) before they can find a way to reap a profit from that user base.

Q: What are the major differences between fund raising in China than say, the Silicon Valley?

A: One marked difference between funding in China and the U.S. is that overseas, VCs and startups have formed echelons, and as a rule, top-league entrepreneurs seek investment from first tier VCs, lesser entrepreneurs get funded by their equivalents, and so on.  This is because both VCs and entrepreneurs are more mature–they’ve had more than two generations of experience to draw from. In China however, there is no such parallel relationship between startups and VCs, which have only been around for ten years give or take.

I can’t say exactly when such a correlation will take shape, but I’d give it at least one VC life cycle. Once we see a generation of mature entrepreneurs who have experience being supported by different types of VCs, word will spread, and like an invisible hand, startups will begin to seek analogous firms that best match their development phase. But that’s not to say that Chinese startups are not picky over who funds them, there’s still a surfeit of capital, and some can afford to pick and chose.

From a larger perspective, the economy is growing at a much slower pace. In China, much of the economic growth is macro, across a range of sectors, whereas in the U.S., progress is usually a redistribution of the clout of two existing industries. Venture capital has been around for 4,5 decades in the U.S., and compared to their fledgling Chinese counterparts, have better defined rules and roles, established through decades of practice. Fluctuations in valuation brought forth by economic cycles and disruptive technology–the mobile internet, IoT and breakthroughs in computing power–also happen in Silicon Valley, but on a narrower scale.

Q: In terms of business model innovation, Chinese companies are in may ways ahead of their counterparts in Silicon Valley. What about in the long run, does China stand to have an advantage in the contest over technological innovation? 

A: The short answer is YES. China has over the years breed a mighty manufacturing industry, and this is what will give China an edge in the next round of technological innovation. Because at the end of the day, manufacturing is where new technologies will be implemented.

Think along the lines of corner overtaking. There are certain things that weren’t China’s stronger limb in the past, like car engine manufacturing. But in an age of electric cars, China’s inferior status in the pecking order of traditional car manufacturing might get bumped up. While China’s no leader, the technological gap in lithium ion batteries and control systems–core tech in electric vehicles–is far smaller, which is why we’ve invested in lithium battery companies. China is now the largest automobile market and largest motor vehicle producing country, and combined, that means in the future, much of the core technology will be coming out of China. After all, China’s where the industry is.

Q: Can foreign startups compete in China?

A: Only if what they are doing is not directly lifestyle and culture related. If what they are doing is farther away from culture specific areas, and more pertaining to technology. The same goes for Chinese setting up businesses overseas. It’s hard to peg up consumer based ideas in a foreign market, because you need a subtle instinct for grasping the local consumers’ needs, and local parters can help only so much.

The dust kicked up by ride sharing has settled, but the air is again charged with electricity. This time, it’s bike sharing, and companies are losing no time stocking up on ammo.

The latest news is that Ofo, a dockless bike sharing company which started on campus, has completed a C round totaling 130 million USD. This number includes the earlier “tens of millions of USD” investment from Didi and additional funds from major league investors like the Coatue, the U.S. hedge fund, Xiaomi and its affiliate fund Shunwei Capital (for cooperation think IOT, Xiaomi’s existent folding bike), and Citic PE fund.

Ofo, which until now has been mostly operating on campus, is now carefully treading waters outside university gates. The company’s founder Dai Wei has revealed that trial runs in Shanghai will begin today, and starting tomorrow, the yellow bikes will temporarily be available in Beijing’s Zhongguancun and Shangdi. These areas to some extent resemble the safe haven of campus, with large populations of white-collars and sprawling office parks.

Its recent round comes after raising more than 20 million USD from its B round in June this year.

Brace yourself, for legions of shared bikes coming your way. Two days earlier, yet another dockless bike sharing project Xiaoming Bikes landed an A round of 100 million RMB from management of Cronus Bikes, a company that makes cycling gear. This was a short 11 days after angel round investors bet more than 10 million RMB on the company. Though we haven’t seen any of these bikes yet, the founder Jin Chaohui claims that it will aiming straight for the bustling hearts of major cities, where the future for ride sharing has just gone from bad to worse.

Mobike is also flexing its muscles. It’s had a head start, and has tacitly confirmed a rumored C round of 100 million USD, led by Sequoia Capital and Hillhouse Capital. Its previous round of 10 million USD was completed less than two months earlier.

The patrons of Ofo and Mobike had gone so far as to wager on the future of their prodigies. In a peppily worded memories post, Zhu Xiaohu of GSR Ventures–early backer of Ofo and Didi–asserted that, like the chauffeur and car-pooling business which both crowned a winner (Didi) in less than 90 days, the bike sharing war would also end in less than three months, with Ofo the victor. Not long afterwards, PandaVC, a B round investor of Mobike, came back half-jokingly with a conditional bet: If Ofo trumps Mobike in 90 days, someone from Panda would ride around Beijing’s CBD naked on one of Ofo’s bikes as a sign of defeat.

The chips are stacked, the bets are on. The question is, is another transportation war really what we need? Subsidized rides were great while they lasted, but how will these companies make pedaling bikes against the Siberian wind more appealing?

Based in Shanghai, iStart Ventures is a technology incubator and angel fund co-founded by the local government, SB China Venture Capital (SBCVC) and angel investor Cha Li. Managing an area of about 10,000 square meters, it offers office rental, training programs and other services for young entrepreneurs. It mostly invests in seed stage and series A round with a fund size of RMB200 million and a focus on wireless internet, new media, health service and environmental technology. TechNode interviewed iStart founder Cha Li, about how iStart attracts young entrepreneurs and invests in them.

Where do iStart Ventures’ funds come from?

Until 2010, our funds mainly came from U.S. and Europe. In 2010, the government’s foreign currency policy changed, and it took about a year for foreign capital to invest in startups here. Startups need money instantly, so it became hard for foreign investors to invest in early stage Chinese companies. For that reason, iStart Ventures’ current fund is mostly from the government fund of funds and domestic investment. The typical government fund is total RMB 1 billion or more, with 30% invested in early startups, 30% invested in grown companies and 30% for IPO or private equity. Domestic funds are from large corporations and high net worth families, I should say. Minhang government is one of the LPs.

In which area do you tend to focus on and invest in?
As an angel investor, I don’t go with crowds, so I don’t have a limitation on the areas I invest in. We try to invest in new technology in broad areas like new materials, health, and environment. We have 50 portfolio companies, with tech startups occupying half of our portfolio and internet startups the rest.

New technology is developing in China. In 2000, only research centers and universities had high level technology, but nowadays the private sector also has access to it. I see people all around me who used to work for government research institutions and quit to start their own businesses.

Tell us about the iStart Ventures incubation program.

The three-month program targets young entrepreneurs with an idea, at a time when they have neither products nor customers. We usually select only the best 20 projects out of up to 1000 applications. In our open space, we invite successful entrepreneurs or VCs to give entrepreneurs intensive training in business models, team building, and product development. After three months, we invite investors to review the projects. In the seed round, we invest between RMB500,000-5 million. By providing a free course for entrepreneurs, we maintain a strong flow of deals for investment. In each incubator, we have an annual turnaround of 200 to 300 projects. About 60% of these projects become startups. The top performing companies can ask for an extension for three to six more months. Some exceptional companies, such as Eleme, have stayed in our incubator for two years.

Tell us about a startup that graduated iStart Ventures incubation program.

Eleme, the largest online food ordering service company in China was started by three college students at iStart. When they first came to our training program, they had only 2000 daily orders; by the end of the first year it had reached 100,000. Now orders are at over 2 million a day. The Eleme team shock me every time I talk with them, since I remember when they were only college students with no business experience. This year they plan to achieve their goal of 500 million orders a day.

I see a lot of post-90s entrepreneurs in China. How can you feel secure investing so much in them, when they don’t have much experience in the business world?

Our current focus is investing in individuals, mainly post-90s born entrepreneurs. They are the internet generation and we try to pick up the best people and invest in their companies. In venture business, we all try hard to create miracles. In this respect, I believe “Experience is a limitation”. Being young and inexperienced is an advantage. Many will argue that experience is a key success factor, but I don’t agree. For those who have worked for a big company for many years, how many of them have had experience of fundraising, finding partners and having to fire people to survive? Doing a startup is a learning experience and entrepreneurship is a lifestyle.

How does iStart Ventures bring young entrepreneurs into its incubator program?

Through our close relationships with Jiaotong University, Shanghai Foreign Language University, and Tongji University, we have many programs organized for Chinese students, such as our Big Idea Competition.

What are iStart Ventures’ future plans?

To make iStart a much more international incubator, we’ll be launching a campus exchange program for the U.S. and European colleges to bring in students to start their business in Shanghai. We’re planning this for a conference held in September. We have also partnered with Fortune 500 companies and their innovation programs. We have hosted SAP executives in our incubator to assist startup entrepreneurs. We also brought Amazon to establish a cloud computing incubating center in Chongqing, an intense city with lots of industry and millions of people.

I believe that young Chinese companies are joining the global wave of innovation and China is becoming a big Silicon Valley.

Image Credit: iStart Ventures

 Editing by Mike Cormack (@bucketoftongues)

Korean game companies have been widely welcomed in China since The Legend of Mir 2 was released in 2001. The game was the most popular MMORPG (Massively Multiplayer Online Role Playing Game) in China in 2002 and 2003, with over 250,000 simultaneous users being reported, with claims of 120 million players worldwide. Following this pioneering effort, more Korean companies entered the Chinese market, introducing online and mobile games.

This trend was continued by internet giant Tencent as the company started to publish Korean-based games in China. In fact, with Tencent investing in overseas companies, Korean games were a dominant part of the list with many of the most popular games on Tencent’s QQ platform coming from Korean. CrossFire, one of the first free first-person shooters (FPS) released in China in 2008, recorded a peak 4 mio. concurrent users in 2012, with Tencent its exclusive agent service company. In an effort to retain its position as the dominant publisher of Korean games, Tencent established a partnership with Capstone Partners in 2010 to co-invest in Korean gaming companies.

Capstone Partners and Tencent

Capstone Partners LLC positions itself as one of the best ways for Korean startups to reach out to China, and boasts the largest fund for investing in early stage startups. Since its establishment in 2008, Capstone Partners has created four US$30-million sized funds with Tencent and Korea Fund of Funds, with a total fund size of US$200 million. Cutting the starting line by co-investing in seven Korean gaming companies, Studio Hon, Reloaded Studios, Topping, Nextplay, Redduck, Eyedentity and GH Hope Island, there are now more than 20 companies in the China market through the help of Tencent.

“We appreciate our collaboration with Tencent and are trying to provide promising Korean game companies to be introduced to China market,” general partner Eunkang Song said.

The VC also runs open seminars to provide Korean game companies as well as internally running a seminar for its portfolio companies to provide a China market overview. The company led a mobile gaming seminar in Korea on June 2014, inviting 30 Korean startups interested in entering the Chinese market. The VC also claims to have gained a better grasp of the U.S. market by collaborating with global accelerator Sparklabs, as the two occupy the same Maru180 building.

Gateway for promising early stage Korean game companies

It is not easy to tell from the early stage if a game will gain real interest from a Chinese audience. However, the VC has regularly successfully estimated a team’s capacity and future prospects. “Out of several dozen game companies in Korea, some companies stand out with a different approach to the market. When a company pitches and presents the demo, we can tell if the team is skilled, which is closely bound up with the future success of the game.”

Half of Capstone’s portfolio companies are game companies, while they also invest in IoT, big data and mobile commerce companies. Promising game companies include FLINT, the maker of mobile game ‘Be a Star’ for Korea’s dominant messaging app Kakao, and Gamevil, the maker of ‘Kritika‘ that gained strong attraction from China following its release three months ago. BLUEPIN, a mobile app book solution specializing company, achieved some success by co-developing education app KidsWorld with Tencent. Other mobile startups include VCNC, the maker of couples app Between, and Drama & Company, the maker of business card app Remember.

“The Korean startups’ strong point is that they optimize the culture code to spread out across Asian countries,” Song pointed out. “As you look into a Korean startup scene, you can find out a company that can be actively embraced by a Chinese audience.”

Image Credit: ShutterStock, Capstone Partners

Editing by Mike Cormack (@bucketoftongues)

Image Credit: CHINACCELERATOR