ADG China Insights October 2017


October 2017 - Too much VC money driving the clones - is it finally ending?

nlb.pngOver the last few years the growth of China tech start-ups has been mind boggling. The net result is that it has improved the quality of life for many people across China. For me, I most enjoy the ease of mobile payments, finding high quality Chinese food in a hip modern environment, and meeting young, smart entrepreneurs building great technology companies with the same vibe you  might find in Silicon Valley. It has been a great trend made possible by an entrepreneurial spirit and massive amounts of local and global VC capital.

But with the good comes the bad. For every one of China's 55 private unicorns you will find 20 copycats behind each of them. And the reason they exist is not because of the entrepreneurs but driven by VCs worried about losing access to their capital if their investors don't see them allocating capital into the hot sectors - so they create the pseudo entrepreneur to build the copycat company - problem solved. This, along with the dumb money, has created what people in China mockingly calling the "VC business model" - driving prices down without any consideration for profits or even an inkling of a sustainable long term strategy.

Over the last few months it appears that a rationalization cycle is finally coming to the rescue and accelerating.  We have seen a noticeable uptick in companies that are running out of funding and struggling to raise follow-on rounds. This is a positive trend and we expect to see a renewed focus on sustainable business models and a slow down in the endless rising cost of salaries, office space and hopefully even the housing prices here in Beijing. If you have a technology company and haven't been to China in the last few years it is time for a visit and see for yourself. On our next newsletter I will talk more about why Sino - Foreign JVs are back. - Chris DeAngelis, ADG


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About The Author

Chris DeAngelis is a Partner and the General Manager of Alliance Development Group (ADG). Chris is considered a leading expert on the Chinese technology scene and is regularly cited in leading media including The Wall Street Journal, The Financial Times, Forbes, TechNode, MSNBC, Digital Trends, China Economic Review, International Business Times, Thomson Reuters and others. He has BS in Accounting from Lehigh University and an MBA from Columbia Business School. He has two daughters and has been living in Beijing since 2005.