China’s Venture Capital Industry – A Fast-Paced, High-Stakes Landscapeby Wenhong You October 7, 2016
“I don’t think your financial projections are aggressive enough,” said one prominent Chinese venture capitalist during a pitch by an American CPG company. “By year 5, your revenue should be at least $100 million, not just $35 million.”
As a professional angel investor, my jaw was on the floor after hearing that comment. As a rule of thumb for US-based angel investors and venture capitalists, a startup company’s financial projections are treated as figures that are almost entirely aspirational and should always be taken with a grain of salt. Detailed financial projections show that a startup’s founders know where they want to take the company, but no American startup ever grows as fast as they say they will in their projections.
Therefore, to hear a VC say that a startup company’s financial projections were not aggressive enough was mind-blowing, but it also offered an important peek into the type of fast-paced, high-stakes ecosystem that Chinese VCs are used to.
Compared to Western VCs, Chinese VCs tend to cut bigger checks but also demand faster growth from their portfolio companies. But then again, this is to be expected for those that understand the development of the modern Chinese economy. First, the Chinese economy is fast-paced. In less than 40 years, China went from being one of the poorest countries in the world to the world’s largest economy with disposable income in China growing over 90 times from 1978 to 2015.
For the startup ecosystem, this high speed of economic growth means that a successful startup might only take 3-5 years to generate $100 million in revenue, as opposed to 7-10 in the United States. Second, the Chinese economy is high-stakes, which is a by-product of its high speed of growth as well as China’s enormous population. With 1.3 billion people, it means that if you have a good business idea in China, chances are there are probably 1,000 other people who have the same exact idea, so it’s a race to see who can get the most traction the quickest. However, 1.3 billion people also means that the winner takes the lion’s share of the largest consumer base in the world, a most enticing prospect for any would-be Chinese entrepreneur.
As a result, Chinese VCs cannot afford to be cautious and take things slow. If they are to make any returns on their investment, they must go all-in in an effort to ensure that their portfolio company is the one that will make it to market first.
So for those foreign entrepreneurs looking for Chinese investors, you must understand that you have to put up some really big numbers if you want to get them excited, and more often than not, the only way to get those numbers is to enter the fast-paced, high-stakes Chinese market.
In other words, you will be living the maxim, “The bigger the risk, the bigger the reward.”
Enjoy 2 days of 2016 China Venture Capital Winter Summit this November 20-21, an event for networking with angel investors, venture capitalists, and government officials from across China in beautiful Clear Water Bay, Hainan. The conference is absolutely free, including 2 days of room and board at Holiday Inn Resort – Clear Water Bay.
Featured Image: Canton Tower from Pixabay