The global COVID-19 outbreak has caused enormous disruption for many start-ups. This sudden and unexpected pause has however given businesses time to review their strategy and solidify their business fundamentals. In this survival of the fittest environment it has never been more important for companies to adapt and restart quickly.
In recent weeks, China has slowly resumed its economic activities. Although it will take time for the country to be back to its normal growth trajectory, we are still optimistic about the mid to long-term potential. Businesses with strong fundamentals - great teams, fantastic business models and strong paths to profitability, are still going to be able to leverage favorable market trends. The Chinese government has also been advocating the developments of “new infrastructure” and has been accelerating the construction of 5G networks and data centers, which will benefit these companies further. As a result, we continue to see ample opportunity to back technology innovations across various fields:
Improving efficiency and productivity is always a key driver of the corporate world and this need is even more pressing in these challenging times. Being able to leverage technology innovation to create better business models, contain cost and maximize productivity is now a matter of life and death for many companies. Start-ups that can create sustainable value for their corporate customers are companies we’re looking to support. The ability to extract insights from data will enable new applications to drive quantum leap improvements in efficiency, cost, as well as product and service quality. For example, Kyligence, a company we invested in back in 2018, is helping many corporates do that job.
Traditional industry operations incur human resources, assets, machineries, systems, products and services. Each component generates data which can be utilized to create a constructive feedback loop within the entire value chain. Corporates can make use of the information to improve the processes and procedures and better understand customer’s needs. The effective use of the relevant data allows companies to potentially develop new revenue streams by bettering its existing products and services, while exploring opportunities to launch new ones. We expect the launch of 5G, which allows speedier transmission of data, to further fuel the operational upgrades across many industries.
The explosion of data has exponentially grown computational power and recent advancements in Deep Learning and this has fueled the recent development of Artificial Intelligence (AI). There was a time where AI was the buzz word in VC industry, but investors are getting more pragmatic by seeing beyond the pure tech and focusing on actual application. A good AI company is one which can apply and commercialize the technology by solving a specific problem.
Over the past two years, we’ve been closely following AI developments in China and invested in Pony.ai and Insilico. Both demonstrate effective use of AI in, respectively, auto-driving and drug discovery. The AI industry is going through a profound paradigm shift from being frontier technology to becoming infrastructure technology, much like the internet in the late 90s. We expect AI to penetrate all aspects of traditional industries. As a result, we’re currently focusing on the application of AI and robotics technology in vertical industries and looking for companies using AI to address real pain points in specific industries - with clear ROI, large market potential and stability. With our unique global platform and ecosystem, we can do more than most to help companies with the ambition of going global.
The highly regulated financial industry here in China offers start-ups a unique opportunity to flourish. Unlike more mature markets, there are huge service gaps between financial institutions and their customers (both individuals and corporates). Our earlier investments, such as Huifu and PingPong support small to medium enterprises in payment solutions. FenBeiTong, which we invested recently helps corporates to manage their expenses. Wealth management and asset management continues to be one of the sub-sectors we are following closely.
China has two million of high net-worth individuals with average asset of RMB 30m as of last year. The emerging middle class has also created more demand for broader investment channels. For the past decades investment activities in China have been confined to the A-share market, real estate and later P2P financing. Wealth management is still a relatively new concept. But we see the market is developing rapidly. The new asset management regulations announced in 2018 curtailed shadow banking and reduced financial risks, and at the same time set out a framework which guides the development of the industry. A plethora of new companies have been set up to offer investment advisory, product design, risk management and tech-enabled transactions to the Chinese emerging wealth. With people’s enthusiasm about Chinese capital markets, we see opportunities for start-ups to play a huge part in wealth management by supplementing the traditional players.
Consumer/ Consumer Tech
The miraculous rise of e-commerce led by Alibaba has been a textbook case of venture investment in China, which we were proud to be an early part of. Two decades after our initial investment in the company, we believe the consumer story is evolving into different new angles.
The consumer market here is one of the most competitive in the world. How to stand out from the over-crowded market, win loyal customers and improve sales efficiency are recipes for success. Unlike the previous generation of consumers who grew up with generic low-value products, the young internet-bred generations are looking for products which resonate with their individual and cultural identities. Brand and brand values are becoming more important among the Generation Z who are now the largest consumer group. For example, the sports brand founded by the famous gymnast Li Ning has become a fashionable label locally, and Hedone, a home-grown cosmetics brand is getting increasingly popular among young women in China.
New retail which combines the merits of online and offline sales platforms, is about building a complete retail experience around customers’ needs and desires. With the rise of social media and the popularity of new channels - WeChat mini program, TMall flagship store, live-streaming sales, retail has become more personalized. For instance our portfolio company and online retail platform Mama+, leverages social media groups to cultivate relationships with potential customers, mostly mothers, and shares product information which they might be interested in. Property sales company, Julive, uses its online platform to understand customer preferences before providing them with one-on-one consultancy services offline. In the era of new retail, companies have to break through traditional operating models and utilize different social channels to engage with their customers. Solid customer relationships will be one of the determining factors for the success of this new brand of retailer.
We are also interested in supply chain upgrades, particularly those companies that can leverage technological innovation to speed up the turnaround of products and services and provide better cost efficiency. Many Chinese shoppers have turned online during the COVID-19 outbreak. The sudden surge in demand was a challenge to the supply chain. We believe the pandemic will further accelerate the push for efficiency. That opportunity can also be applied to Southeast Asia, India and the Middle East where Chinese products are in huge demand.