China's latest generation of entrepreneurs are struggling right along with the country's economy. Venture capital investments in China are down thanks to sagging valuations. But investors with skin in the game say things are poised to get better.
An expert group of venture capitalists and angel investors gathered at Stanford University's China 2.0 conference to talk about the investment outlook in China. While the economy's slow-down has hampered their investments, they say, it's still a good time to be an entrepreneur in China.
The bad news is that China's economy could be better, and VCs have kept their distance. “There's been a slow-down in venture capital investments and an overall macroeconomic slowdown,” says David Chao, co-founder of Silicon Valley-based VC firm DCM. Dow Jones released a report in early August confirming that venture capital deals declined in the first half of 2012, which weakened the world's second-largest economy. It might be unwelcome news now, but the slow-down might be short-lived.
Typical VC investing cycles in the U.S. last about 10 years. In China those cycles are shortened to four to five years, says Chao. That means things could rebound much faster than they would in other markets and that's attractive to investors. Unusually for China, it's M&A that could set that rebound in motion.
Traditionally, M&A hasn't been a popular option for entrepreneurs in China, but that could be set to change as internet sectors, like education, gaming, and mobile continue to explode. "Competition among companies has become more fierce,” says managing partner at Qiming Ventures Hans Tung. “As a result, the big companies are buying up smaller ones to compete.”
Tung and his peers argue that for investors there is still plenty of opportunity in China. E-learning and education startups are on the rise, because people there are fed up with the sub-par education system. “The biggest opportunity in China investing right now is e-learning,” says founder director of ZhenFund Xu Xiaoping. “Online education is quickly growing in other parts of the world, and we are hopeful that China will catch up.”
Bottom line: Investors are cautiously optimistic about investing in China. On the one hand, there is plenty of opportunity and innovation to entice them. On the other hand, the economy is hurting and M&A isn't as prominent as they'd like. Ultimately, it comes down to valuations. Once they come down, investors will come back. “The economy is slowing down, but the market will be back” says Fang. “Investors will come back to the table when the valuations become more attractive.”
