China’s digital revolution was bankrolled with dollars, and it has emerged as the world’s second-largest destination for venture capital with more than 3,000 funds.
As the revolution rolls on, though, leading investors are as likely to hail from inside China as from overseas. Among them are Alibaba Group and Tencent Holdings, global investor darlings that have morphed into powerful investors in their own right. Alibaba has spent roughly $1.72 billion buying at least 50 startups and small businesses since 2013, while Tencent has doled out at least $780 million over the same period, according to Nikkei Asian Review. And as two of the world’s richest and fastest-growing companies, the rivals end up bidding against one another for hot investments, wielding the power to decide the fate of many emerging startups.
Where does that leave investors who lack similar capital and clout?
“There’s definitely a way for VCs to exist with these strategic investors,” said Hans Tung, a managing partner at GGV Capital, at the Fortune Brainstorm Tech International conference in Guangzhou, China, on Tuesday. “A lot of us are investing earlier and earlier. When the right time comes, Alibaba or Tencent ends up investing in that company to help it grow faster.”
Cao Yi, a founding partner of Source Code Capital, added: “The time window for startups in China is very, very key.”
The scale and speed at play in China’s VC scene have prompted “bubble” accusations in Silicon Valley and New York, Tung said.
“Everyone knows that the first three years decide who will win,” he said. “It is definitely not a bubble. There’s a science to how this works.”
Nevertheless, recent media reports about the apparent boom-bust of some Chinese bike-sharing companies, for instance, have fueled bubble speculation. The companies have attracted a whopping $2 billion in venture capital collectively in the past 18 months. Flush with cash, some have attempted to go global, only to burn through their money and shutter operations. That’s a ‘bubbly’ narrative, but one panelist was careful to draw a distinction.
“I don’t think there’s a bubble, but I think there’s this herd mentality that is a little big dangerous,” said Anna Fang, CEO of ZhenFund. “There’s this herd mentality in our field where investors run to two or three themes a year, so it could develop into a bubble in that particular sector.”