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Not All “Venture Capitalists Turn Their Backs on China”

Saw this article in VentureBeat this morning: “As Venture Capitalists Turn Their Backs on China, Funding Dries Up.”

Spurred a few thoughts:

1) Good investors invest in good and bad markets.  They do their homework and focus on finding the best entrepreneurs even when the markets are cloudy.  We invested in Alibaba Group in the early 2000’s when most investors were scared to death of China, and it’s been one of the greatest venture investments of all time – anywhere.  We consistently put $100M+ to work each year in China and the US, and we will again this year.  We’ve been doing it for 12 years – consistently – and entrepreneurs know they can count on GGV to support them regardless of what the public markets are doing.

2) The bar has been raised.  In hot markets, VC’s can throw money at copycat concepts and weak businesses in hopes they can “flip” them to the next set of investors (note: this happens in all markets, not just China).  This never works over the long run.  The bar raises, and VC’s have to work hard to find the best companies.  I am of course biased, but I believe firms that have been investing locally in China for the long term will have an advantage.  They have seen up and down markets, have the strongest relationships with the best entrepreneurs, and have built the infrastructure and teams to do their homework and find the best companies.  I know my Partners at GGV – as well as many of our strongest, long-term competitors in the market – have never been more excited.

3) The trends don’t lie.  There are still 500 million Internet users in China.  Android and iOS are taking the mobile phone market – 1 billion strong – by storm.  Consumers are rapidly turning China into the #1 market for every luxury goods maker in the world – from Mercedes to Apple to Coach.  If you want disruption on a massive scale, there is no better market than China.  Entrepreneurs know it, and the long term VC’s know it.

4) There are risks.  I won’t go into all the details, but yes there are major risks to investing in China (as there are in any emerging market).  They include competitive, regulatory, legal, currency, etc.  Some of these risks are why investors have pulled back on China.  It can be scary to invest in a new market.  Local investors with local knowledge, local relationships and deep industry knowledge tend to win when markets get scary.  As the saying goes “the tourists go home.”

There are Chinese companies which went public in 2010 and 2011 which never should have.  They were subscale without long term, sustainable business models.  But that doesn’t mean all Chinese companies fit that profile.  Ever heard of Qunar, 360Buy or YY?  They are very real companies with very real business models and massive user bases.  As it has on the VC side, the bar has been raised for IPOs, and we think that is a good thing.

But make no mistake – despite the headline at VentureBeat – not all venture capitalists are turning their backs on China.  The long term investors are hunkering down, backing the best entrepreneurs, and looking forward to the challenges and opportunities ahead.

Disclosure: GGV is an investor in Qunar and YY.

3 Responses

  1. […] team investing out of one venture capital fund across the US and China.  Twelve years later, we couldn’t be more excited to be investing Fund IV at a time when technologies like mobile, social and cloud computing are creating massive […]

  2. In the past a few years, Chinese companies went to US markets to IPO, some were good while some were bad. Bad ones usually were artificially made just for IPO, not for business. We Chinese usually finds out some strange company names who claimed themselves on trade in US, but we never heard of them. As a long time goes on, we gradually made a conclusion that “If a company’s name starts with ‘China’, leave it! it must be an artificial one”. However, the US investors seems still not knowing this joke, and that is why they got hurt so badly. The most interesting thing is not why bomb explodes, but is why it takes so long?

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