Examining the State of the VC Market in China

2 September 2015

Jie Gong, Partner
Pantheon

The volume of VC investment in China has expanded rapidly in recent years due to a number of drivers. While the sheer size of increase in internet and mobile user numbers is an obvious contributing factor, the trend of consumption upgrade has created a plethora of opportunities to meet demands for increased leisure and entertainment activities, and for better service quality and customer experience. Compared with VC in the United States, VC in China tends to back companies less on technology breakthrough and more on business model innovation enabled by proven technology. In China, traditional retail and services industries have had a much shorter history compared with those in the West, and are much less entrenched as a result. This makes it easier for technology-enabled disruption to take place and fundamentally alter the distribution model or other key aspects of an industry value chain. This is what excites me most about Chinese VC: to identify and back true game-changers applied to massive, addressable markets.

The compelling investment case has attracted a large inflow of capital and significantly expanded the pool of market participants, which has in turn created a certain amount of froth in some VC segments. This is a concern for VC managers and LPs alike. From past experience, a large increase in capital supply for a specific strategy has often been the precursor of disappointing average returns for that strategy. While the average returns of Chinese VC might follow that pattern, there will continue to be individual outperforming GPs whose knowledge, foresight and discipline lead to outsized returns. The reason is simply that while the market has become much more crowded, the quality dispersion among market participants has also widened substantially. Skilled manager selection in this market is therefore crucial.

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