For those who may not be familiar with the scene, 500 Startups is a renowned startup accelerator from Silicon Valley. In the past five and half years, they have already invested in over 1,500 companies in over 50 countries.
At GMIC Beijing this year, we got a chance to speak with Rui Ma, Partner at 500 Startups, to hear about her perception of the Chinese tech market right now.
You are one of the judges in the semi-final of the G-Startups competition today. What did you think of the competition this morning?
Oh I think it was really nice. GMIC always has high-quality startups, but the contestants in the G-Startup pitch contest this year were even better quality. I found several projects pretty intriguing. But we’re an angel investment fund, so it may be a bit too late for us. I’ve already introduced one of the projects to my colleague.
Compared with the projects in the past few years, what do you think are the highlights of the competing projects this year?
They have a clear idea of their business models and are careful about what they’re doing. I voted for two of the three winners in the morning, Yi Hu Dao Jia and Deepshare.
I realized that 500 Startups invested in over 1500 companies all over the world, but you only invested one company, Fiberead, in China last year. Why?
The reason is pretty simple: we focus on pre-A series startups but companies in the pre-A rounds are normally only raising RMB right now. So for them, we don’t have the right currency for investment right now. We’ve been considering starting an RMB fund.
Will the RMB fund be set up this year?
I can’t guarantee it’ll be this year but we’ve been discussing this for a while. At the moment, we’re raising our next USD fund so after we’ve finished that, we’ll consider whether we should start an RMB fund next.
It’s not that we don’t think the Chinese market is important but we need to focus on our master fund first.
You’re in charge of 500 Startups’ investments in the Greater China area. What do you think are the primary differences between the startup scene in mainland China and in other Asian areas?
Well, I think startups in the mainland are the most mature in this region. For pre-A projects, we find that the quality of pitches are increasing — but there’s still room for improvement. When it comes to the maturity of products and knowledge of product distribution channels, mainland entrepreneurs tend to be more thoughtful.
Ecosystems in other (Asian) countries are lagging way behind China. About 50% of venture capital from all over the world were pouring into the U.S. last year, while 25% was invested into mainland China. So all the other countries combined makes up the remaining 25%. Thus, it’s pretty self-evident that innovation in these two countries take up a great percentage.
Who do you think plays the most important role in building up the startup ecosystem in China now? The government for their highly supportive regulations, or other parties?
I think the government plays an important role, especially in promoting using the media. I’ve been in China for eight years and four years ago, I began to visit Hong Kong and Taiwan frequently. I think the entrepreneurial atmosphere there is less open than it is in the mainland. Particularly, I think entrepreneurs here have a higher risk-resistance and aren’t so afraid of failure. Starting all over again from scratch seems to be less frightful to them. I think this cultural difference is a very significant drawback that prevents other Asian countries from further development.
Which track will be 500 Startups’ next primary focus in Greater China?
Our primary focus will still be cross-border projects.
Right now, we have a new business model where we raise a lot of micro funds. We may invest more in the Greater China area via these micro-funds — our potential investment theme may be hardware. There are a lot more hardware projects here in China.
And if we have an RMB fund, we may focus more on B2B. We spent half of our master fund in B2B as well.
The B2B market seems to be more popular and mature in the U.S. than in China. Do you agree?
I know a couple of funds which are only now investing in B2B in China. I think the way investments are made here is slightly different compared with funds in the U.S.
The B2B market in the U.S., in general, is more mature, so most companies only focus on a specific function. But here in China, you need to upgrade and digitise quite a number of industries. One single online function isn’t enough for them. A better way to develop a B2B product here is to locate a specific niche sector and develop a comprehensive solution package for the entire sector instead of getting them onto a certain platform for certain functions.
For example, an American unicorn may only need to do one thing for companies, like payroll. But in China, for example, you need to get into transportation, and develop an entire system for them, like CRM + HR system + other IT support. It’s very different this way.
If 500 Startups can’t invest in a lot of startups here in China because of all these limitations, what will be the primary direction for your development here in China?
We’ll organise a lot of trips, like trips from Silicon Valley to China. We also divided our 14-week acceleration program into shorter sub-programs. We are bringing sub-programs that we think will be most useful to Chinese entrepreneurs to this market.
YCombinator is also very active in China this year. What do you think of this trend?
I think YCombinator may not localise their products to a great extent here. Not to say we’re moving our entire accelerator to China, but we started investing across borders earlier (since 2010). 39% of the projects we invested in are out of the U.S. I think this percentage is higher than YC or PlugNPlay. We have investments in 62 countries in the world, so we’re more experienced in introducing these projects to the U.S.
And since last year, we gradually moved some of our projects from the U.S. to overseas markets. The U.K. and Malaysia are two of our primary targets right now. I think China will be next, and also Korea. We may do more localisation in these four countries. We’ll be more experienced in duplicating our models in Silicon Valley to our markets.
Earlier this year, quite a number of Chinese accelerators and co-working spaces shut down. Do you think it’s a signal that the Chinese market is cooling down?
This market, per se, is very competitive. We recently did a calculation of our investments. After five years, 25% of the companies we invested in are dead while another 25% have been acquired. Others are struggling to get out of this fierce competition. And this performance is already much better the industry average.
Quite a number of accelerators in China right now still focus on real-estate and don’t have a very diversified and clear revenue model. If they only focus on housing startups, I don’t think it’s going to be healthy for their business.
What do you think of the opinion that the valuation of Chinese startups is too high and the Chinese market is overheated?
First of all, we are a global fund, so whether the Chinese market is overheated or not won’t affect us that much, because we can switch to other relatively cool markets.
We do think the prices are still a bit high, but I think it’s already much better than the previous several quarters.
What are the most important factors that you use to evaluate a project, business model, market projection or team?
It’s definitely not the business model, especially for early-stage investment funds like us, because business models may change. The market doesn’t matter that much either.
It’s silly to value a team using its background or profile, right? We evaluate the team using its product because you can tell a team’s development and operation capacity by looking at its products.
Firstly, if a team can make sure their product goes live on time, that indicates strong management and operation ability. And also, each year, you need to hand in a budget to your board. If it’s a good team, your budget should not deviate that far from your exact expenses. We’re not expecting very detailed financial results for early-stage startups, but you need to be clear about how many users you may be able to get, what your growth rate might be, through which channels you plan to get these users and how much longer you can carry on with these costs. A budget like this will look really effective to us.
Actually, it means you can tell the capacity of a team by looking at their products and budget plan. So, in fact, we’re still assessing the team, but just in another way.
AllChinaTech has a media partnership with GMIC. AllChinaTech is a startup media platform dedicated to providing timely news and analysis on the Chinese tech industry in English.