China’s mobile internet ripe for PE(2)

As China’s Innovation Works begins investing Fund II, it will have less emphasis on the maturing mobile internet and more on startups targeting SME productivity, an emerging sector.

China’s mobile internet sector has developed to the point that some of the startups now provide opportunities for private equity firms, said Chris Evdemon, partner at Innovation Works, an incubator and early-stage investor in China start-ups.

“There’s a lot of interesting activity [in mobile internet] now for growth stage private equity and mezzanine funds and those that focus on pre-IPO investments,” Evdemon told Private Equity International.

The venture firm, which has invested in China’s mobile internet companies since 2009, will begin this week drawing from Fund II, which closed in 2012 on $275 million. The focus will be more on startups working in the area of software as a service (SaaS) for China's SMEs.

“Chinese companies are not used to using the internet for productivity, Evdemon said. “The vast majority of SMEs are used to getting pirated software for free or are still using legacy solutions, but at some point they will realise [SaaS] is good for productivity and sales. It’s coming, it’s unavoidable and we want to be at the forefront like we were in 2009 with Internet mobile.”

It is not cool to fail in China like it is in Silicon Valley

Chris Evdemon
Innovation Work

Other targeted sectors include online education and online-to-offline commerce (O2O), he added.

Innovation Works has made 62 investments in the last three years. Most are pre-Series A stage, but 16 closed a Series A round. One startup, Anquanbao, which built a cloud-based service that helps protect websites from security breaches, reached a B round led by Northern Light Ventures. 

Innovation Works has had three M&A exits to large Chinese internet companies, though Evdemon did not provide details. 

The firm was founded in September 2009 by Kai-Fu Lee, former president of Google Greater China, with an investment from WI Harper Group. It runs incubators in Beijing and in a newly-opened space in Shanghai and does early-stage investment. 

Evdemon said his firm is different from a conventional venture firm – and from a state-sponsored incubator – because it employs a 46 professionals, including an investment team, lawyers, accountants and recruiters to help startups grow. 

China’s entrepreneurial culture presents a unique set of challenges, he said. In China, becoming an entrepreneur is less prestigious than in the US. Startups can’t pay as much as big Chinese internet companies such as Alibaba or Tencent, making it difficult for a founder to build his team. 

Innovation Works has eleven fulltime people involved in recruiting for portfolio companies, he said.

Another hurdle is that Chinese culture does not endorse failure as a business learning experience. In Silicon Valley, the entrepreneur will try a project for six months and if it’s not working out, he’ll accept that and move on to the next project. In China, startups may go on for months or years because the entrepreneurs often don’t want to concede failure.

“It is not cool to fail in China like it is in Silicon Valley.”

At the same time, China is the most competitive market in the world. 

“It’s very easy to see a successful model and easily copy it and very difficult to defend a leadership position as a startup,” Evdemon said.

The enormous growth potential for internet sector products and services is what keeps an entrepreneur focused. 

China has 500 million internet users and 300 million mobile internet users. The market pickup of some technology products has been astounding. For example, China went from 0 – 100 million Android devices in the last two years, Evdemon said. 

Weibo, the Chinese equivalent of Twitter, went from 0 – 300 million users in three years. 

“They are mind blowing numbers that never happened in any single market anywhere, ever, not even for Facebook and Twitter.”