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Is it so bad to take money from Chinese venture funds?
China is becoming a superpower in the tech industry. According to Straits Times, China is the only place in the world where it takes less than six years for a startup to become a unicorn — it takes seven years in the U.S., eight years in the U.K. and 11 years in Germany. Despite geopolitical tensions and recent amendments in CFIUS, it is hard to ignore China.
When I joined Runa Capital almost a year ago, my task was to help our portfolio companies enter the Chinese market, find the right partners and raise funding from Chinese investors. And almost on every call with our startups, colleagues from Runa or other global VCs, I heard: Is it a good idea to raise from a Chinese VC? Is it OK to co-invest with Chinese investors? I was surprised to learn that there is little research answering such questions, as there is a lack of adequate information in English about Chinese investments.
Access to the Chinese market seems to be an obvious reason to invite Chinese funds aboard, but only about 20% of Western startups with Chinese capital have operations in China.
So as a Mandarin-speaking specialist, I decided to fill this gap by conducting a study based on Chinese VC database ITjuzi (the Chinese version of Crunchbase) with the help of our powerful data science resources developed by Danil Okhlopkov.
Below, I will try to answer the following questions using statistics and a case-based approach:
- How much do Chinese funds invest abroad?
- What is the current trend?
- Can Chinese investors bring any value to Western startups?
- Who are the most active Chinese investors abroad?
- In which areas can Chinese funds bring the most value?
- What value can Chinese investors bring?
- When is it better to invite a Chinese investor?
Chinese investors are interested in Western startups
After studying data from ITjuzi, we estimated that Chinese funds invested around $250 billion in 2020 (three times higher than the figure reported in Crunchbase). This figure puts Chinese VC investments only 30% lower than investments by U.S. funds, but three times that of U.K. funds and 12.5 times more than German funds.
Fig. 1 — Comparison of investment from different countries in 2020, $bn. Source: Crunchbase, ITjuzi. Image Credits: Denis Kalinin
However, only 15% of investments in 2020 and 17% of investments in the first half of 2021 were in companies outside China, significantly lower than in 2019. This appears to be because during COVID, China’s economy recovered much faster than other countries’, so many Chinese investors preferred to redirect their capital flows to the domestic market.
On the other hand, there is great potential for overseas investments to rebound as soon as the borders reopen and the global economy starts to recover.
Fig. 2 — Dynamics of Chinese investments. $bn. Source: Crunchbase, ITjuzi. Image Credits: Denis Kalinin
We can also see that Chinese investors are eyeing European startups favorably, which is related to U.S.-China geopolitical tensions as well as the fact that the European VC market is becoming mature.
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Is India’s BNPL 2.0 set to disrupt B2B?
Both as a term and as a financial product, “buy now, pay later” has become mainstream in the past few years. BNPL has evolved to assume various forms today, from small-ticket offerings by fintechs on consumer checkout platforms and marketplaces, to closed-loop products offered on marketplaces such as Amazon Pay Later (which they are now extending for outside use as well). You can also see some variants offered by companies that want to expand the scope of consumption and consumer credit.
Globally, BNPL has seen the most growth in the consumer segment and has driven retail consumption and lending over the past few years. Consumer BNPL offerings are a good alternative to credit cards, especially for people who do not have a credit history and can’t get credit from banks. That said, a specific vertical of BNPL products is gaining traction — one targeted toward small and medium enterprises (SMEs). This new vertical is known as “SME BNPL.”
BNPL can be particularly useful when flow-based underwriting or transaction-based underwriting is used to offer credit to small businesses.
B2B commerce in India is moving online
E-commerce has seen tremendous growth in India over the past decade. Skyrocketing smartphone and internet penetration led to rapid growth in e-commerce across large cities and smaller towns alike. Consumer credit has also taken off in parallel as credit cards and digital lending spurred credit-based consumption across offline and online stores.
However, the large B2B supply chain enabling the burgeoning retail market was plagued by bottlenecks and inefficiencies because it involved a plethora of intermediaries and streamlining became a big problem. A number of tech players responded by organizing the previously disorganized B2B commerce market at various touch points, inserting convenience, pricing and easier product access through tech-enabled logistics and a modern supply chain.
Image Credits: Redseer
India’s B2B e-commerce space has developed rapidly since 2020. Small businesses have moved from using paper to smartphone apps for running a significant part of their day-to-day business, leading to widespread disruption in how businesses transact today. The COVID-19 pandemic also forced small businesses, which were earlier using physical means to procure goods and services, to try new and online models to conduct their affairs.
Image Credits: Redseer
Moreover, the Indian government’s widespread promotion of an instant payments system in the form of the Unified Payments Interface (UPI) has changed how people send money to each other or pay merchants for their goods and services. The next step for solving the digital B2B puzzle is to embed credit inside every transaction and invoice.
Image Credits: Redseer
If we compare online B2B transactions to the offline world, there is only one missing link: The terms offered to small businesses by their supplier/distributor or vendor. Businesses, unlike consumers, must buy goods and services to eventually trade them, or add value and sell to consumers or others down the value chain. This process is not immediate and has a certain time cycle attached.
The longer sales cycle means many small businesses require credit payment terms when buying inventory. As B2B commerce scales and grows through digital means, a BNPL product that caters to the needs of SMEs can support their growth and alleviate the burden on their cash flows.
How does consumer BNPL differ from SME BNPL?
An SME BNPL product is a purchase financing product for small businesses transacting with suppliers, distributors, aggregator platforms or B2B marketplaces.
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Have ‘The Privacy Talk’ with your business partners
As a parent of teenagers, I’m used to having tough, sometimes even awkward, conversations about topics that are complex but important. Most parents will likely agree with me when I say those types of conversations never get easier, but over time, you tend to develop a roadmap of how to approach the subject, how to make sure you’re being clear and how to answer hard questions.
And like many parents, I quickly learned that my children have just as much to teach me as I can teach them. I’ve learned that tough conversations build trust.
I’ve applied this lesson about trust-building conversations to an extremely important aspect of my role as the chief legal officer at Foursquare: Conducting “The Privacy Talk.”
The discussion should convey an understanding of how the legislative and regulatory environment are going to affect product offerings, including what’s being done to get ahead of that change.
What exactly is The Privacy Talk?
It’s the conversation that goes beyond the written, publicly posted privacy policy and dives deep into a customer, vendor, supplier or partner’s approach to ethics. This conversation seeks to convey and align the expectations that two companies must have at the beginning of a new engagement.
RFIs may ask a lot of questions about privacy compliance, information security and data ethics. But it’s no match for asking your prospective partner to hop on a Zoom to walk you through their broader approach. Unless you hear it firsthand, it can be hard to discern whether a partner is thinking strategically about privacy, if they are truly committed to data ethics and how compliance is woven into their organization’s culture.
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Investors are doubling down on Southeast Asia’s digital economy
Southeast Asian tech companies are drawing the attention of investors around the world. In 2020, startups in the region raised over $8.2 billion, about four times more than they did in 2015. This trend continued in 2021, with regional M&A hitting a record high of $124.8 billion in the first half of 2021, up 83% from a year earlier.
This begs the question: Who exactly is investing in Southeast Asia?
Let’s explore the three key types of investors pouring money into and driving the growth of Southeast Asia’s tech ecosystem.
Over 229 family offices have been registered in Singapore since 2020, with total assets under management of an estimated $20 billion.
Big tech
Southeast Asia has become an attractive market for U.S. and Chinese tech firms. Internet penetration here stands at 70%, higher than the global average, and digital adoption in the region remains nascent — it wasn’t until the pandemic that adoption of digital services such as e-wallets and online shopping took off.
China’s tech giants Tencent and Alibaba were among the first to support early e-commerce growth in Southeast Asia with investments in Sea Limited and Lazada, and have since expanded their footprint into other internet verticals. Alibaba has backed Akulaku, M-Pay (eMonkey), DANA, Wave Money and Mynt (GCash), while Tencent has invested in Voyager Innovations (PayMaya), SHAREit, iflix, Ookbee and Sanook.
U.S. tech firms have also recently entered the scene. In June 2020, Gojek closed a $3 billion Series F round from Google, Facebook, Tencent and Visa. Google, together with Singapore’s Temasek Holdings, invested some $350 million in Tokopedia in October. Meanwhile, Microsoft invested an undisclosed amount in Grab in 2018 and has invested $100 million in Indonesian e-commerce firm Bukalapak.
Venture capitalists
In Q1 2021, Southeast Asian startups raised $6 billion, according to DealStreetAsia, positioning 2021 as another record year for VC investment in the region.
The region is also rising in prominence as a destination for investment capital relative to the rest of Asia. Regional VC investment grew 5.2 times to $8.2 billion in 2020 from $1.6 billion in 2015, as we can see in the table below.
Image Credits: Jungle VC
Southeast Asia also has many opportunities for VC investment relative to its market size. From 2015 to 2020, China saw VC investment of nearly $300 per person; for Southeast Asia — despite a recent investment boom — this metric sits at just $47.50 per person, or just a sixth of that in China. This implies a substantial opportunity for investments to develop the region’s digital economy.
The region’s rising population and growth prospects are higher due to China’s population growth challenges, alongside the latter’s higher digital economy market saturation and maturity.
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Meet retail’s new sustainability strategy: Personalization
We have been raised to believe in recycling, but it has mostly been a sham — only 9% of all plastic waste produced in 2018 was recycled. The beauty industry produces over 120 billion units of packaging every year, little of which is recycled. Globally, an estimated 92 million tons of textile waste ends up in landfills.
Reducing waste is key to meeting environmental milestones, and some retail firms have narrowed in on a unique approach to minimize what their customers throw away: personalization. Accurate personalization can guide consumers to the right products, reducing waste while increasing conversion and loyalty.
Reducing waste is key to meeting environmental milestones, and some retail firms have narrowed in on a unique approach to minimize what their customers throw away: personalization.
For big brands and retailers, personalization is expected to be the top category for tech investment this year. Moreover, personalization holds high appeal, with 80% of survey respondents indicating they are more likely to do business with a company if it offers personalized experiences and 90% indicating that they find personalization appealing, according to a survey by Epsilon.
Startups that deliver sustainable personalization solutions that also improve business for retailers and brands fall into three categories:
- AR virtual try-on with shade matching.
- Advanced virtual fitting rooms with VR/AR for fashion.
- Smart packaging with IoT and distributed ledger technology.
AR virtual try-on with shade matching
Faces are easy to map, since it’s not difficult to virtually place a lipstick color on a face, but using AR and AI to recommend skin-tone-matching makeup products has been challenging for many AR virtual try-on companies. “I’ve been searching for an intuitive foundation-shade-finder tool since launching Cult Beauty in 2008, and nothing has lived up to the experience of having a professional match you in daylight until I discovered MIME,” says Alexia Inge, founder of Cult Beauty. “There are so many variables like light, skin tones, prevalent undertones, device, screen, OS, formula density, formula oxidation, as well as preferences for coverage levels, finish, brand and skin type,” she says.
MIME founder and CEO Christopher Merkle said, “Virtual try-on has exploded in the past few years, but for color cosmetics, the technology doesn’t help solve the primary customer pain point: shade matching. From day one, I decided to focus our company’s R&D efforts exclusively on color accuracy. I want to make sure that when the consumer receives their foundation or concealer in the mail, it’s the perfect shade once applied to their skin.”
MIME’s Shade Finder AI allows consumers to take a photo of themselves, answer a few questions, then get matched with a makeup color that pairs with their skin tone. MIME helps retailers and brands increase their online and in-store purchase conversion by up to five times. More than 22% of beauty returns are due to poor customer color purchases, but Merkle says MIME can get returns as low as 0.1%.
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5 factors that can make or break a startup’s growth journey
The “health” of a startup’s growth can be a strong predictor of how large and valuable it can become. Our generation’s most valuable startups have all sustained a high rate of user/revenue growth over an extended period of time. As such, founders, employees and investors are all trying to figure out if their startup can achieve sustainable growth to create a large and enduring business over time.
Simply looking at top-line growth tells you relatively little. Two startups that are currently growing users or revenue 300% every year can each have different long-term prospects. It’s almost like looking at two people of the same age, height and weight, and projecting the same quality of life and longevity for both — there are many more factors that can help you make better predictions. Startups are similar, and it’s important to dig deeper into the health of a startup’s early growth and work to build the right foundation from an early stage.
Paid marketing can be a useful tool in your toolkit to accelerate an already humming flywheel. Just don’t let it be the only one.
Prior to becoming a VC at Defy, I founded two companies and was Eventbrite’s VP of growth for over six years from startup through IPO. Working across all stages from founding through to public company and advising many other startups along the way, I’ve landed on five critical factors for healthy and sustained growth that can be the difference between a startup failing, getting to a modest exit or building a valuable and enduring billion-dollar company.
Healthy engagement and retention are key
At its core, any successful product or service delivers more value to the user/customer than it costs to use (money or time). To see if your product is delivering true value, ask if it is achieving strong user engagement and customer retention. My friend and growth guru Casey Winters captures this well: “Product-market fit is retention that allows for sustained growth.”
Consumer startups can evaluate this via through cohort-based retention analysis of how frequently customers use the service, and how long they are retained for. SaaS businesses should be talking with customers often to gauge their happiness while also looking at logo retention as well as gross and net revenue retention — ideally, the business should show early signs of being a net-negative churn business, wherein revenue from existing customers actually grows over time, even after accounting for churned customers.
Many people incorrectly think “startup growth = customer acquisition.” In reality, retention is the most fundamental aspect underlying sustainable growth.
Customer obsession creates “pull” from the market
Customer obsession, plus organic pull from the market, are indicators of early product-market fit and signals of future growth potential.
Here are a couple ways to measure this:
See if a healthy percentage of the business is growing without paid spend, generally through word of mouth or some other form of virality. If your business is seeing more than 50% organic growth at a fast rate (200% to 300%+ year over year), you’re solving people’s needs well enough that they’re now sharing with others and creating a positive viral effect.
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A founder’s guide to effectively managing your options pool
There’s an old startup adage that goes: Cash is king. I’m not sure that is true anymore.
In today’s cash rich environment, options are more valuable than cash. Founders have many guides on how to raise money, but not enough has been written about how to protect your startup’s option pool. As a founder, recruiting talent is the most important factor for success. In turn, managing your option pool may be the most effective action you can take to ensure you can recruit and retain talent.
That said, managing your option pool is no easy task. However, with some foresight and planning, it’s possible to take advantage of certain tools at your disposal and avoid common pitfalls.
In this piece, I’ll cover:
- The mechanics of the option pool over multiple funding rounds.
- Common pitfalls that trip up founders along the way.
- What you can do to protect your option pool or to correct course if you made mistakes early on.
A minicase study on option pool mechanics
Let’s run through a quick case study that sets the stage before we dive deeper. In this example, there are three equal co-founders who decide to quit their jobs to become startup founders.
Since they know they need to hire talent, the trio gets going with a 10% option pool at inception. They then cobble together enough money across angel, pre-seed and seed rounds (with 25% cumulative dilution across those rounds) to achieve product-market fit (PMF). With PMF in the bag, they raise a Series A, which results in a further 25% dilution.
The easiest way to ensure you don’t run out of options too quickly is simply to start with a bigger pool.
After hiring a few C-suite executives, they are now running low on options. So at the Series B, the company does a 5% option pool top-up pre-money — in addition to giving up 20% in equity related to the new cash injection. When the Series C and D rounds come by with dilutions of 15% and 10%, the company has hit its stride and has an imminent IPO in the works. Success!
For simplicity, I will assume a few things that don’t normally happen but will make illustrating the math here a bit easier:
- No investor participates in their pro-rata after their initial investment.
- Half the available pool is issued to new hires and/or used for refreshes every round.
Obviously, every situation is unique and your mileage may vary. But this is a close enough proxy to what happens to a lot of startups in practice. Here is what the available option pool will look like over time across rounds:
Image Credits: Allen Miller
Note how quickly the pool thins out — especially early on. In the beginning, 10% sounds like a lot, but it’s hard to make the first few hires when you have nothing to show the world and no cash to pay salaries. In addition, early rounds don’t just dilute your equity as a founder, they dilute everyone’s — including your option pool (both allocated and unallocated). By the time the company raises its Series B, the available pool is already less than 1.5%.
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6 tips for establishing your startup’s global supply chain
Startups are hard work, but the complexities of global supply chains can make running hardware companies especially difficult. Instead of existing within a codebase behind a screen, the key components of your hardware product can be scattered around the world, subject to the volatility of the global economy.
I’ve spent most of my career establishing global supply chains, setting up manufacturing lines for 3D printers, electric bicycles and home fitness equipment on the ground in Mexico, Hungary, Taiwan and China. I’ve learned the hard way that Murphy’s law is a constant companion in the hardware business.
But after more than a decade of work on three different continents, there are a few lessons I’ve learned that will help you avoid unnecessary mistakes.
Expect cost fluctuations, especially in currency and shipping
Shipping physical products is quite different from “shipping” code — you have to pay a considerable amount of money to transport products around the world. Of course, shipping costs become a line item like any other as they get baked into the overall business plan. The issue is that those costs can change monthly — sometimes drastically.
At this time last year, a shipping container from China cost $3,300. Today, it’s almost $18,000 — a more than fivefold increase in 12 months. It’s safe to assume that most 2020 business plans did not account for such a cost increase for a key line item.
Shipping a buggy hardware product can be exponentially costlier than shipping buggy software. Recalls, angry customers, return shipping and other issues can become existential problems.
Similar issues also arise with currency exchange rates. Contract manufacturers often allow you to maintain cost agreements for any fluctuations below 5%, but the dollar has dropped much more than 5% against the yuan compared to a year ago, and hardware companies have been forced to renegotiate their manufacturing contracts.
As exchange rates become less favorable and shipping costs increase, you have two options: Operate with lower margins, or pass along the cost to the end customer. Neither choice is ideal, but both are better than going bankrupt.
The takeaway is that when you set up your business, you need to prepare for these possibilities. That means operating with enough margin to handle increased costs, or with the confidence that your end customer will be able to handle a higher price.
Overorder critical parts
Over the past year, many businesses have lost billions of dollars in market value because they didn’t order enough semiconductors. As the owner of a hardware company, you will encounter similar risks.
The supply for certain components, like computer chips, can be limited, and shortages can arise quickly if demand increases or supply chains get disrupted. It’s your job to analyze potential choke points in your supply chain and create redundancies around them.
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The pre-pitch: 7 ways to build relationships with VCs
Most founders fall into an extremely common trap: Just because you produced outstanding results for the last round of investors doesn’t mean new investors will believe you. This new cohort hasn’t seen that performance firsthand, and they have no reason to trust you yet.
As a founder approaching your next round, it’s common to wonder, “How do I get this new group of investors to trust that I will perform?”
In our experience, founders who fundraise successfully are great at building relationships, and they usually deliver what we call “the pre-pitch.” This is the “we actually aren’t looking for money; we just want to be friends for now” pitch that gets you on an investor’s radar so that when it’s time to raise your next round, they’ll be far more likely to answer the phone because they actually know who you are.
But the concept of the pre-pitch goes deeper than just having potential investors be aware of your existence. Building relationships with potential future investors requires you to think less like a founder and more like a marketer — much of the relationship heavy lifting comes long before it’s time to ask for a capital commitment.
If an investor has made a deal in your space, there’s a good chance they know an earlier-round investor who could potentially be a good fit for you today.
There’s a host of advantages to the pre-pitch approach:
- Good practice: You’re not asking for money. Instead, you’re offering a sneak peek. Since your relationship-builder pre-pitch doesn’t have millions on the line, you’ll invariably be less anxious, which leads to better relationships. Remember: If it’s not a good fit, who cares?
- Candid feedback: When you’re not asking for money, you’re more likely to receive honest feedback that you might not get in a high-stakes environment.
- Set the baseline: You should go over where you’re currently at, why it’s actually not time to raise capital quite yet (the inverse of “Why Now”), and what you still have to accomplish until the time is right.
- Performance-based trust: Put your performance where your mouth is by showing your potential investor where you are today and what you expect to do in the short term. Later on, you can prove to them that you achieved what you said you would.
7 ways to build relationships with VCs
Now you’re probably wondering, “What the heck do I say to build a good relationship with that next-round investor?” Here are a few notes on how to approach the pre-pitch:
Seek the relationship, not the money
Acknowledge you’re early, but mention that you think it could potentially be a good fit later on. State it up front that you’re seeking a relationship and want to find out if you could eventually be a good fit for one another. Don’t sneak in an ask; let the relationship blossom organically.
Here’s an example: “We’re actually not raising yet, and we’re probably too early for you. But I think this is something you might be very interested in, and thought it made sense to reach out, open up a relationship and see if there might be a fit.”
Don’t waste time
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Are B2B SaaS marketers getting it wrong?
Which terms come to mind when you think about SaaS?
“Solutions,” “cutting-edge,” “scalable” and “innovative” are just a sample of the overused jargon lurking around every corner of the techverse, with SaaS marketers the world over seemingly singing from the same hymn book.
Sadly for them, new research has proven that such jargon-heavy copy — along with unclear features and benefits — is deterring customers and cutting down conversions. Around 57% of users want to see improvements in the clarity and navigation of websites, suggesting that techspeak and unnecessarily complex UX are turning customers away at the door, according to The SaaS Engine.
That’s not to say SaaS marketers aren’t trying: Seventy percent of those surveyed have been making big adjustments to their websites, and 33% have updated their content. So how and why are they missing the mark?
They say there’s no bigger slave to fashion than someone determined to avoid it, and SaaS marketing is no different. To truly stand out, you need to do thorough competitor analysis.
There are three common blunders that most SaaS marketers make time and again when it comes to clarity and high-converting content:
- Not differentiating from competitors.
- Not humanizing “tech talk.”
- Not tuning their messaging to prospects’ stage of awareness at the appropriate stage of the funnel.
We’re going to unpack what the research suggests and the steps you can take to avoid these common pitfalls.
Blending into the competition
It’s a jungle out there. But while camouflage might be key to surviving in the wild, in the crowded SaaS marketplace, it’s all about standing out. Let’s be honest: How many SaaS homepages have you visited that look the same? How many times have you read about “innovative tech-driven solutions that will revolutionize your workflow”?
The research has found that of those using SaaS at work, 76% are now on more platforms or using existing ones more intensively than last year. And as always, with increased demand comes a boom in competition, so it’s never been more important to stand out. Rather than imitating the same old phrases and copy your competitors are using, it’s time to reach your audience with originality, empathy and striking clarity.
But how do you do that?
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