May 29, 2018

Exploring Venture Capital in China

In March 2018, 24 Tuck students traveled to China for a Global Insight Expedition (GIX) led by Professor Gordon Phillips, faculty director of the Center for Private Equity and Entrepreneurship, and Shu Chen T’18, who served as operations leader. The team spent nearly two weeks in China exploring the venture capital industry in the world’s second largest economy. The goal of the course was to understand the opportunities and challenges in China, including starting companies there and working with Chinese companies. The Tuck team met with both venture capitalists operating in China and companies funded by venture capitalists.

Amongst the business visited were some of the largest and most influential companies in China including Alibaba, Didi, and JD.com, and up-and-coming startups like the bike sharing companies Ofo and luxury electric car maker Nio, as well as some of the most iconic venture capital firms in China like DCM Ventures, and an incubator on the campus of China’s most prestigious university: Tsinghua. The Tuck team split time between Beijing, Shanghai, and Hangzhou. The students were given opportunities to meet high-level management of these businesses in an “ask me anything” format.

The course included visits to some of China’s most important cultural treasures including Tiananmen Square, The Great Wall, and Lingyin Temple.

The overwhelming sentiment amongst the students was positive given how intellectually and technologically impressive the hosts were and the sheer amount of learning that happened on the trip. Some of the most salient points are captured in the students’ quotes of the T’18s who were on the trip:

  • “China is an odd combination of hi-tech companies, vibrant VC environment, and road mayhem on a backdrop of an ancient culture and an enormous population. One of the most surprising things about China was the amount of government financing involved in the private sector and the shares of companies that the Party holds, in some cases reaching 40%.”
  •  “The scale at which Chinese startups must operate makes them almost immediately capable of international expansion.”
  • “One of the things I will never forget from the trip was an alum at Alibaba saying tongue-in-cheek: ‘the funding process in China goes Angel, A-round, B-round, BAT round, then C-round,’ BAT being an investment from Baidu, Alibaba and/or Tencent. These three companies’ platforms have grown so expansive that early-stage technological startups have no choice but to adopt to at least one of the BAT systems. The BAT companies have essentially cornered the tech market in China, having acquired significant power and influence through their user bases.”
  • “Despite what is written about China’s economy, it is extremely difficult to imagine the rate of growth and change without seeing it first-hand. The China GIX exposed us to the country’s largest technology companies and several nimble start-ups, which enabled us to better understand China’s dynamism.”
  • “In the U.S., you focus on core competencies. In China, in the tech space it is a land grab; it’s a jungle. And if you don’t expand in some of these services, someone else.” This is one sentence that defines the trip in China and one that opened my eyes to something I didn’t fully understand coming into this trip, nor during the first days of the trip. I didn’t understand how fast the growth is China and how much runway there is still left, and that just focusing on core competencies might not be the right strategy. In the U.S., there has been a “conglomerate discount” for a long time and my preconceived notion of this led me to be skeptical of the strategy of Chinese companies until I heard the sentence above.