What I learned in my first year as an angel investor in China

Rui Ma is 500 Startups‘ Venture Partner for greater China with a fondness for edutech. She tweets at @RuiMa.

I made one of the best decisions of my entire adult life. In the beginning of 2013, I jumped headfirst into early stage technology investing by joining the hybrid startup accelerator and seed stage fund called 500 Startups as their Greater China venture partner.

I’m no stranger to tech companies, investing or China, but being in charge of a massive region including China, Taiwan, and Hong Kong and having to dig deep for quality early stage investments. I’ve also done fundraising and participated in and organized numerous community events which were, to say the least, challenging. Here are some of my key learnings:

Be in Beijing

According to this 2012 Cyzone report on angel investing (summary is free, full report costs 500 RMB), Beijing received more than two times as much investment as Shanghai (21 percent versus 9 percent), which ranked third behind Shandong.

If you are like me and do not spend time evaluating gaming companies, it feels like Beijing is 3 to 5 times as active as Shanghai. If I had to break it down, Beijing incorporates all the newest tech trends, Shanghai is mostly consumer-facing content and media with some advertising mixed in, Hangzhou (of Alibaba fame) is China’s e-commerce headquarters, Shenzhen is a mix of e-commerce and gaming and some hardware-software startups, and rest of China is either some variation of gaming or outsourcing, or gaming outsourcing, as the folks at the largest “incubator” in China will agree.

The talent is here in Beijing, because there’s a real ecosystem in several “generations” of successful founders and early employees. Furthermore, long-time mainland residents know that if you are looking at employees with a few years of experience, who are mostly married with kids, they just don’t have the ability to move to other cities because it’s prohibitively expensive to do so. I spend quite a lot of time outside Beijing, but that’s because I’ve been living in this city for the past 4.5 years. If you are new to China, be in Beijing.

China is one gigantic accelerator… for accelerators

The country that quintupled its GDP in thirty years has mastered the art of exponential growth. To quote the plans of Tsinghua University’s x-lab, an accelerator program which launched in April 2013, the site will expand from 100 sqm to 500 sqm within the year (mission accomplished) to 5,000 sqm (that’s 50,000 sq ft!) within three years. When I spoke to one of the advisors in October, more than 80 teams were already in the program. It was much the same news at Virtue Inno Valley, a Tsinghua-affiliated accelerator located right below Innovation Works, which hoped to invest in 500 startups in three years (on pace with my employer, coincidentally).

Even “startup cafes,” such as the kind pioneered by Cheku and 3W in Beijing, essentially coffee shops plus co-working spaces plus startup event spaces, have grown like mushrooms throughout the country. My “China Startup Cafes” Wechat group began with a few dozen but now has 285 members. Even third-tier cities I’ve never heard of have their own startup cafes. In this investor’s humble opinion, it’s a flawed business model (successful startups aren’t built on top of a steady flow of cheap coffee, and coffee isn’t all that cheap in China anyway!) but it is growing like a weed because it is often heavily subsidized by an enthusiastic government. Which brings me to my next point:

The Government is all in

The Chinese government has always had a soft spot for high-tech, and in its attempt to foster home-grown innovation, is investing in the sector in a big way. Perhaps this is its solution to the perpetual high unemployment among college grads (even the official statistics are in the high teens, 17.5% in 2011). But whatever the reason, the results are that there are numerous grant-making, equity-taking, and space-providing institutes, industrial parks, innovation centers, coworking spaces, incubators such as this one for college students, or this one targeted at returnees.

Any enterprising entrepreneur can generally, if he or she is not too lazy and has the patience to jump through the hoops, get a cool $10,000-$30,000 worth of grants, some of which are only reimbursable, but some of which can be received upfront. Even investors can benefit, as I know of at least one local investor who utilizes the 1,296 RMB (about $200) in government stipend per university student intern from the Shanghai government to recruit “free” deal-sourcing help. In fact, I know of at least one accelerator who has sneakily changed its business model after a few lackluster batches to be that of primarily a “financial advisor” to startups seeking capital, taking an introduction fee on funds raised and leveraging its close relationships with some government agencies to enable its recommendations to “more quickly” receive cash disbursements.

While I don’t generally look to these funds for deal flow, as their KPIs generally revolve around some irrelevant metric such as number of patents, PhDs or Chinese Academy of Sciences scholars on board, they are nonetheless powerful indicators of what industries the government plans to get behind in a big way – and so after the cloud computing craze of 2011/12, it is clear that two of the bigger trends of 2013 were internet finance and wearable gadgets.

Solo investor rounds are the norm

While syndicates are all the rage in the United States to the point of becoming institutionalized, they are uncommon in China. At a local Chinese angel investor dinner last month in Shanghai where I was the only “cross-border” representative, the hosts asked the dozen or so angels there if we had co-invested in any deals. None of us had. I was surprised given the amount of overlap in interests and geography (all Shanghai-based, mostly consumer mobile internet, particularly social, and a little bit of digital health). The truth is, angel investing, as a formal process, is only two to three years old in China, and rounds are also lower (with 2-3 million RMB or less than $600,000 being a common seed round).

China is watching you

And China is coming to you