China’s economic slowdown is causing concern all over the world, but that doesn’t mean tech innovation in the country will grind to a halt. Gobi Partners believes companies still have room to grow even as the economy drags. The venture capital firm, which is headquartered in Shanghai, just announced a new RMB 600 million (about $94 million) fund dedicated to providing fledgling startups in China with early-stage funding.
Called Gobi Yingzhi II, the fund’s investors include CreditEase Wealth Management, Fivestar Holdings, and Luolai Home Textile. The firm plans to make about 45 investments, including seed, pre-A, and Series A rounds, led by partners Don Jiang, Ken Xu, and Michael Zhu, with an average deal size of RMB 10 million ($1.6 million) each.
Gobi’s current portfolio includes popular photo app Camera360, online travel agency Tuniu, and Madhouse, one of China’s leading digital advertising agencies.
Xu says that Gobi Yingzhi II (named after the first Gobi Yingzhi fund, which was launched in 2012) will look at a wide range of sectors. On the enterprise side, it plans to target software, cloud computing, financial tech companies, and telematics companies. On the consumer side, the focus is on smart hardware, O2O services, and online travel booking.
Before this summer’s financial crisis, funding for Chinese startups hit a high, thanks in part to government initiatives and the enthusiasm of domestic investors. After the devaluation of the yuan and the stock market crash, however, many founders are worried that it will be harder to raise funds or secure debt financing from banks.
The slowing economy will force investors to become more cautious, says Xu, but that might be a good thing. When money was pouring into startups, valuations became inflated. Now instead of scrambling to join rounds, all investors need to step back and closely examine different verticals, which means that companies which might have been overlooked before might have a better chance of funding.
“In the first half of this year, the price of deals was really expensive and some investors were rushing into certain sectors because they didn’t want to lose the opportunity,” says Xu. “But people started to realize that you need to look at the fundamentals for each company.”
The slowing economy will force investors to become more cautious, says Xu, but that might be a good thing.
Instead of spending aggressively on user acquisition and experimenting with risky business models, Xu believes founders will begin to focus on improving the technology behind their products. Verticals where there is room for innovation include cloud computing and enterprise software.
“We believe enterprise customers here are quite different from enterprise users in other markets. It is a totally different experience in building infrastructure for different sized companies and different cultural backgrounds. We’ll see more companies looking at cloud computing and how to improve security and management,” he says.
Hardware will also get a boost as big electronics manufacturers improve their technologies to keep up with the demand for smart appliances. Examples of companies that keeping an eye on the IOT market include Haier Group, which launched its own fund last year to invest in smart home products and services.
On the consumer side, the e-commerce market may already be dominated by major players like Alibaba and JD.com, but Xu believes that there is still space for O2O companies and online travel agencies, especially as more Chinese consumers get Internet access and demand access to services, like ticket booking and meal delivery, through their mobile phones.
Targeting specific service verticals are areas where smaller, more nimble companies have an advantage over big tech companies, says Xu.
“With the service model, the quality of service is key and big companies aren’t necessarily able to control that. Small companies may know better what the key resources are on the service provider side and they also have their own algorithms to really provide better service in an economic way.”
Gobi Yingzhi II is Gobi’s third fund in renminbi. Investments from its first two RMB funds include Opzoon, a data center developer that was acquired by Harbin Gong Da High-Tech, a publicly traded company, in May, online travel agency iTrip (also called Aoliday), car diagnostic tool startup Autobot, and Teambition, an enterprise collaboration platform.
While renminbi funds are optimal for early financing that startups need immediate access to, Gobi plans to recommend the best performing startups for follow-on financing from its U.S. dollar funds as they seek larger rounds to fuel growth.