The numbers talked about in this VentureBeat post really caught my eye:
IDG Ventures was the first VC firm to begin investing in China back in 1993. Since then, it has plowed $450 million into 180 companies... By 2020, IDG’s money for early-stage investments will grow to $3 billion, up from around $950 million now
And on the performance of some IDG investments:
... [IDG] paid $2 million for a 20 percent stake in Tencent, which is now worth $1.2 billion. It invested in search engine Baidu at $2 a share, and it is now $350 a share. It invested in Sohu at 22 cents; it’s now $45. He invested $6 million into Ctrip, and got a $800 million profit.
There is also some discussion on IDG getting favorable tax treatment in China and the possibility of this significantly increasing the overall flow of money into China (if other firms manage to get it as well).
Thinking about this led me to some thoughts on current Chinese successes and to future startups. First, current successes:
1) So far, the big Chinese success stories have started as copies of western companies (Baidu/Google, CTrip/Expedia, Tencent/ICQ, Taobao/eBay, etc.). But, to be fair, they have done a very good job of adjusting the concepts to their own markets and soundly beating western competitors.
2) The next test for these big Chinese players will be to continue growing by expanding internationally. The Chinese market is big enough that they will have their hands full just focusing domestically for the next 3-5 years - but then things will get interesting. World-class western companies (e.g., MS, GOOG, EBAY) have a large % of revenue coming from non-US markets now (Google just hit 51%). My guess is that Chinese companies will find it relatively much harder to grow organically outside of China.
3) This leads me to think that some of these Chinese companies will become acquisitive in the US and Europe. US and European startups have been acquired by MS/Google/Yahoo and a few other smaller guys - but I bet that in 3-5 years we will see Baidu/Tencent/etc come out aggressively and become exit alternatives for western startups. I would think that seeing first-hand how western companies failed in their market the first time around, they will be smart about how they enter western markets (e.g., by not trying to impose their vision on acquisitions).
As for future startups in China:
1) Those IDG performance numbers are obviously great and they are a real testament to IDG's foresight in entering the China market early. But it will be extremely tough to replicate them. Just like in any other market, the inflow of so much money will drive up valuations and reduce returns
2) It will be interesting to see if China will start producing their own set of innovative startups or will just keep on churning out Chinese versions of western success stories. The future will obviously be brighter if they do the former. I bet they will, but they are not there yet.
3) While I am a big believer in China, I am very wary of projections that have their GDP growing at 10% for another 10-15 years. I think that pace of growth will become unsustainable, especially if commodity prices keep rising and China starts having to spend more money to fix their environmental issues. Both these issues together could be a real downer for their economy and slow things down for a few years, further reducing returns.
In any case, what happens over the next few years in China will be fascinating. I spent half of last year in Beijing, and the energy there is amazing. I hope they can keep their momentum going.