For all of China’s newfound wealth, there is still tremendous opportunity for foreign investment in that country’s tech sector, says Neil Shen, the founding managing partner of Sequoia Capital China.
Born in China, Shen came to the United States planning to earn a PhD in math, but soon changed direction and earned a master’s degree in management at Yale. After a stint as an investment banker, he returned to China, where he cofounded and served as president and chief financial officer of Ctrip.com International, the country’s largest travel booker, and Home Inns, a major hotel chain. Shen has been Sequoia’s lead investor in China since 2005, and companies he has taken public include Vipshop Holdings, Qihoo 360, and AutoNavi Holdings.
Tech sectors ripe for investment in China include enterprise software, big data, artificial intelligence, e-commerce, and O2O (online to offline) companies, he told a group of Stanford GSB students recently.
Here are seven lessons on investing in China’s tech sector he shared during a Global Speaker Series talk in early November.
Team Building Comes First
Raising money for a new venture is not the most difficult task for investors in China, says Shen. But building a team to make a sustainable business — “that’s a very, very different thing.” A key step, he says, is to develop a compensation structure in which the person running the business has a direct stake in its success. “That’s probably the best way for a U.S. company to compete and do well in China,” says Shen.
Don’t Be Afraid to Be a “Copycat”
Successful Silicon Valley companies tend to have business models that do not copy the competition, says Shen. But in China, “you will definitely have copycats.” When Shen was running Ctrip, he and his staff spent 30 minutes every Monday morning discussing the moves of rival eLong. Both companies, he says, copied each other’s successful strategies.
Expect Executive Turnover
Talented Silicon Valley executives are quick to leave their jobs in pursuit of entrepreneurial opportunities, but turnover at technology companies in China is even higher. “There is so much money chasing after them, particularly in the mobile internet space … and the barriers to entry are lower,” says Chen. Compensation, including stock ownership programs, is obviously one way to keep employees loyal, “but you also need to build a very strong culture to make sure that your top people can stay,” he advises.
Look for Pain Points
There is a large market for enterprise software in China, but many potential customers have already made significant expenditures in those technologies. “You should look at those areas where corporations are having the most pain increasing efficiency,” says Shen. Find out which areas of a customer’s business are being affected by rising labor costs and sell products addressing that problem, he says.
Big Data, Yes; Consumer Internet, No
Without a deep understanding of local culture, it is difficult for Americans or Chinese returning to their homeland to succeed in the consumer internet, says Shen. “You have to understand your user very well. If you worked in the U.S. for too long, you may not [be able] to do that,” he says. But technological expertise is the key to success in big data, an area in which China lags, so entrepreneurs from the United States could do well.
E-Commerce and O2O Are Hot
Sequoia has made numerous investments in e-commerce in the last seven years, but there’s still room for more, says Shen. “We do have a view that e-commerce will become very, very important in China, probably even more important compared with the retail space in the U.S.” O2O refers to companies that use online sales and merchandising to push customers into brick-and-mortar locations. Sequoia has made at least 12 investments in O2O and Shen says more investments in the right O2O players will likely pay off.
Opportunities in AI
China, says Shen, still lags behind the United States in robotics and artificial intelligence, but some local companies are making significant progress. For example, Baidu, the Chinese internet giant, is using artificial intelligence to help the company’s security software identify threats. Baidu has also developed an AI-based app that taps into live video or a still photo of a face to create a virtual mask. The dynamic in that market, he says, should be interesting, and it is a key area for investment.