The China Startup Report

Here's a link to a presentation on the China startup environment:  http://www.slideshare.net/bowei/the-china-startup-report-a-15min-crash-course-by-bowei-gai which was prepared by Bowie Gai.  Bowei Gai is a Chinese-born, American-educated entrepreneur who co-founded CardMunch, Inc. which was acquired by LinkedIn in January 2011.  He recently spent time in China researching the startup environment and I believe that his presentation is pretty insightful.  

Here's a link to an article on Business Insider discussing the presentation and Bowei Gai:  http://www.businessinsider.com/when-it-comes-to-startups-in-china-everything-you-think-you-know-is-wrong-2011-10?op=1.  

I recently spent time in China meeting with venture capital funds, and agree with much of what Mr. Gai has to say.  I'd add a couple of thoughts from the perspective of an LP considering investing in China-based venture capital funds:

• Huge market opportunity.  The Chinese domestic market is massive and growing rapidly.
  
• Massive competition.  As Mr. Gai points out in his presentation, competition at the startup level is "endless" and as he puts it, "it's pure insanity."
• Regulatory environment adds challenges to startups and to venture capital funds.
• Corporate governance has improved over the past several years, but remains an issue.
• There are huge amounts of money being invested in Chinese venture capital funds.  Is there a bubble forming?
• Valuation creep, especially at the growth stage.
• Liquidity issues.  M&A is not as prevalent in China as in the US (perhaps due to lifestyle issues mentioned by Mr. Gai), and the pace of venture-backed IPOs is slow relative to the number of venture-funded companies.  This means that venture capital funds aren't able to achieve exits as easily or quickly as expected, which leads to...
• Long holding periods for VCs and reduced IRRs to LPs.  Time from initial investment to exit is climbing (see above), reducing net IRRs to LPs.

All in all, investing in China venture capital remains popular, but there are challenges and one must carefully evaluate the risk/reward tradeoff.