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No Easy Rides: DCM Ventures’ Ramon Zeng on How Chinese Startups Manage to Thrive

by Deng Yuanyuan, Liu Sha

March 29, 2017

Ramon Zeng, general partner of DCM Ventures, discusses how China has taken the lead in technology and what that means for the country’s startups

Within 10 years, venture capital (VC) has evolved from a non-mainstream form of finance to one of the hottest areas in China. One reason behind this evolution is the boom in domestic internet companies—a startup with a two-figure number of staff might grow to be a unicorn, a company valued over $1 billion, within one or two years—and the number of innovative startups is only increasing, which has helped to make China the second largest VC market in the world.

But there are skeptics who wonder if VC and startups in China are frothier than in the West, especially since the government has started to advocate “Mass entrepreneurship and innovation”.

Ramon Zeng, DCM Ventures’ general partner, shared his insights on China’s internet industry with CKGSB Knowledge. Since joining the VC industry 10 years ago, Zeng has invested in many top Chinese internet companies, including two Nasdaq-listed firms—the job hunting site 51job and travel site Tuniu. To him, investing a company is not just about being a shareholder, but rather sitting in the co-pilot seat.

In this interview, Zeng shared his observations on the industry: How is culture affecting startups in the US and China? Why are some top companies from Silicon Valley not doing well in China? He also explains why China’s mobile internet become so advanced in such a short time, what the pay-to-read model’s future is, and why he tends to be less judgmental when judging a business plan.

Q. You have been in this industry for more than 10 years. From the very beginning until now, how has your mentality and methodology when gauging a good business plan evolved?

A. In terms of methodology, I tend to be less judgmental when judging business plans, although I have to come to a conclusion in the end because that’s my work. But I think everyone’s vision is limited in some way, because we all come from different perspectives and have different interests. I still give suggestions to entrepreneurs, but there are two things to consider. First of all, my feedback may not be correct only at that particular time, and secondly I may not understand the whole picture behind the business plan. But I still try to communicate with them in the most effective way; I would tell them the challenges. Sometimes the business model is perfect, but the timing is bad. Sometimes the entrepreneur is quite competent, but the business idea is not really there. And sometimes both the idea and personnel are good, but there’s a very strong competitor on the market.

Q. From an investor’s perspective, if a sector is almost a monopoly, will late arrivals have a chance?

A. Yes, if the new ones are driven by new technology. People always say nowadays that founding a startup is way harder than before because in almost every area there are already dominant companies, but I don’t agree.

First, founding a business is never easy, otherwise everyone can become Jack Ma. Second, every successful entrepreneur was a brave innovator at the time he or she founded the business. Some business models that look simple today were visionary back then. When news portal like Sina or Sohu launched, newspapers were the dominant reading platform, and when Baidu was at its startup stage, Yahoo was the biggest search engine, and Tencent started QQ when MSN, ICQ were huge. None of them had any easy ride.

There will be all kinds of opportunities in future—great business models and new technology can be put into use quickly when there are certain changes happening in society and the economy. For example, when people are so reliant on mobile devices, business that are based on PC die. It’s like when the climate changes, new species will take over and thrive. So there’s always opportunity, and the good thing now is that big companies are more ‘friendly’ to startups than ever before.

Q.What do you mean by ‘friendly’?

A. Previously big companies would copycat a smaller company’s model, and because they usually have a larger user base [they can easily beat small company], but today that’s not the case anymore. Now the dominant companies realize that they are a very important part in the business ecosystem, and it’s important to maintain that system’s health so you can have a sustainable business to run. Of course, there is still competition, but it is getting a lot more ethical.

Q. Is there a startup bubble in China? Is that why startup investment is cooling down?

A. There are easy and hard times, and that’s normal. Certain types of companies, often overly competitive ones, would feel it’s extremely hard to get funds, and from this angle the investment could be cooling down. But in terms of the whole industry, it’s still going up and healthy, and there are a lot of idle funds. But it doesn’t necessarily go to a certain industry.

Q. Do you like serial entrepreneurs?

A. Encouraging young people to be a serial entrepreneur is good as long as she or he is a responsible person. Whether young people are encouraged to take risk and innovate reflects the cultural difference between the US and Asia. For example, years ago in Japan, starting one’s own company was shameful because people would take it that you were rejected by big companies. If you became an entrepreneur in Japan at that time, you would suffer certain mental pressure, which in fact has restrained the society’s entrepreneurial atmosphere. But today, in the US or China, if your startup business fails, it won’t make your resume look bad. Instead, people will think that you have entrepreneurial spirit. Of course, from the angle of VCs, we will do an analysis case by case to decide whether we’d like to invest. If it’s someone who keeps making progress, we would give our support for sure.

Q. The mobile internet in China has grown quite fast. Some people have suggested that the reason is our poor offline retail. Do you agree with that?

A. Yes, to a certain degree it is true. In many areas we have first mover advantage. We can apply the new technology faster because no time is needed for us to get rid of the old ones. For example, the e-commerce industry in China took the lead because people found that buying online is much more convenient than offline. Our offline retail system is not so well developed and consumers’ needs are not well satisfied.

In a very mature society, changes happen step by step. But in China, there are many chances to leap frog others. In the US, people used to fill in checks, but few Chinese people experienced that, as we soon jumped to electronic payment. 

Q. The delivery business has become quite common in China. Is this model an example of innovation? Is delivery a real demand or is it inflated by the subsidies and discounts allocated by platforms like Baidu Delivery (a food delivery platform)?

A. Yes. It’s an innovative business model. And in the future there will be a real demand, but in the short term there might be ups and downs. From a long-term point of view, increased productivity and efficiency drives economic development. In the past, we order something and think it’s okay if the goods could arrive three days later. But now we want it to arrive today, and at a certain time.

Q. So you mean that the demand has been driven by technological progress?

A. Yes. And I believe the efficiency of our life will keep increasing. In the future, it will take less time to get a lunch delivery or receive a package ordered online. But in the short term, it’s hard to say whether all delivery businesses can be sustained, because when we do the math, orders must be above a certain threshold to make the business profit. I think as the cost of delivery keeps falling down, the threshold level will keep falling as well.

In China, actually the online-to-offline delivery model can develop quite well because of three reasons: one, the population density—people live close to each other in residential areas and one delivery man can deal with many orders each trip; second, the mobile internet penetration rate is really high and smartphones have become an inseparable organ of Chinese people; third, labor costs is relatively low.

Q. Is it possible that those platforms are not making money, but they just want to take that spot in that particular industry. So they survive based upon capital injections and take the view that although it doesn’t make money today, someday, when the social economy and technology are well developed, people will be willing to pay a higher premium for delivery services and then they will make money. Is such a mindset common in startup businesses?

A. Yes, it’s possible. Actually many entrepreneurs will give you a vision, a long-term one and tell you someday I will take you to the point, though not today. But I can tell you [the investors] how you should get there. And investors will believe that. You know that Amazon’s retail business has not made any profit for many years, but people still support it. And Tesla, investors will invest money with the knowledge that the company is losing money. Many high-tech companies have similar experiences. The expectation behind those investments is that people believe that the kind of future pictured by entrepreneurs will become reality someday.

But are they sure? No. So in the process a bubble will burst and some companies will go bankrupt. Yet most companies, especially those high-tech and great ones, did not make money on the first day they started.

Q. Many startups are now following the “pay-to-read” model, which developed against the background of young people preferring to read more condensed information. What do you think about this emerging business trend?

A. I don’t agree with the kind of expressions that start or end with “young people don’t read” or “young people don’t like books”. Those are very clichéd conclusions.

In the past, we didn’t like to pay for things we read on the internet and Chinese people grew up in an environment filled with pirated books, CDs and films. Now, we finally realize that we should pay for intellectual property. So, although I don’t know whether this “pay to read” or “pay to view” model can make great any companies, it’s a big trend in China.

I think, apart from the fact people’s awareness of intellectual property improved, an important reason for this trend is that online payment has become easier in China. In the past there might be people trying to pay to read on the internet, but they could not just use their phone to scan the QR code—they had to go to banks to transfer. Now with mobile payments, it’s more convenient. Some online education companies are also doing quite well like VIPKID. People pay for what they think is valuable.

The fact that the internet gives everyone a platform to provide content also contributed to this trend. Cyberspace is a decentralized place and as long as someone finds your views interesting, he or she can pay you. While in our parents’ generation, if you wanted someone to read your writings you needed a publisher. That threshold has been greatly lowered and that’s a major sign of social progress.

Q. Some top companies from Silicon Valley are not doing so well in China, what do you think could be the reasons?

A. I think that’s because the internet companies are heavily reliant on human beings and usually the smartest people are not comfortable with being employed by foreign companies. Years ago, even when fundraising was not as easy, Chinese young entrepreneurs would choose to start their own firms rather than working for others, not to mention today, when VCs are looking for good projects everywhere.

Second, internet companies change very fast and need very quick responses from leaders and the decision-making process should be short. But in international companies headquartered in a different time zone, the decision-making tends to be slow, so the efficiency will be lower.

The two most important things for tech firms are people and technology. Firms with a strong patent will do better, like Qualcomm, Intel and IMD, but businesses that are driven more by people and the business model will not do so well as Chinese local companies.

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