China's internet sector has grown so rapidly over the past decade that some have started to wonder whether it has moved into a new phase of development.
But with the closure last month of his debut INCE Capital fund – it closed at $352 million – VC tech veteran JP Gan explained to us why the internet sector remains exciting to watch.
After only four months of fundraising, INCE Capital has gathered investors such as Pittsburg University, Duke, Carnegie Mellon, Dietrich Foundation, Commonfund, and Mayo Clinic among others.
The new fund is looking at online opportunities in China. Although the number of mobile internet users in the country decreased by 2 million in the second quarter of the year, Gan reckons that the various needs of mobile internet users will create new opportunities for investors.
Over the past decade, the greatest gains for VC investors have come from the internet sector, and the momentum here is expected to continue. User habits have evolved at the same pace as new technology. Generation Z – those born after 1995 – are willing to spend more time and money on the internet compared to their parents, which make this an exciting time for tech investors.
Before his move to INCE Capital, Gan was managing partner of Qiming Venture Partners. Over 12 years there he invested in many internet household names such as Ctrip, Bilibili, Dianping, Musical.ly and Meitu. Before that, worked at The Carlyle Group and Merrill Lynch.
The conversation with JP Gan has been edited for brevity and clarity.
Q Why did you choose to raise a US dollar fund when starting INCE Capital?
A Most of our team’s previous investments were carried out in US dollars, so we chose to start our fund with US dollars this time. But we are considering a Renminbi fundraise next year.
A lot of people have talked about difficulties in fundraising, but that depends on what kind of team is raising the money.
Q What do the LPs in the US think of China?
A China’s economy is still growing at 6% a year. As the second-largest economy in the world, that growth rate is quite impressive.
If LPs in the US are looking at their global assets allocation, China is not somewhere that they can ignore. The US can never decouple from China, as the country remains the supply chain for most of the world's products.
Investors in the US are paying a lot of attention to the pace of our reforms and how we are opening up.
Q Is there any sectors in which US investors are particularly interested?
A Historically, the technology, media and telecom sectors are the ones which have given the most returns to investors. The growth rate of the TMT sector is considerably higher than GDP growth.
China has the resources to support innovation in the internet sector as it has hundreds of thousands of graduates who understand coding. It is a critical human resource.
Q Do you ever worry about investments?
A People always wonder about the need to earn money and the fear of risk. But the important thing is how to balance these two emotions.
I am quite optimistic as a venture capital investor.
Q How do you view competition between VCs?
A There is no monopoly in the Chinese VC market. It can’t become a “winner takes all” situation.
The Chinese VC market has entered a stable stage of development. There was fierce competition between 2015 to 2017 when VCs are fighting for projects.
Q Do you think there will be a Matthew’s effect among Chinese VCs as big players become even larger?
A Chinese venture capitalists do enjoy some brand effect, but it won’t be that obvious because every VC has one particular area in which they are strong.
Q How are lower valuations - I am thinking here of what has happened to WeWork - affecting the VC world?
A It is a case of the survival of the fittest. VC investment doesn’t have to be a fierce competition, but some players will get weeded out and there will always be newcomers.
Masayoshi Son of Softbank is just one player in this game. He has had gains as well as losses. Although he has lost in one or two cases, he will continue to invest in the future. Within private equity investment, the number of buyers you need to convince is relatively lower than in the secondary market.
Q Is there an overlap between investment from LPs and GPs?
A We should let the professional people handle the professional thing. No matter how rich you are, you should allocate a part of your asset to investment professions and let them do the work. But it is common for LPs to co-invest with GPs.
Q How have startup founders changed over the past decade?
A The quality is definitely getting higher. Most of them have studied abroad and have abundant work experiences in large firms. They are aiming high with their strategic thinking. These qualities are considerably better than they were in founders of startups 10 years ago.
Q What are your thoughts on how artificial intelligence is developing?
A People have been researching this for the past 20 years and, technically speaking, it is not a new thing. AI already has so many applications, such as medical image recognition, autonomous driving and others. But no country can fully open regulatory limits on AI development.
Q How do you see Chinese internet companies’ going overseas?
A China's internet sector is quite well-developed and has evolved in many ways. Many startups in India and Southeast Asia now use China as a benchmark when developing their own internet businesses. Some startups have built up their R&D centres in China, because of the better internet infrastructure and human resources. It is a partnership as well as a learning process for both Chinese and overseas internet companies. It can bring more understanding to both sides and create new synergies.
