How Alibaba, Tencent destroy the VC market for startups - Shaun Rein

Shaun Rein

Venture capitalist firms have set the rules for investments in startups for a long time in China, but now Alibaba and Tencent moved into the industry, those rules have changed dramatically. And not for the better, says business analyst Shaun Rein, author of The War for China's Wallet: Profiting from the New World Order, to US News.

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"At the end of the day (even if those startups don't make money), they can always fold it in," says Shaun Rein, managing director of China Market Research Group, a Shanghai-based strategic market intelligence firm, and author of a book on Chinese innovation. "It's not like in venture capital firms where you have to be a lot more thoughtful on valuation because that is your only source of revenue. (Alibaba and Tencent) approach pretty much anything that comes out and hope that 1 of the 100 investments makes money."

Public officials in China have also created investment funds for startups, a result of Beijing's priority to create well-paying jobs for China's growing middle class. Premier Li Keqiang frequently boasts of the country's "mass entrepreneurship and innovation initiative," but rarely acknowledges the failures along the way...

These days, China's big tech companies appear willing to overpay for the development of new products that look good in the eyes of their shareholders, Rein says. This is bad, he adds, because new companies might need to struggle less with developing a workable business plan and simply focus on the concept they put forward.

"Tencent and Alibaba are not just throttling the market, but in many ways they are hurting innovation," Rein says. "Because right now basically people are saying, 'Let’s start a company. Let’s create something that sounds innovative, even if it’s not. Let’s not necessarily plan on research and development for five years, let’s instead create something that sounds good and then sell it to Tencent or Alibaba.'"... "If you are a tech startup you either have to get money from Tencent or Alibaba or you won’t be able to grow because these two companies control the tech ecosystem," Rein says. "Basically, any new idea is getting funded by one of the two and its major competitor is funded by the other one of the two."... Competition exists among investors in China's startups, as well. If "you come up with something cool, very soon there's going to be investors hanging around your doorstep because there's just so much money here and there's so few investments that investors in many ways have to beg to get in on deals," Rein says. To compete against the wealthy tech giants – namely, AliBaba and Tencent – experts say VCs need to do a better job at selling their services and expertise. This can prove challenging, Rein adds, because many venture capitalists in China lack entrepreneurial experience: "Most of them are deal-makers," he says.

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Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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