BV Capital

I recently met up with my good friend Michael Li, Partner at U2IPO, in San Francisco. The Shanghai based firm is dedicated to using their rich entrepreneurial and investment experience to partner promising entrepreneurs with appropriate backers. Here is our conversation:

What is U2IPO’s mission?

It aims to be the best and largest platform in China to match solid start-ups and growth companies that want to expand and scale quickly their business to suitable investors who can help with funding and add good value to the business.

How has the need grown over the last few years for this sort of service?

Several trends in the last few years have emerged that help to generate fast growing need for such a service:

1. With the increasing globalization, further integration of China’s economy with the rest of the world, and the fast passing of various deadlines in China’s WTO commitments that open up new sectors to international competition, China needs to transform quickly from a mostly labor intensive manufacturing economy to that of a innovation driven, knowledge intensive economy. This major shift creates a dynamic environment and opportunities for new start-ups who bring new technology or services to the market, and for existing start-ups who can adapt and transform quickly.
2. There has been an increasing number of college graduates accumulated in the last few years due to the dramatic expansion of university enrollments and the inadequate economic structure and labor market that cannot effectively absorb all the high-end talent pool. Together with the large number of people currently working in companies who want to become entrepreneurs, encouraged by the success of such start-ups as Baidu, Shanda, Tencent, Netease, Focus Media, etc., they will generate a new start-up wave in the coming years.
3. There are many more VC funds, both from overseas and domestic, that have been formed in the past few years with Chinese start-ups as their focus for investment. By one estimate, there is now at least 6 or more billion US$ raised for VC investment in China.

Who is behind U2IPO?

There are currently three main partners in U2IPO – Parry, Alex, and [Myself]. Parry has been a successful entrepreneur with several companies in the past, Alex has been both a successful entrepreneur and angel investor in the past and is well-connected in the Yangtze River delta. [I have] rich international experience and a successful entrepreneur and angel investor [myself].

What are the trends in China’s Internet culture?

There are still many C2C (copy to China) Internet companies in China, but the time delay between the original and the clones is getting much shorter now, thanks to Internet! There used to be a delay of up to a year or so, now it’s in just few weeks. But little by little, one starts to see more original innovations among Chinese Internet start-ups, first in service such as to integrate mobile/wireless with fixed line broadband, then in some technology such as anti-spam, privacy protection and online marketing, etc. The strong government control and regulation on Internet won’t go away and will always be there in the foreseeable future, but will become less and less effective given the rapid change and development of Internet technology. Also the growing middle class in China will help to reduce the control from the social aspect.

What are strengths that differentiate Chinese start-ups from Western start-ups?

Somewhat more resourceful, and can do more with less, and more non-linear.

What are the weaknesses?

Somewhat less professional, and there is much wider variability among the quality of Chinese start-ups.

So far it seems that China’s Internet success has been built on copying Western sites. Do you see more innovation developing on the horizon?

Yes, especially in areas such as integration of mobile-fixed, online marketing, anti-spam and anti-piracy, etc.

What challenges do you see that Web companies will have to overcome to move forward and become profitable?

For most web companies, be it web 1.0 or web 2.0, the major revenue source is still ads. The wireless value added services used to generate some significant revenue for some companies like Sohu or Tom, but the tightening control by MII (Ministry of Information Industry) and the operators like China Mobile and Unicom have made this increasingly difficult. How to diversify their revenue source and generate new growth will be major challenges, and there will certainly be consolidations soon as the competition for ads dollars is getting fierce.

Do you think it is getting easier for Western VCs to make investments in China?

Yes or no. On one hand the legal and regulatory framework are getting better, more mature and closer to international norm, on the other hand (I am sounding more like an economist) to find the right project or start-up to invest is getting harder as there are more competition from both other western VCs and increasingly domestic ones.

What barriers to entry do they still face?

Intimate understanding of the local investment environment and ecosystem; close relationship and network with the entrepreneurs, government agencies, angel investors etc.; and the new drive that the Chinese government wants to list good companies in its domestic stock markets and therefore make listing in e.g. NASDAQ, the traditionally preferred exit strategy for western VCs, a more challenge process.

What is most exciting to you about the entrepreneurial environment in China?

It is a very dynamic environment, lots of things happen pretty fast, and it’s a more variable, unpredictable and non-linear environment. That makes life fun and interesting.

Many thanks to Michael for this interview.