Li Yuan
With a cooling and uncertain market for tech startups, Chinese
venture investors who once searched for China's GrubHub or Uber are
hunting for China's Starbucks.
Heekcaa Lab, a chain of 50 upscale teahouses based in southern
Guangdong province, in August received 100 million yuan, or about
$15 million, from a pair of backers including IDG Capital Partners,
one of the most well-known venture firms in China thanks in part to
early investment in search giant Baidu and video site Tudou. Nie
Yunchen, Heekcaa's 25-year-old founder, has grand ambitions to make
traditional tea hip with the young masses the way Starbucks did for
coffee in China.
One of Heekcaa's competitors in that effort is Inwe Cha, which a
month earlier received 500 million yuan in funding from Richard
Liu, founder and chief executive of Chinese e-commerce company
JD.com.
Nontech companies aren't a new concept for venture investors in
China, but they have recently drawn much more interest for several
reasons.
As with their Silicon Valley counterparts, China's venture firms
have raised large amounts of capital they need to deploy. While
some technology areas, such as artificial intelligence, remain hot,
investors generally in the past year have grown cautious regarding
tech startups after years of intense interest.
Restaurant chains and other traditional consumer companies also
offer a play on China's young, free-spending consumers. In a
slowing economy, many of these companies also boast something tech
startups often lack: strong revenue and a clear path to profit.
Mr. Nie, for instance, says his Heekcaa chain, which operates
under the company name Shenzhen Magcc Catering Management, brings
in revenue averaging more than one million yuan a month per store
and has never been unprofitable. Its tea drinks sell for 20 to 25
yuan apiece.
With Wheat, a high-end bakery chain in Beijing that received an
undisclosed amount of funding from investor Sinovation Ventures in
March, says it never opens a store unless it can garner revenue of
at least one million yuan a month.
The business is profitable, says co-founder Ye Jiazhi.
Gao Hongqing at Fortune Venture Capital, which manages 20
billion yuan, says the "crazy hot" investments in the past few
years in startups that use subsidies to acquire users for
ride-hailing and other sharing-economy services aren't sustainable,
because their customers are bargain hunters and have no loyalty.
"Low prices and subsidies are passé," he says. "It's time to return
to the fundamentals." Fortune has invested in a chain of
handmade-candy stores and an indoor-playground chain, among
others.
Such offline plays can be "safer projects for investors as we're
looking for the next big trend," said Wu Shichun, founding partner
of Plum Ventures. Mr. Wu's firm, an early-stage investor focused on
technology and media, has invested in nontech startups including a
custom ice-cream shop in Beijing.
Venture capitalists say domestic investors who put money into
yuan-denominated funds increasingly prefer less-risky investments.
Zhang Ying, a partner at Sinovation Ventures, says that for
investors seeking to exit by having their portfolio companies list
on China's A-share markets, strong financial performance is
important because Chinese securities regulations have profitability
requirements for public listing. In addition to With Wheat,
Sinovation has backed a hair-salon chain and a hotpot-delivery
service.
Investors in these nontech businesses are considering access to
relatively wealthy -- but picky -- young consumers. A report by
consultants BCG and Alibaba Group Holding's AliResearch Institute
projected that by 2020, the number of upper-middle-class and
affluent households in China -- those with annual disposable income
of $24,000 or higher -- would double to 100 million and account for
30% of all urban households. That compares with 17% in 2015 and 7%
in 2010.
Growth in Chinese consumption over the next five years would
roughly equal a market 1.3 times the size of Germany or the U.K.,
said the December report. It also found that upper-middle-class
Chinese consumers 35 and younger spend an average of 40% more than
previous-generation consumers with similar incomes, while being
more brand- and health-conscious.
Zhang Haiyan, a partner at Tiantu Capital, a private-equity firm
known for its consumer-related investments, says he is surprised by
how freely his younger colleagues spend. "Sometimes I worry if we
pay them enough to support their lifestyle," he jokes. "Other times
I wonder if we overpay them."
His firm led a 400 million yuan funding round in September 2015
in Baiguoyuan, which produces and sells fruit in over 1,200 stores
around China. Its investment in the packaged-duck-meat company
Zhouheiya Food, which went public in Hong Kong this year, is often
cited as a successful example of investing in nontech companies in
the internet era.
Zeng Xi, a 27-year-old product manager at a smartphone maker in
the southern city Shenzhen, says he made several trips to Heekcaa
outlets outside Shenzhen before the chain opened in Shenzhen, drawn
by its hip décor and innovative drinks. "Heekcaa meets a uniquely
Chinese demand," he says.
--Follow Li Yuan on Twitter @LiYuan6 or write to
li.yuan@wsj.com.
Write to Li Yuan at li.yuan@wsj.com
(END) Dow Jones Newswires
November 03, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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