China, the land of Super Scalers. A new SEP Tech Scaleup Report
The dragon has awakened undoubtedly becoming an innovation powerhouse
China is definitely “the Super” Scaler Ecosystem according to the new SEP Tech Scaleup China Report 2019, presented today at the London Stock Exchange at the 3rd SEP Scaleup Summit organized by Mind the Bridge. The research report produced by Mind the Bridge in partnership with Chinese Zero2IPO Group provides comparable data on startups in China for the very first time. Mind the Bridge used a comparable methodology in alignment with that used for the other startup ecosystems in the world. A Chinese version of this report along with Tech Scaleup Europe Report 2019, launched on Monday 17th June 2019, will be soon distributed in China.
“How about China? This is the question we are typically asked when we present our analysis on the US, Europe and Israel ecosystems – commented Alberto Onetti, Chairman Mind the Bridge and SEP Coordinator – We have been working for a while to be properly answer this question. And, we are proud to finally extend our scouting database to include all Chinese scaleups by adopting the same consistent methodology we have been successfully using for Europe and US.”
The data show that China is home for slightly less than 10,000 companies, able to raise $337B since inception, equals to 1.34% of GDP. About 5% (490 of them) are Scalers* being able to raise 33% of the total funding while 0.4% (38 of them), the most significant percentage among the world’s main ecosystems (it is 0.3% in the US and 0.2% in Europe), is represented by Super Scalers*. These tech giants raised 38% of their overall funding available to Chinese scaleups. This is an enormous ratio that almost doubles that of Europe (20%) and the US (23%). The remaining 28% of capital invested is scattered among 9,402 scaleups.
Compared to the US, China shows 7 times lower density (22910 scaleups vs 9935, equaling to 7 vs 0.7 scaleups per 100k inhabitants) and half the investments ($731B was raised by US scaleups). Compared to the GDP (scaleup investing ratio), it is almost 3 time less (3,58% in US vs 1.34% in China).
On the other hand, China is well ahead of Europe in terms of number of scaleups (9,935 vs 7,034, 1.4x more) but registers a bit lower density ratio (in Europe the average is 1.2 per 100K inhabitants). China investments are about 2.7 times higher than Europe ($125.6B) with a Scaleup Investing Ratio of more than double (0.53%in Europe).
It is to be noted that China and Europe showed a similar pattern of investments until 2013 (about $5.6B per year on average for China, $4B in Europe). In 2014, both the ecosystems made a substantial step forward in different magnitudes: China increased from $5.7B to $24B, while Europe from $5.7B to $14.2B. From this moment on, the Chinese investments into scaleups have been continuing to grow (approaching the $100B bar in 2019, not far from the United States levels), while Europe’s investments have been flat until 2017.
“While in 2013, Europe and China were moving about at the same pace, now China is traveling at more than double the velocity than Europe – added Alberto Onetti – In the last 5 years China invested $294B while Europe only $105B. This gap is now almost impossible to be bridged. One of the reasons being that there is a robust investment activity by private local and international companies, public venture arms and VCs and the focused Chinese government industrial policy”.
During the same period, the US has accelerated its investing pace. While in 2018, Europe and China ecosystems produced about 1,400 new scaleups, the US added 4 times more (slightly less than 5,800 scaleups) and crossed the $150B bar of capital invested. In the past years, China has started producing larger tech scaleups approaching (though still at a distance) the US standards.
“This is the result of business-friendly policies, establishment of government guidance funds, mandated to invest in a single policy initiative/sector and to provide capital to local companies – stressed Marco Marinucci, CEO and Founder of Mind the Bridge – Corporations and corporate venture arms like Baidu Ventures, Alibaba Group, Tencent Holdings and JD.com and their fiercest competitors are primarily responsible for the transformation of the China investment landscape as they developed horizontally and vertically integrated ecosystems across industries. They started acquiring stakes across a diverse sphere of businesses, backing rival players, and driving up valuations in some cases.”
A Venture Capital Driven Ecosystem. No ICOs.
China’s scaleup ecosystem has been primarily venture-capital driven thus far.
Only 1.2% of Chinese scaleups went public, collecting 9.8% of the capital invested into Chinese scaleups ($33.1B out of $337B). Two large IPOs triggered the 2018 growth: Xiaomi and Meituan Dianping collectively account for $8.9B raised. China has not experienced the ICO phenomenon because the country currently does not allow startups for trading in cryptos.
The scaleup size distribution in China stands in between the US and Europe.
Small scaleups (between $1-10M raised) do account for 67% of tech companies population. They are 61% in Europe and 73% in the US; mid-size scaleups ($10-100M) account for 27% of the total in China, versus 24% in Europe and 33% in the US ecosystem.
Comparing this distribution to the situation 5 years ago, China seems to be moving closer to the US in terms of size of scaleups.
“China is on its way to produce larger scaleups and definitively more tech giants”, commented Alberto Onetti.
3 Main Hubs
Unlike Europe and the US where tech companies are concentrated mainly in the capital city, in China there are 3 main emerging hubs: Beijing hosts the 35% of all scaleups, having raised $162B (48% of the overall amount of capital); 18% are located in Shanghai and collected $59B (about one-third of their Beijing-based counterparts); the third cluster is the fast-growing tech hub of Shenzhen with 11% of scaleups and over $27B in investments (8% of total). The home city of Alibaba, Hangzhou, shows nearly twice smaller figures in terms of volume and funding of scaleups.
Hong Kong ranks 13th with 71 scaleups and $4.6B of capital raised, reconfirming that it is definitively more of a financial hub than a technology cluster. Also, 27% of all Chinese IPOs (and 100% of the billion-dollar ones) floated on the Hong Kong Stock Exchange. The average capital raised by tech scaleups in Hong Kong is $300M, second only to the Nasdaq and Frankfurt Stock Exchange. The Shenzhen Stock Exchange also plays a strong role (36% of all Chinese IPOs), through mobilizing smaller amounts ($87M raised on average). The Shanghai Stock Exchange follows at a distance: 14 tech IPOs, $1.4B in overall capital raised ($99M on average).
Main Backbones: Web, Retail & Shopping Platforms
Over 3,500 scaleups operating in Web and Retail & Shopping Platforms operate in China. They raised $124B (37% of total capital). Fintech involves 1,110 scaleups that collected $37B. Enterprise Software, Digital Media, Telecommunications, Hardware and Gaming follow. Emerging technologies (Medtech, Energy & Cleantech, Insurtech, and Cyber Security) are starting to climb up the charts.
“Though China’s first few “startups” were consumer-focused and started imitating the business models of their Western counterparts early on, they quickly began innovating, having been empowered by mass amounts of consumer feedback and data enabled by mobile behavior – ended Martin Haemmig, Co-founder and Network Partner, Vidian Ventures-GLORAD, co-signer of the Foreword of the Report – With the Chinese government laying strong emphasis on artificial intelligence, cybersecurity, healthcare, and education, there is robust investment activity in these verticals as private companies, public venture arms and VCs participate in spurring competitive growth.”