Image: Shutterstock

Image: Shutterstock

Investors favor enterprise tech startups amid slowing deal flow, still foresee strong growth despite competition from tech giants 

Despite the so-called “capital winter” in China, enterprise tech startups received more funding from VCs than any other businesses in 2019, quite an achievement for a sector without a history of rapid growth and which had just started to take off around 2015. 

Last year, the B2B sector ranked first in the number of deals struck and funding volume, accounting for 18.65% and 16.48%, respectively. Before 2015, China's biggest tech companies were mostly consumer-focused. Only a few targeted the enterprise market, and even so, mostly only in software services.

When asked about the reasons for this, Xiong Xiaoge, Founding Partner of IDG Capital replied: “Most Chinese companies were consumers of information technology and not IT developers, and VC firms looked at only consumer-oriented businesses.”

IDG had invested in Kingdee and other enterprise software providers some time ago, but later found that China's enterprise services market lagged far behind its internet consumer market. “An internet company could make more profit than all business software companies put together,” said Niu Kuiguang, a partner at IDG Capital. 

Growth drivers

In 2014 and 2015, about 1,500 enterprise tech startups were established each year, much higher than in the previous years. The sector also started attracting investors' attention. Funding for B2B companies soared to RMB 39.8bn from 973 deals in 2015, compared with RMB 4.58bn from 206 deals in 2014.

Rising labour cost in China was the main reason, said Niu. A Deloitte report also showed that labor cost in 2015 was five times higher than in 2005, prompting businesses to turn to enterprise-level software for higher productivity and efficiency. 

In addition, the e-commerce boom in China from 2013 meant traditional retail businesses could sell directly to consumers online, which fueled demand for enterprise tech companies for the analysis of transaction data to improve customer service. 

Also, B2C companies that had reached high penetration levels in the market began to look for other opportunities and emerging technologies like AI, big data and IoT were mature enough to be commercialized. Leading internet companies also began to bet heavily on enterprise tech businesses. For example, Alibaba was among the earliest providers of big data and cloud-based services to companies. 

In addition to providing enterprise services, internet giants also prioritized enterprise services companies in their investment strategy. In 2017, enterprise services startups were the top three in the investment target lists of Baidu, Alibaba and Tencent, collectively referred to as BAT. Investments in enterprise services startups accounted for 29% of the total deals made by Alibaba, 26% of Baidu and 11% of Tencent.

Think long term

In the B2C market, many startups have experienced exponential growth in the short term. Chinese social e-commerce platform Pinduoduo achieved unicorn status in just three years, but achieving success in the enterprise services sector requires time and patience. Even in a mature market like the US, it takes a B2B startup 8.8 years, on average, to grow into a unicorn. 

The main reason for this is that clients of B2B companies do not purchase enterprise services on impulse; it is usually a long and considered process. Typically, B2B firms take from three months to up to 18 months to close a deal, and even so only if they provide competitive products and services. 

According to Wu Bing, the founder of online document collaboration tool developer Shimo Docs, B2B business processes take a long time and require in-depth vertical expertise. “In this sector, product delivery is much more complicated; not only product offering but also follow-up service.”

Presence of tech giants like BAT makes the B2B market much more competitive and new entrants have to be prepared for the long haul. Alibaba Cloud now has half of the domestic B2B cloud services market share with a valuation of over $39bn and serving over 500,000 enterprises every year. 

New opportunities

In 2019, Chinese B2B startups raised RMB 115.2bn from 722 deals, dropping from RMB 183.8bn from 1,440 deals in 2018, signaling that investors have become more cautious, but the huge, untapped B2B market potential gives enterprise services startups and investors reason for optimism. 

The enterprise services market in China was worth over RMB 1tn in 2017 and has grown 30% annually since then. Also, although China has about 35m B2B enterprises compared to 27m in the US, the valuation of B2B businesses in China is only 1% of that of their US peers. 

New technology, in particular, is also expected to create opportunities. For example, the rollout of 5G networks means potentially wider applications for B2B businesses working on, for example, access devices, IoT, PaaS and their applications.  

Unexpected developments are also providing opportunities. The current coronavirus outbreak is leading to widespread remote work practices in China, increasing demand for team collaboration platforms, such as, Alibaba's DingTalk, Tencent's WeChat Work and ByteDance's Lark.

The downloads of Alibaba's work-from-home tool, DingTalk, soared to over 600m in February, an almost 15-fold year-on-year growth. Amid the outbreak, the tech giant even adapted the product to offer online teaching tools for schools. 

Shimo Docs' online document collaboration platform, which is also a handy tool for working from home,  raised 8-digit USD Series B+ funding at the end of February. With over 370,000 business clients, the Chinese equivalent of Google Docs, will use the money to refine its cloud-based office software and develop more tools to help enterprises go digital. 

All of Shimo Docs' investors, including China Broadband Capital and China Growth Capital, believe the digital transformation trends will continue to bring huge opportunities to B2B startups like Shimo Docs.

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Edited by S. Mani

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