VC money in the tech industry I Data regulation I Wang Xing

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  • Insights: Following the VC money
  • The week
  • Featured: One year after GDPR, China strengthens personal data regulations, welcoming dedicated law
  • China voices: Meituan’s Wang Xing at 40, without doubts
  • Smart reads
Hello TechNode readers! 

This week, we’re following the VC money trail to understand how venture capital works in China, thanks to a thoughtful piece by John Artman.

TechNode reporter Wei Sheng gives us an overview of Chinese efforts to lay a foundation for data protection laws, comparing them with the European Union's GDPR.

Jordan Schneider offers a compelling profile of how Meituan’s founder and CEO Wang Xing seized victory from the jaws of early failure.

Enjoy the reading and have a nice weekend,

Alberto Sperindio
Newsletter Editor

Following the VC money

June 15, 2019
I’ve been following the China tech industry on and off for almost ten years. In that time, I’ve seen quite a few booms and busts, but surprisingly, the conversation follows a clear pattern:

  • First, people start asking if this is a bubble. While the question nearly always answers itself (yes), VCs and entrepreneurs are wary of answering directly. Instead of “bubble,” they’ll use words like “frothy” or “dynamic.”
  • Next, when it’s clear that the bubble is about to pop (or already has), everyone starts talking about a “capital winter,” a very apt metaphor that quickly becomes a cliche. Money, like water, becomes “frozen” and weak startups begin to die.
  • Finally, once the macroeconomics stars realign, the entire cycle begins again—with nothing really learned except the old adages of “make hay while the sun shines,” “it’s not that bad,” and “fail fast.”

Looking at this phenomenon, I was struck by how little the public is aware of where VCs themselves get money. Who exactly is funding the funders? What impact do they have on startups?

Bottom line: After 15 years of rapid growth, government money (usually in the form of guidance funds) is drying up and VC firms themselves are finding it harder to close new funds. State-backed guidance funds are becoming pickier about who they work with, while non-government backers are also concerned more with cash flow and less with rate of return.

VCs in China have at most eight years to show returns to their own backers (compared to their US counterparts, who have up to 12 years) and sometimes as few as three. Until recently, RMB funds were preferred by VCs because the backers were less demanding. However, VCs are increasingly looking towards USD backers to keep the lights on. As the market for backing VCs matures—and growth slows—so too will the startups receiving funding.

How VC funding works: Venture capital funds are just another asset class. However, since they operate with risky investments, the total return on investment can be significantly higher than other asset classes like stocks, bonds, and other securities. Typical return rates in China are between 5-14%, but some general partners boast up to a 20% rate of return—a claim met by skepticism by TechNode staff.

From the top down
  • Institutional investors and wealthy private individuals need to keep their money working. Government guidance funds, however, are more about making sure investment-led economic growth follows policy priorities or benefits their locality (city, county, province, etc).
  • Venture capital firms raise money from institutional investors, wealthy individuals, and guidance funds to invest in startups they believe will provide a successful “exit” (IPO, acquisition, or even equity sale during subsequent funding rounds).
  • Startups require money to fuel growth models that put speed over profit.

The role of guidance funds: Since reform and opening-up under Deng Xiaoping, China has transformed from a command economy into a market economy. The government, however, still retains its position as leader. Through policy documents, regulations, meetings, and speeches, the central government sets the priorities. Local governments scramble to figure out what the real priorities are and then how to show results to their bosses.

While the first guidance funds began appearing in 2002, it wasn’t until 2008 that the National Development and Reform Commission created a definition:

“[Guidance funds are] a type of policy fund that is established by the government and managed in market-oriented fashion with the aim of … attracting more capital investment in startups.”

Guidance funds, however, are not meant to invest directly in startups. Instead, they provide partial funding to venture capital firms and other funds with the rest of the total formed by “social capital,” i.e. private money.

According to research done by TechNode’s Financial Advisory team, most guidance funds have a broad mandate to either increase GDP in their local area or focus on specific verticals (AI, e-commerce, manufacturing, etc).

Guiding numbers: According to a December 2018 report by Chinaventure (in Chinese):

  • 93.33% of guidance funds are interested in medical treatment, health, or TMT (telecommunications, media, and technology). TMT, in China, covers most of tech.
  • 90% want to be on the decision-making committee of their invested sub-funds.
  • More than 70% want to work with firms with at least three years of successful exits.
  • More than 90% have clear minimum requirements for key people in sub-funds.
  • Guidance funds usually provide 15-30% of total sub-fund funding.
  • 30% have considered creating funds with overseas LPs and GPs.
  • Estimated return rate in 2018 was 10-15%.

Inefficient guidance

Another report, by Qingke Private Equity (in Chinese), found some major problems with how guidance funds operate:

  • Since 2008, only 882 out of 2,065 guidance funds have made investments, leaving 57% of aggregate funding still available.
  • By the end of 2015, 30% of the RMB 109 billion in central government-backed guidance funds had not been used.
  • A random survey of six local guidance funds found that 66% of their RMB 18.75 billion had been deposited in savings accounts.
  • 73.51% of all money from guidance funds winds up in companies that are either expanding rapidly or are already mature.
  • Only 6.41% of the money is invested in seed stage companies.

RMB drying up

From 2002 to 2016, over 2,000 guidance funds were created. In 2016, guidance fund growth peaked at 572 new funds. In 2017, the number of new funds was only 284. By December 2018, only 264 new funds were created.

Data from Preqin, a financial data provider, shows that the number of VC funds closed peaked in 2015, but aggregate capital raised peaked in 2016. According to our Financial Advisory team, over the last six months, more and more China-focused VCs are seeking overseas LPs, who provide US dollars. While they are usually more demanding and focus on rate of return, the RMB is weakening and the “innovation” sector is seeing less and less support from the government.

Slowing China speed

As TechNode contributors have previously reported, opportunities in the consumer space for companies both large and small are quickly diminishing. Not only is easy growth from demographic and mobile dividends rapidly drying up, but the total amount of money available to fund startups—whether 2C or 2B, digital or physical—is also slowly decreasing. This means boom-bust cycles will be increasingly infrequent while VCs become pickier to hedge their bets. Instead of getting easy money on inflated valuations, founders must start thinking about creating sustainable (or kind of sustainable) businesses.

From our perspective at TechNode, this is a good thing. Rapid growth also means rapid social change. The trade-offs inherent in technology adoption (convenience vs. privacy, for example) often go unquestioned as people race to a “better life.” Slowing startup growth could also mean fewer externalized costs—such as having bikes moved to designated zones by security guards of property management companies instead of bike rental employees—and less value destruction in the form of broken bikes, empty office buildings, and scam artists.

The VC model of economic growth is great for many reasons, but in the last few decades, with the rise of consumer technology, it has gotten out of hand. I, for one, am glad things are slowing down and founders can get back to doing what they should be: creating sustainable businesses that benefit their community and broader society.

– John Artman, Editor-in-Chief
The week
Tencent lawsuits

Tencent has filed six new lawsuits against Bytedance, demanding that the company delete all “Honour of Kings” gameplay videos from the accounts of six specified users on Jinri Toutiao and Douyin. It is also requesting Bytedance pay RMB 10.8 million (around $1.56 million) in damages, TechWeb reported. Tencent says in the filing that the videos are a violation of its copyright for the hit mobile title. This fresh round of lawsuits raises to 15 the number of game-related cases brought by Tencent against Bytedance.

Russian ambitions

Online retailer has reached a partnership with Yandex.Market, an e-commerce joint venture between Russian search engine Yandex and the country’s bank Sberbank, to increase cross-border trade from China to Russia. Starting in June, Yandex Market will start selling goods in Russia through its online marketplace.

Google moves

Google is preparing to move its production of smart thermostats and motherboards away from China to avoid the 25% import tariff on Chinese-made goods as well as to mitigate the risk of a volatile and often hostile government in Beijing, Bloomberg reported. The Silicon Valley company has already moved a significant portion of its hardware production; motherboards are being migrated to Taiwan and smart thermostats to both Taiwan and Malaysia, according to Bloomberg’s anonymous sources.

Google is pushing the Trump administration to exempt them from a ban that prevents US firms from doing business with Huawei, according to the Financial Times, which cites three unnamed sources. Google is concerned that if it cannot supply updates to its Android operating system (OS) on Huawei phones, the Chinese company will use its own OS, which it is currently developing. Google says the Android hybrid is likely to contain bugs, making it more vulnerable to hacks and threatening the security of millions of Huawei handsets in the US and worldwide.

Blockchain academy

The People's Daily, the Chinese Communist Party media outlet, has launched an online academy for blockchain technology in collaboration with the open-source community led by Financial Blockchain Shenzhen Consortium, also known as FISCO BCOS. The curriculum of the People’s Daily massive open online course (MOOC) covers underlying blockchain infrastructure as well as real-world blockchain applications. A number of free video courses are now available on the MOOC platform.

Alipay actions

On Monday, Alipay launched a ride-hailing mini program, allowing users to book rides in 33 cities in 10 countries worldwide, including the US, the UK, Australia, and the United Arab Emirates (UAE). The mini-program, which can be accessed inside the Alipay app, connects to ride-hailing platforms such as Grab in Thailand, Gett in the UK, and Careem in the UAE but allows users to interact with maps and text drivers in Chinese, call local police, and pay in Chinese yuan. According to Jiemian, the service will launch in more than 100 popular destinations across more than 20 countries this year.

US banking giant Citigroup is looking to use financial technology and services that have caught on in Asia, such as mobile payments and credit pre-approvals, as it draws up a road map for its global digital strategy. The company has been building out its mobile app back home, and is taking notes from Chinese fintech giant Ant Financial.

Ant Financial is planning to build a fintech innovation center in the Xiong’an New Area near Baoding in north China’s Hebei province, said Ren Haixia, the head of Alibaba’s Xiong’an project, though she did not reveal a specific timeline for the launch. The company has rolled out a blockchain-based home rental platform, which is part of the larger plan for the innovation center. An Ant Financial spokesman confirmed to TechNode that it has collaborated with local entities on fintech projects. Additional projects between Alibaba and the special economic zone are underway, including blockchain and cloud infrastructure development, according to the Hebei news outlet citing Ren.

Douyin developments

Short-video app Douyin and its international version TikTok have brought in a total of $9 million worldwide through in-app sales of virtual coins, not including revenue from China’s third-party Android stores, according to mobile app intelligence firm Sensor Tower. The total earnings increased fivefold from $1.5 million in May 2018 and was up 22% compared to $7.4 million in April.

Bytedance has shifted leadership at Douyin and Jinri Toutiao in an attempt to boost growth, 36Kr reports. Zhu Jun, the co-founder of, now leads Douyin and TikTok. Ren Lifeng, the former head of Douyin and one of the earliest members of its team, now reports to Zhu. Bytedance’s recommendation algorithm expert Zhu Wenjia was promoted to lead the Jinri Toutiao app, reporting to the CEO of the Jinri Toutiao company.

International requests

Tech companies worldwide—including US chipmakers Intel and Qualcomm, mobile research firm InterDigital Wireless, and South Korean carrier LG Uplus—have restricted employees from engaging in informal conversations with Chinese telecom giant Huawei. In response to the recent US blacklisting of the Chinese firm, these companies have issued internal guidance to their employees to not discuss technology and technical standards with their counterparts at Huawei.

The Chinese government summoned several global technology companies—including Microsoft, Samsung, and Dell—for talks last week, warning that complying with a US ban on selling American technology to Chinese firms may create further complications for all sector participants. British chip designer ARM was also called in by Chinese officials; the company halted supplies to Huawei last month. The talks followed last month’s US ban on selling technology and components to Chinese telecom giant Huawei. Chinese officials did not mention Huawei but asked these foreign companies not to make hasty or ill-considered moves before the situation was fully understood.
Featured: One year after GDPR, China strengthens personal data regulations, welcoming dedicated law

Three years ago, when an 18-year-old Chinese schoolgirl died as a result of a telephone scam, it sparked a heated discussion about personal information protection on the internet.

Xu Yuyu, a high school graduate from east China’s Shandong province, died of cardiac arrest on August 19, 2016, two days after she gave nearly RMB 10,000 (around $1,400) to someone posing as a local education official. The fraudster had told Xu to transfer the money, which her family had planned to use for her university tuition fees, so that she could access her financial aid.

Chinese media reported that Xu received the scam call within days of applying for financial aid at the local education bureau. In September 2016, an investigation (in Chinese) by state broadcaster China Central Television revealed that the scammer, named Chen Wenhui, had purchased online the personal information of tens of thousands of high school graduates, including their names, phone numbers, home addresses, and schools.

China has since accelerated legislation on the issue, with more than 200 laws, rules, and national standards being brought up by the country’s legislative bodies, government agencies, and cyberspace watchdogs. A dedicated law that emulates the General Data Protection Regulation (GDPR) of the European Union, which will potentially bring tech companies in line with stringent personal data regulations, is also in the works.

GDPR one year on

May 25 marked the first anniversary of the GDPR, Europe’s strict data protection rules that allows people to request access to their personal data as stored by online service providers and restricts how those companies obtain and handle the information. When the law took effect one year ago, it was considered the world’s toughest framework to protect people’s online privacy.

Bjørn Stormorken, CFO of Sweden-based social networking platform Idka AB, told TechNode that the GDPR had created a whole new industry, in which law firms, auditors, and software consultancies offer compliance advice pertaining to the new rules.


In the first 12 months of implementing the GDPR, the European Commission has fined more than 90 companies a total of more than 56 million euros (around $62.5 million).

China’s road to data privacy

China, which has the most internet users in the world, does not yet have a privacy law, but the country’s top legislative body has put one on its agenda. Ahead of that, various legislative attempts were made to establish norms for personal information protection, including a national standard that is similar to GDPR.

China’s legislative process on the protection of personal information began in November 2016, when the Cybersecurity Law was adopted by the Standing Committee of China’s top legislature, the National People’s Congress (NPC). The law, which took effect on June 1, 2017, banned online service providers from collecting and selling users’ personal information without user consent.

The law establishes basic privacy requirements: It bans network operators from gathering data that is relevant to their services, bans sharing identifiable data without consent, and requires companies to safeguard personal data.

The law does not spell out what companies need to do to comply with key requirements involving consent, anonymization, and securing personal information. But these questions are addressed in a document published by China’s National Information Security Standardization Technical Committee (TC260), the country’s main standards body.

New standards 

In March 2018, the TC260 issued a national standard, the Personal Information Security Specification, which covers the collection, storage, use, sharing, transfer, and disclosure of personal information.

This specification is considered one of the most similar to the GDPR. While the Cybersecurity Law summarizes fundamental principles of personal information, the TC260 specification provides detailed guidance for compliance in information processing.

This standard was followed by strengthened regulations on businesses’ collection and use of personal information.

App checkings

In January 2019, internet watchdogs began to inspect popular smartphone apps to determine whether they engage in illegal or excessive collection of user information.

Apps offering ordering food, navigation, and car-hailing services were the primary targets in the campaign, which will last through December 2019, according to a statement by the CAC, the Ministry of Public Security, the Ministry of Industry and Information Technology (MIIT), and the State Administration for Market Regulation.

January also marked the establishment (in Chinese) of a special administration working group dedicated to apps by the TC260 and the Internet Society of China, a nongovernmental organization supported by the MIIT, to promote closer evaluation of illegal collection and use of personal data by mobile apps.

In order to develop online privacy protection norms for mobile apps, the CAC released a new set of draft privacy guidelines for app operators on May 5. They outline seven situations that constitute the illegal collection and use of personal data, including the collection and use of users’ personal information or the provision of personal information to third parties without the consent of the user.

In the latest move, on May 28, the CAC introduced a new data security regulation, stating that customized content using recommendation algorithms driven by personal information, including news feeds and advertising, should be explicitly labeled.


The Personal Information Security Specification only provides guidelines for enterprises when they are dealing with personal information; it cannot be invoked in court, nor by administrative agencies to levy administrative punishments, said Fang Chaoqiang, a lawyer at Beijing Yingke Law Firm.

Like the GDPR, China’s Personal Information Security Specification includes guidance on user consent, data protection, data access, the obligation of disclosure, and the evaluation of data security, but overall it is more permissive. For instance, the GDPR has provided six lawful bases that allow data controllers to process personal data, such as user consent, legal obligation, and vital interests, but the specification only lists four circumstances where data controllers are not allowed to process personal data.

Fang said the specification would also act as a guideline for legislators making related laws. Thus, the upcoming personal information protection law will probably contain most of the personal data protection elements featured in the GDPR, though it might show more tolerance.

Between the lines

The current Personal Information Security Specification does not give Chinese citizens any right to protect their privacy because it is not a law. But legal experts expect that a dedicated personal information law may achieve the goal.

– Wei Sheng
China voices: Meituan’s Wang Xing at 40, without doubts
He Jiayan 何加盐, The House of Startups (创业家)
May 25, 2019
“From a pile of dead men, he pushed himself forward,” said an anonymous investor.

Serial entrepreneur Wang Xing had over a dozen failed projects under his belt before striking it rich by founding Meituan. In a longform profile, author He Jiayan details Wang Xing’s failures in first imitating Twitter, then Facebook, and then finally finding success adapting the Groupon model to China. He is also known for picking fights with half of China’s internet companies. It remains to be seen just how far his ambition can take him. What follows is an extended paraphrase of the piece.

Wang Xing’s family suffered greatly after the PRC took power. His grandfather was driven to suicide during the Cultural Revolution, and his father spent years forced to work in the countryside and unable to attend college on account of his family background. After China’s reform and opening-up, however, his dad made a fortune in construction.

Admitted to China’s prestigious Tsinghua University in 1997, Wang left an impression. For instance, during hot pot with classmates one night, the upperclassmen gave all the freshmen an opportunity to ask a question all the seniors would have to answer. They expected Wang to ask about secret crushes, but instead he said, “What do you think is the meaning of life?”

Wang Xing headed to the University of Delaware for his PhD, but got bored when his advisor went on sabbatical. After fumbling around with clones of Google Maps and Evite, he stumbled on success with a pixel-for-pixel Facebook copy. But he suffered from a lack of investment—having lost his one-page business plan on the way to his meeting with Sequoia China, he tried to hand-write a proposal on the cab ride over—and was eventually forced to sell to a competitor for a paltry $2 million.
Wang Xing’s next idea was yet another “Copy to China” endeavor. In April 2008, he launched a Twitter clone and quickly amassed over a million users. Out of the blue, the government blocked his site for nearly two years.

Writes the author, “The concrete reason for the ban is hard to pinpoint. But the root cause lies in the fact that during the site’s development, Wang Xing failed to realize that at a certain size, it takes on the attributes of media. Improper handling of certain information caused the site’s doom.”
Most of the employees from that time stuck around through the dark days of censorship purgatory. One of the few who did not was Zhang Yiming, who would go on to found Bytedance.

For his next move, Wang Xing drew yet again from American startups for inspiration. His Meituan was one of about five thousand Groupon clones that launched around 2011. So how did Wang pull ahead of the pack?

He decided to only launch one product a day, ensuring that the merchants really felt the benefits of working with him. Also, Meituan was the first to guarantee automatic refunds for customers whose purchases expired. Lastly, Wang also preserved funds, reckoning that other firms’ ad spend at the time would help educate the customer but not necessarily lead to loyalty. Winning the trust of major investors, he was able to raise a huge round, brag about it on social media, and in doing so scare off competitors and win the trust of customers who worried about their purchases being wasted.
Starting in 2013, Meituan took on Baidu and (now aligned with Alibaba) on food delivery, investing a cool billion RMB in an operation to “storm a beachhead.” Meituan has since grown to control over 60% of the market.

Since 2015, after Meituan’s merger with Dazhong Dianping (closest Western analogy: Yelp), Meituan has been engaged in “borderless competition.” It has picked fights with Ctrip on travel, adopting the Maoist strategy of “encircling the cities from the rural areas” by starting in lower-tier cities. By last year, Meituan had started to book more hotel rooms per night than the former industry leader.

Wang Xing met future Didi CEO Cheng Wei back in 2011, just as he was getting his firm up and running. Wang even gave him some tips on his app. For years, they maintained a friendship. In 2017, they had dinner together; later that night, Wang Xing launched his own ride-hailing service pilot in Nanjing. “That night, Cheng Wei certainly understood how Xi Jinping felt when during the day he was laughing with Trump at his private estate, but at night Trump was mulling over sanctions.” As Didi invested in bike ride-sharing startups Ofo and “Little Blue Bike,” Meituan bought out rival Mobike. Just this month, Meituan has launched an API to bring all of Didi’s smaller competitors onto one platform.

The author summarizes:

“Wang Xing’s path as a founder is at once filled with thorns and flowers. His strengths are inseparable from his weaknesses. He has low EQ, he often offends, and he doesn’t have any partner to make up for this deficiency.

“When he made a social network, the product was solid, but he couldn’t find an investor and was forced to sell.

“Because he accepted Tencent’s investment, he and Jack Ma have had a falling out. In contrast, Cheng Wei was able to make it work and have both Tencent and Alibaba on his board of directors.

“In public, Wang Xing has called out Jack Ma at least three times. First he said that Alibaba would stoop to any low, that Jack was a liar, and that Taobao started out by selling fake and shoddy products.

“He despises people who don’t do the hard work of thinking through strategy. He once said, ‘Most people are willing to do anything in order to avoid having to really think.’”

According to the author, Meituan has three main weaknesses. First, having made so many enemies, Wang Xing may grow distracted from his core customers and get consumed with border fights. Second, Meituan has yet to really bring innovation to the market. Finally, although out-executing others has served Meituan well so far, it remains to be seen how this limitation will fare during a period of dramatic technological change.

– Jordan Schneider, TechNode contributor
Smart reads
Millions and millions. Apple’s got over a billion users, but what does this mean for the company? (Above Avalon)

Hack defense. To pre-empt the risk of retaliation, the People’s Liberation Army will be replacing Windows OS with a custom-built operating system. (ZDNet)

Modern spycraft. Changes in technology, business, and politics are forcing intelligence agencies to mutate and adapt. (Foreign Policy)

Rethinking how we know. Has knowledge become an obsolete concept? (Aeon)

AI supply chain. Much of the data that AI companies use is collected via dubious consent and processed, labeled, and catalogued by cheap contract labor (The Atlantic)
We're looking forward to telling you all about the latest tech developments next week. Till then,

Have a nice weekend!
Alberto Sperindio
Newsletter Editor
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