Andrew Teoh: China’s Tech Unicorns May Grow As More Second-Tier Firms Merge In 2016

A: It didn’t take that long. The fund was filled up just from commitments from existing investors to our first fund. My partners and I are still the single largest group of investors in the fund.

Q: Would you consider raising a U.S. dollar fund?

A: I will never rule that out, but the capital markets in China have changed a lot during the past year. RMB as a form of investment currency will become more important, especially in the tech world.

When I started Ameba, it was rare to see RMB-denominated institutions investing in technologies because a lot of capital was from U.S. dollar funds, and exits were all overseas.

But that is changing rapidly. There are more exits domestically, also more M&A happening among domestic firms.

Q: So you see more RMB funds to be raised, more domestic listings and deals happening in the future?

A: Yes, we will see that both in early-stage and late-stage investments. I think that’s very healthy, and it shows that our format has worked.

Q: How much do you invest per deal, and how many companies have you invested in total?

A: For our second fund, we invest in pre-A and series A rounds, so from a few million RMB to tens of millions RMB. Cumulatively, we have backed around 60 companies.

Q: In terms of strategy, will there be any changes from your previous focus on e-commerce, corporate services, advertising, etc.?

A: We will continue our strategy to focus on the data aspect of e-commerce, a very niche market of advertising. We also like a few verticals such as healthcare and education.

Our sector focus hasn’t really changed, but the companies operating in these areas have changed a lot during the past few years. For example, in e-commerce, we have seen the whole market and business models evolving very quickly.

In 2011, there were a lot of B2C (business-to-consumer) start-ups. We didn’t invest in any of those because we thought it was too early for domestic brands as consumers were still very price-sensitive.

So we invested in a company that focused on optimizing advertising for e-commerce merchants called Maimiao Keji, which was acquired by a listed company not long ago.

But these days, consumers are becoming more sophisticated. They are looking for quality and new shopping experiences. So we have invested in direct B2C models, such as a company who works with certain celebrities to make fashion goods and promote them on mobile phones.

Q: Any sectors that you would avoid?

A: We would not invest in the gaming sector, because it is very much driven by "hit games", a lot like the movie business. It’s challenging to have a consistent and continuing business trying to produce "hit games."

Q: For 2015, the word for the Chinese tech sector would be "merger". Do you see the trend continue next year?

A: I think the trend will continue, especially for companies who want to achieve scale, as the availability of capital declines.

Q: Who else could potentially merge? Do you think those who can merge have already done so?

A: The big and obvious ones have merged, but you can come to the second-tier. The mergers so far have created clear number ones. Now, we can see if others would merge to become industry number twos. If not, they would be swamped and defeated. So, we will see a lot of mergers, especially in the O2O (online-to-offline) areas as these tend to burn a lot of cash.

Q: Ameba has made exits mostly through M&A. When you invest, you actually keep in mind of what companies could buy them. What does the BAT want to buy nowadays?

A: Well, it changes as their strategic priorities change. Alibaba had been focusing a lot on mobile users a few years ago, and a lot of deals were focused on getting more mobile users. Now, they are at a stage looking for additional areas of business expansion, such as music, entertainment, and culture.

Baidu is going heavily into O2O. Tencent, on the other hand, is always looking to build around their ecosystem, be it gaming or payment.

Q: Nowadays, when you talk to companies, do you feel valuation expectations have come down to a more reasonable level?