This American VC Thinks He's Getting Out of China Just in Time

Stephen Bell

Stephen Bell, managing director of Trilogy Ventures. Source: Imaginechina

Stephen Bell spent seven years hunting for bargain investments among the startups founded by China’s entrepreneurs. Now he’s packed his bags and moved back to Texas, convinced the best deals are gone.

The 52-year-old began making venture investments in China in 2009 and ended up putting money into about 50 startups. His focus was backing students graduating from top schools, such as Tsinghua University, as they came up with innovative ideas for companies. The valuations for startups have risen so much, though, he thinks the bargains are now gone.

The venture business has soared in China as investors try to imitate the success of companies such as Alibaba Group Holding Ltd., which last year scored the largest initial public offering ever, and Xiaomi Corp., the smartphone maker valued at $45 billion. Venture investment in China more than tripled last year, pushing valuations to levels approaching those in the U.S.

“The market changed like a switch,” said Bell, who cut the deals as managing director of Trilogy VC, a venture capital firm founded with Trilogy Software Inc. chairman Joseph Liemandt.

In 2014, total venture capital deals in China hit $13.6 billion, up from $4.2 billion the year before, according to the London-based consultancy Preqin Ltd. Venture capital investments in the U.S. rose to $54 billion from $36 billion.

Bell, an entrepreneur who has started companies on three continents, began going to China regularly when he sold software for Trilogy, based in Raleigh, North Carolina. He and Liemandt decided to begin their venture investing in China in large part because valuations were so much lower than for U.S. companies.

University Competitions

Bell would visit schools including Tsinghua and Peking University in Beijing and host competitions in which students voted on each other’s 60-second elevator pitches. The best business idea would win 3,000 yuan ($483).

He found plenty of opportunities for so-called angel investing, usually the first outside money put into a startup. He said he could offer $100,000 for a 25 percent stake, roughly one-sixth the cost of similar Silicon Valley seed deals.

“Every term sheet I put out, I got the deal,” Bell said.

His portfolio grew to include BTCChina.com, China’s most popular bitcoin exchange; games maker droidhen.com; social sharing app JiaThis.com; and sports motion sensor Zepp Labs.

Last year, as Alibaba went public, the number of angel investors in China soared to thousands from a few dozen two years before. A Chinese version of AngelList, vc.cn, tallies at least 1,985 investors. Bell said local competitors started offering money at 10 times the valuations he was used to, putting them in the same range as Silicon Valley startups that had more support and less country risk.

“As a startup investor, if I’m paying seven times or less than my U.S. counterparts, I’m going to be okay,” Bell said. “But once I start paying the same? I’m like, no way.”

Seed Money

China seed and startup tech investments rose to $2 billion in 2014 from $946 million in 2013, according to Hong Kong-based AVCJ Research. So far this year, it has hit $1.4 billion.

Bell isn’t the only one with concerns about valuations.

“Angel investing is almost on par with the U.S.,” said Rui Ma, partner for 500 Startups, a Silicon Valley-based fund. “They have the same prices as the U.S. but less traction, the companies are less mature.”

Online Education

That's a boon for entrepreneurs like Deng Jin, a journalist who decided to launch an online education company to fill what she felt were gaps in her daughter’s traditional elementary school. Even without a clear idea how she’d make money, she raised $2 million to start providing online and mobile courses in liberal arts.

“When you look back in China’s history there has not been a better time than now for startups and entrepreneurs,” she said.

Still, many early stage investors may not see the risks that Bell did. Seed investing in China has a very short track record and few have realized the high rate of failure. In Silicon Valley, it’s common to have only one big hit out of 10 investments.

“When people are doing things they’ve never done before, there’s a learning curve,” said William Bao Bean, investment partner at SOSventures and managing director of Chinaccelerator in Shanghai.

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