Ray Hu, Founder & Managing Partner of Blue Lake Capital, delivered a recent speech titled “The Future of China’s Digital Economy from a Venture Capital Perspective” at the World Innovators Meet (WIM) 2021 Global Real Economy and Technology Summit, hosted by EqualOcean.
This speech has been condensed and edited for clarity.
Dear all, I am Ray Hu, the founder and managing partner of Blue Lake Capital. It is a pleasure to have the opportunity to speak to you today.
Blue Lake Capital is a venture capital firm specializing in the technology sector. Since our founding in 2014, we have made investments targeting digital transformation and digital upgrades. We see two major motivations for digitalization: one is cost reduction and efficiency which can be improved through software for daily operation and management; the other is the constant need for upgrades and iteration in China’s vast manufacturing industry. Accordingly, we focus on investment in intelligent manufacturing and enterprise software, especially cloud-based SaaS software.
2020 proved to be remarkably special. It saw an almost 17% rise in GDP for the software and IT services industry. This high growth rate in a single sector in such a huge economy is partly fueled by the pandemic and partly because China is hitting rapid growth in digitalization.
China’s digital transformation is unique, and it’s only just beginning. There are almost 200 software companies listed in the A-share market, valued at a total of 3 trillion yuan, representing a significant revenue volume, and China is a leader globally in terms of research capabilities in artificial intelligence technology. As a result, digitalization and intelligence in China progress in tandem and largely on the same frequency as the world.
Digitalization has broad applications in China’s manufacturing industry. However, this industry has faced a considerable challenge: it’s big but not strong. To achieve breakthroughs in manufacturing capacity and efficiency, we, as the world’s most significant manufacturing power, should inevitably turn to “digital transformation and upgrades.” The country has high expectations and high requirements for the manufacturing industry, especially in terms of core process innovation, digitalization of production lines, intelligent equipment, and localization of industrial software. This turns out to be a good opportunity for entrepreneurship and investment.
So how big is the market opportunity in this industry? Let’s make a simple analogy. Informatization and digitization have been revolutionizing the consumer market in China since 2000. China’s six largest consumer tech companies add up to a market cap of almost $2.5 trillion US dollars. As the world’s second-largest economy, China is bursting with market opportunities even greater than the consumer market, if enterprise management and manufacturing can be intelligently and digitally transformed.
Among these opportunities, we see application-side enterprise software offerings as “low-hanging fruit” that will mature the fastest in the next 2 to 3 years. Let’s make a simple calculation of the growth of China’s SaaS market in the next few years. Based on a P/S standard growth rate of 20-25x (the average P/S for US SaaS companies is 20x), the value of China’s SaaS market is expected to exceed 6 trillion yuan in 2025. China’s SaaS software entrepreneurship is entering into its golden time:
First, the software market shows strong performance both in terms of supply and demand. China has one of the highest smartphone penetration rates in the world. The public cloud infrastructure here is expanding at an extremely rapid pace. Compared with 2015, AliCloud’s revenue grew 50-fold over five years, while its public cloud offerings saw a dramatic drop in unit price. This is a very representative signal. Similarly, the US SaaS software market also began to boom with the commercialization of AWS in those days. It made an affordable platform available for developers, which contributed to the blossoming of the SaaS market.
Second, we believe that Chinese entrepreneurs stand a perfect chance of making globally leading software products. For one thing, China already leads the world in AI algorithms and capabilities, and today’s enterprise software has undergone the digitization and intelligentization process. For another thing, China leads the world in the mobile internet ecosystem. Thanks to the accumulation of the consumer internet industry in the past two decades, we now enjoy the world’s leading mobile payment and communication software. Many applications can be exposed to end-users through mini-programs and enterprise-level communication tools—DingTalk, WeCom, Feishu, etc.
Third, Although China’s SaaS offerings remain in the early stages of popularization compared to the mature market in the US, we believe that, fueled by the previous two reasons, the penetration of SaaS offerings in China can increase from 13% in 2020 to 25% in 2023.
SaaS offerings are one of the few growing and reliable business models in the B2B market. The past 2 to 3 years have seen increasing attention in the software industry from the primary market. 2021 is a milestone year. Investment in the SaaS industry in the first half of this year was 70% of that in the whole of last year, and VCs are increasing their investment in the software industry.
In the secondary market, the cumulative market cap of the 40 leading cloud-based SaaS companies in the US has grown nearly 6.7 times over the past five years. In comparison, the Nasdaq index has grown 1.8 times, meaning that SaaS software companies outperformed the technology stock market by almost five times. This is similar to the Chinese market. We have fitted the market cap performance of A-share listed SaaS companies to the Blue Lake China SaaS Index. This index also outperformed the A-share index by 4 to 5 times. The capital market shows high investment enthusiasm for SaaS enterprises.
As a venture capital firm specializing in digital transformation and upgrades, we have invested in nearly 30 companies in the software industry over the past five years, making extensive layouts. More than 10 of them have now reached first place in their respective tracks, each of them at least two to three times bigger than their biggest competitor.
These products focus on scenarios in various functional departments of enterprises, such as sales, human resources, procurement, finance, and legal affairs as well as subsectors like automobile, catering, e-commerce, games, and industry.
The application scenario in the manufacturing industry is particularly worth mentioning. If we split the business chain of the manufacturing industry, there are a lot of digitalization scenarios involved, ranging from supply chain collaboration, procurement, and design of core software components to the production process and the post-production inspection link. Blue Lake has also made investments in each of these segmented scenarios. The inspection link, for example, is perceived as a very traditional artificial link, i.e., engineers send sample products to the laboratory for quality inspection. However, this approach has made it increasingly difficult to meet production requirements. Many manufacturers have raised new requirements for inspection means and methods today, including demanding full inspections. In this regard, efficiently capturing the data collected in the inspection, like optical, vibration, and acoustic signals, and making quick and accurate judgments, has become an urgent issue. Digitalization enters the picture as the best solution.
Digital innovation spans a vast scope and is a world-class market where Chinese entrepreneurs can participate and make an impact. As a venture capital firm concerned with the digital transformation and upgrading of enterprises, we have seen an increasing number of startup teams on the front line make breakthroughs in technology and products. We believe China will bring world-class digitalized products to the global market.
Looking back, what is the core driving force behind China’s miraculous ability to sustain rapid growth over the last four decades from reform and opening until now? From a humanistic perspective, it is the hard-working spirit of the Chinese people. From an industrial perspective, China is now at a special stage of development. China spent 40 years advancing in urbanization, industrialization, and informatization all in parallel, covering a development course of nearly 200 years in Western countries. As the world’s second-largest economy, China still boasts a world-leading GDP growth rate today. As an investment institution, we feel fortunate to be able to do our part in the digital transformation and upgrading of China’s economy together with outstanding entrepreneurs.Thank you.
Blue Lake Capital was awarded the following at the World Innovation Award 2021 (WIA2021)
– 2021 China’s 10 Investment Institutions: Science & Technology
– 2021 China’s 10 Investment Institutions: Smart Manufacturing
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