Australian startup ventures seeking to expand in China can now tap the financial resources of the Dragon Egg Fund, a new $20 million fund that targets investments in startups operating in the health, cleantech, logistics, education and agriculture sectors.
The Dragon Egg fund is founded by Mai Capital, which is focusing on post-seed and mezzanine pre-Series A investments in early-stage startups operating in these industry verticals, due to their thesis that these will generate the optimal returns in the Chinese market.
The fund is backed by Michael Mai, the founder of Mai Capital and property development firm ICD Property, where he serves as managing director. ICD Property, incepted in 2009, claims to maintain $1.3 billion in assets under management (AUM).
In an interaction with the Australian Financial Review, Mai, founder of Mai Capital, said, “We will look to invest in emerging companies that are positioned to tap into the enormous Chinese market. This offers investors the chance to invest in high growth innovative companies and provides these companies with a fast track to the world’s most populous country.”
Mai added, “We want to do a lot more business between Australia and China to further the two countries’ economic benefits. We see them as the perfect joint venture,” he said. “In Australia there are too little people and a lot of resources, China has too many people, too few resources and too much competition.”
The fund is aiming to fill the market gap between Australia and China, which Mai perceives as being due to the differing economic context and focuses of the startup ecosystems in each country, as well as the differences in human geography.
In a statement to the Australian Financial Review, Mai opined: “Chinese startups are too narrow, they’re solving a problem that’s only domestic and they don’t have a global strategy. But in Australia, they’re too broad and they want to do everything. They have a global focus, but we want them to think about the Asian market as well.”
Few Australian startup ventures maintain a presence or consider the potentially lucrative Asian market they can access. For instance, Southeast Asia represents a market of 650 million people with a growing middle class that drives consumption and increasing Internet and smartphone proliferation. The Chinese market, which represents a market with significant size and volume, should business ventures find traction with the appropriate strategy.
However, few Australian ventures are equipped to deal with the fragmented markets that Southeast Asia represents, while both Southeast Asia and China represent markets with barriers like language, culture and regulations that may inhibit the rapid growth startup ventures need when scaling.
The current investment director of the Dragon Egg fund is Tom Ellis, a former banker who has been the principal of his own firm, Melbourne-based boutique corporate advisory Pebble Ventures, since 2014. According to Ellis, Mai Capital has plans for establishing larger funds in the future to support portfolio firms through later stage funding rounds.
He shared with AFR: “The key for this specific fund is to deploy capital intelligently. We’re looking to raise capital beyond that though to help take those companies to another level, at which point the risk profile of the investments will be different. We’re working through final due diligence on a few deals now. There is some phenomenal stuff in cleantech and agriculture where we can see a really broad application.”
With China’s economic profile seeing a shift towards growing consumption and associated services, this is an area that Australian ventures can leverage upon, while the China-Australia Free Trade Agreement is seeing healthcare being predicted as the next growth sector for Australian businesses entering the Chinese market, as affluence increases and the health profile of Chinese society changes.
While AFR cited cited the success of Australian brands like Blackmores and A2 Milk as suggesting a demand for quality Australian products among Chinese consumers, other Australian businesses that have found traction and a degree of success within China, such as Stone & Chalk, Freedom Road Travel and SmartTrans.
In an interaction with the Australian Broadcasting Corporation, Alex Scandurra, the CEO of non-profit fintech hub Stone & Chalk, highlighted a challenge of the Chinese market for Australian businesses, sharing: “If anything, the sheer scale of the market is the major challenge for Australians looking at China. There are currently over 2,600 companies in the peer-to-peer lending space alone. Adapting to the speed of market is another challenge I can see.”
He added, “One thing you also immediately notice when you are in China is that people and companies here move fast and are not afraid to embrace risk. This is something Australian entrepreneurs can definitely learn from.”