For China’s enterprise technology sector, the COVID-19 pandemic has come as a significant shot in the arm. As employees were forced to work from home, enterprise tech services — that help businesses with their digital transformation such as streamlining of workflows — began to write the pandemic playbook.
China’s Future Capital Discovery Fund is particularly bullish on the future prospects of this sector. Founded in 2014, the VC firm has allocated 85% of its investments to startups in enterprise tech, primarily in China.
“We believe the next 10-20 years will be the golden age for China’s enterprise technology sector. Across the economy, the degree of digitalisation, IT infrastructure readiness, and enterprise demand has hit a tipping point, providing fertile ground for enterprise tech startups,” said Future Capital founding partner Mingming Huang in an exclusive interview to DealStreetAsia.
So far, Future Capital has backed over 160 startups in various segments including enterprise software, big data, AI, smart mobility, advanced manufacturing, and intelligent supply chains. Among its investees are Niu Technologies, Newborn Town, Sensors Data, Duckbill, Narwal, Encootech, Hose, and Taos Data.
In 2020, Future Capital assisted 52 of its portfolio companies to close subsequent funding rounds and invested in ten new startups, including Edgeworx, Treelab, and iLabService.
The firm manages five USD-denominated funds and two RMB funds and has combined assets under management of about $1 billion.
Last September, it secured $187 million — a record for Future Capital — in commitments for its Future Capital USD Fund IV. The firm had announced the final closing of its USD Fund III at $100 million in October 2018. In 2021, Future Capital closed its debut growth fund within four months of its launch at $108 million. Currently, it is in the market to raise a second growth fund.
Edited excerpts of the interview with Mingming:
When and why did Future Capital decide to invest in enterprise technology services?
Since our inception in 2014, Future Capital has bet on enterprise technology. At the time, we reckoned that technology-driven transformation in multiple industries will be among the biggest opportunities in China in the coming 10-20 years, and corporate services is a much sought-after niche market.
How has the growth curve in this sector changed over the past few years?
Over the years, we’ve seen changes in three aspects. First, demand in areas like internet and e-commerce is growing.
Secondly, many server message block (SMB) corporate service startups have emerged, competing with Alibaba’s enterprise communication platform DingTalk and Tencent’s WeChat, among others. SMBs help companies in facilitating collaborative work.
Thirdly, awareness of corporate services software and sales of generic software has grown steadily.
What was COVID-19’s impact on the industry?
Overall, it has been positive. In the second half of 2020, China’s economy bounced back from the COVID slump and several companies realised the power of IT infrastructure and corporate service software. As an example, offline retailers shifted to boost their online presence that benefitted Martech [marketing technology software] corporate services providers.
What could be the possible trend in the coming 1-2 years?
It [enterprise tech] will continue to bloom. The development of new technologies will spruce up corporate services. For instance, the improvement of real-time audio and video technology will support extensive digitalisations of many activities.
Could you take us through some of Future Capital’s successful portfolio companies in the corporate services sector?
Future Capital has been a long-term investor in Beijing-based e-invoicing firm HOSE EKUAIBAO. In August last year, the VC, alongside marquee investors like SoftBank Vision Fund 2, Tiger Global Management and Sequoia Capital China, had collectively infused 1 billion yuan ($154 million) in the startup’s Series D funding.
Beijing-based HOSE EKUAIBAO provides enterprise invoicing management and claims to have nearly 2,000 clients.
We are also an investor in the martech software-as-a-service (SaaS) provider Sensors Data, TiDB database solution developer PingCAP, container truck fleet operator Duckbill, low code development service specialist ClickPaaS, and the cloud-computing collaborative office software developer Shimo Docs, among others.
The market for corporate services in developed countries is more mature than in China. What are the opportunities for China?
The less-developed enterprise information, digital operation management, and payment models have resulted in a premature market in China. On the flip side, China has potential due to the country’s assortment of emerging industries and competitive infrastructures and platforms.
Future Capital mentioned that there will be more M&As in the sector
M&A activity has been very active in overseas markets — Salesforce, Microsoft, and Okta acquired Mulesoft, GitHub, and Auth0, respectively. Likewise, as China’s tech giants grow and enterprise services extend to new scenarios, a similar phenomena will happen in China. Future Capital, supports its portfolio companies to participate in M&As.
Besides enterprise services, what about investment in other sectors?
Approximately 15% of Future Capital’s investments are allocated toward consumer tech firms that leverage novel technology to deliver products and services to a new generation of consumers. Our invested startups include Nasdaq-listed Li Auto and NIU Technologies, as well as home cleaning robots developer Narwal, home fitness player XQiao and smart earphones designer Nothing.
Is Future Capital raising a new fund?
We are currently in the market to raise a second growth fund. In 2021, the firm closed its debut growth fund within four months at $108 million, receiving capital commitments from limited partners (LPs) including endowments and family offices in Europe and the US.