What do Genki Forest, HeyTea, Pop Mart, and Perfect Diary have in common? Besides being worth billions of dollars, these Chinese consumer brands were all funded by blue-chip investors such as Sequoia Capital, Hillhouse Capital, and GGV Capital. These investors have typically backed technology startups, but consumer brands are increasingly catching their attention.
Tech investors’ bets on nascent consumer brands started to pay off in the form of successful IPOs—PopMart’s USD 674 million public listing in Hong Kong in December 2020, and Nayuki’s USD 656 million H-share listing in June 2021 are two examples. In fact, nearly half of the IPO funds raised among all of the 33 Chinese companies that went public in the US in the first half of 2021 were in the consumer sector, according to a report from consulting firm Deloitte.
The rising investor attention on Chinese consumer startups selling everything from trendy cosmetics to fruity beverages and colored contact lenses is altering the Chinese funding landscape, according to Kataya Tojiro, an analyst at GenBridge Capital, a fund that focuses on China’s consumption sector backed by Tencent and JD.com. Today’s Chinese consumer brands can leverage China’s robust existing infrastructure in logistics, e-commerce, and social media to quickly build their new-age brands and adapt to rapidly shifting consumer tastes.
“Normally, the valuation of consumer startups is up to twice that of their annual sales, but recently in China, the rush of investors is pushing some valuations to nearly ten times their annual earnings,” Tojiro told KrASIA.
Funding cycles run amok
In Q1 2021, a total of 137 investments were made in Chinese consumer startups, mainly in areas like beauty and cosmetics, as well as snacks, food, and beverages. Investment in Chinese consumer startups has been characterized by its high frequency—the number of companies that have completed two or more rounds of financing in the first half of 2021 increased by 87% compared to the second half of 2020, according to CBN Data. The same report found that startups operating in the food and beverage sector are the ones that have attracted funding quicker.
For example, Chinese-style bakery Momo Dim Sum Bureau secured five rounds of financing worth over RMB 200 million (USD 30.7 million) while it opened 18 stores since its founding in June 2020. Manner Coffee, instead, netted three investment rounds in 18 months to reach a valuation of more than USD 2 billion since its launch in 2015.
Another example is Moody, a startup founded in 2019 that sells colored contact lenses. The firm completed five financing rounds from VCs, including Sequoia Capital and Hillhouse Capital, securing a total founding amount of nearly USD 60 million in little more than two years.
“There are more eager investors than good projects at the moment, and that drives up the prices of high-quality startups,” Tojiro explained. “We have even seen investors offering huge sums to mom-and-pop businesses that never dreamed of expanding into a large corporation,” he added.
The oversupply of investors has resulted in an imbalance during negotiations, as investors feel the need to acquiesce to entrepreneurs’ every demand to secure a stake in an up-and-coming company.
“Funds are trying to provide all kinds of added value to differentiate themselves from one another. Investors will offer to help promising founders with strategy, human resources, and staffing. I’ve even heard about investors offering founders with Beijing housing registrations and math tutoring for their kids,” Tojiro said.
For instance, in 2017, Sequoia Capital China, one of the most recognized blue-chip investors, had to push for a seat at the table of the then promising fast-fashion firm Shein. The company’s founder, Xu Yangtian, wasn’t intent on raising external funds, but Sequoia’s partner Zou Jiajia convinced him over a period of around six months, according to a report from LatePost. Eventually, Sequoia Capital participated in Shein’s Series C round at the beginning of 2018. Shein then reached a valuation of over USD 15 billion after closing another round of financing in 2020.
Young consumers fuel domestic brands’ rise
Driving the rise of domestic consumer brands in China are the 170 million Chinese between the ages of 20 and 29, said Z&H Investment’s executive Hu Ying during a roundtable discussion at WISE 2021. Hu highlighted that they are new to the workforce and have a bigger appetite for spending than past generations.
“Young people in China have new demands for products and brands. First, their spending power is higher than that of previous generations. They also grew up during a period of relative wealth in an age of consumerism. They have no memory of poverty, and their consumption habits are ways of making a statement about their identity,” Tojiro said. These consumer traits are not new to markets like the US or Japan, but are a novelty in China, Tojiro added.
China’s new generation of consumers is also powering Chinese brands to rival foreign competitors, according to Cai Rong, a partner at Eight Roads Ventures. “Because of China’s stability and prosperity, they are less likely to view foreign products as of significantly higher quality compared to Chinese goods, like older Chinese. They are ready and willing to try domestic brands,” she said at WISE 2021.
Selling to younger consumers means greater potential for retention, especially in high-frequency categories like beauty and food products. “We hope that entrepreneurs in this era can look at their businesses from a longer-term perspective. As they service this new group of consumers, they have to accompany them for 10 or 20 years, or even longer,” Liu Yang, a partner at Jinding Capital and active investor in China’s consumption space, told 36Kr.
In the future, these young Chinese will become the country’s economic engine and be responsible for families’ purchasing decisions. If successful upstart brands like Genki Forest or Perfect Diary can endear themselves to Gen Z customers, they can build rigid demand that lasts for decades to come, experts pointed out.
“If you go to fourth or fifth-tier cities in China, you can observe the immense room for growth when it comes to consumption,” Tojori said.