Thread by @lillianmli

1) I was a SaaS-focused VC in Europe for ~5 years, and then left for China to explore the SaaS ecosystem here.

Initially, I was highly disappointed. But after 18 months I've coming out of the trough of disillusionment.

Here's why:

2) Answer: Chinese SaaS aka ToB ( To Business) lags behind that of the Western SaaS ecosystem by estimates of 5 to 10 years due to a combination of unwillingness to pay and high adoption barriers. However Cov-19, labour shortage and regulations have accelerated adoption.

3) In 2020 when I just got back, I took stock of the B2B ecosystem in China and found
- Chinese SMBs ( ~60% of GDP) used cheap labour rather than software
- SMBs don't have cash reserves to invest in upgrades
- Historical software piracy led to lack of desire to pay for software

4) - China has a smaller proportion of mid-size companies (which are the traditional landing spots for SaaS in the west) so often B2B companies have to target enterprise accounts straight away without a firm mid-size client base

5) - Enterprise often hasn't adopted cloud, and in the midst of getting the right hardware and software to be cloud-ready, that's a high investment upfront to utilise SaaS. Most Chinese firms are buying software as in on-premise licenses rather than on-cloud recurring revenue

6) - Enterprises demand high levels of customisation - while large enterprises are willing to pay for digitalisation, they require high levels of hand-holding through the process. They often expect customisation to allow a straight transplant of their existing processes online.

7) - The thing is, Chinese enterprise companies have highly convoluted internal company structures, processes and workflows. Customisation is highly time-consuming and there's not much re-use for other clients. Essentially a lot of B2B companies are being tech consultancies

8) - Other issues include wanting to build in-house, distrust of public cloud, even lack of talent in scaling Chinese B2B companies (can't really call half of them SaaS since they are neither multi-tenant cloud nor getting recurring payment).

More here
lillianli.substack.com/p/why-are-ther…

9) So that's quite depressing, to say the least. I was like, welp, guess I arrived too early for the golden age of Chinese SaaS.
Then a few things started to happen over the course of 2021 which made me change my mind.

10) On the demand side - 2021's census made it very clear that the Chinese demography was ageing fast.

For factories who's been having issues recruiting young workers for the past few years, they know the next investment upgrade will be to automate the production lines

11) Like everywhere in the work, Covid also accelerated the digitalisation of the workplace (also schools). DingTalk (the messaging software of Alibaba) had a breakout year in 2020 in mixed ways.

https://twitter.com/lillianmli/status/1407691102271021059?s=20&t=7KvCv7FsXYIPgSDog1VlFA

12) The slew of tech regulations during 2021 did two things.

They made it clear that the gov really loves technology in the form of cloud adoption and making manufacturers all IoT and blockchain (not even kidding, for supply chain safety lillianli.substack.com/p/overview-of-…)

13) They also made it clear that the gov was not hot on consumer internet giants have been spending too much energy extracting value from consumers rather than creating value through innovation.
lillianli.substack.com/p/let-the-bull…

14) The result was the tech giants are like - ok we can't be so obvious in growing our consumer segments anymore, so guess full pivot towards B2B companies in a bigger way (which they were doing well before 2021 with the rise of Alicloud)

https://twitter.com/lillianmli/status/1350488772488511497?s=20&t=5yF1azar-m_kXdA1W1HBxA

15) Something of an ecosystem was also springing up with Alibaba and Tencent both focusing on investing in the middleware for their cloud platform - just like Google cloud and AWS's dynamic. Wander into any SaaS conference and either Alibaba or Tencent will be sponsoring.

16) VCs were decrying the death of consumers for a while, but 2021 was the year they got their B2B teams together and deployed a lot of capital. They deployed enough capital that it didn't seem like a phase anymore.

17) Software founders who weren't given the time of day by VCs a few years back suddenly got a much warmer reception.
The success of Agora and TikTok also meant that Chinese VCs weren't asking 'what's the western equivalent of this?' at every turn

18) The founders still tell me that the general knowledge of SaaS investment is not high amongst VCs, but at least they were willing to admit they can't expect consumer internet growth from B2B companies

19) The disgruntlement against relentless 996 work culture and recent layoffs has seen a considerable amount of talent depart from tech giants.
Sources tell me that a lot of high ranking management left that one firm that almost IPO'ed.

20) A lot of folks may end up working for competitors, but a few would start companies and a lot of talent can go work for them. That seems promising for a new crop of SaaS companies.

21) On the matter of adoption, enterprises are adopting the cloud as per policy encouragement. Slowly but surely.
Due to security concerns, they are still going with hybrid cloud structures that optimise for cost and security but that adoption trend has grown quite fast in 2021.

22) In China, the adoption of software will perhaps be more top-down lead relative to the west, as regional governments encourage companies with subsidies (and hold a carrot with KPIs) to migrate to the cloud or digitalise data.

23) As such, the pace of adoption can move much faster than letting markets organically evolve.
As a SaaS investor, I'm not complaining.
So in summary, 2020 looked kind of dire. But in a year's time, the general attitude towards software and cloud adoption have changed

I'm not saying it's all roses from now on, but I definitely am more hopefully than a year ago.

If you enjoyed the tweet, you might enjoy the series I wrote on Chinese cloud.
lillianli.substack.com/p/the-state-of…