This is the first part of a two-part series on how the B2B market rose from a niche sector in the VC market to one of the major investment hotspots in China today.

The Unlikely Rise

Everyone knew things had changed when Zhu Xiaohu (Allen Zhu) embraced the B2B market.

The famed venture capitalist has been known as a maverick in China’s investment circles for the last five years. With a slice of the pie in some of China’s fastest growing and most promising enterprises, including the ride-hailing firm Didi, bike-sharing company Ofo, and online food delivery service Ele.me, the managing partner of GSR Ventures has built a strong reputation for embracing firms that pursue aggressive growth, and an uncanny ability to gain tens of millions of users at their peak.

Many paid attention, therefore, when the number of B2B projects invested in by GSR surpassed the traditional B2C investments.

It also signalled a monumental shift in the VC market. For a long time, so-called “toC investments”, which focus on products and services that are oriented towards consumers have been in vogue. But the rise of the “toB” market, which emphasizes a focus on business operations and optimization, has begun to challenge the crown.

But the blockbuster growth that has characterized consumer-based investments in recent years is now facing inertia. The investing frenzy that has created major tech giants including Tencent, Pinduoduo, and Alibaba has slowed, after more than a decade of intense growth.

B2B is a potential new goldmine. But, its growth has gone under the radar compared to its blockbuster cousins in tech. Software firms like SAP and Salesforce are multi-billion dollar firms operating on the same scale as the likes of Netflix and Coca-Cola, but are little-known outside the discussions of industry insiders. VCs are also turned off by the lack of explosive growth in a sector that has traditionally grown at a glacial pace compared to Pinduoduo or the fast expansion of the bike sharing industry.

Nonetheless, more investors are migrating to this new sector. Keywords like “efficiency” have supplanted the use of traditionally tech-focused terms like GMV or site traffic.

“More than 90% of the investments we managed last year were made in the B2B sector,” said the head of a financial advisory firm specializing in entertainment, who declined to be named.

Mumian Capital, which was founded five years ago to focus on investments in the entertainment and education industry, is having to make the shift as well.

“In order to grow bigger, there is a need to give up this [B2C] path,” admitted Sun Tingting, a partner of the firm.

One-third of the company’s 20-man staff have been deployed to focus on B2B sectors, such as corporate services.

Others concur that a reality check is forcing many towards B2B. For Will Wang, the managing director of Bertelsmann Asia Investments, his lifelong dream of backing a new startup like Facebook after watching The Social Network has not panned out as he has expected. Wang spent most of last year pondering how to better optimize operating systems for firms like L’Oréal and Unilever instead, as a lucrative market for tech startups shrunk.

“There are no more B2C opportunities left,” said Wang.

Social media giants have created a Matthew Effect in the market—with the rich getting richer while others struggle to catch-up. He argued that most tech startups and new products face more hurdles than before to establish a sustainable foothold.

Firms must be able to expand their market share, expand, and survive, he said, a paradoxical set of requirements that have made finding a successful candidate to back much harder than before. Even in 2019, no new startups were able to break the 10-million mark for daily active users, said Wang.

But like any migration, new entrants had little foreboding of the intense fight in store for the next growth area in Chinese investment.

Next issue: The Fight Begins

The original article was written by Chen Ziyan for tech outlet 36Kr.