Why Tiger is eyeing China’s electronic signature sector

While China's consumers love e-payments, few contracts are sealed digitally. Start-ups are trying to change all that, and international investors are putting their money behind it.

Investors have poured billions of dollars worth of dry powder into China's consumer sector, hoping to ride the wave of innovation that is changing the way the country's burgeoning middle class spends its money.

Given the huge investment, there's it's little surprise certain areas have been saturated, helping create bubbles in verticals like bike sharing and smart convenient stores.

But international investors are still keen to find areas with the potential for exponential growth in China. And one sector that promises to hit multibillion-dollar scale is the electronic signature industry.

Electronic signatures allow counterparties in a transaction to seal a legitimate, safe contract without resorting to paperwork. It's most often used in big-ticket transactions between businesses. However in China, despite the immense popularity of mobile and app-based payments with consumers, it also has potential in reducing paperwork for, say, low-value loans.

On Friday, Hangzhou-based electronic signature service provider BestSign said it had completed its Rmb358 million ($52.4 million) series C round of funding, led by US-based Tiger Global Management

Early investors including Matrix Partners China, DCM and Morningside Venture Capital also participated in the latest round.

The start-up claims to be the first firm to successfully close a series C round in China’s electronic signature service area.

The company says it sees more than 11 million contracts signed on its platform on daily basis. BestSign did not provide any figures for its financial performance, but Chinese research house madai.com says a company typically makes Rmb1 for each contract signed. Based on that, and not taking into account special offers, bulk discounts or promotional rates, BestSign would be generating Rmb4 billion per year in revenue. 

“China’s electronic signature service sector becomes increasingly attractive on the capital market,” BestSign said in the statement, citing DocuSign, a San Francisco-based company that went public in April, as a successful forerunner.

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While investors may have seen their fingers burned by Chinese start-ups in hot sectors, there is little doubt that businesses and consumers will continue to seek to take the pain out of contract paperwork.  

According to Chinese research entity iiMedia Research, China’s third-party electronic signature market may top Rmb3 billion by 2019, up from 2016’s Rmb150 million.

Source: iiMedia Research

Traditional paper contracts are still dominant in China, as the nation – where trust is at a premium – feels safer with actual signatures, stamps and sometime even fingerprints on the contract.

This is understandable, as digital footprints are clearly much easier to erase or forge than clauses on paper these days. But players in the broad internet space believe that, eventually, the spirit of contract will be reflected digitally rather than physically.

BestSign sees the challenges. The company said it plans to “further expand its strategic layouts in advanced technologies such as blockchain and artificial intelligence”, aiming to apply safer and more efficient electronic signature services to various business scenarios.

However, that future won’t come soon in China.

Researcher madai.com, which is backed by Citic Private Equity, believes the Chinese electronic signature service sector is far from being fully exploited and will continue to grow exponentially.

According to its statistics, there were more than 150 billion e-commerce contracts signed nationwide in 2015. That should mean a market that is worth much more than Rmb100 billion.

Unfortunately, or maybe fortunately for investors, the penetration rate of electronic contract signing stands way below 1%.

The sector is destined to grow, and capital is starting to sniff around. Both these trends are likely to accelerate following the successful IPO of DocuSign, which saw its stock price jump from $39 at its listing in late April to $65 as of close of business on August 30.

“We consider the electronic signature sector as a key point in China’s business trust ecosystem, which is improving alongside intelligent technological developments,” Tiger Global Management said in the statement. “It is an emerging sector with great potential.”

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