The Chinese vaping startup betting on world-first innovations amid stricter regulation

On Nov 26, 2019

China’s decision to halt online sales of vaping products earlier this month has put e-cigarette makers under intense pressure, and follows a global trend towards stricter regulation. One Chinese startup, backed by some of Asia’s most prominent tech investors, remains confident of weathering the storm through its innovative products and safety-first approach.

The backstory: Founded in February 2019, Snowplus launched its products in April and scored significant funding from major backers including Sequoia Capital.

Set up by US-educated young entrepreneurs, Derek Li, Ray Xiao, Sa Wang, Jimmy Zhong and Justin Li Snowplus launched its first closed system e-cigarette product in April 2019. A caffeine-based vape followed in July and then a smokeless edition in August.
Major investors have quickly taken notice and Snowplus closed $40 million in Series A funding from Sequoia Capital, among other big players.

“Our investors believe in us because we are making products with unique tech that provides a competitive advantage in the market.”
Derek Li, co-founder and head of international business at Snowplus

Unique selling point: Snowplus has already launched two world-first innovations in the e-cig industry, a vape that substitutes caffeine for nicotine and one that produces almost no second-hand smoke.

The startup has managed to build a presence in Canada, Southeast Asia, Russia, and South Korea, a rare feat for a Chinese vape maker. Snowplus is also in the process of expanding to Europe.

Funding: Snowplus’ Series A was the largest investment ever in Chinese vape startup to date. Sequoia Capital China, ZhenFund, K2VC, and Matrix Partners China contributed to the $40 million round.

Sequoia Capital is an early backer of Google and Apple. In 2011, it invested $8million in messaging app WhatsApp, which Facebook acquired in 2014 for $19 billion. At the time, this was the largest acquisition of a venture-backed business, according to Crunchbase.
ZhenFund has backed Ofo, VIPKid, and Horizon Robotics. Matrix Partners was also an early investor in Apple, and has recently invested in Didi, Xiaomi, and Ele.me.

The landscape: China is home to 300 million smokers—the world’s largest market—providing much room for vaping to grow. The country produces 95% of e-cigs globally, but only 5% of them are smoked in China, CGTN cited data from the Chinese Centre for Disease Control and Prevention as saying.

Only recently did Chinese entrepreneurs start to claim the domestic market, but now countless vaping startups have piled into the market to compete for a slice of the pie.
One of the most prominent players is Relx, which has raised $25 million to date over angel A rounds, according to Crunchbase.
So far, these companies have been operating in a legal grey zone, and it is unclear how their status will change once new regulations kick in at the start of 2020. Beijing’s new rules include increased taxation, enhanced health and safety standards, and a ban on online sales.
E-cigarettes are facing increasing scrutiny worldwide, after several cases of alleged vape-related deaths in the US, as well as a boom in underage vaping. The World Health Organization says that evidence on the health effects of vaping is still “inconclusive.”

Prospects: Derek Li, one of the Snowplus co-founders, told TechNode that he is optimistic about the startup’s future both in China and abroad, despite the imminent rule changes and the need for localization in overseas markets.

The Chinese vaping market is likely to see quick consolidation in 2020, as regulations squeeze out weaker competition. Snowplus stands a better chance of survival thanks to its unique products, focus on safety, and financial backers.
Li told TechNode that the company is expanding its research and development efforts and aims to enter more markets. The startup has just signed an agreement with the Shenzhen government to boost R&D capabilities considerably, and it will soon announce new products with integrated smart features and more sensors, Li said.
Outside of China, Snowplus faces competition from big established players, most notably Juul. But its e-coffee and smokeless products are likely to attract consumers.
US vaping giants are also facing a harsh environment after the Trump administration announced a ban on all tobacco-flavored products in the US in September.
Snowplus’s products are compliant with regulations in both the US and EU, and the company says it welcomes Beijing’s new rules as it will help the industry “evolve.”