$6 billion – that is the amount of money that Chinese companies have committed to investing in U.S. technology firms in the first quarter of this year, according to a report this month by the Asia Society and Rhodium Group. This was no small jump, given that the peak annual transaction value in this category in the past eight years was only $1.5 billion.
Increasingly, Chinese investors are interested in having a stake in the very frontier of technology development by buying into U.S. start-ups. The $365 million backing for messaging app Tango and search engine Quixey by China’s e-commerce giant Alibaba is a case in point. Tencent, the close rival to Alibaba in China’s internet space, has also invested in half a dozen early-stage star-ups. While the two take the lead, other players from China are itching to ride the tide.
To better grasp the trend and the potential pitfalls, I spoke with Jackie Yang, co-founder of TransLink Capital which invests Asian capital in U.S. start-ups, and David Lam, managing director at WestSummit Capital, a Chinese state-backed fund investing in American technology companies. See below for the edited highlights.
We know that Chinese investment in U.S. technology isn’t news, but is Chinese investment in American start-ups a recent phenomenon?
Yang: Yes, definitely. It’s very interesting to see the development. The Chinese economy has developed in a very fast pace. There are enough people in the country that have become very, very resourceful, and have accumulated a lot of cash.
Recently, I had dinner with one of the CEOs from China. His company has about $1 billion [in revenue] and the CEO owns 20-30% of the company. The way he’s thinking is, now you want to diversify some of the assets overseas and the U.S. is still one of the top investment destinations. What he tried to do is first of all, he tried to buy a house, as usual. Then he buys commercial real estate. He’s actually also looking for golf courses. Then he thinks about, my business is in the cable industry, which provides equipment to cable operations. He starts to think about start-up companies that he can partner with and improve his business in China, or just for financial return. It’s kind of step-by-step. If you are comfortable about the basic need, then you will start to think about going a little bit more aggressive and taking some risks in tech investments.
But it’s more than just individuals. If you think about where the Chinese want to allocate resources, not only from an individual’s but from a company’s point of view, it’s natural for them to want to invest in U.S. start-up companies. Just like companies in Japan 20 years ago, Chinese companies in the high tech industry have grown to a global rate, for them the next step is to go beyond global. U.S. start-ups have always been in the leading position in delivering the next generation of technology and business models, so it’s natural for Chinese companies to look there.
We help start-up companies connect with partners in Asia. Three years ago the Chinese companies were interested but maybe 10-20% had the plan to actually invest. Now I’d say 60-70% of them have a plan already.
Lam: Chinese interest in investing in U.S. start-ups is fairly recent. It took off in the last 2 years or so. Silicon Valley has established itself as the innovation capital of the world. There are a lot of technologies developed there that are very applicable to the China market. A lot of Chinese companies are dealing with the same tech issues to grow their business as many U.S. companies do.
We have a number of portfolio companies and are actively helping [them] access the China market. We are in regular contact with well-known companies in China in the tech space. We have had, in recent memory, over 10 Chinese companies that have expressed interests in investing in our portfolio companies. We recently took one of our companies to meet with 15 strategic partners in China, and 6 came back and said that they are interested in investing. The interest level has continued to rise in the last few years.
One area we find exciting is the enterprise software market. In the consumer space you have consumer internet, you certainly have a handful of companies from the U.S. going to China. But most U.S. companies have a difficult time doing so. In the enterprise market there’s a higher success rate. There are interesting companies that are building enterprise software that have huge applicability to China.
What type of Chinese companies are interested in investing in U.S. start-ups?
Yang: They are the leader in their sector in China. When you are the No.1 and No.2 in the high-tech business, I’d say 9 out of 10 are thinking of expanding to the U.S. It’s quite natural for them to consider what their strategy is in Silicon Valley and start-ups. This should be part of their long-term strategy. Whether they can really do something though, there’s a question mark.
You have heard several big investments done by Alibaba. We invested in one of the companies [that Alibaba invested in], Tango. Alibaba started that practice almost less than 2 years ago. That’s one example. The other company that’s been very aggressive, though not in the start-up space yet, is Lenovo. They have bought Motorola and
Lam: They are leading companies in their market, domestically, most likely publicly listed. They have leadership teams that are very international and very sophisticated. However, they are not networked into the start-up community of Silicon Valley per se.
What are the pros and cons for a U.S. start-up to take Chinese money, v.s. American, Japanese or Korean money?
Yang: I’d say there’s no advantage or disadvantage taking the money from say a Chinese company or a Korean or a Japanese one. The key decision should be, regardless of where the company is from, who will really bring you the value to help you grow to the next step. For example, for some of the investments that Alibaba made, Alibaba has committed a lot of resources to helping the companies to be very successful, by leveraging Alibaba channels.
Lam: For the Japanese and the Koreans, the development of the corporate venture model is much more evolved than on the China side. The challenge is that you don’t have a local interface for most of the Chinese capital coming out here. That creates a communication barrier and there are cultural barriers that we all agree with. There are a couple firms like Alibaba that are massively international and extremely localized, but for one company like Alibaba there are probably 50 companies still finding their way.
What are the major barriers for Chinese companies to invest in U.S. start-ups?
Yang: the experience, the culture, the process – they are different. You need to be familiar with the high-tech industry here. That’s the major barrier. On the other hand, I’d say the barrier is getting lower. The start-up environment in China is developing very fast. Some of those Chinese companies were start-ups themselves 15 years ago.
Lam: The biggest barrier is that they are not local. You really have to be in Silicon Valley to have the right set of relationships to make the right investment decisions. It’s hard to instantaneously create that network and that level of trust. The unfortunate aspect of that is there may be issues that are not obvious to someone who’s not local. There’s so much capital here, so many great start-ups, and so many great investors. It’s just a really crowded market place. Coming in once a quarter, or once a year, makes it very hard to be locally integrated. On the one hand you can’t say, I want to be local so I will put someone in Silicon Valley who doesn’t know my own culture in China. On the other hand, it’s going to take them quite a few years to build that local network from scratch.
