We seem to have hit an inflection point as more VC funding went to China than the US in Q2 2018. This represents total dollars invested, though the US maintains a larger number of rounds. In terms of seed investments, Silicon Valley has seen a sharp drop while China shows an almost four-fold increase in the number of VC rounds completed last quarter compared to Q2 2017, according to Crunchbase analysis.
The China Internet Report 2018 published last week by South China Morning Post (a subsidiary of Alibaba), Abacus News and 500 Startups, shows that the “Big 3” Chinese tech companies, the Baidu, Alibaba and Tencent (BAT), are now growing faster in ad revenue, the primary source of income for American giants like Google, Facebook and increasingly, Amazon.
High stakes, large scale
The pace and size of deals demonstrate the opportunity that Chinese market represents. Some recent examples:
- Ex-Googler Eric Tuang IPOs PDD, or Pinduoduo, aka the “Chinese Groupon”, valued at $24 billion in just three years
- Softbank to invest $1 billion in Chinese AI startup SenseTime, making it the most valuable AI startup in the world
- Truck hailing company Manbang raises $1.9 billion from Softbank and China Reform
- Google to invest $550 million into China’s eCommerce giant JD.com
- Ant Financial (Alibaba’s payments subsidiary) raised $14 billion
- Chinese coffee shop upstart Luckin Coffee raises $200 million to take on Starbucks, achieves Unicorn status in just a year, opens 500 new stores in 5 months
Local or Global?
Success for domestic companies depends on government approval to operate and much more so for western companies looking to enter China.
BAT companies operate in nearly every sector on the Internet, focusing their own and non-BAT branded businesses mainly on their huge domestic market or across Asia more broadly. This is the case with Baidu and Tencent, but less so for Alibaba, which enables B2B commerce between Chinese merchants and the world. Taobao, Alibaba’s most popular service, is local only. Their international activities are done mainly through direct investments or fund investments.
Chinese companies have yet to massively internationalise to the US and Europe, with the exception of perhaps Mobike, Lime and Ofo, bike and scooter sharing services which raised huge amounts of capital and can be seen across the US and Europe major hubs. Much of Chinese tech sector international focus takes the form of investment.
As noted by Mike Moritz in “China is winning the Global Tech Race“:
“Most Chinese activity is outside the US, with Tencent and Alibaba building vast constellations of satellites. Tencent has more than 600 investments, while Alibaba has around 400 — totals that almost make Japan’s SoftBank look like a penny-pinching slowpoke.”
To contrast with the US tech companies:
“Between 2015 and 2017, the five biggest US tech groups (especially Apple and Microsoft) spent $228bn on stock buybacks and dividends, Bloomberg data shows. During the same period, the top five Chinese tech companies spent just $10.7bn and ploughed the rest of their excess cash into investments that broaden their footprint and influence.“
Equally, American tech companies struggled to succeed in China:
- After publicly withdrawing from the Chinese market in 2010, Google returned to China in early 2018, though some consider it a ‘stumble’
- Facebook is struggling to get into China – recent reports suggest that the Chinese government was not proceeding its acquisition of a local subsidiary
- Uber lost the ‘car hailing’ war to Didi Chuxing
- eBay lost the marketplace war in China with Alibaba
In a recent post, Crunchbase asked the question – What would it take for a US company to succeed in China? the answer is: it’s complicated. The combination of people, language, culture, regulation makes the Chinese market a tough one to crack. As mentioned in the China Internet Report 2018:
Success or failure in China’s internet landscape, especially media or fintech, is contingent upon government authority.
Even with the right regulatory blessings, the Chinese market requires local adaptations vs. the usual copy and paste approach to scaling.
US dollars are very actively deployed in China via venture capital funds, including some of the valley’s leading funds: Sequoia China, Matrix Partners, Redpoint Ventures, Accel-IDG and KPCB China-TDF Capital. To get a sense of how US venture sees China, look no further than Sequoia’s Mike Moritz controversial opinion piece on the FT titled “Silicon Valley would be wise to follow China’s lead” where he describes the work ethic of Chinese managers and draws parallels between Silicon Valley firms and Chinese firms.
China is the latest growth story for US companies
With a recent $500M in funding from Softbank and Temasek, WeWork is doubling down on its Chinese subsidiary, which is now valued at $5 billion. It currently has 40 locations and claims to have 200,000 users in China, after acquiring a local competitor, Naked Hub. Airbnb has set is sights on China with its separate, domestically focused venture Aibiying. In a recent statement, an Airbnb spokesperson told Crunchbase News:
“As the company’s fastest growing domestic market, Airbnb continues to invest in the China travel market. By 2020, more Airbnb guests will come from China than any other country. We will continue to deepen our commitment with the goal of bringing authentic magical travel experience to Chinese travelers”
To succeed in China, Aibiying will need to play its cards smartly against (or perhaps with) the competition from Alibaba backed Xiaozhu and Ctrip backed Tujia.
Who’s copying who?
The Chinese market used to have a reputation of being a ‘copycat’ of US models, but that trend seems to be reversing in some cases at least. I asked Twitter for examples and as pointed out by David Truong:
FB messenger is copying the platform play of WeChat. Shared bike schemes started in China. Many of the top live video mobile apps came from China (musical.ly, others from Toutiao), digital gifting innovations coming from China, etc
— David Truong (@daveytea) July 27, 2018
There are certainly areas where the Chinese market is way ahead than the US tech market. To name a few:
- Mobile messaging and mobile commerce – Commerce in China is ahead of the curve. The ‘social plus’ model – offering discounts for initiating a group buy, influencer marketing, social shopping – is massively on the rise. WeChat, the main messaging app, has 580,000 of “mini-programs”, a small app within the app, only a year after launching the feature. It created an ecosystem within the app, which makes WhatsApp feel antiquated. Not to mention Apple’s iMessage which seems to be stuck in the 90s.
- China is pushing ahead on 5G – making it the fastest mobile network in the world. It has big implications for streaming, which is a huge phenomenon in China as well as games.
- The race for AI – the city of Tianjin alone, announced a $16 billion plan to support AI startups. China places a huge importance on Artificial Intelligence and the the government envisions a $1 trillion AI industry by 2030. Face recognition technology and self driving cars, are emerging as key areas of excellence.
What’s next for China tech?
Not all is rosy. The New York times reports that in the last three years about 10,000 venture capital funds were started in China, “amid a technology gold rush powered in part by China’s government-guided economic growth engine”. However, a lot of these investment vehicles are struggling to go beyond their debut funds, as mentioned:
After many years of easy credit and go-go growth, China is struggling with weakened investment and household consumption and increasing corporate and local government defaults.
In addition, Trump’s tariff wars went from 18 products to 10,000 products, which is making some worried:
Yet in private conversations, investors, entrepreneurs and economists admit that with the high debt level and a trade war with the United States, the room for government maneuvering is shrinking. The degrees of pessimism vary, but many of them are bracing for a tough ride ahead.
Last week I had the opportunity to give a lecture to a group of Executive MBA students from CKGSB, one of the leading business schools in China. Using translators we had a lively discussion on the future of venture capital in China, with some talking about the “population dividend” as a huge opportunity, while others concerned with what that could look like in the age of growing automation. Overall, I left with newfound interest in how and why the BATs fly.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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