Collaboration (of sorts) between China and the United States can be traced way back to the beginning of the Californian gold rush in the 1850s when the first Chinese immigrants arrived in San Francisco seeking, if not their fortune, then at least work. These days China no longer supplies cheap labour to the U.S., but significant investment into tech companies based in Silicon Valley.
A recent study, High Tech: The Next Wave of Chinese Investment in America, by the Asia Society, examines America’s long tradition of involvement with China and its growing importance to Chinese investment as its own economy slows down.
Writing in KPMG and CB Insights’ Q1 2016 Venture Pulse Report, Irene Chu, partner and head of high growth technology and innovation group at KPMG, Hong Kong, said: “There has been a much stronger push from the central government for Chinese investors, especially large corporate investors, to look internationally for opportunities and in many cases, bring those new opportunities back to China to help strengthen our own ecosystem.”
Signs of slowdown?
Chinese investment in U.S. tech companies has been on the rise since 2010, peaking last year with more than 140 deals, including $1B+ ‘mega deals’ into companies such as SoFi, Uber, and AirBnB, according to figures from cbinsights.com. But halfway through 2016 there are already significant signs of a slowdown in Chinese overseas financial activity with cbinsights.com predicting approximately 100 Chinese deals into U.S. tech startups by the end of the year, pegging them back to 2014 levels.
This tallies with an extended global decline in venture capital sloshing around due to factors including China’s own economic slowdown, rising interest rates, a presidential election in the U.S. and a referendum later this month which will decide the UK’s future in Europe.
Further evidence is provided by the KPMG and CB-Insights report into deals made in Q1’16 that highlights only one $1B+ deal in the quarter, a $1.2B funding round to investment and financing platform Lu.com. In past quarters there has been multiple $1B+ deals involving VC-backed companies in China. Analysts are therefore predicting more buyout activities and consolidation in China with more Chinese corporates establishing VC arms like Baidu, Alibaba and Tencent.
Alibaba and Tencent recently invested in the same company (Snapchat) for the first time. Alibaba invested $200m into the mobile messaging app in 2015, after Tencent invested $60m in an earlier funding round.
“Alibaba and Tencent have had portfolio companies merge (Kuaidi-Didi-Dache) as well as portfolio companies acquire other portfolio companies (Alibaba-backed Kabam bought Tencent-backed TapZen), but Snapchat is the first shared investment among the duo’s many deals,” says cbinsights.com.
In deals stretching back to 2013, the Alibaba Group has invested in U.S. tech companies including Peel ($70m), Lyft ($250m) and Tango ($280m). While Tencent have backed companies including Epic Games ($330m), fab.com ($150m) and WhoSay ($12m). Last year Baidu announced a multi-million dollar strategic investment partnership with leading discovery platform Taboola, who are headquartered in New York City.
Bloomberg also reports that earlier this month Robinhood, the no-fee online brokerage app, has partnered with Baidu to offer its U.S. stock trading service to customers in China. Chinese investors can buy any U.S. stocks or exchange traded funds without paying commission by downloading Baidu’s StockMaster app and creating an account. It is a move with potentially far-reaching overtones as it will give Chinese traders opportunities to diversify their portfolios beyond the increasingly volatile internal stock markets and increase investment in the U.S. tech sector.
Tencent is the country’s most prolific player with investments into more than 40 U.S.-based tech companies since 2010
In geographical terms, California snapped the most deals with Chinese investors, with more than 280 deals into U.S. tech companies since 2010, according to cbinsights.com. New York was second favourite with just under 40 deals and there was some interest in the states of Massachusetts and Texas. There was also evidence of non-major market startup deals with Chinese investors including Kabbage (Atlanta, Georgia), FiscalNote (Washington DC), and TiKL (Provo, Utah).
Despite political concerns and issues surrounding intellectual theft, more successful Chinese investments into the U.S. tech sector will perhaps soften America’s approach to its pacific partners and a two-way investment flow will also be in China’s own interest. America’s high-tech sector is also an area of growing interest to Chinese investors because of its track record in innovation, free market spirit, proven success and sexy dynamism.
China’s internet giant Tencent is the country’s most prolific player with investments into more than 40 U.S.-based tech companies since 2010. Shenzhen-based hardware accelerator HAX is in second with more than 30 U.S.-based companies. Alibaba is in fifth behind Cherubic Ventures and IDG Capital Partners.
The Asia Society’s report urges U.S. policy makers to acknowledge China’s arrival as a high-tech investor: “Many policy makers and businesses are still new to the fact that China is now a major U.S. investor, and they struggle to imagine that Chinese firms could be major contributors to local innovation. As our data show, they already are. Many local economies now benefit from Chinese capital flows and related job creation,” it concludes.
And the readiness of Chinese firms to invest in the U.S. should not be downplayed. Everything in the tech world is converging, fuelled by growth and demand, and a global market demands global thinking where previous impediments no longer exist.