China tech: From Beijing to the Bay Area

Renren, the so-called Facebook of China, wants to end its tenure as a US-listed company and return to private ownership. The business has been struggling for years to grow its user base as China's younger generation prefers to conduct its social networking via smart-phone apps such as Tencent's WeChat and Sina's Weibo.

Revenue came to $83 million last year, a 43.9% drop from 2013, while net income fell from $64 million to $60 million, and then turned into a loss of $27.6 million in the first quarter of this year. Led by founder and CEO Joseph Chen, Renren is trying to revolutionize its business by investing in start-ups far removed from social networking and games. Most of the targets are in the US.

Earlier this year, Chen announced that Renren would invest $500 million in the financial sector, forging a new business model for the company. Mortgage marketplace LendingHome is one of these fintech bets, having received $70 million in April. Stock trading site Motif, real estate crowdfunding platform Fundraise and peer-to-peer lending site Social Finance are among the other US-based start-ups to receive backing.

"We all understand that Renren has lost the advantage in its core operations. There is a joke that the company's future market valuation will equals its current cash flow, which is negative. However, Joseph is admittedly a talented financial investor," one US-based investor says.

Whether Renren can come up with a new idea through a string of start-ups and subsequently transform its business remains to seen. But certainly there is an increasing trend among Asian companies, especially Chinese technology firms, to look for investments in Silicon Valley. They are building corporate VC arms that provide capital with the promise of strategic support in Asia. But is the local start-up community buying into it?

First steps

Tencent Holdings was the first Chinese tech firm to establish a beachhead in Silicon Valley in 2005. The company, which rose to prominence with an instant-messaging app QQ, wanted exposure to new technologies coming out of the US. This was a key factor in the creation of WeChat. Even though competition was less competitive back then, it still took Tencent almost five years to train up its staff and fine tune its investment strategy.

Another two Chinese tech giants, Baidu and Alibaba Group, have also formed their US investment teams. Alibaba arrived last year after its record-breaking IPO, although it took a short-cut to become familiar with the start-up landscape: the company hired the likes of ex-Liberty Media executive Michael Zeisser and Mike Katz, formerly of Battery Ventures.

They have now been joined by second-tier Chinese tech firms including antivirus software developer Qihoo360, online retailer JD.com, and game developers Changyou and Sohu. Participation isn't restricted to internet players. Electronics manufacturers Huawei and Gome, as well as Chinese conglomerate Fosun Group, are setting up investment units in the valley.

A few have their own VC funds or are making commitments to funds managed by local GPs. For example, Qihoo360's venture investment group is led by Edward Tsai, who previously worked at DCM in Silicon Valley.

Everyone is talking to US start-ups about the China story, but how many of them are really able to offer what they have promised? - Brad Bao

The rest of Asia is represented by a handful of South Korean and Japanese conglomerates. Then, last month, Taiwan's National Development Fund and Ministry of Science & Technology agreed to form $120 million VC fund that will invest in venture funds targeting Taiwan and Silicon Valley start-ups. However, Chinese groups remain the most active players, partly because they have more to offer in terms of value-add.

"The bigger purpose for these Chinese companies is to try and find some innovative products or businesses and create cooperation that could make them look different to their competitors at home. They have ample cash and this money needs to go out. That's why a lot of VC funds have been set up here," says Xiao Wang, CEO of the InnoSpring Seed Fund, a Sino-US technology-focused incubator.

Differing agendas

Every company has a different purpose when investing. Tencent initially it hoped to acquire North American client-based game studios that could deliver high-quality games - and therefore revenue - to its platforms, but it didn't really take-off. This specific remit meant that Tencent America passed on opportunities to invest in YouTube and Twitter, which didn't fit with the company's China operations.

In recent years, it has expanded into other content-generating categories, such as social communications, online music and movies. Unlike other Chinese tech firms, which usually come in at later stages, Tencent invests early, either directly or through local VC funds. It has accumulated a portfolio of nearly 80 seed investments so as not to miss out on the next big thing among US start-ups.

Alibaba's strategy is more concentrated. Some investments related to its ecosystem, such as a delivery service provider ShopRunner. Others, including a $280 million commitment to voice and video mobile app Tango and $200 million investment in social network Snapchat, are denounced as "nonsense" by industry participants because there is no link to Alibaba's current business. However, Snapchat and Tango seem to be a direct push against Tencent's stranglehold on chat and cross-platform services.

Baidu, meanwhile, is forging ahead quietly, mainly building R&D centers in the valley. For JD.com and Qihoo360, the focus appears to be the internet-of-things.

"Many Chinese companies have built investment units in Silicon Valley. But few of them operate independently by making investments from their own funds. Often times the money comes from the company's balance sheet, carries a strategic mission, and the parent companies have influence on the investments," says Brad Bao, managing partner at Fosun Kinzon Capital.

In this respect, Fosun Kinzon Capital is different, which is part of a wider effort to transform the group to be a global investment firm. The $320 million early-stage venture fund, in which Fosun is the sole LP, only wants financial returns. Over the past two years, it has backed over 30 start-ups in both China and Silicon Valley.

China expansion?

American companies are also keen to find strategic partners that can support their expansion into China. They are familiar with the likes of Baidu, Alibaba and Tencent, but less so with the second-tier players.

"Everyone is talking to US start-ups about the China story, but how many of them are really able to offer what they have promised? Only a few. That's the same story when a lot of US venture funds said to the Chinese start-ups that they can help the Chinese companies expand in the State but actually not many of them walk the words," Fosun's Bao says.

Most US start-ups still prefer to receive capital from the US venture capital firms because they focus on their domestic market in the early stages. Even if they gain traction at home, entering China represents a challenge due to the intensity of competition.

"I tell the US start-ups, ‘If you are considering taking money from Baidu, Tencent or Alibaba, you're going to have limitations in terms of who you can work with in the China on products distribution or business partnerships," says Chris Evdemon, a Silicon Valley-based partner at China's Innovation Works. "You might even have enemies before you come in."

US-based VC investors understand what strategic investors can bring to portfolio companies with the scope to enter new markets. But at the same time, they may not grasp the level of competition in China's technology space, or how the different leading players behave.

Evdemon notes that these companies cleaned up a lot of potential domestic rivals after going public. He sees little chance of a US company achieving fast growth in China. A recent example is the battle between the domestic taxi-booking platforms, Didi Dache and Kuaidi Dache, which have now merged and are trying to squeeze out Uber.

At the same time, it is difficult for Chinese strategic investors to enter the US. As such, it seems fanciful that a company might complete a spree of bolt-on acquisition over the next three years and succeed in driving up its valuation. The US is more a market for minority investments through which to keep tabs on technology development and build up a track record in order to source the best deals in the future.

Expansion is the primary objective in emerging markets such as Southeast Asia, India and Africa, given the demographic and developmental similarities with China.

"I don't anticipate a wave of M&A by Chinese strategic investors in the US. Most US companies would prefer to sell to US buyers such as Amazon or Google because they understand them better. Sometimes Chinese strategic investors have to overpay if they want to acquire an US company," says Hans Tung, managing partner at GGV Capital. "But it could change in the next few years as groups become more familiar with each other and more comfortable about cooperating."

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• Topics
• Venture
• North America
• Greater China
• Technology
• China
• Venture
• USA
• Alibaba Group
• Tencent
• Baidu
• Fosun Group