The financial district of Pudong in China
SILICON Valley, long the undisputed king of venture capital, is now sharing its throne with Asia.
A decade ago, nearly three-quarters of the world’s financing of innovative, tech-heavy startups and young companies took place in the U.S., with American investors plowing money into mostly U.S.-based venture firms.
Now, a surge of new money—mostly from China—has helped drive funding totals into the stratosphere and has transformed the venture landscape, according to an exclusive Wall Street Journal analysis of venture funding data.
Asian investors directed nearly as much money into startups last year as American investors did—40% of the record $154 billion in global venture financing versus 44%, the Journal’s analysis of data from private markets data tracker Dow Jones VentureSource found. Asia’s share is up from less than 5% just 10 years ago.
U.S. investors now lead less than half of all venture finance, while China's share is nearly a quarter and growing fast.
That tidal wave of cash into promising young firms could herald a shift in who controls the world’s technological innovation and its economic fruits, from artificial intelligence to self-driving cars.
Silicon Valley previously was far and away the leader for tech entrepreneurs in both money and know-how, says Kai-Fu Lee, a veteran tech executive who headed China units of Microsoft and Google before founding his own Beijing-based venture-capital firm, Sinovation Ventures, in 2009. The rise of China’s venture market “signifies a shift from a single-epicenter view of the world to a duopoly,” he says.
U.S. investors remain the biggest single source of global venture capital, and they do more deals than anyone else—nearly half of all venture rounds in 2017, according to VentureSource data. The U.S. is still an important driver of innovation, with many of China’s bigger investments merely copying American technologies. For startups, the big increase in Asian funds also makes more cash available to finance new technology.
The surge also positions Asia’s investors to win stakes in markets that Western companies covet, or that have national security implications. The U.S. government has grown increasingly uneasy about Chinese advances in key technologies such as artificial intelligence.
The expanding pool of venture capital from the East “is powerful rocket fuel for innovative activity,” says Josh Lerner, a Harvard Business School professor and expert on venture financing. “If you think that being the locus of invention gives you a boost to your GDP and so forth, that’s a deterioration of the U.S. competitive advantage.”
Although one of the biggest Asian investors is Japan’s SoftBank Group Corp. , which has tapped Middle Eastern money to create the world’s largest tech-investment fund, it is Chinese activity that is having the greatest impact.
The prospect of a trade war between the U.S. and China could crimp venture finance along with overall investments if the countries go through with threats to levy billions of dollars in tariffs on each others’ products. But since the tariffs are so far largely focused on industrial or agricultural exports like cars, chemicals and corn, they are unlikely to have much direct impact on most startups.
China is creating unicorns—startups valued at a billion dollars or more—at much the same pace as the U.S., drawing on funding from internet giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. as well as more than a thousand domestic venture-capital firms that have raised billions of dollars a year for the past few years, according to VentureSource.
Chinese-led venture funding is about 15 times its size in 2013, outpacing growth in U.S.-led financing, which roughly doubled in that time period, the Journal’s analysis shows.
Most Chinese-led investment so far has gone to the country’s own firms, the Journal analysis found. Many of them, like the Yelp equivalent Meituan-Dianping, are household names with millions of customers in China, yet virtually unknown elsewhere.
Slowing growth and fierce competition in China is prompting the country’s tech champions to look for markets overseas. Last year, the amount of China-led venture investment outside the country more than doubled, the Journal’s analysis found.
Of the five biggest venture investments led by Chinese investors in 2017, three were rounds led by Tencent or Alibaba in e-commerce and ride-hailing startups in India and Indonesia.
Many Chinese tech companies are “at this critical size that the China market alone is not enough to support their business and valuation,” says Brian Gu, who recently left a position as J.P. Morgan ’s Asia Pacific investment banking chairman to become vice chairman and president of Alibaba’s electric-car startup, Xiaopeng Motors. “The money will first go to adjacent markets where Chinese technology, Chinese business models, Chinese capital will have more impact.”
Madhur Deora, chief financial officer for Paytm, one of India’s biggest e-payments firms, says the company approached Alibaba affiliate Ant Financial instead of U.S. backers for funding in 2015 because Chinese mobile-internet innovations are “way far ahead of anything that’s happened in the U.S.” Ant is preparing to raise $9 billion in a private funding round, according to people familiar with the matter, valuing it at close to $150 billion.
Ant and Alibaba eventually invested a total of around $800 million in Paytm parent One97 Communications, while SoftBank later poured in around $1.4 billion. That made the trio the biggest investors in the company, says a person familiar with the transactions, and gave them board seats. The company hasn’t had “meaningful” U.S. investors, Mr. Deora says. SoftBank led another investment of $445 million in Paytm’s online mall in recent weeks.
One reason China’s push into new technologies worries many in the U.S. is that, unlike the hunt for good returns that underpins most Western venture finance, a lot of Chinese investment is driven by strategic interests, some carrying the specter of state influence.
China is pushing hard into semiconductors, for which the government has provided billions of dollars in public funding, and artificial intelligence, where Beijing in July set a goal of global leadership by 2030. China’s state and local governments have also put money into private venture funds, and Beijing’s interest has spurred a rush of startup VC activity, experts say.
Chinese venture investments include stakes in companies like Megvii Technology Inc., a Chinese facial-recognition firm that has worked with financial firms on systems that match facial scans with databases for loan approvals. It has also helped Chinese police with surveillance systems.
U.S. investors are still pumping more money into AI startups than Chinese, leading $4 billion in funding rounds last year, double the previous year’s amount, according to the Journal’s analysis of VentureSource data. Chinese investors led around $2.5 billion in AI venture financing last year—up from less than $100 million a few years before.
China’s tech giants have their own agendas for investment, separate from government policy. Yet they have faced intense pressure to serve state interests, creating worries that even funds from private sources could come with government strings attached.
Tencent says it is focused on investments in companies with leading technologies or research as well as top players in high-growth markets “where we can share our experience and contribute to building the internet ecosystems.”
Alibaba has taken stakes in companies abroad to expand its services and hopes to create “chemistry” with others in the Alibaba group to “build long-term value,” Alibaba Executive Vice Chairman Joseph Tsai told investors last June.
Mr. Lee, the venture investor, predicts that in the next five to 10 years Chinese tech companies will become pacesetters for tech-related development, vying with the likes of Alphabet Inc.’s Google and Facebook for dominance in markets outside the English-speaking world and Western Europe.
“All the rest of the world will basically be a land grab between the U.S. and China,” he says.
“The U.S. approach is: We’ll build a better product and just win over all the countries,” says Mr. Lee. The Chinese approach is “we’ll fund the local partner to beat off the American companies.”
Last year, deals led by U.S. venture-capital and tech-investment firms, such as Sequoia Capital or Andreessen Horowitz, accounted for about $67 billion in venture financing, slightly more than the $61 billion led by Asian investors, including Tencent and SoftBank, according to the Journal’s analysis of VentureSource data.
A decade earlier, U.S. investors led 73% of the $41 billion in venture finance logged; in 1992, the figure was 97% of $2 billion, when VentureSource’s records begin.
The Journal’s analysis looked at the source of venture finance based on the headquarters of the company or companies leading or making up the majority of each round’s investors.
Asia’s rise as a startup financier is even starker in the biggest venture investments—those of $100 million or more. These megadeals have become an increasingly important part of venture finance as valuations have ballooned, with their proportion of deal volume growing from around 8% in 2007 to around half of the total last year.
In 2017, deals led by Chinese investors made up a bigger portion of that megafinance than those led by U.S. investors. Japanese-led funding—largely by SoftBank—came in third.
In Southeast Asia, a flood of Chinese money into local startups—such as the $1.1 billion Alibaba-led investment into Indonesian online marketplace PT Tokopedia last year—is drawing the region closer to China, says Santitarn Sathirathai, Credit Suisse ’s lead economist for emerging Asian markets.
Chinese money is also playing a big role in India, which, with a population of 1.2 billion, has been described as the next big internet market. Chinese and Japanese investors each led nearly $3 billion in venture finance in India last year, ahead of the nearly $2 billion in deals led by U.S. investors, which have been the top source of India’s VC money in recent years.
Last year, Tencent led a $1.1 billion round in Indian ride-hailing company Ola, which is piling up cash to battle U.S. rival Uber Technologies Inc. Tencent and SoftBank, another big investor, got seats on the board of Ola’s parent.
The money has helped Ola continue a tight race with Uber for market share in India, as well as challenge Uber in Australia, where Ola recently launched operations with introductory free rides.
Tencent and SoftBank also each led billion-plus rounds into Flipkart, India’s biggest local e-commerce company, earning them board seats as well. Flipkart has also recently discussed selling a stake in itself to Walmart Inc., people familiar with the discussions say, and is facing a challenge from Amazon.com Inc., which has announced plans to pour $5 billion into its India operations and is gaining market share. Walmart and Flipkart declined to comment.
Vijay Shekhar Sharma, the founder of Paytm, the Indian e-payment firm, visited Alibaba’s home base of Hangzhou several years ago, and was amazed at the online retail and payments market it pioneered with its affiliate Ant, says Mr. Deora, the CFO.
Paytm executives adapted practices they saw in China, including distributing stickers with QR codes to Indian merchants that let them accept payments via mobile phones, and rolling out shops that pop up for a limited time in Indian malls, where buyers can check out goods before they buy them online. Paytm is going up against Google and Facebook, which have also launched or tested services in India that let users pay through their phones.
“Think of strategic investments and M&A as playing a game of go,” said Mr. Tsai, the Alibaba executive vice chairman, at the investor conference last year. “In a game of go the strategic objective is to put your pieces on the chessboard and surround your opponent.” - WSJ
To gain full access to The Wall Street Journal online, subscribe to StarBiz Premium Plus.
Limited time offer:
Just RM5 per month.
