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U.S. Companies Backing Out of U.S. Indices? Maybe Not

ChinaIt’s been a big story of late. As of mid-June, 14 U.S.-traded China-based companies had received buyout offers valued at a collective $22.4 billion, according to Dealogic. The highest profile of the bunch is Internet services provider Qihoo 360, which, several weeks ago, announced it had received a buyout offer led by its chairman and CEO — one that would make it the “largest take-private deal of a U.S.-listed company,” said the WSJ.

The reason for all the take-private talk? China’s stock market, which has roared along for much of this year, thanks to a series of moves by the Chinese government, including cutting benchmark interest rates, reducing stock market transaction fees — even reconsidering its stance on what are called variable interest entity structures, which are used by China-based companies to list in the U.S. and are hard to unwind.

China, in short, wants its companies to come home.

“The government wants to build its own capital markets,” says Glenn Solomon, a managing partner of the cross-border venture firm GGV Capital who we talked with last week. “It wants to see capital stay in China and continue to be invested in China.”

The question is whether companies are smart to listen.

(More on what’s changing fast in China here.)



Ben Thompson on What Xiaomi Gets Just Right

Ben ThompsonBen Thompson, a Taipei, Taiwan-based writer with a sharp understanding of consumer tech, has attracted a loyal and growing base of readers to his one-man media company, Stratechery. Thompson has also become something of a thought leader in Silicon Valley over the last year, largely because of the perspective he enjoys from his perch halfway across the world.

Last night, at a San Francisco dinner hosted by the venture firm GGV Capital, Thompson — who’s in the U.S. for an Apple event this Monday — shared some of his thoughts with investors and entrepreneurs as they sipped wine and enjoyed a series of carefully prepared Cantonese dishes.

Among the topics raised was five-year-old Xiaomi, the fast-rising Chinese company that became the top player in China’s competitive smartphone market last summer, as well as the world’s third-largest phone maker. Thompson didn’t address the long-term prospects for Xiaomi, which raised $1.1 billion in funding at a stunning $45 billion valuation in December. But he did talk at some length about why he thinks it shouldn’t be underestimated. From his comments last night, edited lightly for clarity:

“Whether [I’m ‘long Xiaomi’] is a separate question from why I think the company is interesting.

Xiaomi is very highly valued right now, but they’re a company that a lot needs to go right for them to succeed. Then again, in 2012, if you said a lot would need to go right for them to get to X by 2015 — well, a lot did go right. They’ve executed very impressively to date.

Why they’re interesting as a company is that tech companies get so caught up in scale, and the efficiencies that come with them, that they tend to treat entire markets the same. Not Apple, which has demonstrated that you can definitely segment markets, [and not Xiaomi, which has done the same].

If you view the whole world as one market, you have this view that on one end, you have people who really love technology and will spend a lot on their phone and you give them the highest end sort of thing. And [you think that at the other end of the spectrum], you have someone who just doesn’t care, who walks into the AT&T store and buys whatever they’re told to buy and they get some crappy knock-off phone or whatever it might be.

But too many tech companies treat that [latter] person the same as the person in the developing country who is also buying a cheap phone. And they’re exactly the opposite. If you’re a young person and you’re interested in technology but you don’t have much money, you’re very different from someone who will just walk into a store [with no agenda]. What Xiaomi did was treat that person [like a sophisticated buyer]. “You want something that’s super customizable that you can dig into, and we’re going to meet you at a price point that’s approachable for you.”

It’s no wonder they just obliterated these other phone companies that are offering a knock-off of last year’s model at a low price. Like, which would you rather buy? A phone from a company that’s giving you what you want, or last year’s Samsung? The low-income market is different, but it’s the same in that there are also geeks there who want something interesting there, and there are people who don’t care there. You don’t think about [customers] in terms of money. There are different segments — people who are on the super cutting edge and people who aren’t — and that’s fine as long as you don’t treat it as one monolithic kind of thing.

I kind of feel like tech in general is too much in love with scale when often what’s interesting is at the margins — identifying a niche and serving it and figuring out how to scale it later. Too many companies think about scale from day one and they end up making a mediocre product that tries to serve everyone and does it very poorly.”



StrictlyVC: January 22, 2015

Hi, happy Thursday, everyone! (Web visitors, click here for an easy-to-read version of this email newsletter.)

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Top News in the A.M.

Amazon is reportedly in talks to buy the stealth-mode Israeli startupAnnapurna Labs in order to give its data centers a boost. Sources quoted in the Israeli media place the value of the deal at about $350 million.

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China’s Economy is In the Dumps; Why Haven’t Internet Investors Noticed?

China’s economic growth has slowed to a quarter-century low of 7.4 percent. You wouldn’t know it, though, looking at the gigantic rounds that China-based Internet companies are raising.

Just this week, Apus Group, a six-month-old, Beijing-based Android app development firm, raised a whopping $100 million; Beibei.com, a nine-month-old, mother and baby-focused e-commerce site in Hangzhou, raised $100 million; and Meituan, a four-year-old group discount platform that’s headquartered in Beijing, pulled in $700 million. There was also that little announcement by the Chinese government late last week about the venture capital fund it’s establishing with $6.5 billion to support start-ups in emerging industries.

The word “bubble” invariably comes to mind. But there’s something far different going on, insist those bullish about Chinese tech companies.

Take Glenn Solomon, a managing director at the cross-border investment firm GGV Capital and a frequent visitor to China. Though he acknowledges that “China’s economic growth will inevitably slow as the law of large numbers takes effect,” he says two very different economies in China — old and new — explain the seeming disconnect between that slowing growth and all the money sloshing into tech startups.

In China’s retail industry, for example, overexpansion has hurt large, established brick-and mortar-retailers who are seeing flat or slowing growth and retrenching. Meanwhile, Alibaba and other new e-commerce players are growing extremely rapidly, says Solomon, noting that “on the ground [in China], there are delivery trucks lining the streets.”

That divergence is “pronounced and growing” across other industries, too, says Solomon. “Companies in the Xiaomi ecosystem focused on home automation are rapidly going direct to consumer, while traditional players in this area are seeing a slowdown.”

Travel, mobile commerce, and companies whose apps aim to improve their users’ offline experience — among them the GGV-backed companies Tujia.com, a site similar to Airbnb that raised $100 million last June, and Didi Dache, a taxi app that closed on $700 million in December — are also trouncing weaker, traditional offline players, he says.

There are yet other reasons to rationalize those big investment rounds, suggests Michael Feldman, an independent consultant based in Hong Kong who advises on cross-border technology investments from China to Israel.

Feldman notes that unlike, say, Facebook, which only recently began reaching into new businesses, the “tentacles” of China Internet giants like Tencent Holdings and Alibaba stretch into everything from car service apps to their own mobile payment services, including Tencent’s Tenpay, and Alibaba’s Alipay.

That growing reach is a scary prospect to startups and would-be entrepreneurs. “In almost anything you do online, you could potentially be competing with them,” notes Feldman.

But in their race to compete with one another, such behemoths have also grown more acquisitive than they used to be — creating new and better M&A opportunities. “It used to be that they’d either copy your product or pay a team to join their company, then they’d destroy the competing company,” explains Feldman. “Now that they’re kind of globalizing, they’re beginning to behave differently.”

China is also seeing its first generation of battle-tested tech entrepreneurs launch companies, which is emboldening investors to back them with big checks, notes Feldman. “Everyone knows the PayPal Mafia and Google Mafia and Facebook Mafia. China now has its own mafias,” including those to spin out of Alibaba, Tencent, Baidu and Xiaomi.

If that development is leading to some froth, Feldman, like Solomon, doesn’t seem terribly concerned. As elsewhere, he suggests, China’s tech economy isn’t as closely tethered to the country’s broader economy as one might imagine.

“Ultimately, it’s all about the adoption of mobile,” Feldman says. “It’s just totally changing society. It’s an unstoppable force at this point.”

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New Fundings

Air, a 2.5-year-old, San Francisco-based startup that was formerly known as Yevvo and is building a live broadcasting service for mobile users, has raised nearly $4 million in Series A funding from undisclosed investors. TechCrunch has the story here.

Alchemist Accelerator, a 2.5-year-old, San Francisco-based enterprise-focused accelerator, has raised $2.1 million in new funding led by Mayfield, with participation from Tyco International and earlier investors Cisco Systems.

Beibei, a nine-month-old, Hangzhou City, China-based maternal and baby supplies e-commerce platform, has raised $100 million in Series C funding led by Capital Today and New Horizon Capital, with participation from Banyan Capital and IDG Capital. The round, which reportedly values the company at $1 billion, follows a $24.3 million Series A round raised by the company last summer.

Brandfolder, a 2.5-year-old, Denver-based online platform that allows users to easily organize, share and update brand assets, has raised $2 million in funding from earlier investor Jeffrey Covington, as part of his new investment fund, White Cedar Enterprises. To date, the company has raised $3 million, including from TechStars and a group of angel investors. TechCrunch has more here.

Button, a 1.5-year-old, New York-based company that enables smart connections between apps that drive installs, has raised $12 million in Series A funding led by Redpoint Ventures, with participation from Greycroft Partners, DCM, VaynerRSE, Slow Ventures, and former NBA Commissioner David Stern. VentureBeat has more here.

Choozle, a 2.5-year-old, Denver-based, cloud-based platform for marketers looking to analyze their customers’ behavior, has raised $4.1 million in Series A funding led by earlier backer Great Oaks Venture Capital. The company has raised $3.1 million to date.

Fastback Networks, a five-year-old, San Jose, Ca.-based mobile-network technology company, has raised $15 million in Series C funding led by Harmony Partners, with participation from Foundation Capital, Granite Ventures, Juniper Networks, and Matrix Partners. The company has now raised $30 million altogether.

Green Biologics, a 12-year-old, Abingdon, England-based company whose fermentation technologies convert biomass into renewable fuels and chemicals, has raised $76 million in new funding. Earlier investors, co-led by Swire Pacific and Sofinnova Partners, led a $42 million equity piece of the funding, with Tennenbaum Capital Partners supplying nearly $34 million in debt.

Handle, a three-year-old, Menlo Park, Ca.-based company whose productivity app combines emails and calendar functions with to-do lists, has raised $9.9 million from investors, says Venture Capital Dispatch. Menlo Ventures, where Handle founder Shawn Carolan is a managing director, provided $5.6 million; Silicon Valley Bank provided $2.5 million in debt; and a long list of angel investors, including Mitch Kapor, provided the company with another $1.8 million in seed funding.

Interana, a two-year-old, Menlo Park, Ca.-based data analytics company, has raised $20 million in Series B funding led by Index Ventures, with participation from new investors AME Cloud Ventures, Harris Barton and Cloudera’s chief strategy officer, Mike Olson. Earlier investors Battery Ventures, Data Collective and Fuel Capital also invested in the round, which brings the company’s total funding to $28.2 million.

Keaton Row, a four-year-od, New York-based fashion startup that pairs clients with stylists, has raised an undisclosed amount of funding led by Time Inc. Earlier backers Menlo Ventures, Rho Capital and Grape Arbor also joined the round. The company had previously raised $4.2 million across a couple of rounds.

Kitchen Stories, a year-old, Berlin-based mobile cooking app, has raised $1.8 million in seed funding, including from Point Nine Capital and Bertelsmann Digital Media Investments, with participation from Cherry Ventures and numerous angel nesters.

Kreditech, a three-year-old, Hamburg, Germany-based consumer finance startup that focuses on lending money to “unbanked” consumers with little or no credit rating, has landed a $200 million credit line from Victory Park Capital. The company is also preparing to raise a Series C round, reports TechCrunch. The company has raised $263 million to date, shows Crunchbase. Its investors include Point Nine Capital, Blumberg Capital, and Varde Partners.

Persado, a 2.5-year-old, New York-based company whose “smart” software specializes in creating automated messages around calls to action, has raised $21 million in Series B funding led by StarVest Partners, with participation from Citi Ventures, American Express Ventures, and earlier backer Bain Capital Ventures. The company has now raised $36 million altogether, shows Crunchbase.

Pluribus Networks, a five-year-old, Palo Alto, Ca.-based software-defined networking (SDN) startup, has raised $50 million in new funding led by Temasek Holdings, with participation from Ericsson, Newtech, and earlier backers New Enterprise Associates, Menlo Ventures, Mohr Davidow Ventures and AME Cloud Ventures. GigaOm has more here.

Raise, a 1.5-year-old, Chicago-based offering a marketplace where consumers can buy and sell their unused gift cards, has raised $56 million in Series B funding led by New Enterprise Associates, with participation from earlier backers Bessemer Venture Partners, the Pritzker Organization, Listen Ventures and angel investors. The funding brings the company’s total outside investment to $81 million.

The parent company of StockRadars, a 3.5-year-old, Bangkok, Thailand-based company whose products aim to demystify investing in Asia’s stock markets, has raised roughly $800,000 in Series A funding from Japan’s CyberAgent Ventures and East Ventures, reports TechCrunch.

True Link Financial, a two-year-old, San Francisco-based startup whose prepaid Visa card promises to protect older adults from scams and fraud, has raised $3.4 million from a group of investors including earlier backer Cambia Health Solutions. The company had raised an undisclosed amount of funding prior, including from Y Combinator, whose accelerator program it passed through in 2013.

Uber, the six-year-old, car-booking company, has raised $1.6 billion in convertible debt from Goldman Sachs’s wealth management clients, Bloomberg reported yesterday. The new round of financing comes just months after the company raised $1.2 billion from investors, including New Enterprise Associates, Lone Pine Capital, Valiant Capital Partners, and Qatar Investment Authority. The company is now reportedly valued at $41.2 billion.

XOR Data Exchange, a year-old, Austin, Tx.-based company that facilitates cross-industry data sharing through permission-based controls and audits, has raised $1.8 million investment round led by Chicago Ventures and KGC Capital.

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New Funds

University of North Carolina officials announced the formation of the Carolina Research Venture Fund yesterday, a seed-stage pool that will begin investing $5 million in non-state funds to start. “It takes a little money for that initial seed stage, so we wanted to go ahead and get this going,” board member Sallie Shuping-Russell, who’s also a managing director at BlackRock, told a local outlet yesterday. The fund reportedly aims to bridge the funding gap that local startups often face before attracting the attention of venture capital firms across the state and country.

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Exits

Temasek Holdings, Singapore government’s global investment arm, is acquiring Mumbai-based venture lender SVB India Finance, an arm of Nasdaq-listed SVB Financial Group, for $46.4 million, reports the Economic Times. The deal creates the country’s second homegrown and independent venture debt player after Delhi-based Trifecta Capital, which recently started raising its debut fund.

ZeroPaper, a two-year-old, Brazilian startup that offers cloud-based accounting services to small businesses, has been acquired by the accounting software giant Intuit for undisclosed terms as the latter looks to raise its profile in international and emerging markets. ZeroPaper had raised just $200,000 from investors, including Brazil’s 21212 Digital Accelerator in Rio de Janeiro.

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People

eBay is cutting 2,400 positions as it continues to lose marketshare to increasing competition from e-commerce upstarts. The Financial Post has more here.

Wilson Sonsini lawyer turned Y Combinator partner Carolynn Levy is helping to revolutionize startup investing. Here’s how. (H/T: Quibb)

Laurene Powell and Adrian Fenty took an island shopping trip during a Caribbean vacation, and the Daily Mail was on it!

—–

Jobs

Sapphire Ventures (f.k.a SAP Ventures) is looking for a pre-MBA associate. The job is in Palo Alto, Ca.

—–

Essential Reads

Google’s next telecom move: Becoming a wireless carrier.

Satya Nadella’s plan to make you care about Microsoft.

Drones: the tech-savvy trafficker’s new drug mule.

—–

Detours

Postcards from Cuba.

The strange science of Twitter and heart disease.

Seven surprising things that can help you stop worrying.

—–

Retail Therapy

Wirelessly lock and unlock your Mac with this.

Leatherman laughs at your Fitbit activity and sleep tracker.



China’s Economy Has Hit the Skids; Why Haven’t Internet Investors Noticed?

China-PBOCChina’s economic growth has slowed to a quarter-century low of 7.4 percent. You wouldn’t know it, though, looking at the gigantic rounds that China-based Internet companies are raising.

Just this week, Apus Group, a six-month-old, Beijing-based Android app development firm, raised a whopping $100 million; Beibei.com, a nine-month-old, mother and baby-focused e-commerce site in Hangzhou, raised $100 million; and Meituan, a four-year-old group discount platform that’s headquartered in Beijing, pulled in $700 million. There was also that little announcement by the Chinese government late last week about the venture capital fund it’s establishing with $6.5 billion to support start-ups in emerging industries.

The word “bubble” invariably comes to mind. But there’s something far different going on, insist those bullish about Chinese tech companies.

Take Glenn Solomon, a managing director at the cross-border investment firm GGV Capital and a frequent visitor to China. Though he acknowledges that “China’s economic growth will inevitably slow as the law of large numbers takes effect,” he says two very different economies in China — old and new — explain the seeming disconnect between that slowing growth and all the money sloshing into tech startups.

In China’s retail industry, for example, overexpansion has hurt large, established brick-and mortar-retailers who are seeing flat or slowing growth and retrenching. Meanwhile, Alibaba and other new e-commerce players are growing extremely rapidly, says Solomon, noting that “on the ground [in China], there are delivery trucks lining the streets.”

That divergence is “pronounced and growing” across other industries, too, says Solomon. “Companies in the Xiaomi ecosystem focused on home automation are rapidly going direct to consumer, while traditional players in this area are seeing a slowdown.”

Travel, mobile commerce, and companies whose apps aim to improve their users’ offline experience — among them the GGV-backed Tujia.com, a site similar to Airbnb that raised $100 million last June, and Didi Dache, a taxi app that closed on $700 million in December — are also trouncing weaker, traditional offline players, he says.

Yet there are other reasons to rationalize those big investment rounds, suggests Michael Feldman, an independent consultant based in Hong Kong who advises on cross-border technology investments from China to Israel.

Feldman notes that unlike, say, Facebook, which only recently began reaching into new businesses, the “tentacles” of China Internet giants like Tencent Holdings and Alibaba stretch into everything from car service apps to their own mobile payment services, including Tencent’s Tenpay, and Alibaba’s Alipay.

That growing reach is a scary prospect to startups and would-be entrepreneurs. “In almost anything you do online, you could potentially be competing with them,” notes Feldman. But in their race to compete with one another, such behemoths have also grown more acquisitive than they used to be — creating once-scant M&A opportunities. “It used to be that they’d either copy your product or pay a team to join their company, then they’d destroy the competing company,” explains Feldman. “Now that they’re kind of globalizing, they’re beginning to behave differently.”

China is also seeing its first generation of battle-tested tech entrepreneurs launch companies, which is emboldening investors to back them with big checks, notes Feldman. “Everyone knows the PayPal Mafia and Google Mafia and Facebook Mafia. China now has its own mafias,” including those to spin out of Alibaba, Tencent, Baidu and Xiaomi, among others.

If that development is leading to some froth, Feldman, like Solomon, doesn’t seem terribly concerned. As in the U.S. and elsewhere, he suggests, China’s tech economy isn’t as closely tethered to the country’s broader economy as one might imagine.

“Ultimately, it’s about the adoption of mobile,” Feldman says. “As in most of the world, it’s just totally changing society. At this point, the mobile revolution seems to be an unstoppable force.”

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Will Alibaba Draw VCs Back to China?

china-sky_1814294bAlthough the American financial press seems preoccupied with Twitter’s impending IPO, Alibaba’s IPO could be an even bigger story. The China-based e-commerce juggernaut, which could go public as early as the first quarter of 2014, racked up revenues of $1.38 billion for the quarter ended in March, and analysts estimate that the company could be worth anywhere from $120 billion to $200 billion. (Facebook’s market cap as of this writing is $125 billion.) 

As the Alibaba offering approaches, one can’t help wondering why U.S. investors have had so much trouble capitalizing on Chinese tech IPOs.

Although Yahoo remains among one of Alibaba’s biggest shareholders – with a 24 percent stake, half of which it plans to sell at the IPO – Alibaba has few U.S. investors other than GGV Capital, an expansion-stage firm on Sand Hill Road that invested in Alibaba in 2003; and Silver Lake, the private equity firm, which reportedly invested $300 million in Alibaba in 2011. (Japan’s Softbank owns 35 percent of the company; Alibaba’s founders and senior executives own another 13 percent.)

American tech types have tried repeatedly to capitalize on the country, but factors like partner defections, accounting scandals committed by China-based companies, and a slowdown in the country’s GDP growth rate have yielded disappointing returns.

Still, success will only come if a firm is willing to stick it out and take the time to forge relationships within China’s close-knit entrepreneurial community, says David Chao, co-founder and general partner of DCM, the early-stage venture firm.

Since 1999, DCM has backed more than 200 companies across the U.S. and China, and three of its most recent IPOs are China-based companies, including  Renren, Dandang, and Vipshop. (DCM owned 20 percent of Vipshop went it went public last year with a market cap of $600 million; today it’s valued at $3.2 billion.)

Last week, DCM scored another China-based investment win when Kanbox, a personal cloud storage service that is often likened to Dropbox, was acquired by Alibaba for an undisclosed amount.

Pointing to a separate, recent deal – the Beijing-based search engine Baidu’s agreement to pay $1.9 billion for China’s popular smartphone app store 91 Wireless – Chao says that it’s actually becoming easier for savvy investors to generate returns.

“Five years ago,” he observes, “almost all successful Internet companies were destined to go public. Now that you have a second generation of successful Internet companies going public — large cash companies,” Internet investors can expect exits through M&A, too.

Other shifts Chao has witnessed include an “angel investor boom in the last year that will probably continue for a while,” and less copycat tech and more innovation, particularly when it comes to smartphones and mobile social networks. (Chao characterizes several companies as “way ahead” of anything we’ve seen in the U.S.) “What we’re seeing isn’t a 180-degree shift,” he adds, “but 10 years ago, 99 of 100 business plans were largely focused on being analogous counterparts to successful U.S. or Japanese Internet companies; today, that number is maybe 80 out of 100.”

I ask Chao if it’s too late for firms that still haven’t made a foray into China — as well as whether he thinks U.S. investors have the intestinal fortitude to stick it out. Will Alibaba be the company that refocuses their attention?

“It’s more difficult than it was 10 years ago” to enter the market, Chao notes. But plenty of venture brands are still being established in China, he says. Succeeding in China is all about the long game, he suggests, but “a firm can make its name in very quick order.”

Photo: Courtesy of AFP/Getty

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