Last week, toward the end of a StrictlyVC event in San Francisco, GGV Capital managing director Hans Tung took the stage to interview one of his portfolio CEOs, Peter Szulczewski of Wish. With an increasingly boisterous crowd as their background, Tung managed to ferret out lots of fascinating information from the highly personable Szulczewski, who looked very much the part of busy founder. (Blood-shot eyes, rumpled clothing.)
We’d been eager to learn more about Wish — a fast-growing e-commerce mobile app that has raised roughly $600 million from investors — particularly because Szulczewski hasn’t talked often with the press or shared much hard information about the company. He did last week, though, including telling the crowd that Wish now has “hundreds of millions of users,” that it saw “single-digit billions of dollars” in gross merchandise volume, and seemingly confirming rumors that the company has seen interest (if not concrete acquisition offers) from Alibaba and Amazon.
If you’re interested in e-commerce or want to understand merchants in China particularly, this is a must-read.
U.S. Companies Backing Out of U.S. Indices? Maybe Not
It’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.)
China’s Economy Has Hit the Skids; 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 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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As China’s Internet Giants Look to U.S, GGV Makes Introductions
GGV Capital knows China. The 13-year-old, expansion-stage venture firm, with offices on Sand Hill Road and in Shanghai, prides itself on a U.S.-China strategy that sees its partners spending healthy amounts of time in both countries. With China now the world’s second largest economy and, as of last year, the world’s largest trading nation, that puts GGV in an enviable position.
Already, 16 of GGV’s portfolio companies have gone public since 2010, several of them China-based, including the Chinese online travel booking service Qunar, which went out in November, and the entertainment site YY.com, which held its IPO in November 2012. Meanwhile, e-commerce powerhouse Alibaba — which GGV backed in both its A and B rounds, in 2003 and 2004, respectively — is expected to go public this year at a valuation of up to $150 billion. (Asked if it still holds its stake in the company, GGV says only that it “continues to work actively” with Alibaba.)
Now, GGV is looking to invest alongside China’s Internet giants as they endeavor to expand their presence in the U.S. market. In October, for example, Alibaba led a $50 million financing round in Quixey, a Mountain View-based search engine for apps, and GGV participated in the round.
Last week, I spoke with GGV managing partner Glenn Solomon about Chinese companies looking to invest here. Our conversation has been edited for length.
What’s the biggest trend you’re seeing?
We’re living in a truly cross-border world, so we’re seeing more China companies that want to access the U.S. capital markets and more U.S. entrepreneurs, particularly in mobile, recognizing that China is a really important part of market.
Why are Alibaba and Tencent and others so keen on backing and acquiring U.S. companies?
First, the big players are very cash rich. And while they’ve been peacefully coexisting in China for the last couple of years — Tencent [Holdings] is really a social and entertainment gaming company; Baidu is search; and Alibaba has largely been e-commerce — the intensity of the competition amongst them is increasing as the China market matures. Particularly around mobile, where they’ve all been pretty aggressive about finding ways to increase their business, they’re bumping into each other more and more.
So they see the U.S. as the next frontier.
It might be odd for someone in Silicon Valley to think of the U.S. as a second frontier. But the Chinese market, as it relates to mobile, is bigger than the U.S. And while there is still room for [these companies] to grow in China, they’re thinking about international expansion and the U.S. makes sense. They also want access to companies in the U.S. that they can learn from to re-import opportunities to China.
How directly are they looking to copy U.S. companies?
Many companies look something like U.S. companies, but they have a very unique flavor. Qunar, for example, has elements of its business that are extremely local, and the entrepreneur who started it is very Chinese. He’s very worldly, but he grew up in Beijing; he went to a Chinese university.
Another example is the video chat service YY.com. It’s a social network, but its primary form of communication is voice, so it’s synchronous, rather than asynchronous, and it’s thriving. People are increasingly using it to play “World of Warcraft”; you have performers performing to large audiences on the platform; and the economic model is virtual items, which most people in the U.S. didn’t quite understand when the company went public. [YY.com debuted on Nasdaq at roughly $10 per share; it’s now trading at $71 per share.]
Would you say Chinese Internet companies are ahead of the U.S. when it comes to revenue?
In many ways, yes, entrepreneurs are importing techniques from China, including free-to-play, with calls to action within applications that produce virtual item revenue. That’s much more developed in China and that model came out of Asia, but you’re seeing more and more of it in the U.S. In fact, if you go to [Apple’s] App Store on your phone, you’ll see that the 20 top-grossing apps are free; it’s because they do a very good job of monetizing that small segment of the base who play the game or use the app, whatever it might be.
Where is China on the enterprise side of things?
It’s early days in enterprise. I’d say China is three to five years behind the U.S., but we expect it to emerge as a big opportunity, so we’ve been investing in some younger software-as-a-service companies and the like.
Other trends to watch?
The M&A market is more active than in the past. An example would be Baidu, which has a large strategic interest in Qunar; we expect we’ll see more M&A and strategic investing in China.
There’s also a more active angel community, which is good for our business, as we primarily invest in B and C rounds. It’s not quite as fashionable as it is here [to be an angel investor], but things are changing.
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Will Alibaba Draw VCs Back to China?
Although 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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