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.)
Opendoor, a year-old, San Francisco-based company, is on a mission to make residential real estate liquid by making it simple to buy and sell it online.
Investors are buying what it’s selling. This morning, the company is announcing $20 million in fresh funding led by GGV Capital, a round that brings the company’s total outside funding to $30 million.
Consumers are also buying Opendoor’s pitch. The 20-person company is now buying one house per day – sight unseen — in its test market of Phoenix. Home owners need merely give it their address and some basic details, and using public market information about historical home sales and Opendoor’s own proprietary data about market conditions, the company arrives at an offer price that’s just one to three points below what the seller might fetch on the open market roughly three months into the future. (That’s the average time, it says, required to sell a home in the U.S.)
The big question now is whether the whole operation is sustainable. Certainly, the risk and reward associated with what it’s trying to pull off is enormous.
Consider: After Opendoor acquires each home, it must ensure the home is up to code in order to resell it. The repairs alone can likely get complicated, as any homeowner can attest. But each home is also given numerous cosmetic upgrades that will give it so-called curb appeal. Think everything from new kitchen cabinets to light landscaping.
Opendoor can (and surely intends) to sell its homes at a premium, based on those upgrades. But it’s a lot of work, the kind that involves contractors and lawn maintenance workers, in addition to Opendoor’s growing team of developers. More, hanging on to that inventory in the meantime is a huge risk. Though the company’s equity certainly helps, as does a partnership with a bank that gives it debt to use, the housing market is highly sensitive to interest rates and other macroeconomic factors. In Phoenix, for example, where Opendoor has been testing out its service for the last several months, up to a quarter of the homes that are listed for sale are eventually taken back off the market.
CEO Eric Wu — a serial entrepreneur who cofounded Opendoor last year with investor-operator Keith Rabois — acknowledges the challenges, but he seems convinced that none are insurmountable. Partly, that owes to the progress Opendoor has made as a software company, whose platform can now (Wu says) seamlessly address everything from property assessments to quickly presenting offers to potential customers to handling the payment of the house to overseeing the infrastructure involved with holding and reselling it.
Wu also knows that there’s tremendous pain associated with home buying today, and where there is pain, there is opportunity.
In fact, Wu is already envisioning the day that Opendoor both buys homes, then resells others it owns to those same customers, creating one of those virtuous cycles that the digerati like to talk about.
“Longer term,” says Wu, “we’d love to have a path where we transact 5 to 35 percent of all homes. Once that occurs, this business really starts to evolve into us solving pain points for homeowners, from [allowing them to easily sell their homes] to helping them [purchase] another with high-quality renovations. We definitely think we can touch both buyers and sellers.”
The company could even get into the financing business eventually, Wu suggests. There’s “lot of headache and stress in securing mortgages today,” he notes. Opendoor has enough work ahead of it right now, but it’s “something we’ll look at down the road,” he says.
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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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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