With its decades-long run of breakneck economic growth slowing down, China’s investors are increasingly looking away from the Middle Kingdom to U.S. tech businesses.
About a quarter of the $60 billion poured into U.S. startups last year came from China, according to the National Venture Capital Association. While much of the inflowing cash will land in Silicon Valley, there is good reason to expect more L.A.-based deal flow as well, according to industry analysts, particularly in sectors where local companies have traditionally thrived, such as entertainment.
The most obvious example of this trend is Dalian Wanda Group’s $3.5 billion purchase of Burbank’s Legendary Entertainment in January. But Chinese investors have been heavily investing in virtual and augmented reality startups, too – platforms they see as the future of entertainment.
“They are taking up the vacuum of the traditional VCs,” in those areas, said William Hsu, managing partner at Santa Monica’s Mucker Capital.
Chinese investors poured $252 million into L.A.-area tech companies last year, up from $75 million in 2014 – an increase of 336 percent.
While not an Earth-shattering number, the increase comes as American venture capital firms have so far shied away from backing things like virtual reality companies, according to data compiled earlier this year by law firm Perkins Coie. While media conglomerates such as Walt Disney Co. and Comcast Corp. have filled some of that void, Chinese investors have also stepped in.
Beijing-based telecom firm Hengxin Mobile Business Co. led a $23 million fundraising round in June for VR content producer Virtual Reality Co. of Miracle Mile. The money will be partly spent to produce and distribute original virtual reality content to kiosks owned by Hengxin in China, which allow customers to rent headsets and pay for short VR experiences.
Hsu said many Chinese investors look to marry their local expertise with U.S.-based innovation.
“They believe instead of investing in a copycat in China they could invest in a leader in the U.S. and help take it back to China,” he explained.
Moreover, Chinese investors are keenly aware of their value as gatekeepers to China’s economy after a string of failed market entries by prominent U.S. firms such as Amazon.com Inc., Uber Technologies Inc., and Wal-Mart Stores Inc.
“Few companies … know technology deeply and also know the China market comprehensively,” said Victor Wang, managing partner at Palo Alto’s China Equity Ventures, the U.S. arm of Chinese merchant bank China Equity Group.
“The internet has a lot of cultural aspects,” he said. “Government control aside, you might not be successful because you don’t know the tastes of your customers.”
Cooling Chinese market
A weakening domestic market has underpinned much of the activity by Chinese investors, said Wang.
“You can’t always grow at breakneck speed of 10 or 12 percent,” he said. “As China’s economy is slowing down, that is making outside opportunities attractive.”
In addition to direct investments, Chinese corporations, institutional investors, and limited partners are also placing their money with American venture funds, said Mucker’s Hsu. In fact, many of the limited partners in Mucker’s funds hail from China, he said. The firm closed a $45 million fund in March – its third and largest since launching in 2012.
Much of the Chinese capital hitting L.A. tech firms comes in the form of strategic corporate investments, which are also typically aimed at bringing technology to China. The most active mainland Chinese investors within the greater L.A. area from 2009 to 2016 were Tencent Holdings Ltd., Alibaba Group, and Sinovation Ventures, according to research firm CB Insights.
Tencent has invested in an assortment of L.A. companies, including caretaker marketplace HomeHero Inc. of Santa Monica and Venice’s Snap Inc., parent of Snapchat. Alibaba has also invested in Snap, while Sinovation has backed Spaces Inc. of Santa Monica, a virtual reality production company.
A number of Chinese companies also have chosen to plant physical roots in Los Angeles, including electric-car manufacturer Faraday Future, which is financed by Leshi Internet Information and Technology Corp. founder Jia Yueting. The Gardena company launched in 2014 partly to gain access to U.S. engineering talent. Then there’s Beijing ad agency Hylink, which opened a Santa Monica office in September to connect U.S. businesses with Chinese advertising opportunities and acquire local ad tech companies. (See page 9).
Elsewhere, CEC Capital Group in October acquired Santa Monica’s Siemer & Associates, a boutique merchant bank and advisory firm, as part of an effort to facilitate cross-border mergers, acquisitions, and investments on behalf of Chinese investors.
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