The Impact of Chinese Venture Capital Investment in

Silicon Valley from 2005 to 2014

Author: Nan Liu

Thesis Advisor: Robert Ehrlich

December 12, 2014

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Content & Outline

I. Introduction

II. The Development of Venture Capital in China

III. China’s Outward Foreign Direct Investment

IV. Three Hypotheses: How Can Chinese VC Invest in Silicon Valley Startups

V. Semi-structured Interview: Why Do VCs Come to Invest in Silicon Valley?

VI. The Predicted Tomorrow

VII. Conclusion

VIII. Works Cited

IX. Scripts for Semi-Structured Interviews

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I: Introduction

Recently, many Chinese venture capital (VC), private equity (PE) and angel investors are

investing in Silicon Valley startups. Wealthy individuals or families invest directly in startups as

angel investors; renown institutional ventures come to Silicon Valley, either to open their

branches, or to invest in local VC firms as their Limited Partners (LP); large Chinese technology

corporations come to invest in startups so they can develop their own business strategies; and

later-stage investment firms are more focused on their returns. Throughout my study on Venture

Capital in United States and China, I am interested in researching the methodology and

reasoning behind the migration of capitals, during the period from 2005 to 2014. I am choosing

my time span of subject is to measure the development of Chinese investment in United States

technology industry, and 2005 marked the beginning when Lenovo acquired IBM Personal

Computer Unit. Also, I am expanding the concept of venture capital to investment in technology

startups in general, and the broad concept of venture capital also includes angel and seed

investment, early stage investment, private equity investment and merger and acquisition in

technology companies. By studying existing scholarly researches on cross-border investment and

by conducting semi-structured interview targeting for 7 investors, Chinese VC firms come to

Silicon Valley for various reasons, mostly for economic profits. In order to succeed in current

China-Silicon Valley startup environment, VC firms need to focus on investing in companies

with a “Chinese Angle”, that is, a company with Chinese cofounders or interested in Chinese

market. In my paper, I will explain the background, introducing three hypothesis of the

methodology, and explain the reasons of “Chinese Angle”.

Across the Pacific Ocean, China is following up with the pace of development of Silicon

Valley venture capital industry. Despite the bubble of overpriced valuation and overly optimistic

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deals, the bilateral collaboration is a very interesting topic. American VC firms started to invest

in China about 20 years ago. American VC firms’ investments are mostly led by two generations:

first wave by companies who entered China earlier and facilitated the growth of current leading

technology companies such as IDG-Accel, Sequoia Capital, SAFE China Fund, and the second

wave by companies who are Silicon Valley based firms who established offices in China such as

GSR Ventures and DCM Ventures. The first wave of American VC firms is mostly founded by

Chinese who used to work in Silicon Valley, and they are more familiar with the mature VC

business models in Silicon Valley.

China used to be a country that restricts a lot with Outward Foreign Direct Investment

(Outward FDI), especially in the technology sector. But with the rise of GDP and the downturn

on economic growth, Chinese government changed its attitude to encourage Outward FDI. It

happens at two levels. One is on the national level, where Chinese State-Owned Enterprise (SOE)

helped with foreign infrastructure investment and development, such as developing pipeline in

Africa, building dams in Latin America and etc. Another level is on the corporate level. Many

corporates have decided on their strategies to invest in foreign assets, including large real estate

companies, technology corporate and etc. Many are investing through the form of private equity

investment, that is, by setting up an investment arm, mostly private equity fund to make direct

investment in the form of dollars.

As for private Chinese resources investing in the United States, that is a comparatively

new concept. As China’s private sectors are gaining more and more wealth, investing overseas

became a viable option. VC firms such as West Summit Capital opened its Palo Alto office in

2010, and in 2013 Snapchat received funding from Tencent, whilst Tango received funding from

Alibaba.

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In order for American and Chinese venture capital firm to collaborate bilaterally, there

are a few approaches. First, as we have analyzed, Chinese leading technology companies need to

invest in promising startups that can realize their own corporate strategies in return, hence,

investing in companies with a “Chinese Angle”. Secondly, China’s investment companies, angel

investors, venture capital firms or even private equity firms can invest in American investment

companies, either as their limited partners or as their general partners. American investment

companies can be super angel funds, early-stage investment fund, venture capital firms,

incubators, accelerators, tech media or even entrepreneurial communities. Furthermore,

American and Chinese investment firms can collaborate and share resources to build cross-

border companies. The key figures are mostly Chinese Americans who understand both markets.

Investors who resided in China a few years ago that are returning back to the Bay Area with the

support of Chinese money and start to invest in local companies. Unlike the direct investment

backed by large institutional funds, they are able to raise money and collaborate with their LPs

globally.

During my interviews, I asked investors, “What types of startups are you looking for?”

Many have given me their answers and reasoning behind their choices. A common trend for

Chinese VCs is to find disruptive technology or disruptive business idea. Because the tradition of

Chinese technology startups is to copycat Silicon Valley startups, China has lacked the source of

innovation. Even though China is getting better with having original ideas and innovations, there

are still a lot of concerns on whether China can truly innovate. By investing directly in disruptive

technology and ideas, Chinese VCs are able to transfer the technology in its domestic market.

That’s why many VCs right now and in the new future are claimed with “Chinese Angle”.

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In conclusion, currently the phenomenon of Chinese investors investing in Silicon Valley

is still early, and there ought to be more and more investors coming. However, in order to

succeed, they need to have a clear strategy with “Chinese Angle”. In the future, they might be

able to be more localized and more successful.

II: The Development of Venture Capital in China

Chinese venture capitalists investing in Silicon Valley startups are results of the rise of

Chinese venture capital and China’s outward Foreign Direct Investment (FDI). Chinese

technology companies accumulated huge wealth from years of operations helped by venture

capital. The venture capital industry in China became mature, which leads to the trend of going

public in NYSE or NASDAQ. Investing in these public companies and setting up office in

Silicon Valley are part of Chinese’s process of FDI. Therefore it is necessary to introduce these

concepts before.

Venture Capital in China has been developing very rapidly. When IDG Capital Partners

started its first investment in 1994, the information technology industry in China just begins to

show its peak. Venture capital investment in China is developed in different phases. Despite the

bubble of overpriced valuations and too many deals, the bilateral collaboration is a very

interesting topic. American VC firms started to invest in China nearly 20 years ago. With the

first boom of Chinese Internet companies before the dot com bubble broke out, Chinese

technology companies such as Sohu, EaseNet, Tencent and Baidu and Alibaba were mostly

funded by American venture capital firms, such as IDG-Accel and Sequoia Capital. These

investments of the American VC firms are mostly led by two generations: the first wave led by

companies who entered China earlier and facilitated the growth of current leading technology

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companies, such as IDG-Accel, Sequoia Capital, SAFE China Fund; the second wave is led by

companies who are Silicon Valley based firms that has established offices in China, such as GSR

Ventures and DCM Ventures. According to China Internet Network Information Center (CINIC),

China currently has 564 million Internet users, and 420 mobile Internet users. [1] In 2005 alone it

was estimated that $1.17 billion was raised by venture capital firms to invest in China, up from

$325 million in 2002. International VC investment in China has profited a great deal from

Chinese Internet companies who went public on NASDAQ. [2] The first waves of American VC

firms were mostly founded by Chinese who worked in Silicon Valley, and they are more familiar

with the mature VC business models in Palo Alto. Investors such as Hugo Xiong or Neil Shen

have done numerous successful deals investing in several public companies. Their strategies

were mostly investing in Chinese high growth companies in two directions: to invest in all

promising startup companies within one prospective industry or to invest in promising founders.

Both strategies have proved to work well. However, between the divisions of two generations are

the VC firms based in Silicon Valley. Companies such as GSR and DCM ventures are investing

in major industries such as E-commerce and Social-Local-Mobile (SoLoMo). Both GSR and

DCM have brought NASDAQ a few public companies, and the stocks of these companies are

still growing. From Lin Zhang, for most American VCs who have offices in China, the majority

of their LPs are from the US, which ensured the independent investment decision, and easy to

circulate dollars rather than RMB. [3]

The first wave is the establishment of foreign VC (most American) pouring money into

China’s traditional high-tech company before the 1990s. Venture Capitalist such as Siwei Cheng

and Ta-lin Hsu set the standard of VC investment in Asia, and they were greatly welcomed

together with the crowd of foreign Fortune 500 companies by the Chinese government.

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In the 1990s, China was undergoing the great transition from planned economy to free

market economy. When Deng Xiaoping and his successor promised to open the Chinese market

to the world, these foreign 500 companies and venture capitalists saw the potential of the market,

and they led to the growth of the first generation of technology innovation.

I have interviewed Ting Lee, former CEO of HP China, who went to China in the late 80s.

He confessed that there were so many things China did not know at the time. The government

and the companies had to rely on the foreign investors to help set industry standards.

Companies like IDG Capital Partners and Sequoia Ventures saw the chances and entered

the Chinese market during that period, and they also successfully exited before the first dot.com

bubbles. In addition, companies such as Sina and Sohu successfully went public and returns

hundreds of folds to IDG and Sequoia. That was the first generation of China’s Internet

companies, and venture capital firms grew with these technology companies. In the early 2000s,

China’s four biggest web portals, Sohu, Sina, Tencent and Netease, all went public in the United

States.

From Yasheng Huang and Yi Qian, there was a period of time when entrepreneurship

innovation went against China’s planned national industrial policy. [4] Arguably nowadays there

are still hints of planned economy. Yasheng Huang and Yi Qian argued that in Shanghai because

of its “particular strong industrial policy”, entrepreneurship went against the city’s industrial

policy, and entrepreneurship was discouraged.

The second generation of Chinese Internet companies was led by a group of Chinese

Internet service companies, such as Ctrip, New Oriental Education. These companies rose from

dominance of its own industry. For example, New Oriental Education is the largest English-

training Corporation in China, and went public on NYSE and created a series of billionaires that

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influenced the next generation of entrepreneurs. These companies received helped from a

mixture of VCs from China and Silicon Valley. During this period, existing American venture

capital firms in China begin to merge with Chinese venture capital companies, and adapt to the

Chinese culture.

Meanwhile, the second generation of VC firms such as leading players DCM ventures

and GSR ventures entered China and begin to invest. These companies invested mostly in

cutting-edge technology Internet companies such as e-commerce and gaming. They are more

coherent in cultures with the Silicon Valley startup cultures. Many venture capitalists had

actually opened their own startups before, either in the Silicon Valley or Beijing, and they know

the current trend of Silicon Valley better than others. The market in China has huge potentials

and therefore they want to invest in the startups in China. This was also when the Chinese

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venture-backed e-commerce startups have emerged and swamped up. With VC’s help, the rise of

the business model “C2C”, which means “Copy to China” was established. Whenever there was

a successful business idea in Silicon Valley, hundreds of startups in China begin to cope this

business idea, and have proven to be financially successful. For example, Renren.com is a

copycat of Facebook; Weibo is a copycat of Twitter, and even Baidu is said to be a copycat of

Google. With the financial leverage of these American venture capital firms, China’s Internet

industry boomed and flourished. Even though there are few innovations or disruptive technology,

but the Chinese local version has already proven useful.

In the first 10 years of 21st century, Chinese local VC has established and competes with

American venture capital firms in the domain of Chinese Internet startups. When the first wave

of startup companies went public in the late 20th century, Chinese central and local government,

financial institutions and technology companies saw the chances, and are aiming to set up

investment funds for local startups. For example, Lenovo group (formerly Legend Group) has at

least four investment arms, Legend Star for early-stage investment, Legend Capital for venture

capital investment, Hony Capital for private equity investment and Legend Holdings for

corporate strategic mergers and acquisitions. These four investment arms are all successful in

their own specific arena, and they support each other in one form or another. In many ways, the

development of venture capital in China resembles the development of Internet technology in

China, which also resembles a mutual benefit. Many successful startups are venture-backed

startups and many venture capitalists are developed from previous successful startups. However,

there are setbacks. From Lin Zhang, in terms of fundraising capital, Chinese domestic VCs are

far behind American VCs, where a majority distinguisher is pension funds, since in the states the

system of pension funds are much more mature, they already know how to diversify their

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investment portfolios by investing in venture capital firms. [5] But in China, the system of

pension funds are not matured yet, and most social security funds are geared to invest in state-

controlled enterprises. Besides raising from enterprises and existing public companies, domestic

VCs also raise findings from government VCs (GVC). As shown on the chart below:

Other forms of venture capital for startups are government guide funds, incubators and

government-invested venture capital funds. The trend of government funding has grown

tremendously in the last five years, and has since then become a major player in startup

incubation. With its core policy of “One Thousand Plan”, Ministry of Central Organizations of

Chinese Communist Party collides academics, business leaders and promising entrepreneurs.

With this policy, Youth Party, Ministry of Education, Ministry of Technology and Science all

participate in startup incubation, mostly in the form of organizing startup competition. These

startup competitions select startups and entrepreneurs from several cause, and will send them to

government incubators in many cities. These causes have strength of improving technological

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innovation effectively, and in a way to change China’s cultural and gender roles. The weakness

of these specific regions of technology is first, the limitation according to MOST’s intention, and

they lack highly specialized and profit oriented executive agents. Furthermore, policies oriented

around overseas Chinese investors, and a lot of government delegations come to Silicon Valley

to attract startups.

According to Dinyar Lalkaka’s UN report [6], “ With entry of China in to the World

Trade Organization and the opening of its markets to international competition, the

entrepreneurial energy of educated youth (and their ability of attract venture capital for ICT-

enabled ventures) offers the opportunities of transforming the economy and creating new

employment. Examples of this ferment are to be found in the university-affiliated technology

incubators such as Tsinghua, Tianjin, Wit-hub and Xian as well as the new Internet Incubators

such as Shanghai Dakang Business Accelerator…today there are some 127 incubators in China

located in every province, autonomous region and major city except Tibet and Qinghai. In

addition, there are another 64 organizations such as ‘software parks’ that function much like

incubators. Incubators have become an established feature of the technical and business

infrastructure and continue to increase in number at the rate of one to two each month. As of the

end of 1998, the 77 incubators included in the Torch Programme, mostly representative of the

first generation of incubators and almost all with a general technology focus, had a total floor

area of 884,000 sq m with 33 having space of over 10,000 sq m each. There are 4,138 tenant

firms in incubation and 1,316 graduate firms. Tenants and graduates together had total sales of

some 10.1 billion yuan (about US $ 1.2 billion) and employed some 140,000 people.”

Each government incubator provides an initial funding for on average 1 million Chinese

yuan (about 160k USD), and gives startup free office spaces, helps to recruit in local universities.

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Local governments also have some venture capital funds, which could be very successful in

terms of financial returns. Governmental incubators such as Z-park, Suzhou Industrial Park and

Hangzhou Overseas Entrepreneur Park are examples of such.

III: Chinese’s Outward Foreign Direct Investment

With the gaining wealth and trillion-dollar foreign debt, China started to invest overseas,

both on national level and on corporate level. China has conducted a policy called “Walking

Outward”, which represents the encouragement from the central government for entities to invest

in foreign assets.

On a national level, China’s state-owned enterprises signed contracts with many

developing countries to set up pipelines, factories and many other forms of entities. From United

Nations’ World Investment Report Overview 2014, FDI inflow to China reached $124 billion

while outflow rose to $101 billion in 2013. Major SEOs in this area are China Railway Group

(CREC), China State Construction Engineering Corporation (CSCEC), and China Development

Bank. Much governmental diplomatic collaboration was signed for Chinese companies to enter

markets in Africa, Latin America and Europe. These development projects are mostly for profits,

because many businesses have been popular in China and the tendency to copy to other

developing countries is very high. However, these projects are also products of the Chinese

government’s diplomatic behavior. There is a blurring line between the Chinese government and

Chinese SEOs.

On the other hand, at the corporate level, China’s outward FDI seems more vibrant.

These trends are initially led by large information and telecommunication technology (ICT)

companies such as Huawei and ZTE. These two companies aided similar projects as China’s

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SEO companies. Since 2010, more and more corporates begin to invest in foreign assets using

merger and acquisitions, such as Wanda and Shuanghui. The rise of Chinese upper class

businessmen are becoming more aware of international business opportunities and are actively

buying. Many corporates have decided on their strategies to invest in foreign assets, including

large real estate companies and technology corporate. Many are investing through the form of

private equity investment, by setting up an investment arm, mostly private equity fund to make

direct investment in the form of dollars. Throughout my interviews, a major problem for

Outward FDI is how to convert Chinese Yuan into US dollars. The current governmental policy

has a limit of $50,000 per person. Many companies have received payment in US dollars in

another country and save the income in a multinational bank. Therefore instead of saving for the

interest rate, many corporates begin to investment. A major solution is to start buying good-

quality assets such as hotels, and clubs. But more importantly, many companies are interested in

investing in the Silicon Valley startups, and expect to get returns up to more than ten folds.

From Wang Wei’s book “National Risk- The Black Hole of Internationalization of

Chinese Enterprises”, Professor Wei studied the case of Huawei’s internationalization strategy.

After Huawei conquered the Chinese domestic market and becomes the biggest ICT provider in

China, the company decided to go globally and using multiple entrance strategies, set up open

innovation center, joint ventures, mergers & acquisition, brand recognition and using diplomatic

approaches. After China joined World Trade Organization (WTO) in 2001, China’s not only

serving as world factory, but also an innovative hub for outward foreign direct investment. Many

companies are using merger and acquisition as a tool to expand to other countries. More and

more companies are buying multinational fortune 500 companies. But there are challenges too.

Many countries have anti-dominance and anti-competition laws that are against these

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investments, and Chinese companies are fighting their way as Chinese government rises to

power. [7]

IV: Three Hypotheses: How Can Chinese VC Successfully Invest in

Silicon Valley Startups

For Chinese investors to successfully invest in Silicon Valley startups, there are three

hypotheses.

The first hypothesis is that Chinese investors have to be localized and establish entities in

Silicon Valley. This by far takes the most efforts. Successful Venture Capitalists such as

Raymond Yang has created startups in both China and the US. Because of people like him,

Chinese Americans are able to grasp the knowledge and information in Silicon Valley and the

wealth from China. Under this hypothesis, many funds are set up from several of backgrounds.

For example, Z-park Ventures is an early-stage venture capital firm that consists of Chinese

Americans executives from top Silicon Valley technology companies, such as Facebook and

Google. The firm raised 50 million on its second fund, and is actively investing in startups from

various fields.

Under this hypothesis, investment activities also involve the establishment of incubators,

organizations, and startup services. Since more and more overseas students or Chinese

Americans receive high-quality education in the US, they are able to master in their own areas

before moving to Silicon Valley for their own startups, forming the center of “Chinese Angle”

startups in the Bay Area.

In this sense, startup incubators such as InnoSpring, Hanhai z-park and TI Park becomes

the center of Silicon Valley’s “Chinese Angle” ecosystem. These incubating services provide

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startups with office spaces, seed funding, recruitment and mentorship programs. Even though

they are faced with similar audience, these incubators are not necessarily similar in terms of

strategy and brandings. For example, InnoSpring is the first-ever Chinese incubator in Silicon

Valley, founded by Tsinghua alumni and supported by China’s leading venture capital firms

Northern Light Venture Capital, TEEC Angel Fund, China Broadband Capital and several others.

The company also operates an early-stage investment fund for a few million, which invests in its

own portfolio companies, which are more localized than other incubators.

From the UN report [7], these Chinese-backed incubators operate similarly with China-

based governmental incubators. “With an exploring experience of more than 10 years in business

incubation, IC came to know the importance of seed fund for startups, especially the small or

medium-sized ones. According to the statistics in 1998, there were 34 innovation centers that had

founded incubation funds, with a total amount of 237.32 million yuan, averaging 7 million yuan.

By means of incubation funds and guarantor companies, etc., these innovation centers provide

various types of financing services such as investment, low interest loan and guarantee for the

incubated. In recent years, professional teams for managing innovation investment have been

growing, especially in Wuhan, Chengdu, Shanghai, Shanxi and Xi’an innovation centers.

Innovation centers in Wuhan, Suzhou and Ha’erbin, Tsinghua Pioneer Park and Peking

University Science and Technology Park, are jointly founded by GuoChuang High-tech

Investment Company Ltd. and are preparing for China Torch High Tech Investment Fund.”

Unlike Y Combinators and 500 Startups, most of these Chinese-backed incubators are

based on the commercial real estate business model because they are mostly founded by

commercial real estate companies, such as Hanhai z-park, which also operates commercial real

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estate incubators in Beijing. Also, TI Park is part of the TI Holdings, which operates the Z-park

Entrepreneurs Avenue in Beijing.

The second hypothesis is that Chinese technology companies need to make strategic

investment in Silicon Valley. Large Chinese technology companies such as Lenovo, Tencent,

Alibaba are no smaller than Silicon Valley magnates such as Google, Apple and Facebook. Their

valuation is growing by the day. These companies want to invest in Silicon Valley for a several

of reasons, and they have a higher success rate accessing deals and helping startups in terms of

resources and distribution channels than professional venture capital firms.

Many companies have established their investment arms, they are either using their

Merger and Acquisition department to play its investment arm, or they have set up one or

multiple individual funds to operate. As I mentioned, under Lenovo Group, there are Legend Star

for its early-stage investment arm, Legend Capital for its venture capital investment, Hony

Capital for its private equity investment and Legend Holdings for its strategic merger and

acquisition investment. Also, Tencent has Tencent Win-Win Fund and its M&A department,

both headed by Richard Peng, VP of the Tencent. Alibaba has Ali Capital, and Jack Ma himself

is using multiple private equity fund or venture capital fund to leverage his resources, such as

Yun Feng Capital. Another thing worth to mention, in companies such as Xiaomi or Meitu or

CreditEase, their CEOs are naturally investors, especially in the early-stage side. Lei Jun, CEO

of Xiaomi is also the founding partner of Shunwei China Internet Fund, who also invests in four

public companies such as YY.com, Cheetah Mobile and Xunlei and Kingsoft, and three of them

are Nasdaq-listed companies. They are done both by Lei Jun’s angel investment and through

Shunwei China Internet Fund. Even in China, there’s a word called “Lei Jun Mafia” to

demonstrate the successfully closed group of Internet companies led by Lei Jun himself. Another

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thing worth to mention, Lei Jun is the sponsor of the Silicon Valley event called Global Mobile

Internet Conference, organized by one of his investment portfolio, Great Wall Club. GMIC has

become one of the most successful events regarding mobile Internet and startups. Lei Jun builds

his brand by organizing the GMIC conference and thus is able to source deals and invest in hot

Silicon Valley startups.

The structure of Chinese Internet companies is loosely connected among different

departments, and it creates diversity and efficiency for looking for new startups to invest. With

Alibaba’s recent IPO, Silicon Valley has witness the coming of Chinese Internet companies.

Before Alibaba went IPO this year, the leading technology companies bought a number of

middle-sized companies, such as Weibo, UC Web, Youku-Tudou and Autonavi. Also in Silicon

Valley the company invested in Tango, Lyft, Tile and etc. From Alibaba’s perspective, these

investments are strategic as Alibaba is mostly an e-commerce and B2B company, and its users

need more exposure in terms of mobile, maps, massagers and etc., in a way to compete against

the other two members of the BAT club, Tencent and Baidu. In a way Alibaba is using these

investments to boost its valuation, and in another way Alibaba is using its hot IPO to have easier

access to deals. Many startups in Silicon Valley actually need the exposure of these Chinese

companies, and they act no different than their colleagues, Apple, Facebook and Google in

United States.

From semi-structured interviews, a common understanding is that investments made by

BAT companies actually have a higher rate of success than VC firms in terms of investment

decision and marketing distribution channels. For often times when a Chinese investor

approaches a Silicon Valley startup, he promises that he would help the company to enter China

and win the Chinese market. This model works great as many investors have strong connections

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with Chinese technology companies, media and government. However, the chances are if there’s

already a very successful technology company to collaborate with, what’s the need for an

investment agent. The competition between Chinese technology companies and investors are

very complicated because they are fighting against one deal while collaborating with another

deal. Unlike some of the early-stage investment venture capitalists, BATs are more interested in

investing in later stages, such as series B and series C, in promising Silicon Valley startups. The

reason is that they have a limited team of talents to cover all deals, and they tend to find already-

established companies to collaborate with and maybe help them to expand to China. Some of the

investments are indeed strategic, but some of the deals are merely for financial returns. BAT

gained lots of wealth from stock market and from Chinese netizens, they are not so worried

about financial returns of those investment. Therefore they are likely to invest in promising

startups that are famous in Silicon Valley even though they have higher valuations. Even though

they are expensive to invest, chances are these investments will keep growing. Both Alibaba and

Tencent hire investment teams that are pure Americans, and they tend to have better

understanding of the local Silicon Valley ecosystem, than Chinese who lacks the observation of

Silicon Valley.

What’s worth to mention is that, the trend of Chinese technology companies are also

expanding to US. The first waves are Lenovo and Huawei, and the Lenovo proved to be very

successful while Huawei was a complete disaster. These technology companies are great at using

the financial leverage of investment. Lenovo becomes successful because of its strategy to be

global. Throughout my semi-structured interview with Lee Ting, board of director of Lenovo, the

company is now simply just headquartered in Beijing, but is truly global in its management

team’s mindset. The company in US spends money on public relations and branding, and Lenovo

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ThinkPad is one of the best sellers among PCs. However, Huawei is using a different approaches,

which is opposed by local lobbyist from Cisco and local and federal government. Huawei

focuses on researching and development, and its sales and marketing team is not local enough to

understand the American domestic market. But a company called Cheetah mobile is attracting a

lot of attention because it is purely Chinese team who moves from Beijing to San Francisco now,

went public and is now worth of 3 billion market capital. Cheetah is one of the companies

invested by Lei Jun, and the company focuses on mobile securities and ranks top on Android

Play store. Like Cheetah mobile, there are more and more companies who are founded in China

but orients to a global market, and they are representatively of a form of investment in Silicon

Valley.

For multinational corporations, there are a few effects that gears innovation, knowledge-

diffusion effect, agglomeration effect, crowding-out effects and preemption effects and demand-

creation effects. [9] These effects also work as the solutions and strategies for multinational

corporations to invest. Cai’s conclusion is that R&D activities for MNEs stimulate entry of

domestic firms, which includes domestic medium and large enterprises and enhance newly

entering domestic firms, which is referring to startups.

The third hypothesis is that Chinese wealthy individuals, commercial real estate

companies and business owners can invest in Silicon Valley venture capital firms as their

Limited Partners (LPs). These investors are mostly angel investors. They either have been

actively investing in startups in China or are diversifying their investment portfolio to spend in

Silicon Valley. As China’s upper-class businessmen rise in their political and economical power

contest, more and more are investing in real estate, mutual funds and startups. Backed by their

family business, the investors are able to invest in huge amount of wealth, resources and energies.

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They are more and more educated to diversify their investment, and therefore investing in early-

stage venture capital firms has one of the highest returns.

Recently, more individuals are coming to Silicon Valley to invest in real estates in around

the Bay Area and other parts of the U.S. Also, more and more executives from NASDAQ-listed

companies are gaining wealth and prefer not to move their wealth back into China. Instead, they

are becoming Limited Partners in Silicon Valley venture capital firms so they can make more

profits.

Existing Silicon Valley startups such as KPCB are open to limited partners from China.

For example, Deng Feng brought two public companies, and he got invited from KPCB to be its

LP, which also brought huge wealth to him and led him to enter the VC career.

However, what are more interesting are the emerging Silicon Valley venture capital firms,

especially in the early-stage investment area. For example, the 2013 founded company z-park

ventures are brought by several investors from China. On its first fund Z-Park Ventures attracted

active angels investors, technology company executives, mostly Chinese American. However, on

Z-park Ventures’ 2nd fund, the company attracts LPs from commercial real estates and wealthy

families from China. Their LPs are interested in the returns of Z-park Ventures and they would

like to invest in equities of the company who helps other startups grow. Z-park Ventures invest

in early-stage startups with a focus on mobile, gaming, Internet, security, big data and healthcare

IT etc.

Often times, Silicon Valley venture capital firms are brought up by mostly Chinese

American, who either have spent time in China or have changed citizenship from Chinese to

American. In this sense, it’s about the trust that really matters. LPs in China would like to invest

in someone they trust, and they want to know the partners of these funds in reliable form of

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organizations. In this sense, the venture capital firms are hugely relied on networks that boost the

relationship between them and their Chinese local business partners. What’s worth to mention, is

that Tsinghua University network is very closed with Chinese entrepreneurship in Silicon Valley.

Most entrepreneurs and investors are alumni or friends with Tsinghua University. They exist in

the forms of Tsinghua Entrepreneurs and Executive Clubs (TEEC), and TEEC angel fund, and

Tsinghua International Park (TI Park) and Tsinghua- InnoSpring Incubator and Tsinghua Alumni

Association-north California etc. All these networks leverage on each other’s resources and are

creating an ecosystem for alumni of Chinese university.

In general, under all these hypotheses, for a Chinese investor to successfully enter Silicon

Valley, he has to invest in “Chinese Angle” startups. There are a few reasons for these three

hypotheses to stand. First, as we have analyzed, Chinese technology conglomerates need to

invest in promising startups that can realize their own corporate strategies in return. Second,

China’s investment companies, either angel investors, venture capital firms or even private

equity firms can invest in American investment companies, as limited partners or general

partners. The American investment companies can be super angel funds, early-stage investment

fund, venture capital firms, incubators, accelerators, technology media or even entrepreneurial

communities. By far, these investment companies are mostly operated by Chinese Americans or

green card holders, or Chinese employees in leading venture capital firms. They identify

themselves to be closely related with China and Silicon Valley. The ambition for growth is also

the core value to attract Silicon Valley investors and startups. Third, American and Chinese

investment firms are collaborating and sharing resources to build cross-border companies. The

key figures are mostly Chinese Americans who understand both markets. Investors who resided

in China a few years ago are returning back to the Bay Area with the support of Chinese money

  23  

to invest in local companies. Unlike direct investment backed by large institutional funds, they

are able to raise money and collaborate with their LPs globally. For example, Managing Director

of GGV Ventures Hans Tung was the investor of Xiaomi, China’s leading smart phone brand,

returned to the US and begin using his knowledge of China to invest in local companies. Also,

China-based IDG-Accel is collaborating with Z-park Ventures, a Palo Alto based early stage co-

investment fund to share resources together.

In terms of individual cases of American startups funded by China, I will now use case

studies of three examples: West Summit Capital, Tencent and Alibaba. Through my research,

West Summit Capital is funded by China’s sovereign private equity fund, China Investment

Corporation (CIC). The case with West Summit is an example of how China’s PE fund is

funding a VC firm that also operates in Silicon Valley. One investment West Summit capital

made was Unity’s 12 million series B round. West Summit Capital used its resource to help

Unity to tap into China’s market. From this case, a VC firm with a well-connected Chinese

background can help with startup companies. In fact, Unity did tap into the Chinese market, and

with the help of Raymond Yang, they were able to get Chinese game developers to use their

platform.

In 2013, there were two investments led by M&A divisions of Tencent and Alibaba to

Snapchat and Tango. Snapchat, a major competitor with Facebook in instant video messaging,

was funded by Tencent, China’s largest social network, in its 80 million series B round, for

strategic planning reasons. According to Geek Park journalist Kevin Zhou, a media blog who

specialized in digging information of Silicon Valley magnates, Snapchat’s series B funding was

led by Tencent is because of Evan Spiegel, co-founder and CEO of Snapchat was a big fan of

Tencent’s success and an admirer of Pony Ma, Tencent’s CEO. There’s the personality charm

  24  

that plays an important role in terms of VC investment. Another case was Alibaba’s investment

on Tango, a mobile messaging app. Alibaba, China’s largest E-commerce company, invested 215

million dollars in Tango, in a reaction to fight against Tencent’s “killer” mobile massager app

Wechat. For this investment, Alibaba’s focus is mostly on its own strategic planning, namely that

the investment on Tango could benefit Alibaba as the latter lacks the expertise on mobile

messenger apps. According to Wall Street Journal, Tencent also invested in Fab.com and

Alibaba also invested in Shoprunner.com. From these cases, China’s leading technology

companies are conducting investments on its own reasons in Silicon Valley. On the one hand,

they are looking for companies that could help themselves to grow. For example, Tango is able

to help Alibaba to build its own messenger app that can compete with Wechat. On the other hand,

the Chinese technology companies are able to help them expand into the Chinese market. For

example, Tencent also bought Riot Games, the leading game developer who created League of

Legend (LOL), in turn bringing Tencent billions of revenues each year. The investment allowed

Riot to grow massively in China. Furthermore, there are chances that these technology

companies are getting more recognized by American startups and are treated equally as other

Silicon Valley venture capital firms.

V: Semi-structured Interview: Why Do VCs Come to Invest in

Silicon Valley?

Throughout interviews with 8 investors who are experienced in investing in China and

Silicon Valley, I asked them their views on why they want to invest in Silicon Valley. Strangely

  25  

enough, almost all of them answers with a unanimous tone. The interviewed materials are in the

appendix, but I would like to conclude on their reasons.

So why do Chinese VCs come to invest in Silicon Valley? Some say it’s a natural flow.

Bobby Chao, Managing Director of DFJ Dragon fund answers; it is natural for Chinese venture

capitalists that have been very successful in China to look for opportunities that are economically

profitable. Startups in China used to lack innovation, and Silicon Valley startups are full of great

or bad idea. For a venture capitalists who went to China, they are naturally informed of the

opportunities happened in Silicon Valley and are willing to participate. “All for the economic

profits”, said Bobby.

From this reason, many investors have the same philosophy that it’s a great business for

Chinese investors to invest in Silicon Valley startups. First, as many investors or former

entrepreneurs have brought their companies public on NYSE or NASDAQ, they won’t let the

money flow back into China. Instead, they are eyeing on the vibrant market of Silicon Valley.

Many have thus become LPs of Silicon Valley VC firms, or many have directly involved with

VC investment. They want to leverage the money they raise from stock market to help the

company grow strategically. And that’s why they are looking for startups that can help their own

companies.

Silicon Valley startups generally have higher quality and their valuations are cheaper.

Almost every of my interviewed investors agree on that. When China’s innovation is still way

behind the Silicon Valley entrepreneurship, why don’t they just come to the center of world’s

innovation? Startups in Silicon Valley generally have the most disruptive technology or most

disruptive business models. For investors from China, they want to know what’s the newest or

hottest technology out there. Also, many disruptive technologies are from universities and

  26  

academic research institutes from UC Berkeley, MIT or Stanford. And therefore Silicon Valley

is the place to commercialize these technologies. China is undergoing transition from resource-

heavy industrial structure to a more utilized industrial structure. Therefore there are many

opportunities in China on developing a startup that have disruptive business model, such as

online-to-office model, which is huge and hottest in China. However, if the Chinese investors are

able to find new technology and bring the technology to China, that would be a great success.

When talking about valuations in China, most investors believe that most startups are

overpriced, whereas in Silicon Valley valuations are more reasonable. There’s an agreement that

China has bubbles while United States doesn’t. With the bid of valuation between different

investors, valuation in China is easy to go high if you have some initial users. However, Silicon

Valley has gone through two series of dot com bubbles, and therefore investors are more

cautious in terms of valuation and investment decision. In Silicon Valley often times we see a

fund for about 10-100 million which only invests in 10 companies each year. Therefore they are

cautiously choosing the best on their lists. However in China, more and more funds are founded

and more capitals are raised. In order to have higher returns, lots of venture capital firms are

choosing high risks too. Therefore whether it is a good startup, they still make it valuation high

and tractions high, and make it a war against other companies in the same area. This so called

“burning money” leads to the craziness of China’s bubble. Also, an increasing number of

startups are founded in support from more and more incubators. All parties collaborate with

other parties to enlarge the bubble.

When investing in a deal, Chinese investors are often times shortsighted. They want to

see the tractions in half a year and they want to take it public in four years. Chinese investors are

hugely influential in startups, and they prefer to take more shares so they have a stronger voice

  27  

on the board. And many investors don’t actually know how to run the company. Therefore the

problem with Chinese investors is unnecessarily bringing this phenomenon to Silicon Valley.

There’s another trend with American Chinese investors, Chinese American investors

referring to the kind of American who went to China for opportunities, who then made a great

fortune as investors, and are coming back to the U.S. with Chinese money. Examples of them are

Han Tung, managing director of GGV Ventures and the investor of Xiaomi, Lei Jun’s 40 billion-

valuation company and Chris Evdemon from Innovation Works. Hans Tung has invested in

Silicon Valley startups such as Wish, Tile and etc. He mostly focuses on investing in mobile

applications, by which he thinks there is no huge different in China and United States. Startups in

China are most scalable. Hans commented in the interview that he is very positive about the

trend of American Chinese investors coming back to the Silicon Valley, and he represents the

best of them. These investors often travel to Asia, but they are coming back for one or two deals

every year.

Throughout my interviews with investors, most of them propose the term “Chinese angle

startups”, which literally means a startup, which has Chinese cofounders or is focusing on

Chinese market. Under this term, most overseas Chinese students who were studying in United

States and are doing startups in Silicon Valley are Chinese angle startups. Also, companies doing

e-commerce focusing on Chinese market, or hardware startup with manufacturing factories in

China and are orienting their market in China are Chinese angle startups.

In order to invest in Silicon Valley startups, a Chinese VC firms need to start with

investing in Chinese angle startups, and then focusing on branding and local startups who are

earlier. The best scenario for a Chinese venture capital firms, say with a 100 million fund, is to

start off investing in Chinese angle companies and build awareness among the Chinese American

  28  

startup community in Silicon Valley. Then the company should also expand to early-stage

startups from schools like Berkeley or Stanford, from incubators like Y Combinators and 500

startups, and from TechCrunch-reported newbies. This is a time for investors to build its

branding and go into the community. And finally he will be eligible and have higher chances of

investing in “A” league startups.

For Chinese domestic VCs to invest in American startups, their business model has a

dispute against American model. From Lin Zhang, most Chinese domestic VCs are following

control-based model, where board seats and stock options are key to protect investors’ interest in

the startup, which may also have a negative effect. The American VC model is mostly set up by

giving advice to idea and help them on a high growth, even though successful exits are the key,

most American VCs are looking at beyond the investment returns. [10] Existing problems for

Chinese VCs are the low tolerance of failure and the limited options of exit channels, where

corporate M&A only appeared recently, and Shenzhen GEM and Beijing Z-park’s Agency Share

Transfer System (third market) are the most effective exits, but it has number limitations per year.

In order to successfully invest in reaching American startups, Chinese domestic VCs need to

change their strategy from VC-centric to entrepreneur-centric, and increase their risk tolerance of

failure, which in reality is really hard for most VCs. As Bobby Chao pointed out, most angel

investors don’t dare to lose 10 million just to learn the lesson, they have low tolerance of failures.

When pitching to startups, investors unanimously use a same strategy, to exhibit the

gigantic market opportunity in China. According to Forbes’ article on Jay Eum, “Asia is now a

necessity, particularly in the skyrocketing mobile and gaming industries. The sheer economic

power of the region, the massive population and the fact that it has become the epicenter of

hardware manufacturing in the high-tech sector combine to make it a must-win for virtually any

  29  

new tech venture.” [11] This speech is not only a fact of business opportunity, but also a sales

pitch where investors can increase their opportunity to invest in promising startups.

VI. The Predicted Tomorrow

Nowadays Chinese investors are looking for startups in mobile, big data, hardware. But

what do they do to monetize them? Silicon Valley has been changing rapidly and there’s now

way for investors in China to catch up the entire craze. However, Silicon Valley insiders such as

Paul Graham, Ron Conway, Peter Thiel and etc. also bring these concepts. However, according

to Peter Thiel, he doesn’t work with Chinese investors. Therefore to sell an idea to the public is

still hard for investors from China. The bias between two countries made it clear that hot things

in China are not necessarily hot in the United States. Therefore one of the trends is to decrease

the limitation, maybe through mobile app, or maybe through hardware devices where both

countries are able to enjoy the same level of innovation. Nowadays in Silicon Valley, the SMAC

model, which stands for Social-Mobile-Analytics-Cloud model is the key when startups combine

mobile application with hardware devices, and use the big data analytics and cloud computing

technology to do the math. The trend is just up and there are no dominant players in this industry.

However, the opportunities are also open to China, since in this industry hardware is

manufactured in China, mobile app has a huge Chinese market potential, and no need to mention

data analytics and cloud computing where in China these startups are really hot. So this

opportunity is one of the way for Chinese investors to play and bring resources from both sides

of the Pacific Ocean.

Another opportunity is on the mobile side. Many Chinese companies have won great

traction targeting Chinese market, and they have the potential to be a billion dollar company.

  30  

Examples like Dayima, Changba or FaceQ are really growing exponentially. In the United States,

user acquisition cost is high and there are more and more chances for startups to try in China.

That’s the curiosity of Chinese market that gives the investors opportunity to bring more and

more startups to China and help them with the Chinese market. Also, hot startups in China are

also eying in the global market. They have conquered the Chinese market and they are on their

way to expand globally. Some frontiers have raised capital in United States and went public,

such as Cheetah Mobile. Some are expanding to Silicon Valley and joining an incubator such as

500 startups and Plug and Play Tech Center. Hardware companies in China are targeting at

global audience, such as Ghost Drones and Lepow Chargers. They are invested by their Chinese

investors, and these investors have connections in Silicon Valley, which help them to move to

Silicon Valley.

The way Chinese startups innovate is mostly a reaction from the market. Companies such

as Wechat, YY, or MoMo are huge in China, and they basically fix problem to help people

communicate and fulfill the needs. Wechat and MoMo started as social apps for people looking

for romance on mobile, and because of the niche market they grow exponentially and reaches the

level of 20-30 million users, and then they decided the change the way it was looked and focus

on gaming, payment and location-based services. True, startups in China is using other’s

business idea, or solving the problems that somebody else in Silicon Valley is still solving. But

the incremental innovation is still major players in China and they are not only looking for

Chinese domestic market, but also aiming at developing economies and developed economies

such as Europe and North America. Companies such as Xiaomi, Wechat has already set up their

branding in United States, and people are more and more familiar with this business concept,

“Chinovation”.

  31  

The predicted future is the trend to consider the United States and China as one global

market. With Internet and convenient transportation, the technology innovates everywhere and

startup opportunities are not limited by location.

During my interviews, I asked them “what types of startups are you looking for?” Many

have given me their reasons. A common trend for Chinese VCs is to find disruptive technology

or disruptive business idea. Because the tradition of Chinese technology startups is to copycat

Silicon Valley startups, China has lacked the source of innovation. Even though it is getting

better and better, there are still a lot of concerns on whether China can truly innovate. By

investing directly in disruptive technology and ideas, Chinese VCs are able to transfer the

technology in its domestic market. That’s why many VCs right now and in the new future are

claimed with “Chinese Angle”.

VII: Conclusion

With the rise of Chinese venture capitalists investing in Silicon Valley startups, some has

successfully exited but some are stuck with their current portfolio. However, the trend of Chinese

VC investments coming to the U.S. has never stopped. Where there is a business opportunity,

there is venture capital. In order for investors from China to successfully invest, they should first

choose one three ways to be able to invest: set up an office in Silicon Valley, become a LP of a

Silicon Valley venture capital firms or to represent a technology company from China. The way

investors want to conduct invests in Silicon Valley is first to find the Chinese American

community and invest in Silicon Valley startups, and then to find university or incubators and

talk with startups there. Finally they are eligible to approach hottest startups in Silicon Valley.

  32  

Opportunities lying for Chinese investors are hardware and mobile related startups. The

model of SMAC provides opportunity for Chinese entrepreneur and thus Chinese investors to

create a product or platform that is both attractive to China and United States market. Startups

that connect with China and United States and are approaching users and customers at the same

time are one of the best opportunities.

In conclusion, the trend of Chinese VCs investing in Silicon Valley startups has already

shipped. And there are for sure more and more startups and investors who are coming from

China and are looking forward to creating the next Facebook in Silicon Valley. Chances are just

how to do it and what to manage and differentiate them from their competitors. As Hans Tung

said, this is the great time and the “era of discovery”!

In conclusion, currently the phenomenon of Chinese investors investing in Silicon Valley

is still early, and there ought to be more and more investors coming. However, in order to

succeed, they need to have a clear strategy with “Chinese Angle”. In the future, they might be

able to be more localized and more successful.

VIII: Works Cited

[1] China Internet Network Information Center. “Basic Data”. Last modified Aug 15, 2014.

http://www1.cnnic.cn/IDR/

[2] Feng Zeng, Venture Capital Investment in China (Rand, 2004),

http://www.rand.org/content/dam/rand/pubs/rgs_dissertations/2005/RAND_RGSD180.pdf

[3] Lin Zhang, Venture Capital and the Corporate Governance of Chinese Listed Companies

(Springer, 2012)

  33  

[4] Yasheng Huang and Yi Qian, Is Entrepreneurship Missing in Shanghai, International

Difference in Entrepreneurship (University of Chicago Press, 2010), 321

[5] Lin Zhang, Venture Capital and the Corporate Governance of Chinese Listed Companies

(Springer, 2012)

[6] Dinyar Lalkaka, Strengthening Technology Incubation System For Creating High

Technology-Based Enterprises In The United States of America, Strengthening Technology

Incubation System For Creating High Technology-Based Enterprise In Asia and The Pacific (UN,

2001)

[7] Wang Wei, Zhang Jinjie, National Risks, The Black Hole of Internationalization of Chinese

Enterprise (Zhejiang University Press, 2006)

[8] United Nations, Country Presentation-China, Strengthening Technology Incubation System

For Creating High Technology-Based Enterprise In Asia and The Pacific (United Nations, 2001)

[9] Hongbin Cai, Yasuyuki Todo and Li-An Zhou, Do Multinationals’ R&D Activities Stimulate

Indigenous Entrepreneurship? Evidence from China’s “Silicon Valley”, National Bureau of

Economic Research (Cambridge, 2007)

[10] Lin Zhang, Venture Capital and the Corporate Governance of Chinese Listed Companies

(Springer, 2012)

[11] Toshi Otani and Jay Eum, U.S. Startups Meet Asian Investors: Five Tips For Smoothing

Cultural Edges, lasted edited, Nov 13, 2014,

http://www.forbes.com/sites/forbesasia/2014/11/13/culture-clash-u-s-startups-meet-asian-

investors/

XI: Scripts for Semi-Structured Interviews

  34  

Throughout my research, I have interviewed several investors using semi-structured

interviews, on their understanding of the impact of Chinese VC investments in Silicon Valley.

For each interview, I will greet these investors and schedule an hour (sometimes two hours) for a

talk. During the interview, I will mostly ask them the following six questions, and take notes.

1. Why do you invest in Silicon Valley?

2. What’s your investment strategy?

3. How many deals have you done in China and Silicon Valley?

4. What future are you looking at?

5. What’s your understanding of Chinese-angled startups?

6. What do you see will the impact of Chinese VC investments have for the macro economy?

My interviewees are:

1. John Yu, former Managing Director of West Summit Capital

2. Tao Huang, Venture Partner of Cenova Ventures

3. Bobby Chao, Managing Partner of DFJ Dragon Fund

4. Hans Tung, Managing Partner of GGV Capital

5. Lee Ting, Director of Lenovo Corporation, former CEO of HP China, former Managing

Director, W.R. Hambrecht + Co.,LLC

6. Yong Liu, Managing Partner, SV Tech

7. Brad Bao, Managing Director, Kinzon Capital

Hans Tung:

Hans Tung is the investor of Chinese smart phone company Xiaomi, one of the fastest

growing companies in the world, and was a partner with Qiming Ventures. GGV Capital has

  35  

been around since 2000, and now operates five dollars funds for two billion, and two RMB funds

for 200 millions. The firm has invested in 150 startups, and had about 18 billion returns after

exits. In the US, the firm invested in Pandora, Square, House, Wise, Purso, Nimbo and etc. In

China, the firm invested in Alibaba, Qunar, YY and etc. For the RMB fund, GGV’s LPs are from

China; and for the dollar fund, GGV’s LPs are from United States and Europe. In Hans’ idea,

dollar funds such as IDG, GGV, SAFE, Hillhouse and Ce Yuan are representatives of Chinese

dollar funds. RMB funds such as Fusun and many other funds are from capital raised in

Shenzhen Growth Enterprise Market (GEM). Some RMB funds are converting to dollars, and

those LPs are from outside of China. Hans’ investment strategy is on mobile Internet, especially

globalized startups. He raised an example of Wish.com, a very hot Silicon Valley startup that

focuses on importing e-commerce products from Alibaba’s Tmall and Taobao. GGV Capital is

very interested in Chinese Angled startups, where the combination of China and other countries

provide a great geo-focus for startup market size. China’s Internet industry rose from 600 million

in 2005 to 3 billion in 2014. But there are still huge potentials about Chinese Internet market, as

Baidu’s revenue is only 51 billion whereas Google’s 200 billion revenue. Alibaba’s recent IPO is

the largest IPO ever in United States. Regions like BRICS and East Europe have startup

environment like China. He’s also looking into startups doing online-to-offline mobile startups

for Asian American and Asian Immigrations. When I asked him what are the biggest challenges

for Chinese company investing in the United States, he confessed that it’s hard to find

cofounders here in Silicon Valley, due to cultural differences, where in US doing startup are

more into opportunity. GGV Capital also looks into hardware startups with key technology, and

Internet of Things (iOT). The current leadership structure for GGV Capital is half and half,

where among 6 GPs, 3 are based in China and 3 are based in Silicon Valley, where General

  36  

Partners are sourcing deals actively. The firm looks at 5-6 startups per day, talk with about 1000

startups per year, and invest in 10 startups, whereas incubators such as Y Combinators and 500

Startups invest in 10 deals a month. On a macroeconomic level, Chinese assets are undergoing

pressure from inflation, and money is circulating towards talents. This is the great era of

discovery!

Lee Ting:

Mr. Lee Ting is now a director and advisor to Lenovo Corporation. At his 71, Lee went to

China as Hewlett-Packard’s China CEO in the late 80s, he returned to US and worked for W.R.

Hambrecht + Co.,LLC as a venture capitalist. He became a director of Lenovo in 2003, and is

still now the board. Ting joined Lenovo and led the acquisition of IBM PC division in 2005,

which is the first famously noted investment from a Chinese company to American technology

industry. In Lenovo he is responsible for branding, expertise in management and level of

technology. He confessed that there are tough and mistakes regarding cultural problems.

American businesses don’t trust China, and western business cultures are different from Chinese

business culture. Recently Lenovo bought Motorola mobile, and this was a way to help Lenovo

to rebrand its Le Phone in China, which has No.1 market share in China. The detailed

information about the acquisition with Moto mobile is for Lenovo to have the brand name, where

the previous boss Google wasn’t so interested in high growth. By collaborating with Google, the

new Moto will combine Lenovo’s distribution channel with Google Android’s technology.

Lenovo is ambitious to study Apple’s business model and create an ecosystem with customer

loyalty and a premium high margin, which is about 40-50%, and build a fan base with user

customer engagement. Xiaomi has done great in building its fan base. The biggest competitive

advantage for Lenovo is its distribution channel, where in China online sales are not as big, and

  37  

Lenovo is dominating the traditional field sales. In Mr. Ting’s word, Lenovo is truly a global

company. Companies such as Alibaba only have business in China, and its leverage is only on e-

commerce. Despite Jack Ma’s recent activity in the US, Alibaba is still a company with US

subsidiaries but heavily based in China. Lenovo, on the other side, is globally operated, where

executives of the company come from different cultural backgrounds, and are making decision

with a global mind. When Lenovo acquired IBM PC division, Lenovo itself was only 3 billion

big whereas IBM PC was 10 billion, but with the financial leverage the deal went successful.

When I asked about Lenovo’s investment strategy, Mr. Ting doesn’t agree with the impact of

Chinese VC investment in Silicon Valley. Most investors don’t have an edge coming to Silicon

Valley, and they could do better in China. Most funds are not active in early stages, and they

only look at market and traction. His experience with H&Q Asia Pacific was mostly in Singapore

and Thailand, where he helped Ta-lin Hsu to establish H&Q Asia Pacific’s offices. In Asia, late

80s there are huge potentials of high growth for technology innovation and manufacturing,

especially in Taiwan, Singapore and Thailand. Mainland China started to take over

manufacturing in the 90s. Mr. Ting doesn’t agree with China’s current strategy with incubators

almost in every city. He gave more credits to Singaporean and Israeli incubators, where the

ecosystem of technology grows with education, enterprise, venture capital and government.

Tao Huang:

Tao Huang is Venture Partner and Legal Advisor for Cenova Ventures, one of the leading

Chinese VC firms specializing in healthcare. Cenova Ventures is brought up by Chinese State-

owned Assets Supervision and Administration Commission of the State Council (SASAC) and

Merck Corporations. In Silicon Valley, the firm invests in Chinese angle startups and helps them

  38  

to outsource R&D to China, which can effectively reduce labor and lab cost. They are interested

in building a virtual company where a healthcare startup is headquartered in Silicon Valley but

have most R&D and operations in China. Cenova ventures invest in medical devices and drug

discovery, where for medical devices the inputs are little but have a huge market, and they are

easy to have clinic trial for diagnosis. The company wants to invest in early stage, mostly for

series A and series B, and bring these startup portfolios to a global market. Like many other

Chinese investors, Tao is also incentivized by the quality of startups in Silicon Valley and the

low valuations. He said that Chinese VCs have money, but the environment in China is bad.

Cenova wants to look at all deals regarding healthcare, and they want to invest in companies

with unique technical barrier where maybe for drugs they want to make the biology validated,

and they also invest in strong teams, where most cofounders are PhDs and have 8-10 years of

experiences.

Bobby Chao:

Bobby Chao is the managing partner of DFJ Dragon fund. He was cofounder of Cadence

Networks, and founded his VC fund in China named Dragon fund. Tim Draper, legendary and

heritage investors of DFJ ventures, worked with Bobby and they both founded DFJ Dragon fund.

Bobby Chao is the investor of Baidu.

DFJ Dragon fund invests mostly in technology that can be commercialized. Bobby stayed

in corporate ventures for a while in 1999, and in 2005 he founded DFJ Dragon with 100 million

dollar fund, and invested in 24 companies with Variable Interest Entity (VIE) in China, which

includes Baidu and Alibaba. In 2005, the barrier was not existed yet. And in 2010 DFJ Dragon

raised the second round from American institutions to invest in Chinese companies. In 2012, he

  39  

raised another RMB fund from Chinese LPs, which include Chinese VCs and Chinese companies

who went public on Shenzhen or Hong Kong. The way he prefers VIE structure is that it is more

convenient for DFJ to invest. One of the biggest issues is for VC firms to convert dollars into

RMB, and it used to be executive process, where VC firms have to ask for permission from

government, and now it is turning into legal standard now. So why do VCs invest abroad? A lot

of real estate companies gained huge wealth from China, and they have short visions, and their

previous business behaviors can be on the table but sometimes are under the table. The normal

investment return in US is 10 years, where in China it’s 5-8 years. Most startups went public in

Shenzhen GEM, and some went public in Hong Kong or New York. Also, investors want to

invest in reliable and predictable environment, where US is the best fit. The general trend of

Chinese VC investment to Silicon Valley started in 2005, where there were purely Chinese

Americans investing. Baidu was one of Bobby’s favorite portfolios, where the company earned

100 times exit. At that time, Silicon Valley was still mostly focused on architecture, software, e-

commerce and social network. More and more Chinese investors are getting used to grasp the

Silicon Valley spirit. And that was the generator for C2C business model, where investors are

learning from Silicon Valley and adopting it in China. Also, besides venture capital investors,

there are more and more angel investors as well as corporate investors. The ideology of Chinese

VC investment in Silicon Valley is a result of pursuing economic profit. From a historical

perspective, American business families have gained huge amount of wealth, and China only

became wealthy recently. So there are some great lessons to teach. American wealthy families

are in a way distribution their wealth to technology innovation, and they don’t care much about

returns. In a way there is a reflection of socialism. Where in China, after Deng Xiaoping’s policy

to open its economy, businesses and investors are in a way undergoing the capitalist society,

  40  

where economic profit is the driving force. But there’s been paradigm shift in Taiwan, India,

Korea, UK and Japan, where government, small business associates, endowment funds, family

funds, corporate ventures are all working in a way for economic profit, and that’s the opportunity

for Chinese VCs to invest globally.

Yong Liu:

SV Tech is defined as corporate venture, where in China many startups went public in

Shenzhen and gained lots of wealth. One of SV Tech’s LPs is Lenovo Holdings, and they also

look to SV Tech’s portfolios too. Similarly in Silicon Valley, Tencent and Alibaba are investing

in growth stage startups, such as series B and later, and they tend not to invest in early stage

startups, since the time spent on early stage startups are too long, and there are competitors from

third party. SV Tech collaborates with many entities in Silicon Valley, such as incubators, series

A investors, seed investors, lawyers and accountants, startup organizations and even loaning

banks, such as Silicon Valley Bank and East West Bank. In Yong’s mind, for cross boarder

investment, it is better for corporate investors to invest. For most Chinese enterprises, they have

external R&D. For example, Samsung has an Open Innovation Center, and is using corporate

ventures for startup incubation and growth. The open innovation idea turns closed strategies to

joint ventures. What SV Tech ventures offers is corporate’s needs, where corporate works as SV

Tech’s LPs to look for new technologies to be combined into their existing products, and

providing sales channel and license. Also, when corporates invest in startups, startup will have a

good exposure to consumers, and they can also get data and better understanding of market needs

from corporate. Besides R&D, for large corporations there are not enough needs to invest in

smaller startups, but a good way to invest is by setting up a new investment arm, from examples

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of Lenovo. For SV Tech’s investment thesis, the firm looks into new technology that can be put

into market, such as smart hardware, infrastructure, and iOT carriers. They want a team with

strong technological backgrounds and an appetite for Chinese market.

John Yu:

John Yu is now the cofounder and managing partner of West Summit Capital, a China-

based global investment fund who also operates in Palo Alto. John explains the bubble of

technology startups, mostly because of overpriced valuations. For a Chinese investor, he finds

that venture capital investment in Silicon Valley startups is comparatively cheaper. They usually

have a higher return than those John invested in China. Also, as many Chinese Internet

companies are raising money in NASDAQ or NYSE in US dollars, the money is usually left in

the States because of a projection of a decrease in Chinese RMB. Since most Chinese investors

are focusing on the United States market, they are mostly investing in venture capital firms as

their limited partners in America. For Raymond Yang, another MD of West Summit Capital, his

answers are more categorical. There are three major types of Chinese investment to United States,

one is the investment from large technology companies in China, such as Tencent and Alibaba to

invest in perspective startups such as Snapchat and Tango; one is that private equity companies

are investing in local Silicon Valley venture capital firms as their Limited Partner (LP); one is

that China’s commercial profits such as real estate developers are investing in entrepreneurial

properties, incubators, accelerators and etc. He thinks that no matter where the money comes

from, the investors have to have the knowledge about Silicon Valley and Entrepreneurship. In

most cases, they have hired local talents or college graduates from UC Berkeley or Stanford

University.

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Brad Bao:

Brad Bao is the managing director of Kinzon Capital, the newly founded early-stage

investment firm from Fosun Group, one of China’s leading private equity and asset management

firm. Previously Brad served as General Manager for Tencent USA.

Throughout our conversation, Brad gives a perspective very different from other firms.

Kinzon Capital doesn’t invest in Chinese angled startups. Kinzon wants to be alike many other

Silicon Valley local VC firms and invest and compete against major early-stage investment firms.

In his mind, Chinese venture capitalists say that they would help the startup to expand to China,

but in fact it is still hard for them to do. Kinzon Capital doesn’t fool startups like this. Based on

his previous experience in Tencent, it is easy for startups to get invested from BATs and sale to

China. Kinzon Capital is an elite team with about 400 million dollars, and they invest in all early

stages. From Brad, Tencent’s previous investment in League of Legend (LOL) is one of the best

investments ever in terms of thousands of returns. During that time, Tencent USA team looked at

about 6,000 teams on gaming, and invested in a few startups, among which LOL proved to be

hugely successful and profitable. For Chinese VCs investing in Silicon Valley, they can’t beat

all-star VCs but they could be diligent and study the trends and invest in earlier stage startups.