Joe Chen, CEO of Chinese social networking service Renren, first met SoFi CEO Mike Cagney in Palo Alto in 2011 and, over coffee, decided to invest in the fast-growth, disruptive online finance start-up. That initial $4 million investment helped SoFi get its start and led to two more financings within three years, with Renren contributing a major chunk of some $230 million raised.
Fast-forward, and SoFi last month topped it off with a $500 million investment from private-equity powerhouse Silver Lake.
SoFi is just the kind of deal that Chen has been pursuing: His NYSE-listed company, once known as the Facebook of China, has been investing in to broaden its revenues and boost its stock price. That connection with Renren has also boosted SoFi.
"Joe is a great investor and was our investor from the early days. He saw the vision early on and pushed us to grow faster and be more aggressive," said Dan Macklin, a co-founder of SoFi in San Francisco.
Similarly to Renren, China's tech titans Baidu, Alibaba and Tencent are leading a surge of Chinese investment in cutting-edge U.S. technology start-ups with bold ambitions to expand their footprint, attract top talent and gain an edge in innovation.
Collectively known as the BAT, China's giant technology companies that dominate search, e-commerce and mobile messaging in their home market are going global. The United States is their primary shopping place to diversify and build out their brands. The hunt is on to acquire or buy into fast-growing young companies in a broad range of the hottest tech sectors, such as virtual reality, fintech, social media, video games and mobile apps. Their deals include such well-known American brands as image messaging app Snap, ride-sharing service Lyft and virtual reality player Magic Leap.
China's four largest internet companies — the BAT plus e-commerce company JD.com — have invested $5.6 billion in 48 U.S. tech deals over the past two years, according to CBI Insights data. California took in more than three-quarters of the total U.S.-based deals by these four companies, with Silicon Valley a popular hunting ground.
Overall, Chinese investment in the U.S. economy has soared, with such high-profile deals as China's Anbang Insurance purchase of the landmark Waldorf-Astoria hotel in New York City for $1.95 billion.
Last year Chinese investors put a record $45.6 billion in U.S. companies, triple the amount for 2015, according to research group Rhodium Group in New York City. The momentum has picked up as the Chinese economy has slowed and as the U.S. dollar has appreciated against the Chinese yen, points out Rhodium economist Thilo Hanemann.
"The Chinese government is spending billions of dollars literally trying to level the playing field a bit" between the United States and China in technology, said Orville Schell, director of U.S.-China relations for the Asia Society, which released a 2014 report on China high-tech investments in the United States.
This flurry of deal making comes against a recent crackdown by Chinese authorities to tighten restrictions on capital outflows and control "irrational" outbound investment by Chinese firms. Such restrictions are threatening completion of a $1 billion purchase by Chinese conglomerate Dalian Wanda Group of Dick Clark Productions in Los Angeles. Meanwhile, U.S. alarms about potential security and economic risks over Chinese takeovers of American companies have been heightened during the recent presidential election.
For the founders of U.S. tech start-ups, getting cozy with Chinese acquirers and investors can make good business sense. With a Chinese investor, their business gains a competitive edge in the exceedingly difficult-to-penetrate China market. Getting funds from China's leading tech companies can help U.S. companies gain an entry point to China, an immediate on-the-ground presence and strategic insights such as how to best customize products for the local Chinese market.
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Moreover, founders of U.S. tech start-ups can get favorable terms from the Chinese corporate investors, which are known to pay more to invest in American start-ups compared with Sand Hill Road venture capitalists. The Chinese buyers are in effect "paying a tuition" to get insights into the U.S. market, points out Jay Eum, co-founder and managing director of TransLink Capital in Silicon Valley.
China's e-commerce leader, Alibaba, by the visionary Jack Ma, has been particularly active in investing in U.S. start-ups. In recent years Alibaba has led a $793 million financing round in virtual reality start-up Magic Leap, $200 million in social media company Snap, $215 million in mobile messaging app Tango, $250 million in ride-sharing app Lyft, $50 million in remote-control app Peel, $120 million in mobile gaming start-up Kabam in July, $50 million in app search engine Quixey and $206 million in subscription service ShopRunner.
Not to be outdone, Baidu has invested $30 million in mobile safety firm TrustGo and $10 million in mapping company Indoor Atlas. Meanwhile, Tencent invested $400 million in game developer Riot Games and another $400 million in Epic Games, in addition to co-investing with Alibaba in Lyft. Besides its groundbreaking investment in SoFi, Renren has invested in a series of U.S. fintech start-ups, leading a $31 million lead investment in crowdfunding real estate site Fundrise in 2014 and leading a $40 million investment in U.S.-based stock-trading outfit Motif in 2015.
The China deals typically are for a minority investment stake rather than a controlling interest —in part a strategy to minimize risk while still getting an angle of U.S. tech. Taking a long-term perspective, Baidu, Alibaba and Tencent have all established offices in California for research and development and for corporate venture investing. This type of China tech deal making is a long way from the pattern of Japanese deal makers during the 1990s in the United States, when investment from Japan poured into trophy properties such as Pebble Beach and Rockefeller Center and later suffered major losses.
The Chinese deal makers in U.S. tech companies are active, not passive, investors. Silicon Valley-based messaging app Tango, which snared a $215 million investment by Alibaba in 2014, holds monthly meetings with a board member at Alibaba to review strategies and strategic impact, says Tango CEO and co-founder Eric Setton. He frequently visits Alibaba headquarters in Hangzhou and has set up a Beijing office. Setton said he got his initial introduction to Alibaba from Jerry Yang, a founder of Yahoo, which has been strongly linked through ownership ties with the Chinese conglomerate for several years.
Another Silicon Valley start-up, Peel, has experienced a similar tight interaction with its Chinese investors, which include Alibaba. Co-founder Thiru Arunachalam said he gets access to talent in China through the Alibaba connection and gains leverage in the fast-growing Chinese market.
Venture investor Eum of Translink, which has seen three of its portfolio companies (Peel, Tango and Quixey) get invested in by Alibaba, said he has been "super impressed" by Alibaba as a strategic investor. He pointed to a synergistic relationship and solid informational interchange as key advantages for both the China and U.S. sides.
— By Rebecca Fannin, special to CNBC.com