- Silicon Valley's lead over China in venture capital investing shrank by the end of 2018 to $6 billion as the Asian market's techno-nationalism rises.
- China's venture investments rose to $105 billion in 2018, nearly matching the U.S. at $111 billion.
- China's technology ambitions in its Made in China 2025 policy initiative has been a bone of contention in the U.S.-China trade war.
It's down to $6 billion.
China's venture investments rose to $105 billion in 2018, nearly matching the U.S. at $111 billion, according to Preqin data.
Several factors have contributed to the trend. The Chinese government has grand ambitions to make China a tech superpower, such as its Made in China 2025 policy initiative for building national companies into high-tech champions, and its Internet Plus plan to power up the mobile Internet and the Internet of Things. China's rise in tech has been a bone of contention in the U.S.-China trade war, unsettling President Donald Trump and other American policymakers.
For a snapshot of the trend, one only has to look at the CNBC Disruptor 50 list, a ranking of the world's most innovative private companies creating paradigm shifts in their industries. Since its launch in 2013, Chinese venture capital and angel investors poured $30.6 billion into 14 of these emerging growth companies — including Airbnb, SoFi, Ellevest, The We Company and Didi Chuxing.
China now has 86 "unicorns" — start-ups valued at $1 billion or more — compared with 151 in the U.S., according to CB Insights. And it scored the world's most valuable unicorn — AI-powered news and video app ByteDance at a $75 billion valuation.
This trend is also reflected on this year's list. Seven-year-old Didi Chuxing grabbed the No. 2 spot, boasting a valuation of $57.6 billion after snaring billions in funding from SoftBank and China Merchants Bank and the Bank of Communications. Others are Xiaohongshu (No.10), a leader in Chinese social e-commerce, and YITU Technology (No. 20), an AI facial recognition company.
Some of the largest companies to go public in the U.S. in the last year have been from China, such as Baidu's video streaming spin-off iQiyi, the Netflix of China; social commerce start-up Pinduoduo, which raised $1.7 billion; and electric carmaker Nio, which pulled in $1.2 billion. The number of Chinese companies that went public in New York nearly doubled to 31 in 2018.
Among the Chinese companies that are planning to go public this year are coffee shop and mobile-app start-up Luckin Coffee, a challenger to Starbucks in China.
China has made a lot of investments in tech over the past two decades, and they're paying off.
Already China has the world's largest internet and mobile communication markets, the most supercomputers, the highest number of STEM graduates, at 4.7 million, and the most scientific academic papers. All of these factors have led China's ascent to second-place worldwide patent filings, at 21% of the world total, right behind the U.S. at 22%.
Over that period, China has transitioned from a "copy in China" strategy of borrowing internet ideas from the West to a "Made in China" era of businesses tailored to the Chinese market.
Now U.S. companies are starting to follow Chinese innovations, says David Chao, co-founder and general at venture firm DCM in Menlo Park, California.
"China is now innovating, and business models are being imported into the U.S.," Chao notes, citing dockless bike-sharing as one example.
Since the internet start-ups that defined China's early tech culture, Chinese technologies have broadened to include cutting-edge areas like artificial intelligence, drones, robots, electric cars and autonomous driving. China has created a parallel universe to Silicon Valley.
China's tech titans — the BAT or Baidu, Alibaba and Tencent — have diversified from their original search, e-commerce and gaming businesses. They now span across broad sweeps of the economy, from healthcare to fintech and have bulked up with multi-billion dollar acquisitions in both countries.
And as more disruptive business ideas bubble up in China, a core group of experienced Sino-U.S. venture capital firms, such as Sequoia Capital China and Qiming Venture Partners, are helping to turn them into growth businesses. China's tech titans, Baidu, Alibaba and Tencent, are also funding the next generation of start-ups.
Both Tencent and Alibaba are backers of Xiaohongshu, alongside GGV Capital and ZhenFund, which has led to $418 million in total investment. Like many Chinese start-ups, Xiaohongshu is focusing on fast growth to chase the market opportunity and is not profitable yet.
But as the Trump administration scrutinizes Chinese investment in U.S. companies, Chinese investors who had been pouring money into Silicon Valley are turning their attention elsewhere.
China direct investment dropped to $4.8 billion last year, from $27 billion in 2017 and $46 billion the prior year, according to Rhodium Group. One of the most notable VC departures is Sinovation Ventures, the firm started by former Google China president Kai-Fu Lee, who opened a U.S. investing operation in 2013. CNBC reported on Tuesday that the head of Sinovation's Silicon Valley office, Chris Evdemon, departed in recent months and informed at least some portfolio companies that the firm was was halting investments in the U.S. as it restructured its fund.
Top China-based investors in US VC/PE (by deal count)
- IDG Capital: 69
- ZhenFund: 61
- Tencent Holdings: 58
- Qiming Venture Partners: 45
- GSR Ventures: 44
- Northern Light Venture Capital: 36
- Tencent Industry Win-Win Fund: 34
- Lilly Asia Ventures: 32
- Baidu Ventures: 31
- Fenbushi Capital: 27
- Hillhouse Capital Group: 27
(Source: PitchBook, data from 1/1/2009-5/10-2019)
China's domestic innovation has largely been centered on AI and mobile-centric technologies where China has natural advantages.
China's smartphone market is 783 million users, the world's largest. Most of its young, digitally savvy population skipped right over the personal computer and adapt to new tech quickly, without as much concern for privacy issues as in the U.S. That has spurred China-originated super apps to wrap in services for payments, food delivery and travel bookings. Many of China's newer apps rely on sales of virtual goods instead of advertising for monetization, including Chinese 15-second video app Toutiao and music and gaming apps from smartphone maker Xiaomi. These ideas are catching on in the West -- for instance, Facebook is reportedly building a cryptocurrency that could be used to enable transactions in WhatsApp and other messaging apps.
"China's mobile apps are more robust and developed. They are more transaction-based," said Hans Tung, managing partner at venture investor firm GGV Capital in Menlo Park, California.
One of his firm's China portfolio companies is 2019 CNBC Disruptor 50 company Xiaohongshu (translated to English, it means Little Red Book), which blends mobile commerce into social sharing. Celebrities and ordinary users share their latest tips for fashions, fitness, travel and culture. Even Kim Kardashian got in on the action, telling her makeup tips on the Chinese site while marketing her KKW Beauty Line on the highly popular app.
Xiaohongshu, which launched in 2014, has broken out of the pack of Chinese e-commerce sites: Its number of registered users tripled to 220 million in March 2019 from a year and a half earlier. This adds up to 3 billion views daily.
"Xiaohongshu is the No. 1 lifestyle sharing platform in China where you share your life, your hobbies, and where you can buy almost every item," said Miranda Qu, a co-founder of the Shanghai-based company.
Another major moment in the race for tech supremacy between the U.S. and China tech is the success of ride-hailing leader Didi Chuxing's in beating Uber in China. After a three-year effort, Uber surrendered the Chinese market to this local champion in 2016, and Didi absorbed its Chinese branch in a $35 billion deal in 2016.
"Didi was the hottest company around when Uber decided to leave," said venture capitalist Chao. "It was a case of the local beating the global incumbent."
Didi has boosted the confidence of Chinese entrepreneurs taking on Silicon Valley.
China's rise is leading to a major challenge to the U.S. and market watchers believe Silicon Valley will have to figure out how to move faster.
"Technology adoption in China is as rapid, or more rapid, than in the U.S.," says Wei Jiang, a venture partner at ZhenFund who also invested in Yitu Technology. Shanghai-based YITU specializes in speech recognition and computer vision for medical imaging and diagnostics and was started by an overseas returnee, Zhu Long, a Ph.D. from UCLA who studied with a disciple of Stephen Hawking.
Experts predict that this sort of entrepreneurial talent, coupled with China's government support and venture capital funding, will continue to tilt the innovation wheel eastward to China.
—By Rebecca A. Fannin, author of the book "Tech Titans of China," to be released in June.