A Blog by Jonathan Low


Mar 16, 2015

Asymmetric Competition: Asian Tech Giants Are Investing Heaviliy In US Startups

Sure, you can steal other people's intellectual property . But it's much more efficient to just invest in the companies that produce the innovations you believe will determine future technological success.

Theft gives you a one-time advantage of dubious quality. But investing enables a stream of future benefits based on both rising prices and potential licensing agreements.

Plus you have the added benefit of having strategically out-foxed competitors seeking the same sort of opportunity, meaning that their ability to disrupt your plans is reduced.

For all these reasons - and because they are flush with cash and prices are reasonable compared to building something possibly inferior from scratch, Asian companies are investing heavily in US startups, as the following article explains. The problem for US companies is not just that they are losing out on access to the latest and best developments - but that their most feared competitors are gaining advantage. JL

Douglas MacMillan and Rolfe Winkler report in the Wall Street Journal:

People have historically thought of corporate investors as ‘the dumb money.' But that is changing. These Asian digital power platforms want to extend their reach globally. They are flush with cash and they want to put it into the digital equivalent of beachfront property.
Asia’s wealthiest technology companies are leading a wave of investment in U.S. startups with the hope of gaining a toehold in Silicon Valley and taking some hot new products home.
Alibaba Group Holding Ltd., China’s largest online retailer, recently invested $200 million in Snapchat Inc., people familiar with the matter said Thursday. The investment pushed the Venice, Calif., mobile-messaging company’s value up to $15 billion, one of the people said. This week, Japanese e-commerce company Rakuten led a $530 million round of funding in Lyft Inc., valuing the San Francisco ride-sharing startup at $2.5 billion.
Those high-price deals followed an investment playbook that is becoming common for the Internet giants of China, Japan and South Korea. Motivated by intense competition and powered by mounting piles of cash, the Asian companies are showing a willingness to spend big for access to some of the most promising technologies, investors say.
The uptick in Asian investments adds to the flood of capital now washing over U.S. tech startups as investors from hedge funds to mutual funds vie for equity in private startups that are waiting longer to hold public offerings. That competition for deals is driving up the valuations of young companies with unproven business models and raising risks for investors.
“[Asian companies] can write major checks, and they can move really fast when they are seriously interested,” said Tim Chang, a managing director at Mayfield Fund in Menlo Park, Calif. Mr. Chang noted in particular Masayoshi Son, chief executive of Japan’s SoftBank Corp., who he says has been known to seal an investment deal after a single half-hour meeting. Softbank declined to comment.

SoftBank, Alibaba and China’s Tencent Holdings Ltd. have all set up U.S. investment offices and hired stateside investors with the goal of acquiring stakes in mobile software, gaming, digital media, e-commerce and payment technologies.
Unlike the venture-capital firms they increasingly compete with for deals, these investors aren’t motivated by financial gains. They’re looking for a peek inside the next big thing and to eventually import technology back home, to the countries that together contain the world’s largest Internet audience.Asian corporations or their venture-capital arms were investors in 86 equity financings of U.S. venture-backed companies in 2014, more than doubling the number of deals they joined in three years earlier, according to Dow Jones VentureSource data.
Of note, Asian companies are wielding more influence in deals. Last year, they “led” 29 U.S. deals involving venture-capital firms, compared with none five years earlier, according to VentureSource. Leading a deal generally involves overseeing the negotiations, bringing in other investors, setting the terms and performing the due diligence—all tasks normally reserved for venture firms.
Alibaba, which had about $21 billion in cash as of Dec. 31, decided to invest in Snapchat less than a year after deal talks between the two parties fell apart. While a global leader in e-commerce, Alibaba still trails its local rival, Tencent, in the rapidly growing area of mobile messaging. It lacks a strong competitor to WeChat, a messaging app with more than 460 million users that also acts as a gateway to online shopping, banking and other Internet services. Alibaba declined to comment about specific deals.
The deal with Snapchat, at a valuation 50% higher than investors paid just last December, gives Alibaba equity in an emerging leader of mobile messaging with more than 100 million users. Alibaba also led a $280 million investment last year in another messaging app, Tango, in a deal that valued that company at more than $1 billion.
“Definitely, there was strong interest for Alibaba in messaging apps,” said Eric Setton, co-founder and chief technology officer of Tango. “If you’re in China and you see how much impact Tencent’s product, WeChat, has had, you have to be interested.”
To lead its U.S. investment strategy, Alibaba now has a small team based in San Francisco’s financial district. It is led by Michael Zeisser, a former Liberty Media executive, and Peter Stern, formerly an investment banker with Credit Suisse. They have also made investments in Lyft, e-commerce startups ShopRunner and Fanatics and app search engine Quixey.
Speaking at a conference held by Morgan Stanley last year, Alibaba Executive Vice Chairman Joe Tsai said his company is investing in the U.S. in part because that is where tech innovation is happening. According to a person who was in the audience, he said that, in effect, his company is buying a front-row seat to watch these companies so that by the time such products and services reach China, they won’t already be controlled by someone else.
Beyond paying top dollar for startups, Asian tech giants are winning deals on the promise that they can help U.S. startups find a new audience for their services overseas.
“China is really difficult to enter,” said Kent Wakeford, chief operating officer at Kabam Inc., a gaming startup that took a $120 million investment from Alibaba last year at a $1 billion valuation. “It was important for us to align with a strategic partner who understands customer behavior, who understands marketing and distribution and who can help us overcome barriers to entry in the market,” he added
Part of Alibaba’s deal with Kabam included an agreement to distribute its games through Alibaba properties such as UCWeb, its popular Web browser, Mr. Wakeford said.
“I think people have historically thought of corporate investors as ‘the dumb money,’” said Jeff Richards, a partner at GGV Capital, which invests alongside Asian companies. “But I think that is changing.”
Rakuten’s deal with Lyft appears to present an opportunity for both companies. The ride-sharing startup, the top U.S. rival to Uber Technologies Inc., is plotting its first move overseas and was looking for an investor who could help it navigate the expansion, John Zimmer, Lyft’s co-founder and president, said.
“They are interested in the U.S.,” Mr. Zimmer said. “We are interested in having a smart, long-term global strategy.”
Investing at high valuations means Asian companies often take on more financial risk. In 2013, Tencent led a $165 million investment in online retailer Fab Inc. that valued the startup at close to $1 billion. Last month, after the company overspent on marketing and expanded too quickly, it was forced to sell its assets for a fraction of that amount. Tencent didn’t respond to a request for comment.
Mayfield’s Mr. Chang said today’s rush by Asian companies to invest in American startups is equivalent to the flood of Asian money that was spent to buy up U.S. property in the 1980s.
“These Asian digital power platforms want to extend their reach globally,” he said. “They are flush with cash and they want to put it into the digital equivalent of beachfront property.”


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