Highlights 5 | Silicon Valley Innovation During and After the Pandemic (Week 5: Cross-border Venture Capital)

Highlights | Silicon Valley Innovation During and After the Pandemic (Week 5: Cross-border Venture Capital)

It is an understatement to say that Covid-19 has had a sizable impact on global society and economy. As such, SVTC is using its platform to host virtual events. Through conversations with scientific experts from various fields, we hope to explain to Chinese audiences how Silicon Valley is innovating during the pandemic and the future direction of innovation in the post-pandemic era. These talks will take place on Saturdays at 9:30-10:30 am CST (Fridays, 6:30-7:30pm PDT).

For our fifth virtual dialogue, SVTC invited Mr. Wayne Shiong, partner of China Growth Capital (CCG), to share with us how the pandemic has impacted and created opportunities for cross-border venture capital, the current financing situation, and the impact and changes that the pandemic has on the existing technology startups.

About China Growth Capital Management

China Growth Capital was established in 2006 and from 2006 to 2014, made numerous angel investments. At present, China Growth Capital manages a total of eight billion RMB. Investment fields include soft technology, hard technology, consumption upgrade, and B2B. Notable portfolio includes Tiger Brokers, SMZDM (300785.SZ), DeePhi, Wish, WeRide, and more.

Among its acquisitions, Deephi Tech is Xilinx’s only acquisition in China, acquired not for Deephi Tech’s Chinese customers and markets, but for its abundant technological accumulation. China Growth Capital helps portfolio companies  find Chinese resources. The Chinese supplier China Growth Capital introduced to Wish early on became the head of Wish suppliers.

Judy Lee, general manager of the Silicon Valley Technology Council (SVTC), moderated this event. She and Mr. Shiong have been good friends for 15 years; they have worked together at Wall Street investment banks and have helped Baidu, Sina, Sohu and other Internet companies successfully list in the United States. Mr. Shiong is an expert in the field of mobile Internet investment and has valuable insights for China-US cross-border investment.

For this week’s event, as Judy and Mr. Shiong are both experienced in the venture capital industry, they exchanged valuable investment insights, especially in the mobile Internet field, prompting many questions from the audience. Below, we’ve provided a summary of the event’s key takeaways.

Investment Thesis and Direction During and After the Pandemic

1. How has China Growth Capital changed its investment strategy due to the pandemic?

Mr. Shiong believes that China's market has changed since 2014: the consumer infrastructure is already well-developed, and there are already industry giants in each consumer segment, so there is little chance of further penetration. It is very difficult for consumer base startups to reach 10 billion US dollars. China has now entered the era of enterprise-level software as a service (SaaS) investment. The Chinese personal cloud computing center runs on mobile phones, while the American personal cloud computing center runs on computers. At present, mobile phones are very popular in China, so there will be an explosion of enterprise service software.

In addition, Mr. Shiong mentioned that CCG’s investment amount has not changed, ranging from 10 million RMB to 10 million USD for a single investment, from seed round to series A. The decrease in the number of investments is not due to reluctance on CCG’s part to invest, but to the fact that the deal flow is undergoing a rapid adjustment from high to low in the market.

Judy is familiar with the trends of the Internet in the US, asking, “Many US enterprise SaaS startups have been acquired by large companies. Will there be more mergers and acquisitions instead of listings in the future?”

Mr. Shiong responded that mergers and acquisitions are already taking place, explaining that listing requires volume. Software giants can still emerge in areas that traditional Internet giants are not willing to enter, so there will still be enterprise SaaS startups that go public.

2. Predictions for Enterprise SaaS Startup Giants 

Mr. Shiong thinks there are three areas:

1. Software tools for small- and medium-sized enterprises. Because small- and medium-sized enterprises do not want large enterprises to control their inventory management and financial management, they need a third-party software service provider to provide solutions. 

 2. Private Cloud Architecture for Large Enterprises. For example, China Merchants Bank has changed from a traditional offline service organization to an Internet company with 50 million daily users. 

3. Database. The demand-driven nature of this area and the way the industry is structured have led to a lack of access to American products that used to be readily available and thus now the need for self-sufficiency.

3. Prospects for Enterprise Saas companies in China 

“华创看到很多企业级软件即服务创业公司创业者之前有在美国大企业和国内互联网巨头工作的经历，这些都是不错的创始人。” 熊总补充道，“企业级软件即服务符合中国目前的发展阶段，因为企业算过帐之后会发现软件服务外包会更划算，这点中国在学美国。”

China Growth Capital has observed that many entrepreneurs of enterprise SaaS startups have worked at large American enterprises and Chinese Internet giants before, and these are founders that Mr. Shiong considers to be good. Mr. Shiong added that enterprise SaaS is in line with China’s current stage of development, because enterprises will find it more cost-effective to outsource software services—something that China is learning from the United States.

Financing Environment and Valuation in the During and After the Pandemic

1. The Impact of the Pandemic on the Venture Capital Financing Environment and Valuation 

Mr. Shiong thinks that the financing environment is favorable at present: LP and GP still have money, and many leading funds have recently raised new funds.

Mr. Shiong explained that China’s Beta is good and there are many Alpha opportunities. The consumer market environment has changed, and at the enterprise level, there is not yet a large market. At present, China's enterprise market, like the Internet in 2003, still needs time. Valuations have fallen and become more reasonable.

Judy made a key point when she asked if startups’ valuations decline because previous valuations were too high?

Mr. Shiong said, “It should be said that the valuation has become more reasonable now. Investors are more concerned with the logic behind the rise than the absolute valuation.”

Comparison of Project Withdrawal Methods and Conditions in China and America

1. Is it appropriate to exit at this stage? What are the advantages and disadvantages of a China vs. US exit? 

The questions of whether, how, and where to exit require comprehensive consideration. Mr. Shiong explained that deciding whether to exit or not should be calculated as a value: the difference between the expected return of investors and entrepreneurs who exit now and the expected return from exiting in the future. The morale of the founding team should also be taken into consideration.

Below, we will summarize Mr. Shiong’s three exit methods: IPO, selling (merger and acquisition), and secondary fund.

Mr. Shiong believes there are many factors to consider when exiting. For example, one should keep in mind that there will be a 6-month lock-up period after IPO. If the price is right, he advises selling, but acknowledges that some founders will be obsessed with listing. An exit strategy also depends on the development cycle of the industry to which the company belongs. If the industry develops rapidly, listing is a good choice. If it is a scientific research industry, there is no bubble and the price of listing and selling are the same, then it may be better to sell.

When comparing exit strategies in China and the United States, that largely depends on the industry. Currently, China's semiconductor industry is equivalent to that of the United States in the 1970s, and there are good opportunities for semiconductor entrepreneurs to return to China. China’s regulation of the Growth Enterprises Market (GEM) and STAR Market is matching up more closely with that of the United States’. China's STAR Market bubble has both advantages and disadvantages: a certain bubble can attract more funds and talents. In conclusion, Mr. Shiong thinks one should exit wherever it is most worthwhile to exit.

2. Views on A V-shaped Recovery 

Judy quoted Warren Buffett's famous saying, “You only know who is swimming naked when the tide goes out,” and asked Mr. Shiong for his views on the V-shaped recovery. 

Mr. Shiong replied that when the secondary market faces setbacks, the primary market will feel like it's swimming naked. The financial crisis in 2008 was an asset problem and there were problems in company balance sheets. This year, there is a cash flow problem for companies, because many employees cannot go to work. Mr. Shiong believes the current situation is much better than the situation in 2008, and there is likely to be a V-shaped recovery, because this is not an assets issue. However, the bottom of the V may be wider because the pandemic and its impact could last a long time—something that is hard to accurately predict.

The insights shared during this conversation prompted enthusiastic questions from attendees. Though we cannot list all the questions asked, we will summarize the frequently asked questions below.

01 The current pandemic situation is gradually improving in China. What should entrepreneurs do at this stage to attract investors’ attention? How long should you maintain your cash flow?

Mr. Shiong said that now is a good time to start a business, because fund partners have a lot of time to discuss deals. When you are ready to raise funds, you can do so via online video. Cash flow below 6 months at any time in most industries is a red flag and funds need to be raised immediately.

02 In the United States, where the market is relatively mature, Okta and Auth0 survive due to their comparative advantages. In contrast, do Chinese identity as a service (IDaaS) companies compete with giants such as Alibaba and Tencent? If so, what is the competitive situation between them? Is this kind of enterprise service software internationalized?

Mr. Shiong thinks that the domestic ecosystem is different from that of foreign countries, and that countries are very concerned about data security. IDaaS companies occupy an independent, third-party identity security market space and will have many future development opportunities.
03 We often see WeRide’s autonomous vehicles in Guangzhou. What does this company’s development look like now? Where did they come from and why did they register in Guangzhou?

Mr. Shiong explained that unmanned driving involves safety. China is unlikely to allow foreign enterprises to fully land. The Chinese government has given WeRide a lot of support. China's autonomous vehicles industry, including Guangzhou’s WeRide and Changsha’s Baidu, are now starting to charge fees. Unmanned vehicles are available in local areas. Apart from unmanned vehicles, the pandemic has spurred the automation process in a variety of industries.
04 Can you compare the business environment and investment environment in China and the United States? Should overseas Chinese choose to return home to start a business or stay abroad?

Mr. Shiong thinks that it is necessary to look at the field in which the innovation is happening; cutting-edge technology is being developed in the US and implemented in China. It is better to obtain seed and angel funding in the United States, because seed and angel investment institutions have more specific and comprehensive focuses for investing. Later rounds of funding can be obtained in China because the amount of money in China is more massive.

05 Video Conference or Virtual Office is a 100-billion-dollar market. Who can enter that field in China? Can Huawei/China Mobile do it, or a non-state-owned enterprise like Zoom?

Mr. Xiong thinks that non-state-owned enterprises, such as DingTalk, Tencent, and Toutiao are likely to do this better. Because what  video conferencing and virtual office competing is  product iteration capability and a huge consumer base. There are the advantages that giants like Alibaba, Tencent, and ByteDance have. Moreover, these companies know more about user behavior because their services are used by so many people. 

After an hour of insightful discussion, SVTC once again thanked Wayne Shiong for joining us this week. As an expert in Internet cross-border venture capital, he shared with us how cross-border venture capital has turned “risk” into “opportunity” during this time. We wish Mr. Shiong all the best in his future investments!