The US, Europe and much of Asia may feel threatened by China, but from the Chinese perspective, they're the ones who are getting squeezed.
China is fearful that its innovative and entrepreneurial instincts have been quashed or at least hindered by cultural and societal pressures. They understand that they are losing smart people to Silicon Valley, where the civil liberties and money-making opportunities are freer. To catch up, Chinese companies have attempted to acquire foreign ones, but US and European regulatory authorities routinely deny permission for Chinese firms to acquire entire companies. Even the takeover of Smithfield, a company that primarily produces pork products, has been contested.
In searching for alternatives that will not generate accusations of spying and rejections on national security grounds, Chinese firms have discovered that taking minority financial positions in tech firms seems to work just fine. As the following article explains, the Chinese are hiring US and European nationals to lead this effort and have benefited from the participation of Chinese financial specialists, many of whom - to no one's surprise - learned their trade at Goldman Sachs.
The benefits are mutual: China gains access to US business and begins to learn how globally scaled innovations are fostered, developed and brought to market. The US and European companies that agree to these investments get abundant lower-cost capital and potential access to the Chinese network of regulatory officials, institutions and consumers. The belief is that eventually such cross-border alliances could break down the wall of suspicion and fear that currently influences such relations. And that, in itself, has considerable value. JL
Evelyn Rusli and Paul Mozur report in the Wall Street Journal:
Chinese firms, which have little consumer business outside their home market, are unloading small fortunes on startups as they strive to understand and eventually gain a foothold in the elusive U.S. market.
China's homegrown Internet giants are buying their way into Silicon Valley. Tencent Holdings Ltd. , a social networking and gaming company, is vying to lead a fundraising round of $200 million in buzzy American messaging app Snapchat Inc., according to people briefed on the matter.Tencent's investment will likely value the two-year-old company, which has no revenue, at $4 billion.Snapchat is just China's latest target. Tencent, which has more than $5 billion in cash reserves from its massive social networking and online gaming business, this summer led a $150 million investment in Fab.com Inc., an American e-commerce company. Last month, Alibaba Group Holdings Ltd. took the lead on a $206 million investment in ShopRunner Inc., a rival to Amazon.com Inc.Long cloistered by a censorship regime that blocks international competitors, China's 600-million user strong Internet market has helped companies like Tencent and Alibaba become some of the world's largest. Tencent is worth more than $100 billion, while Alibaba is edging toward an IPO that could value it just as much. Growth, however, has slowed in recent years amid ferocious competition, and the largest firms have begun to look abroad for new opportunities.To accomplish this, Chinese firms are tunneling into Silicon Valley's tightknit network with more than just thick checkbooks.To lead their efforts, they've tapped a small circle of connected bankers and executives. In October, Alibaba established a San Francisco-based U.S. investment group, headed by Michael Zeisser, formerly of Liberty Media Corp. and McKinsey.The Chinese firms' appetites are fueling lofty valuations in the frothy U.S. startup market, where founders who don't even need the money are now entertaining aggressive bids."Obviously, China is not the pioneer in terms of global Internet," Martin Lau, Tencent's president, said at a conference at Stanford University last month.The Chinese firms "will begin to impact the landscape," said Rich Wong, a partner at venture-capital firm Accel Partners. "They have the market cap to put to work, and that market cap can help them go global."At the center of the activity is Tencent, which has sought for years to gain a toehold in the U.S., and lately been one of the Valley's most aggressive players, according to interviews with startup executives, venture capitalists and former employees.Tencent doesn't have a splashy U.S. conference or startup incubator, but Palo Alto, Calif.-based senior executive David Wallerstein and his colleagues regularly visit the offices of venture capitalists and quietly work the rooms at investing and videogame industry events. One entrepreneur, who described him as "well-connected," said Mr. Wallerstein can project a casual, goofy demeanor, even as he diligently grills founders for information about their startup.Back in Shenzhen, where Tencent has its headquarters, two Goldman Sachs Group Inc. alums call the shots. Company President Mr. Lau formerly worked at McKinsey and later ran Goldman's telecom, media and technology group in Asia. Chief strategy officer James Mitchell, once led Goldman's global Internet coverage in New York, and was lured to China by Tencent in 2011.Tencent declined to make any of the executives available for interviews, and declined to comment on Snapchat. "We are interested to work with companies that share the same goals through partnerships, open platforms or equity investments," said a spokesman.Founded in 1998, Tencent first gained prominence with an instant-messaging system called QQ that targeted Chinese college students. The company used its dominance on chat—where it now claims more than 800 million monthly active users—to drive people to videogames and social-media sites where it made money by selling virtual products, charging gaming fees, and advertising. Less than 10% of Tencent's revenue comes from ads; by comparison, Facebook Inc. makes some 80% of its revenue from ads.Early in its history, Tencent established a beachhead in America, where it now operates out of a former Christian Science church in Palo Alto. But for many years, it struggled to gain meaningful traction. Tencent built services, like games on Facebook, that never really took off.Tencent shifted strategy in 2011 by loosening its purse strings. The company announced a $760 million fund for emerging companies. Later that year, it poached Mr. Mitchell, an Oxford graduate who had spent years at Goldman slicing through the financials of Internet companies like Google Inc. and Tencent.By 2012, the company made investments in venture-capital firms, such as Andreessen Horowitz and SV Angel, which helped the company get early peeks at rising startups. In 2012, Tencent acquired the bulk of game maker Riot Games for $231 million, and purchased about 40% of Epic Games for some $330 million.This summer, Tencent was also part of an investment group that spent $2.34 billion for an almost 25% stake in Activision Blizzard Inc.In the case of Fab, Mr. Mitchell met with Fab's CEO Jason Goldberg this summer, but soon fell quiet and didn't return with an offer, until months later."There's no obvious follow-up, but you know they are doing their research," said one person familiar with the deal.The play for a stake in Snapchat, which allows users to send messages that expire, may be connected to Tencent's global ambitions for its own messaging application, WeChat. The app has taken China by storm, but is less popular elsewhere.Tencent previously spoke to executives at U.S.-based rival WhatsApp Inc. about an acquisition, according to people familiar with the matter. "They are looking for scale," said one venture capitalist who meets with Tencent executives frequently
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