SV Needs to Embrace China and Japan

Although Silicon Valley has many Asian born immigrants and descendants, a strong cultural Asian influence and is a relatively short commute to China and Japan, Silicon Valley entrepreneurs and investors (SVEI) know surprisingly little about how to successfully grow businesses in Asia or stimulate investment from abroad into their companies.  As new technology firms realize that the opportunity is tapped in the west, many are now looking towards Asia for growth and learning how to navigate the Asian treasures.

Below is a snapshot of the cash balances of some of the largest Internet and telecom companies in China and Japan:

Tencent: $40B

Alibaba: $30B (post-IPO)

Baidu: $6.37B

Qihoo: $2Bn

Rakuten:  $4B

Softbank:  $19B (post Sprint)

Because many of these companies are US listed entities, analysts and investors are putting pressure on these firms to continue growth in order to uphold their stock prices.  Similar to their US counterparts, these technology companies have slowing growth in their own markets.  And for many of them it is not just simply growth they want but it's the hubris of world domination and not to be second to US technology firms like Google, Amazon, eBay, and MSFT.  In order for Asia to successfully compete with these firms, these Asian firms are going to need the help of SV technology startups.  Both Asian companies and US will benefit significantly in looking towards partnerships, investments, and acquisitions. 

For example, just last week, Alipay and Stripe concluded a landmark deal, one of the first of its kind in the consumer Internet space.   This partnership is allegedly a two-way partnership for Chinese consumers buying things overseas as well as US consumers buying things in China.  I'm not sure if I entirely buy that strategy but whatever is the actual objective, this is the beginning of a working relationship that will help Alipay to understand the massive payment problem that Stripe is solving – the ability for any merchant to accept credit cards online without the hassle of integrating a payment service provider like Chase or a clunky Paypal. The Alipay – Stripe partnership is a direct attack at Paypal.  While sitting in my hotel room in Riyadh, this news was rampant across every TV channel throughout Asia. Its likely that this partnership ends up in a acquisition of not less than $18bn – Mike Moritz will make a mark on the world with his last investment and will not be outdone by Jim Goetz’s Whatsapp deal.

Alibaba is not the only Chinese Internet firm seeking partnerships abroad.  Tencent and Baidu are currently focusing on SE Asia, Middle East, and India as next expansion steps since they are closer to home both geographically and culturally. Qihoo is actively looking at partnerships in SV and looking to bring new technology back to China.   Chinese companies are now not only ready to expand to the US but they are also seeking technology to bring back to China.

Whereas Chinese companies may have been distrusted with technology before, that distrust is now likely easing.  One executive mentioned, “we are looking at ways to sell more product to our 100M users back at home.  We are running out of ideas and need partners to help us.”  This trend indicates that Chinese companies are learning to understand the value of partnerships and innovating together.  One of the most obvious examples of this is Riot Games – an American game company with astounding success throughout Asia.  Who would have ever thought that an American game company would take a significant share of the Chinese game market? Tencent saw the value in their product and community and leveraged this when they brought the game to China.  There was not even an attempt to copy the game.  One executive said, “We did not have the time nor the knowledge to try to copy that game.”  The $400M investment has been a smashing success and Riot has continued to grow with revenues in the billions.  This investment, two years ago, was a key indicator of the coming Chinese investment.

And alas, many reading this blog would like the Chinese to just buy their companies. As of yet, Chinese companies have not made any multi-billing acquisitions in the US. But that will change soon.  Only last month, Alibaba acquired app stores UCweb for more than $2.1B in response to Baidu’s purchase of 91wireless for $1.9B.   In addition, Albibaba has been investing in the US including Lyft, Shoprunner, and Tangome but have not closed any major acquisitions as of yet.  It’s just a matter of time before they make some outright acquisitions.  These indicate that the Chinese companies are ready to make big acquisitions and the next ones will likely be overseas.

The Chinese are not the only active investor in SV.  Over time, the Japanese have been a stalwart investor in the US and their activity is continuing to grow.  Rakuten acquired Viki and Viber for $300M and $900M respectively.   Other notable deals include Softbank – Supercell ($1bn); DeNA- ngmoco ($300M); Gree – openfeint ($100M) & ); Gree – Funzio ($200M); Docomo-Buongiorno ($50M).  Though DeNA and Gree have suffered a small slow down in 2013, there are signs of them coming back in 2014. Gree’s new game has recently taken over the #1 game slot held by Puzzles and Dragons for almost 2 years.  For Rakuten, Docomo, and Softbank, this is only the start of the acquisition spree for some of these companies

An acquisition may be the end goal for many startups but it’s unlikely that the Japanese firms will lead with a heavy hand in all cases. It is in the Japanese DNA particularly to try before they buy or take majority shareholding positions while allowing founders to retain shares.  Japanese firms often like to purchase just over the 20% or 50% mark so that Japanese companies can accrete earnings to their balance sheets.   Recently I sat down with the head of corporate development at one firm and he asked me about crowd funding projects and all the cool new stuff in SV. He is clearly interested in what the valley has to offer and what could be a platform for them to expand in the west.  Mitsui just invested in Box and aside from the larger companies, there are many other active strategic Japanese investors now including Sumitomo, Cyberagent, Recruit, Docomo Ventures, KDDI ventures, and GMO Ventures (leading payment gateway).  SV should reach out to these companies to better understand their investment thoughts. 

Even with these positive indicators in mind, SVEI have always had a tenuous relationship with the Japanese investors claiming they are slow, too diligent, and have lengthy funding processes.  Even recently one of the big Japanese acquirers mentioned that they were not interested in SV because of this reputation and felt like SV did not understand how to work with Japanese companies. They decided to avoid SV in favor of Europe and Israel – businesses who are naturally more global than businesses originated in SV.  I could sympathize with him because when I was at Mitsui, it was a constant fight to get investors to let us in deals to prove our value.   And this was in 2006 when there was a lot less money in SV!  (Cough cough - the Mitsui fund I worked for from 2006-2008 returned 10x their money with investments including IPOs Ruckus Wireless and A10 networks and acquisitions including Smart Signal (first internet of things before it was called that), and Beceem.

Even so, these slight annoyances should not detract from the value Japanese partners can bring to SVEI.   Sunbridge Japan successfully expanded Sales force and Oracle into Japan.  The trading firms Mitsui and Sumitomo have been actively investing in SVEI and bringing the technology back to Japan.  One of Mitsui’s investments, A10 networks, recently went IPO off the back of significant revenues in Japan, created by a small merger of one of Mitsui’s distribution channel companies. Carriers such as Softbank or KDDI have been great distribution partners for startups. Softbank has partnered with Fon and Fitbit.  KDDI has had several successful partnerships like KKBox (Taiwanese startup created by a UCBerkeley graduate) distributing it as an early leader for music streaming.  

As young companies are looking abroad more aggressively, SVEI should embrace the Chinese and Japanese in a much more meaningful way.  While this post focused solely on internet and mobile companies, it is not limited to this industry.  Clean energy, healthcare, and new hardware companies all will rely on Asia for growth and adoption of technology over the coming years. Asian investors cannot only invest they can help build companies.  SVEI should allocate people to help build this bridge between the different countries; business development associates should spend ample time scouting out opportunities and developing partnerships.   The future rewards will benefit all parties.