CHINA INVESTMENT OUTLOOK
Happy Friday, Term Sheet readers.
Let’s wrap up the week with a quick overview of China’s investment outlook. I spoke with Hans Tung, a managing partner at GGV Capital. Tung has been a U.S.-China investor for more than a decade. His portfolio includes Xiamoi, Airbnb, Wish, and muscal.ly.
I spoke with Tung about some of the emerging trends in China, the bike-sharing craze sweeping the country, and his thoughts on the future of crypto.
Below is an abbreviated conversation. Read the full Q&A here.
TERM SHEET: Give me a general sense of China’s investment landscape.
TUNG: The Chinese venture capital space started in the mid-1990s. Back then, money was invested in anything that could make money — anything from retail to natural resources. After about a 10-year period, people started to realize that more and more of the exits were coming from technology-related investments, in particular around Internet-related sectors.
Internet access and smartphones turned a lot of people into shoppers. People were willing to spend a lot of time on a good product like WeChat, for example — even more so than the people in the U.S. The mobile payment market in China is 11x the size of the mobile payment market in the U.S. because there are so many users on mobile in China. Now, there are 700 million in smartphones on a population of $1.4 billion. That’s only 50% penetration with a lot more room to grow. People willing to spend time on mobile makes it easier for entrepreneurs to build new apps serving consumers and small businesses. It makes the country more efficient because there are users, consumers, suppliers, and channels developed on the Internet, which is much more efficient than anything that could be developed offline.
Where are people investing their money?
TUNG: People are investing more in education to build the next generation of Internet companies leveraging mobile internet or distance learning. We invested in Liulishuo, which has an AI learning algorithm allowing users to speak to it, and it is able to tell them what areas they need to improve in order to be better English speakers.
Another trend is transportation. Didi Chuxing bought Uber’s China operations, and it’s investing aggressively into other areas of transportation. Bike sharing is the second hot category after ride-sharing with a suite of companies that are receiving VC money, PE money, and now strategic money, from investors like Tencent and Alibaba.
We’re also seeing the disruption of retail. E-commerce companies like Alibaba are moving offline to build new convenience stores and supermarkets that are powered by Internet technology. For instance, when you go into these stores, every item has a QR code that you can scan with your phone and gives you all the details you need to know about the product you’re considering buying. You can either buy on the spot or buy online.
Chinese search engine giant Baidu announced a 10 billion yuan ($1.52 billion) autonomous driving fund. NIO Capital is in talks to raise up to $500 million in a dollar fund aimed at the country’s auto sector. It seems there is an increasing interest in the electric vehicle and autonomous driving market. What are some of the reasons for this?
TUNG: In China, traffic congestion is a huge problem. About 20 to 25 million people on any given day live in Beijing. In a city of that size, roughly 20% of people own cars. Traffic is terrible — even worse than New York. It’s gotten so bad that the government mandates, by law, people cannot drive their car for two days out of the week depending on the last digit of their license plate. That’s why people are looking for solutions around ride-sharing and cars that don’t emit as much pollution.
In what time frame do you foresee autonomous vehicles being a mass phenomenon in China?
TUNG: I would probably say within the next 5 years.
Some are calling the bike sharing economy in China a bubble and some startups are already closing their doors. What are your thoughts on the bike sharing craze?
TUNG: Every category that we have invested in since 2000 until now has been called a bubble. Before the bike sharing bubble, it was the ride-sharing bubble. Before that, it was the take-out delivery bubble. Before that, it was the e-commerce bubble. What people from outside of China don’t realize is that there is a period of rapid growth with lots of money being poured into a category. And then after the first three years, typically only two to three category leaders emerge. In e-commerce, you have Alibaba and JD.com. In ride-sharing, there’s Didi. In bike-sharing, you have three right now — Mobike, Ofo, and Hello-Bike.
If you invest early, the organic growth through M&A will eventually build a sizable business that you can monetize later when you have that market share position.
We actually see startups in China grow at a faster pace the first three to five years than they do in the U.S. It’s not uncommon to see Chinese teams working from 9 a.m. to 9 p.m, six days a week. And the reason for this is because they know they need to get to one of the top three position in their sector in a three-year span. They all gear to get to that point as fast as possible. In the U.S., we see more entrepreneurs who are doing things for fun, so whether you do it today, two days from now or a week from now, it doesn’t matter — it’s a marathon. In China, it’s whatever it takes in those first three years.
China recently banned initial coin offerings, lumping them in with pyramid schemes. Do you foresee them reversing the ban in the future?
TUNG: I don’t see that changing anytime in the future. A lot of times we tell investors to invest in different financial assets — right now, it’s mostly the domestic stock exchange and the property market. To get yields, they’re willing to speculate on new things including ICOs. So the government sees that as money that should be invested in increasingly better companies that exist on the Chinese stock exchange.
What should we expect to see in the Chinese VC space in 2018?
TUNG: There will be more education companies that will get funded. Consumers have a huge demand for better service yet the quality and the spread of teachers is very uneven in China. So through distance learning and mobile Internet, that problem will be solved over time.
We will see that AI will be applied across many more industry sectors to make them more efficient. We don’t think AI should exist for its own sake, but it should exist for various use cases — whether it’s in enterprise customer service or whether it’s in helping e-commerce companies.
In the U.S, we have very few innovations in social media beyond Facebook, Instagram, and Snap. In China, we’re seeing a lot more fragmentation of uses in different pockets across many interests. There are mini-social networks emerging in the form of mobile apps that target specific interest groups across China. We will see a lot more innovation around consumption for content, consumption for knowledge, and consumption for entertainment happening much more quickly than we will see in the U.S.
Finally, more U.S. companies should be learning from China given the innovation happening in the space and apply more of the principles in what they do. We’re seeing our own porfolio companies taking lessons from Chinese e-commerce companies. I think U.S. teams can globalize much quicker than anyone else around the world if they are more open to being inspired by what’s working well in a market that’s as huge as China’s.
Read the full Q&A here.
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• Lumicell, a Wellesley, Mass.-based developer for real-time detection of tumor tissue in patients, raised $28.7 million in Series C financing funding from investors including Launch Capital and BlueIO.
• Prose, a New York City and Paris-based hair care products maker, raised $5.2 million in Series A funding led by Forerunner Ventures and was joined by Correlation Ventures.
• Dosh, an Austin-based payments firm, raised $4.9 million in its fourth seed round, led by Goodwater Capital, and was joined by investors including Extol Capital and Next Coast Ventures.
• Overhaul, an Austin-based transportation security technology company, raised the $4.5 million in seed funding led by Abbey International Finance Group.
• Burrow, a New York-based online furniture startup, raised $4.3 million in seed funding led by Red & Blue Ventures, and was joined by investors including Interplay Ventures, Twitch.tv Founder Justin Kan, Y-Combinator CEO Michael Seibel, and Ken Pilot.
• ParaGen Technologies, a Columbus, Oh.-based company backing four medical device companies, raised $4.1 million in seed funding led by Ikove Venture Partners,
• Genies, a Los Angeles-based firm making personalized emojis, raised $3 million from investors including Shawn Mendes, Russell Westbrook, Ndamakong Suh, Jake Paul, Cameron Dallas, NEA, and Joe Montana.
• Clora, a Boston-based startup making an online platform to connect life sciences professionals, raised $3.3 million in seed funding, led by Spark Capital.
• Apprentice, a Jersey City, N.J.-based augmented reality software firm, raised $2.5 million in Seed funding led by Silverton Partners and was joined by investors including Hemi Ventures.
• Contrast Security, a Los Altos, Calif.-based provider of security technology, raised an undisclosed amount of funding. The investors were AXA Strategic Ventures and Microsoft Ventures.
HEALTH AND LIFE SCIENCES DEALS
• Metacrine, a San Diego-based biotech focused on drug development, raised $22 million in Series B funding led by New Enterprise Associates and was joined by investors including participation from ARCH, Polaris, venBio and Alexandria Venture Investments.
PRIVATE EQUITY DEALS
• KKR has completed acquisition of PharMerica Corp, a Louisville, Ky.-based pharmacy services provider, for $29.25 per share or $1.4 billion.
• SK Capital agreed to acquire the fire safety and oil additives businesses the Israel Chemicals Ltd for about $1 billion.
• SoftBank Vision Fund invested $450 million in Compass, a New York-based real estate tech company.
• Blackstone acquired a majority stake in TITUS, an Ottawa-based provider of data classification and categorization solutions. Financial terms weren’t disclosed.
• New Mountain Capital acquired majority ownership stakes in CenseoHealth, a Dallas-based provider of prospective health assessments for health plans; and Advance Health, a Chantilly, Va.-based provider of prospective health assessment. Financial terms weren’t disclosed.
• Mill Point Capital invested in KKSP Precision Machining, a Glendale Heights, Ill.-based machined metal components producer. Financial terms weren’t disclosed.
• Greystar Real Estate Partners acquired Resa, a Spain-based student accommodation provider. Financial terms weren’t disclosed.
• Tiger Infrastructure Partners invested in Crosslake Fibre, which was formed to develop fiber optic cable projects in North America. Financial terms weren’t disclosed.
• LOGOS Resources II, a portfolio company of ArcLight Capital Partners, agreed to acquire WPX Energy‘s legacy gas properties and undeveloped Mancos acreage of the San Juan Basin. Financial terms weren’t disclosed.
• DexKo Global, a portfolio company of KPS Capital Partners, acquired E&P Hydraulics, a German maker of professional leveling system solutions for caravans, motor homes and light commercial vehicles. Financial terms weren’t disclosed.
• Riskonnect, a portfolio company of Thoma Bravo, acquired Aruvio, a California-based provider of cloud-based governance, risk and compliance solutions. Financial terms weren’t disclosed.
• MFG Partners invested in Mail Communications Group, a Des Moines, Iowa-based MCG provider of omnichannel communication services. Financial terms weren’t disclosed.
• Southfield Capital acquired American Refrigeration Company, an Andover, Mass.-based industrial refrigeration services company. Financial terms weren’t disclosed.
• Togetherwork, a portfolio company of Aquiline Capital Partners, acquired Capturepoint, a Ridgewood, N.J.-based recreation management software maker. Financial terms weren’t disclosed.
• A group of investors led by Bernhard Capital Partners has acquired three infrastructure management companies: Moreland Altobelli Associates, PAVETEX Engineering and Engineering Testing Services to form Atlas Technical Consultants. Financial terms weren’t disclosed.
• Mill Point Capital invested in KKSP Precision Machining, a Glendale Heights, Ill.-based manufacturers of machined metal components produced on automatic screw machines. Financial terms weren’t disclosed.
• Hamilton Robinson Capital Partners with management and co-investors recapitalized GrayMatter, a Pittsburgh, Penn.-based, software maker for the industrial space. Financial terms weren’t disclosed.
• Tencent Holdings Limited and its subsidiary Tencent Music Entertainment, Shenzhen-based tech firms, bought minority stakes in Spotify. Financial terms weren’t disclosed.
• Koddi, a cloud-based marketing technology company for travel brands, acquired HookLogic Travel Business from Criteo.
• GigCapital, a Palo Alto, Calif.-based blank check company formed to acquire a tech, media, or telecommunications business, raised $188 million in an upsized offering of 18.75 million shares at $10 a piece. Avi S. Katz backs the company(79.7%). Cowen & Company is the sole bookrunner in the deal. The company plans to list on the NYSE as “GIG.U.”
• Luther Burbank, a Santa Rosa, Calif.-based residential loan-focused bank, raised $131 million in an offering of 11.35 million shares priced at $10.75. In 2016, the company posted income of $52.1 million and assets of $5.1 billion. Keefe, Bruyette & Woods and Sandler O’Neill + Partners are joint bookrunners in the deal. The company plans to list on the Nasdaq as “LBC.”
• Old Mutual, a South African financial services firm, chose Goldman Sachs, J,P. Morgan and Bank of America Merrill Lynch to lead an IPO of its U.K. wealth unit next year, sources told Reuters. Read more.
• Edwards Lifesciences agreed to acquire Harpoon Medical Inc, a Baltimore-based provider of beating-heart repair for degenerative mitral regurgitation, for up to $250 million from Epidarex Capital.
FIRMS + FUNDS
• Blue Point Capital Partners, a Cleveland, Oh.-based private equity firm, is seeking to raise $600 million for its fourth fund, according to a SEC filing.
• Vida Ventures, a Boston-based VC firm, has raised a $254.8 million venture capital fund, according to a SEC filing.
• 6 Dimensions Capital, a Shanghai and Cambridge-based firm, is raising a $26 million affiliates fund, according to a SEC filing.
• Bridge Line Ventures, a Boca Raton, Fla.-based firm, raised over $2 million of a $100 million target for its debut fund, according to a SEC filing.
• Steve Dearing was named managing director of equity capital markets at Stephens. Previously, Dearing worked at Imperial Capital where he was a managing director.
• Lincoln International hired Carrie Grapenthin to lead the firm’s global brand and marketing strategy efforts. Previously, she worked at BGRS.
• Constant Energy Capital has named Jubran Whalan as a managing director. Previously, he was managing director of global structured products at BP.