Billions-worth start-ups and increasingly powerful VCs: innovation speaks Mandarin

NewsFromThePlatform | September 20th, 2018

China beats USA. In the second quarter of 2018, for the first time, Chinese start-ups collected more money than North American ones: exactly 47% of total financing by VCs versus 35%. This numbers, revealed by Crunchbase, are just some of the figures describing tomorrow’s landscape of innovation and venture capital, whose focus is increasingly moving towards the East.

First of all, more and more successful start-ups that were born in the shadow of the Great Wall have become colossal: the news aggregator Bytedance, known in the West for acquiring Musical.ly for about 800 million dollars, is worth 11 billion. Meituan-Dianping, operating in the e-commerce sector, is worth 30 billion dollars, according to analysts. And Lu.com, worth 18.5 billion, is the largest Fintech start-up in the world. Its headquarter is in Beijing, like that of Didi-Chuxing, which operates in the field of on-demand transportation services, competes with Uber and is valued 56 billion dollars. Not to mention artificial intelligence: a sector in which Sensetime, specialized in computer vision and deep learning, has become the most important start-up worldwide, thanks to a valuation of 4.5 billion dollars.

These are not isolated cases: everything that revolves around the world of innovation, new entrepreneurship, technology and disruptive ideas is migrating towards the Celestial Empire at increasingly high rates. According to a research by CB Insights, the US is still leading the Unicorns ranking. But from May 2017 to date, the US share has dropped by 7% to 47%. At the same time, China’s Unicons have risen from 23% to 30% – and the trend has been going on for over a decade. The rest of the Unicorns are based in the United Kingdom (6%), India (4%) and Israel (2%), while no other country has more than 3 start-ups with a value of over one billion. It is basically a battle between two giants, in which one contestant is ready to overtake.

Venture capital, of course, follows the wind of innovation. According to the Venture Pulse Report by KPMG, up to the first quarter of 2018, Silicon Valley was still the leader, but “investors have expanded beyond Silicon Valley to identify investment opportunities” and in the first quarter they have seen “five $1 billion+ mega-rounds, including two massive deals in Southeast Asia.” Kpmg reports investment records in 2017 – 157 billion dollars –  and a significant change in proportions: a quarter of a century ago, 95% of VC funds came from the US, today its share is 44% and Asia’s share – which ten years ago was just peeping at the scene – has risen to 40%.

The Japanese Softbank, with its 100 billion Vision Fund, is still the largest venture capital investor in the world, to which China responds with billionaire moves. Thus, for the first time, at the top of the latest edition of Forbes Midas List there’s a Chinese citizen (and more 16 of them are in the top-100). He’s Neil Shen, founder and managing partner of Sequoia Capital China, who invested in Chinese giants such as JD.com and Alibaba. At the second position is Bill Gurley, one of Uber’s best-known and most controversial investors.

How has the country of low-cost production, with a dictatorial regime and no market economy, been capable of all this? Thanks to a very aggressive industrial innovation policy, whose clear and declared intent is that of turning China into the world’s leading economic power by 2030, using innovation as a sort of battering ram. And, especially, developing IoT, AI and Blockchain, the three pillars of the fourth industrial revolution. “Made in China 2025” is one of the cornerstones of this strategy.

The Chinese start-up ecosystem took its first steps in 2014, when the plan for “mass entrepreneurship, innovation” dictated the guidelines for the creation of a culture of ‘made in China’ start-ups. Last July, the government presented new guidelines to attract foreign entrepreneurs by streamlining procedures and increasing benefits for those who want to set up their start-up in China. More recently, the “National Technology leadership group”, which develops hi-tech strategies, has been strengthened. And in the meantime there are new VC funds, participated by the State, such as China New Era Technology, launched in July with a budget of 15 billion dollars, or the fund created by the alliance between State VC Starquest (born in 2005 with 200 billion endowment), Sequoia Capital’s Chinese subsidiary and the e-commerce group JD.com. Launched in August, it will invest 40 billion dollars in the aforementioned strategic sectors.

Thanks to this strong commitment, since 2014, 13 million new businesses have been created in China, 15,600 each month (source here) and Beijing has become the most feared tech competitor of the Silicon Valley.

What is more, the Chinese innovation escalation changed he meaning of the verb “to scale“: according to Crunchbase, the average round of a US start-up is 50 million dollars, the round of a Chinese start-up is about twice that amount. In 2017, the 20 largest Chinese rounds have raised 43 billion against the 52 billion dollars raised by US start-ups – overtaking is close, considering Chinese growth rates. And what about Italy? On average, all the rounds of the last ten years have only come close to 1 billion dollars, even if the situation is finally changing. Considering proportions and the immense differences, we can learn a lot from the Chinese lesson.