Hanhai zPark is an 80,000-square-foot incubator for tech startups that opened last June in San Jose. It’s backed by investors from China, including the largest state-owned developer of business parks in Beijing. The group plans to open a biotech incubator twice the size in South San Francisco, near Genentech’s campus, by the middle of 2013. They’re searching for a third Bay Area property to turn into a 200,000-square-foot space for clean tech companies next year.
By the time they’re done, the combined incubators will hold space, for startups, greater than seven NFL fields, or enough to occupy about one-fifth of the Empire State Building. All these offices and labs are meant to house young companies eager to do business in China and Chinese startups expanding to the U.S. Hanhai zPark is scouting spaces in Boston and other cities, as well. “There’s a huge demand from cities all over the U.S. that they need investors from China to grow their industries and jobs,” says Victor Wang, president of Hanhai zPark.
The money flowing from China to buy U.S. properties and companies reached a record $6.5 billion last year, up 17 percent from a year earlier, according to Rhodium Group, a research and advisory firm. Hanhai zPark isn’t the first China-focused incubator to open in Silicon Valley last year: InnoSpring, a Santa Clara space whose backers include Chinese real estate developers, opened a few months earlier.
Why park big new incubators in an area already packed with them? Existing ties between China and the Bay Area make Silicon Valley a natural home to ventures like Hanhai zPark. Many Chinese-born entrepreneurs go to Stanford or work at U.S. tech companies in the valley. Wang, himself a native of Harbin, in northern China, went to Stanford business school before starting his own health IT venture. About a year and a half ago, leaders from Hanhai, a privately held operator of five big business incubators in China, and zPark, a state-owned developer of the largest science and tech park in China, approached him about running a space for startups in the U.S. Xi Jinping, China’s incoming president, and Vice President Joe Biden touted the deal during meetings in Los Angeles and Washington last year.
The space available may be growing faster than demand. Hanhai zPark has about 40 tenants so far, but it has room for as many as 100 or 200, depending on the space they need. About a three-quarters of the tenants are American companies, many founded by Chinese immigrants or Americans of Chinese heritage, Wang says. The rest are Chinese companies exploring the U.S. market.
On top of offering the usual incubator services, such as legal and accounting help, Hanhai zPark will invest directly in some of its tenant companies through a $5 million angel fund. It will also make introductions to people in business and government on the mainland. “We’ll connect [startups'] needs to the Chinese partners in different cities,” Wang says.
Those connections, along with ample capital, are the main attraction for American companies considering seeking investors from China. “That differentiates them from other venture investors, particularly in sectors where there’s a high political risk, like digital services,” says Thilo Hanemann, research director at Rhodium Group, who tracks Chinese investment flows.
That can help startups crack a market where even multinationals such as Google have stumbled. Still, companies face risks doing business on the mainland, where the legal protections taken for granted in the U.S. and Europe don’t exist. In China, “there’s no rule of law that protects individuals and companies against the government,” Hanemann says.
Expect the pace of Chinese investment in the U.S. to accelerate. Hanemann notes that while the growth in cross-border investment gets a lot of attention, China is really playing catch up. “If you think about China as the world’s second-largest economy, the right question to ask is why have they not been more active?” he says. Part of the reason is that the government has only recently made it easier for wealth to move beyond China’s borders. “There’s a lot of channels through which Chinese corporations and funds can shovel money into the U.S. now,” Hanemann says.