China's Next Export: Venture Capital
In April, Empower Micro Systems became one of the first tenants of InnoSpring, a new startup incubator in Santa Clara, Calif., backed largely by Chinese investors. Less than two weeks after Empower’s move-in date, InnoSpring helped the young company—which develops technology that converts electricity between AC and DC—set up meetings with 22 China-based venture capital firms in preparation for a trip to Shanghai in May. “To have that network working on our behalf is priceless,” says Jon Bonanno, Empower’s president.
As more U.S. tech startups see China as an essential place to do business, increasing numbers of Chinese investors are funding them and helping them expand to the mainland. Chinese venture capital firms backed 28 U.S. companies in 2011, nearly double the number two years earlier, according to Dow Jones VentureSource. China’s growing wealth and the government’s desire to attract tech companies have set the stage for more deals, says Gavin Ni, founder of Zero2IPO Group, which advises venture capitalists in China.
Much of the activity is driven by Chinese-born entrepreneurs who made their fortunes abroad, such as InnoSpring President Eugene Zhang. A graduate of Beijing’s elite Tsinghua University, sometimes called the MIT of China, Zhang started his career at Sun Microsystems and Cisco Systems before founding semiconductor company JEDA Technologies in Silicon Valley in 2002. Two years ago he helped form a $5 million angel investment fund with 24 fellow Tsinghua alumni. The fund is one of several groups that will back companies from InnoSpring. Chinese entrepreneurs “are entering into the Silicon Valley ecosystem not only as startups but as investors,” Zhang says.
Though Empower’s founders are from the U.S. and Europe, most of InnoSpring’s companies already have ties to China. Xuyang Li, founder of mobile antivirus app maker TrustGo, emigrated from China in 1993. His year-old venture has four employees in the U.S. and 40 in China, where software development is done. TrustGo’s English-language app launched in March, and a Chinese version is expected soon. “We’re trying to build an American company, but I have a deep connection to China, so we’re able to cover both markets,” Li says.
InnoSpring today is home to more than 20 companies and expects to eventually double that number. By establishing a foothold in Silicon Valley, the group says it can strengthen the ties Chinese-born entrepreneurs have with their homeland. “If you look in the Valley, there are a few hundred thousand Chinese and Indian immigrants who are some of the brightest, most motivated people in those countries,” says Richard Lim, managing director of GSR Ventures, which has offices in China and Silicon Valley. The firm has funded dozens of Chinese startups and will invest in InnoSpring companies. The incubator, Lim says, can “attract people to go back and set up enterprises in China.”
Even the Chinese government is betting on foreign startups, via WestSummit Capital, a venture firm backed by the country’s sovereign wealth fund. Formed in 2009, WestSummit invests primarily outside China, and its six partners are all U.S. citizens. WestSummit promises to help its portfolio companies navigate China’s bureaucracy, particularly in energy, telecommunications, media, and other industries that are heavily regulated or dominated by state-owned enterprises.
One of WestSummit’s companies is trying to sell technology used in credit cards and ID badges to state-owned banks and government bureaucracies. While such contracts in China rarely go to outsiders, WestSummit can help foreigners form partnerships with locals—though the government has no control over investment decisions, says Raymond Yang, WestSummit’s managing director. “We leverage government influence and [our] background to help our portfolio companies,” he says.
For entrepreneurs, the benefits of investors with strong ties to China are clear. Breaking into the Chinese market can be daunting even for multinationals with decades of experience in countries around the globe. “There are very few places where relationships are as pivotal to your success or failure,” says Chris Hartshorn, vice president at tech advisory firm Lux Research. “If someone likes you in China, paperwork disappears pretty quickly.”
While funding U.S. startups may be attractive to growing numbers of Chinese, successful venture investing requires management skills and experience that remain in short supply in China, says Feng Deng, co-founder of Northern Light Venture Capital, a Hong Kong firm that has invested in InnoSpring. “It’s not like, ‘You have money, you can do this,’ ” Deng says. “Especially for early-stage investors, you need to really understand how companies grow.”