Asian Tech Start-Ups Quietly Earn Backing
HONG KONG — The rise of a mobile software company from nothing to a $1 billion valuation in just over a year from its first product release would typically draw rapt attention, and jealousy, inside Silicon Valley.
Yet the Apus Group, one company with such a stratospheric rise, is largely unknown in Silicon Valley. That is because the company is based more than 6,000 miles away, in China.
Across Asia, investments in technology start-ups have escalated at the same swift pace and to the same heights as in the United States. In the first six months of this year, 46 Asian start-ups, including Apus, have had fund-raising rounds of $100 million or more, just short of the 48 in North America, according to the research firm CB Insights.
The focus of investors in Asia — China and India in particular — reflects an increasingly decentralized reality in global technology investment. Asian banks, private equity firms, venture capital funds and hardware and Internet giants are all willing to invest in domestic start-ups. And American investors are increasingly willing to back Asian players with advantages in their home markets.
The turmoil in China’s stock market in recent weeks, though, raises new questions about whether the pace of investments will continue. The sharp rise of stocks in China over the previous year helped support many of the big fund-raising rounds. But the steep fall over the past month could keep large Chinese investors and private equity firms away from big rounds because of difficulties with other investments.
Last week, the Chinese ride-hailing app Didi Kuaidi said it had raised $2 billion in two weeks when the stock markets were at their worst. The company originally set out to raise $1.5 billion, but it received so much interest, it was able to raise an extra $500 million.
Kai-Fu Lee, chief executive of the start-up incubator Innovation Works and a former vice president at Google, predicted that the downturn would not halt the big investments, even if there were some hiccups. He said even if valuations decreased a bit, any downturn would be cushioned by the large number of investors coming from America, and because many of China’s biggest tech stocks like Alibaba were listed on American stock exchanges.
“Also, top funds still have plenty of venture capital,” Mr. Lee said, “so good tech companies will continue to be able to demand fair valuation.”
China and India have two of the world’s largest smartphone markets, and investors are particularly interested in finding ways to make money from these giants. Small hardware companies that use their knowledge of China’s electronics supply chain to make sensors and novel devices like drones are also drawing attention — realms of technology not yet dominated by the current power players in the industry, namely Apple, Google and Microsoft.
“There are maybe two or three global platform players that are the exception, and most opportunities are Balkanized,” said Fritz Demopoulos, an investor and founder of the travel site Qunar.com. “The Chinese, the Indians, the Indonesians can all raise money to exploit chances within their respective markets.”
In China, the tech market is protected from outside competition by ferocious local competition as well as censorship and blocks on foreign Internet companies. But Beijing’s Internet filters have not stanched the flow of money from domestic or foreign investors.
The huge homegrown Internet companies Baidu, Alibaba and Tencent — each is one of the world’s 10 largest Internet companies by market capitalization — have set the pace in major investments. All three have spent billions over the last two years making strategic investments and acquiring smaller companies that complement their core businesses within China.
Twice as many Chinese investors have participated in $100 million or larger fund-raising rounds in China than American investors have in China. Already, that money has helped numerous start-ups reach valuations of $1 billion or more; these companies are now called unicorns. In 2014, 13 new unicorns were created by private investment in Asia compared with 30 in North America, according to CB Insights. So far this year, Asia has generated 11 unicorns to North America’s 19.
“Industries that will be huge are e-commerce and the sharing economy, and you’ve got people writing huge checks in order to be big players in the years to come,” said William Bao Bean, a partner at SOSventures and managing director of Chinaccelerator, which invests in and mentors software start-ups.
The rise of the Apus Group illustrates how the market has been working.
Within three months of the July 2014 release of the company’s original app — which works as a skin, or visual interface, that makes the Android operating system easier and more efficient to use — the company had 40 million downloads, many from users in countries like Indonesia where users of cheap Android phones sought out the software to improve their phones’ functionality.
With the increasing pace of adoption, Li Tao, Apus Group’s founder and a first-time entrepreneur, looked to raise money. He talked to a dozen major investors within 45 days and ended up raising $100 million from three venture capital firms with a speed and ease that surprised even Mr. Li.
In India, the two largest investments were made by the American hedge fund Tiger Global Management and the Chinese e-commerce giant Alibaba. Alibaba and its finance affiliate Ant Financial invested $575 million in the Indian mobile commerce company One97, while Tiger made a $500 million investment in India’s leading e-commerce site, Flipkart. Tiger Global has yet to make an investment in the United States this year and has focused 82 percent of its new investments in India at companies in their early stages, according to a June report from CB Insights.
“India is one of the youngest countries, and their mobile penetration is low,” said Michael Dempsey, an analyst for CB Insights. “With more than a billion people, why wouldn’t it be one of the next major tech hubs? That’s what investors are thinking.”
Though many in China agree that this environment has inflated the prices of some start-ups, few are worried about any sort of bubble, at least so far.
Neil Shen, a founding and managing partner of Sequoia Capital China — which has been one of the most active venture capital investors in China over the last six months — likened the current situation to that of 15 years ago, when he founded the online travel site Ctrip in China. At the time, he said, many investors put money into companies that failed, and yet out of that period came giants like Tencent and Alibaba, and other smaller businesses like the online media company Sina and the gaming company Shanda.
“I don’t think you can avoid bubbles when people are all enthusiastic about the segment. It’s the process of natural selection,” Mr. Shen said, adding that investors and companies that are not sufficiently wise, no matter how well funded, naturally fail.
He says he finds good reason to continue investing.
“Compared to 15 years ago, when I was an entrepreneur,” Mr. Shen said, “the opportunity is broader, and more importantly, the entrepreneurs are more experienced.”
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