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31 October 2017

Asia explores its tech dragons and tigers

Congress report: GCV Asia 2017

Author: James Mawson, editor-in-chief

The theme of the inaugural Global Corporate Venturing (GCV) Asia Congress, held in Hong Kong last month, was the next-generation technologies being developed and invented in the region. These so-called dragon and tiger technologies are leapfrogging the platforms and technology infrastructure in much of Europe and the US and in large part a result of a unique combination of competitive and collaborative investment strategies by entrepreneurs, governments, universities and corporations.

The opening panel at the congress, led by Jay Eum, managing partner at Translink Capital, highlighted this process. Koichi Narasaki, group digital officer at Japan-based insurer Sompo, which recently set up a $150m corporate venturing programme, including a $50m commitment to Translink, said it had started working with China-based peer ZhongAn.

Narasaki said: “I am amazed by their disruptive insurance process. They do not need us as much as we need them. It is learning [by us] not necessary collaboration.”

ZhongAn, which floated in Hong Kong last month raising $1.5bn at about a $10bn market capitalisation, has sold more than 5.8 billion insurance policies to 460 million customers since its foundation in 2014 by insurer Ping An, media conglomerate Tencent and online retailer Alibaba’s affiliate Ant Financial.

ZhongAn has the platform to launch a new product every week and a creative and testing process with its partners to encourage new ideas and development.

Narasaki described China’s market as so large and sophisticated it allowed for such rapid growth. However, these characteristics meant business models and even technologies that work there could have limited application in other markets.

SaeMin Ahn, the Singapore-based managing partner at Rakuten Ventures, on the same panel said: “I am cautious. Business models [that work in China] and ones that work overseas are as different as those between Mars and Earth.”

Satoshi Yano, leader of corporate investments at Japan-listed communications platform Line, which has made more than 10 corporate venturing deals since its investments programme launch last year agreed.

Yano said the majority of its deals had been outside Japan and focused on entrepreneurial hotspots around the world. Of its team of 10, two are in Silicon Valley and one in Beijing, while Ahn said Rakuten preferred to “sniper” invest from Singapore into the Valley.

Similarly, John Suh, vice-president and head of corporate venturing at South Korea-based carmaker Hyundai plans to open a CVC office in Shenzhen, China, by the first quarter of next year, to complement the one in Silicon Valley, California.

Suh said investing globally and particularly in Silicon Valley was important.

He said: “When Hyundai set up its ventures team in the Valley six years ago it was difficult to justify then but the CEO had the vision and drive to make it happen. Now, it is self-evident we should be there as autonomous vehicles, technology, original equipment manufacturers, tier-one suppliers and entrepreneurs are all there. The talent is self-sufficient regardless of whether there are ups or downs in a startup itself.”

He gave the example of one deal it had struck in 2010 for US-based SoundHound. This was reported as a GCV big deal in February this year when it closed $75m as part of a push to develop a conversational artificial intelligence (AI) platform. TransLink had been an investor in this round and invited as co-investors some of its limited partners, including Sompo and Line.

The close collaboration between sophisticated VCs and corporate partners, either investing directly in technologically-advanced portfolio companies or working as technology providers or customers, was a theme running through the day’s discussion.

Yano said Line did a few deals directly on the west coast of the US but this was not enough, so it partnered VCs to help and also as a source of exits for their portfolio companies by buying them.

Suh said from 2007, when Apple’s iPhone effectively launched the smartphone breakthrough, to about 2014, Hyundai’s open innovation and venturing focus had been on understanding mobility and connecting devices to its cars.

In this case, SoundHound was initially known for its music recognition app, which took the template set by Shazam and added features such as the ability to find songs by inputting lyrics or to see them linked to the music as it plays. But its more recent evolution reflects what many see as the next wave of technology breakthroughs, voice-recognition to control devices applicable across a wide range of industries, which is why so many CVCs joined its latest round.

In late 2015 the company introduced Houndify, a platform that enabled developers to add complex voice interaction to their products, and added a voice-powered personal assistance app called Hound a few months later. It intends to build its products into a large-scale platform for voice and sound-based AI that can be used by a range of partners.

Jeffrey Li, managing partner at Tencent Investment, in a fireside chat with Chris Pu, head of China at Telstra Ventures, moderated by Gloria Liu, partner at law firm DLA Piper, said it had also looked at SoundHound for this reason.

Li, who led the GCV Powerlist in May, collected the Unit of the Year award in the lunchtime session presented by Bernard Chan, Hong Kong’s under-secretary for commerce and economic development, and Paul Morris, chief investment officer at the UK’s Department for International Trade.

Tencent was the largest investor in Asia-based companies last year by deal value, followed by Alibaba and SoftBank, according to GCV Analytics, and has committed to more than 100 VC funds as it develops its network.

Tencent also scored highest among local CVCs in the GCV Power Index, in part for its innovative approach to working with portfolio companies effectively as business units able to access its WeChat platform rather than independent companies.

Li said: “Tencent set up its investment arm in 2008 as before there had been criticised for operating a closed ecosystem and copying startups. From 2009 to 2010, the focus was on building the ecosystem by developing the core ecosystem and then opening it up to partners so they can build, and investment is an important arm of that.

“For the past six years we have been reinvesting our profits back to venture while other corporations focus on M&A. We do do that but it is a small part compared with lots of minority deals, such as Didi Chuxing, 58 and Meituan, from our 50-strong team, which is still growing.”

Li had earlier told GCV: “The competitive landscape of China internet space, especially the very high iteration speed of the market, forced all major players to capture future innovation. In that case, there might be relatively more minority deals in China compared with the US market. And the giants might leverage their market resource to speed up the growth of the investee company.”

Li said it was increasingly turning its attention from its local market, China, to deep technology and research in the US and Europe. However, he said the company was cautious in its international expansion as the network effects in communications, such as Tencent’s WeChat platform, meant switching could be difficult.

WeChat’s near 1 billion users dominates China’s market but in Hong Kong many locals still seem to use Facebook’s WhatsApp, which Li admitted it had tried to buy before Facebook acquired it for about $19bn in 2014.

But the challenge is increasingly encouraging corporations to scale up their CVC units as part of wider research and development and open innovation programmes and for what Li called a “survival game, as organisation structures mean it is hard for big companies to survive”.

Especially in technology and communications, where network effects, such as language, culture and user behaviour, mean it is “extremely difficult” to expand, Li said: “WhatsApp is a 30-year-old product feature built around text, versus WeChat, which is an amazing product that has not happened overseas.

“We tried to acquire WhatsApp before Facebook did, but [instead] invested in Kik and Snapchat to try to understand the major challenge of culture and talent in expanding. Digital communications have strong network effects and other verticals are easier maybe. Didi invested in Uber and we are global partner for them, for example.

“Since 2005, there have been lots of innovation in consumers and mobile internet but fundamental research technology will be a key driver in the next five to 10 years.”

This is helping venture both scale up and globalise, according to Telstra’s Pu, in agreement with Li. Pu said: “Corporations are attacking from everywhere [all sectors and regions].”

Telstra last year estimated CVCs could soon make up about 35% of the entire venture market, with SoftBank named GCV’s Fund of the Year for raising $93bn in its first close of the SoftBank Vision Fund doing much to reach this goal, it seemed to attendees.

Although SoftBank was just one of 124 venture funding initiatives backed by Asia-Pacific-based corporations last year, it was the vast majority of the $117.1bn they raised, according to GCV Analytics data.

Nearly half the direct CVC investments in Asia-Pacific region went to China (763), followed by India, Japan and Singapore and Indonesia and South Korea, all active target areas for SoftBank. Asia-Pacific made up about a quarter (463) of the more than 2,000 deals globally last year, according to GCV Analytics, although its share of exits (42 out of 221 last year) has lagged behind as the market has been relatively nascent.

SoftBank, which addressed the GCV Symposium in May as it made the first close of the Vision Fund, committed up to $500m to the flotation of ZhongAn in just one of its latest large rounds.

Other CVCs noted how sophisticated the group was at investing by buying primary shares in a up round – higher valuation than earlier rounds – but also buying secondary shares, those from existing shareholders, at a discount and negotiating hard on the terms and rights. As one investor said: “They [SoftBank] are disrupting growth equity by targeting market leaders and adding a zero on the end of the cheque.”

But while leading corporations are stretching the belief in what is possible in terms of deal size and fundraising, the basic tenets in venture remain the same and increasingly applicable in different regions and industries.

Ramy Farid, co-founder and partner of technology platform Proseeder, moderated a panel discussion on dealmaking and incubation in Asia and their ties to the west.

Yinglan Tan, CEO and managing partner at VC firm Insignia Venture Partners, which he founded this year after leading Sequoia Capital’s Southeast Asia investment team from Singapore, including leading its deals for Tokopedia, Go-Jek, Carousell, Appier, Dailyhotel, Pinkoi and 99, said the Southeast Asia region was a few years behind China in terms of entrepreneur numbers and unicorns – companies worth at least $1bn (see analysis) – but this was changing rapidly given its demographics, economies and openness to technology.

Singapore-based Pocket Sun, founding partner at SoGal Ventures, pointed to the technology purchases and working and living patterns of the millennial generation as integral to outlier returns in the future. Millennials increasingly wanted personalised, on-demand products and services. She said: “Millennials are looking for consumption upgrade in niche products and services that reflect their values, such as one-off hair care by colour or fragrance.”

Blair Zhang, partner at Hong Kong-listed SkyOcean’s Comb Plus accelerator, said she was developing a global platform to bring these western entrepreneurs, particularly from the Nordic region, to China.

However, selecting the entrepreneurs remains a challenge. Cha Li, founder and managing partner at China-based early-stage VC iStart Ventures, said he had started angel investing in the early 2000s after selling his company but initially struggled as his focus was on top-down research and “reading the press”. However, his investment track record improved when he concentrated on the founders and their goals.

As Li from Tencent said in advising potential new CVCs: “In our experience focus is important and it takes about three years to train people in what they should not do as the issue is there are so many opportunities that could make money. Be selective on what you can do and core competence you can bring.”

This message has been heeded by some of Tencent’s unicorn portfolio companies. Ernest Fung, senior director and head of international investments at JD, Wen Jiang, entertainment and content investment lead at Xiaomi, Wenqian Zhu, vice-president for strategy and investment at Meituan Dianping, and Xiaoyang Li, vice-president for corporate investment, head of M&A and strategic investment, at 58.com, discussed in the congress’s final panel how to go from being venture-backed to being a corporate venturing leader through such insights and others.

They said it was important to be able to move as fast as the next generation of entrepreneurs and this combination of speed, capital-raising and growth was at the heart of why China had worked so well at both venture and developing its entrepreneurial ecosystem.

It was a strength that the often founder-led corporations have engaged as rapidly and with support for the next generation, especially when compared with many US and European peers, the panel concluded before sharing case studies on how their deals had benefited from the parents’ core business in the way they themselves had benefited from WeChat’s platform.

But these founders have more funding choices now. Louis Lehot, co-head of the VC practice at DLA Piper, asked speakers about initial coin offerings (ICOs) and the disruption they were causing to dealmaking and fundraising if entrepreneurs could effectively raise tens or hundreds of millions of dollars in a few minutes by crowdsourcing. Cha Li said: “ICOs could kill all of us. Two of my portfolio raised $12m in one hour and $24m in 40 minutes, respectively. Last month China blocked blockchain and so they just moved to Japan.

The dealmakers panel admitted there was plenty of cash chasing the best entrepreneurs but the value of governance and other support through corporate and independent investors meant they were still in demand.

However, the impact of ICOs on funds is less clear and VCs were increasingly targeting corporate limited partners (LPs) – investors in funds – for the value-add they brought to the general partners (GPs) – the fund’s managers.

Paul Denning, CEO and legendary placement agent at Denning & Co, moderated a panel discussion on what were the factors driving next-generation corporate LP and GP relationships.

The panellists showed the wide range of options, depending on the corporate strategy. Chibo Tang, managing director of Gobi VC firm, which manages Alibaba’s Hong Kong Entrepreneur Fund as one of its eight funds with a dozen corporate LPs among them, said the mandate gave it greater scale and opportunities to invest on the island while Alibaba was able to tap into greater local presence and a skilled team for earlier-stage investments than its growth and buyouts focus.

He added: “Corporations [investing directly] are a love-hate relationship for VCs. They can fund the next round or provide an exit but it is hard to compete with strategics on the best deals.”

Victor Orlovski, managing partner at Sberbank’s SBT Venture Fund, said having Russia’s largest bank as sole limited partner in its first fund while he was based in the US was an advantage in giving it money and close connections but a degree of autonomy to find deals that could be disruptive.

Karthik Prabhakar, partner at IDG Ventures India, said its own journey had been from a similar relationship where publisher International Data Group had been sole LP when it started a decade ago, but for its third fund closed this year its parent provided a minority of the $200m raised.

International Data Group had earlier been acquired by its China-based corporate venturing subsidiary, IDG Capital, which was perhaps a global first, but family offices developed out of wealth generated from corporate profits and ownership often have increasing ties to CVC and venture investing.

Hong Kong’s tax haven status as a special administrative region of China has meant many of these family offices have billions or tens of billions of dollars to invest and a desire for more impactful venture strategies. The government is also supporting VCs more directly with its latest fund.

Danai Pathomvanich, managing partner at Hatton Capital, which is his family office, and adviser to Thailand’s conglomerate CP’s venturing strategy, said the role of the state in underpinning VC was important to recognise. Thailand’s state bank is an LP in its inaugural social impact fund, while changing legal restrictions on private equity and VC managers.

Prabhakar drily noted that in India or emerging markets, anything could be considered impact and it had the International Finance Corporation, the World Bank’s private investment organisation, as one of its LPs partly for this reason.

But in terms of state support, China has led the way. Angelica Anton, founding partner at Silk Ventures, in a keynote, described how China’s State-owned Assets Supervision and Administration Commission of the State Council controlled about 98 state-owned enterprises with between $1.5 trillion and $3.5 trillion in annual revenues.

Given their importance, she described China’s strategic venture landscape as having multinational corporations, domestics CVCs and state-owned and backed venture funds, such as the RMB100bn ($14.5bn) China Internet Investment Fund supported by Industrial & Commercial Bank of China and state-owned Citic Guoan Group, China Post Insurance, China Mobile, China Unicom and China Telecom.

Anton said the state was also pushing mixed-ownership reforms to bring in private corporate investors, such as Tencent, Alibaba and Didi Chuxing’s investment in China Unicom. She said: “It will be impossible to compete if they get it right.”

Her view was funding, ownership reforms and policy focus on technology as an enabler to increase efficiency would drive the economy. For the latter, China has developed three major policies, around AI – to be the premier nation in the field by 2030 – things being “Made in China” by 2025, and the infrastructure-focused Belt and Road initiative, which she described as “today’s Marshall plan, only 40 times bigger” with $900bn in projects planned to develop land and sea routes from China.

Alvin Graylin, China president of Vive at Taiwan-based HTC, gave virtual reality (VR) and AI as an example of how China’s five-year plans focused attention on a topic. In a presentation on the topic and the excitement around it, he said China was willing to adapt and VR was being used as a tool to drive its fifth-generation (5G) communications infrastructure, as well as AI work. China was also setting the standards globally and Vive’s cloud VR business launched just before the congress required partnerships to enable 60 megabits per second download speeds to avoid latency issues.

For other countries not at China’s scale, Simon Cant, co-founder and managing director of Australia-based Westpac’s Reinventure corporate venturing unit, then went through fintech as an example of how to play a role when China was leapfrogging ahead on the technology.

While China seemingly has cities with populations the same size as Australia’s enitre 24 million, Cant said his continent was the world’s fourth-largest pension pot and fintech was its largest employer, so disruption was a big issue for the country.

As a result, its focus on Westpac had helped the country as a whole, he said, but this required a shift in its strategy. “Reinventure Fund provides Westpac Bank the optionality to own the disruptors and grow into adjacencies.”

Initially, its corporate venturing strategy had been to look to find proven entrepreneurs and business models in local markets where it had an unfair advantage, as in Australia. But under Cant and his co-founder, Danny Gilligan, it had evolved into a strategy looking to provide early cheques to credible founders in technologies, such as AI, data and blockchain, in which Westpac had “potential” unfair advantages.

Reinventure, therefore, was set up as an independent unit with Westpac as its LP. Cant added: “To reinforce our independence while raising the tide of Australian fintech we set about creating a fintech ecosystem in Australia – connecting startups to capital, government, corporates and mentors.”

As well as the two A$50m ($40m) Reinventure funds, they set up co-working spaces, Stone & Chalk and the Sydney Startup Hub, for corporate and government support, the Fuel-D Accelerator for skill-sharing and mentoring, and Fintech Australia to campaign for government cooperation and a favourable regulatory environment.

All of which has led to more meetings and fintech startups, going from fewer than 100 in 2014 to 579 by this year, Cant concluded.

However, the day’s final keynote went to academic, entrepreneur and investor Martin Haemmig. His presentation on the Global Innovation Corridor Challenge covered initially the R&D and patents landscape then how startups were increasingly going global. Using data provider Dow Jones figures, between 2006 and end-June 2017, 6.7% of the 32,840 startups tracked had both raised money and set up an international office.

And CVCs were active in helping them. While data provider PitchBook found about a third of VCs invested internationally between 2014 and 2016, GCV Analytics traced about half of CVCs doing so in this time period. This made sense given Haemmig identified a global valuation arbitrage at the series A round stage. He said: “Valuations are significantly lower in some smaller or less mature markets, providing scope for significant valuation uplift follow-on funding rounds, and higher multiples at exit. However, very few from these markets can be market leaders in Silicon Valley, and only if they set up offices there early in their life.”

Haemmig combined the analyses to look through where CVCs had invested in startups with international offices and found China had the largest proportion (64 out of 79).

In discussing the future of venture and technology, all roads seem to lead to China.

Roundtable roundup

Future of technology roundtables were hosted under Chatham House rules with summaries of the discussions shared by the speakers.

Blockchain and fintech’s future starts in Asia – moderated by Rimas Kapeskas, UPS; Ron Arnold, IAG Ventures; Nina Zho, CreditEase; Igor Pesin, Life.SREDA VC Fund

  • It feels a bit like we are flying the plane while building it
  • Difficult to see truly fully distributed ledgers taking root in industries, although specific applications make sense, for example fraud, tracking goods through supply chains
  • Very likely a useful architecture that will be utilised by business to drive some efficiency and allow some innovation, eg smart contracts
  • A fair degree of caution/cynicism around ICOs (initial coin offerings)
  • Query the ability of the majority players in a system to ‘redefine rules’ – how does effective governance work/what is needed for effective governance?

Mobility drives into the future – moderated by Graham Howes, BP; Hiro Saijou, Yamaha Motor Ventures; John Suh, Hyundai; Leonard Lee, Airbus Group; Marc Teo, Infineon

  • The business model is important and where to act in the mobility sector is not immediately clear. 
  • The long term economics of the various applications being pursued need to be carefully considered
  • It is apparent that personal space and travel time are important, and that seamless mobility experience is required, probably using multi-model transportation
  • Data does not lie with any one organisation and if mobility is to be simplified in terms of user experience then issues of sharing, ownership, trust privacy, etc surrounding personal data need to be overcome and agreed at an individual level
  • Each new generation has a different attitude to data privacy and mobility which could precipitate disruption in the transportation sector
  • Electric vehicles and fully autonomous capability are likely to converge in a similar time frame as there are symbiotic characteristics

What language will machines speak with their artificial intelligence – moderated by Vitaly Golomb, HP Tech Ventures, and Pocket Sun, SoGal Ventures

  • Timing is always a question. People typically expect technology breakthroughs to cause direct effects (Hollywood idea of the future) on life faster than possible and at once they underestimate the second order effects of a new technology paradigm, which tend to be much more profound.
  • There will certainly be an effect on jobs but timing is not yet clear. Government jobs will be safe.
  • We will see a greater level of personalized content and targeting creating very different experiences.
  • AI can already understand humans better than we can.
  • The first trillion-dollar company will be driven by AI.
  • Core AI has a chance of being open-source or freely available
  • If AI is more human, who are we? What is the new meaning of life?

Sports: the digital revolution coming from China – moderated by Olivier Glauser, Shankai Sports, and Alvin Wang Graylin, HTC Vive

  • Favourable Chinese government policies towards sports, in part to grow the consumption economy, in part to bolster healthy lifestyles and “national pride” will present significant opportunities for growth
  • China with its advanced adoption of digital media and mobile technologies will be able to leapfrog and accelerate the adoption of digital media across the sports industry.
  • “Traditional sports” are ripe for a revolution in digital media adoption – TV consumption being an old model – which will be driven in big part in the Chinese market.
  • Chinese companies, with their need to have their brands known globally via sports sponsorship – for example, Alibaba Olympics and the Fifa World Cup – plus outbound investments will be a driving factor of China entering the world stage in sports.
  • AR and VR adoption – happening first in China – will also lead a revolution in both sports media consumption and practicing sports. This will lead to a convergence of virtual world and physical world. People will be able to practise physical sports in virtual environments against virtual or distant opponents, and consume real sports remotely as if being on the scene.

Manufacturing Asia’s next generation of competitiveness – moderated by Keith Gillard, Pangaea Ventures; CK Kan, Desktop Metal; Laura Oliphant, Translarity; Valery Krivenko, FPI

  • Additive manufacturing and robotics.
  • Precision and speed will drive yields up, cost down, and quality up, taking market share from traditional manufacturing.
  • As complexity increases, new application emerge, including printed electronics.
  • Artificial Intelligence and big data.
  • Manufacturing will be democratised and largely open-sourced, except for quality-critical applications such as medical devices, which will be regulated.
  • AI will exponentially accelerate progress, also allowing fur accurate anticipation of demand, further reducing costs.
  • Social Impact.
  • Advantage of cheap labour will become obsolete, moving manufacturing close to demand.
  • Jobs in Asia will be lost.

Sovereign funds and corporations’ collaboration with VC – moderated by Abigail Wye, Future Planet Capital; Gordon Lam, Guangdong Asia Pacific E-Commerce Institute; Hira Laksamana, Mandira Capital; Alison Nankivell, BDC Capital; Antti Kosunen, Nestholma

  • The discussion covered three main topics:
  • Should government entities / SWFs take direct investments in startups?
  • How do sovereign wealth funds and sovereign development funds help ensure innovation transfer?
  • Do these funds make good investors, and what might be best practise?
  • There was agreement that there are many different sovereign funds, so it is hard to make generalisations.
  • However, overall consensus that there needed to be a separation between financial investing and political executives.
  • Governments may be best placed to set up accelerators and invest in funds as LPs, unless deep experience.
  • Acknowledgement of the challenges if innovation transfer – much easier said than done. Corporates can help to bring business understanding.

Above: The artifical intelligence roundtable

Above: The manufacturing roundtable 

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