Andrew Gaule talks Tim Hardin, vice-president and head of corporate banking, SPD Silicon Valley Bank in Shanghai, China (pictured left)
Give us a brief introduction to yourself.
I have been with Silicon Valley Bank or one of its interests for nearly 22 years. I am currently with the joint venture we formed in 2012 with Shanghai Pudong Development Bank, SPDB. So it is the 50-50 joint venture between Silicon Valley Bank in the Silicon Valley California, US, and Shanghai Pudong Development Bank, which is the sixth-largest bank in China, headquartered here in Shanghai.
Let us talk about what is developing in China. People say: “China just copied products and software from the west.” Do you believe this is true, and which sectors do you think are changing fastest?
There has certainly been a history in the past of that being the case, where intellectual property was not appropriately recognised in China, so there was that aspect of copying. I have personally seen that fundamentally changing over the last several years. Now I am seeing business model innovation and technology innovation originating from China and moving outward from this market as it gains a foothold, first domestically here in China, and then in Southeast Asia and then potentially more broadly than that.
A few industries specifically have garnered the most press. The sharing economy is one example. The adaptation of shared bikes is I think the one company or the one group of companies that gets press globally, but it is broader than that as well.
One area I have found the most interesting is the life sciences industry. China was one of the world’s manufacturers and one of the world’s labour markets, and the life sciences industry here five years ago was largely outsourced labour, highly-skilled labour, but in the form of clinical research organisations (CROs) for the large global drug companies, the Mercks and GSKs of the world, for example.
And over the last several years we have seen a lot of those scientists and practitioners migrate from the CROs into drug discovery, drug development companies of their own. Which is really exciting.
What sort of valuations are you seeing in China compared with other markets?
I have never been in a market in which the investors were not complaining about the valuations. I was with an investor just last week that has funds in China, funds in the US, and funds in Israel and in India. They were commenting that the US and China market are largely on par at the series A, series B stage. Then if you look upmarket from there, at the unicorn stages [companies worth at least $1bn] the valuations of some of the larger companies in China are comparable to those in the US.
Tell us about the Bat – Baidu, Alibaba, Tencent – the leading Chinese and online businesses built up behind the great Chinese internet wall, and about their scale, speed of change and the different business models?
Those are the three largest internet companies in China. They are comparable to Google, Amazon, Apple and Facebook in the US in terms of both where they sit in the large, corporate technology ecosystem and in their valuations.
Baidu started in search and is the Google counterpart. They have been very active as an investor and acquirer of other companies, and now making a very strong play into artificial intelligence. Alibaba is the e-commerce juggernaut, so they would line up with Amazon. The one thing Alibaba does quite differently from Amazon is that they are also one of the largest consumer payment gateways. Every middle class and up Chinese local would have an Alipay account.Tencent is the largest social network in China, with a product called WeChat – everyone in China has a WeChat account, and that is how they message each other, that is how they share their moments, which are like Instagram or Facebook posts, and they use Tencent’s form of payment.
So WeChat has a payment function and Alipay has a payment function, and nearly every person in China has both, and nearly every retailer in China from the largest to the very smallest can take either Alipay or WeChat. I lived in China 2011, 2012 and 2013. When I left it was an entirely cash-based economy. I came back earlier this year and cash is all but gone. There is a supermarket in our building here downstairs that is majority owned by Alibaba and they take only Alipay. They will not accept cash.
These companies can scale domestically, and achieve great scale domestically. But we have already seen all three of the Bat investing outside China, into similar businesses. So for example, Tencent, which is the gaming company, Supercell – a large European gaming company – has invested in other e-commerce companies. Both Tencent and Alibaba had invested significant funds in Flipkart in India and Lazada in Indonesia, for example.
I think the investment is the first foray into those markets, and they follow with their technology and business models. I think it is inevitable that they reach the west. I do not think their intent is to jump across the pond directly from China into the US, but rather throughout Southeast Asia. Having said that, it would not surprise me if for the next year or two we start to see either WeChat or Alipay make a foray into western markets directly.
I have outlined my term “innovative new value chains” – connecting new technologies, different startups and corporates to create different business models. How will China play within these innovative new value chains in terms of manufacturing tech or the social side of things?
I think they will play ultimately on both fronts. You will see large Chinese companies, both state-owned and privately-owned, reaching into other markets to pick up technology to grow beyond their own R&D capabilities, and then you will see a number of those global corporates reaching into China, looking for both access to the market, but also access to technologies and innovation that are being brought forward in China before they are brought forward elsewhere.
I will give you one example. I do not have permission to give the name, but it is one of the largest furniture manufacturers and retailers in China. They have come to us saying: “We recognise that we are not in the flow of information that we think we need.” They have asked us to help them source, for example, internet-of-things and connected-home relationships in the US technology market.
Do you have any insights on outside corporate venturing into China?
The ones that have been successful have feet on the ground. It is really challenging to do that from outside the market. Companies like Intel, for example, are examples of success on the CVC side. I had breakfast with the chief financial officer of Intel a couple of weeks ago, and he said 25% of their market is in China, and growing, so for them it is absolutely critical that they are here on the ground.
Companies here are more complex because of the nature of the currency challenges – with the renminbi and US dollar access, or lack of access, they get quite complicated quite young. But there is still an opportunity for a foreign dollar or sterling-denominated investor to be on the ground here and actively engaging with even very young companies.
What are you doing to relax – particularly in China?
I am a cyclist, occasionally braving the roads here, either on my own bike or a Mobike or Ofo, one of the shared bikes. And when the roads are not cooperative I ride in an online game called Zwift, which is a lot of fun.
Andrew Gaule talks to Min Zhou, managing partner, China Materiala (pictured right)
Give us a brief introduction to yourself.
I have a bit of an unusual background in that I grew up in China and I graduated from Tsinghua University before coming to the US with a scholarship. In total I spent 17 years in the US before moving back to China in 2010.
I started as a scientist. I did my PhD in material science at University of Southern California and then did R&D for six years at Rockwell Scientific. And then when Unilever started its corporate venturing back in 2003, I was fortunate to be one of the very first people they recruited to run the material science platform.
So that got me into venturing. I was with Unilever Tech Ventures for four years, and then I moved to a Silicon Valley Bank Capital, and did two years of fund-of-funds investing, responsible for the Chinese market. Those two years gave me a taste of looking at the overall venture capital space in China, and assessing funds and the type of companies they invest in.
So when I moved back to China in 2010, I had a corporate venture background and an understanding of the Chinese venture capital space, and I thought I wanted to start something different in China, which is to bring a hybrid of corporate venture and institutional venture to China and really looking at early-stage investing.
We started in 2010 with a bit of consulting. We started our first fund in 2011 with about $25m of renminbi. That was a partnership involving the government and private individual investors in China. This was the first year the Shanghai government started its Government Sponsored Fund program for venture capital, so we were fortunate to be selected as one of the first 12 funds.
In 2016 we started our second fund, which is about $60m of renminbi. Ve significantly updated our limited partner base. We still have government backing, which accounts for about 30% of the fund, and we have 10% private companies, and the remaining 60% is contributed by five multinational companies. We have GE, Samsung, BASF, BAT and Sabic all investing in our second fund.
There are some common themes among the five corporates. First of all, they are all interested in the materials, manufacturing, digital industrial space. And second they are all first time investing in China in these spaces.
What are the contrasts between the Chinese and US technology ecosystems?
For a long time, China’s entrepreneurial ecosystem was described as “wild west”. I would still say it is probably a bit true now, because there are a lot more players in the ecosystem, it is much less organised, it is much less institutional, and a lot more dynamic and more chaotic in a way. China has a lot more entrepreneurs and a lot more investors. So unlike institutionalised VC firms in Silicon Valley in the US, we have investors from individuals to big corporates. They might do it ad hoc, they might have organised VC, and the VC firms themselves change much more rapidly. You have newer firms established, people leaving their old firms, getting new firms set up, on a daily basis.
Second, government plays much more of a role in this ecosystem compared with the west. So a lot of the hot topics or a lot of the hot investment structures are somewhat tied to government policy. For example, when the government started in 2013 or 2014 to encourage semiconductor development, all of a sudden we had 100 times more investment in semiconductors.
Tell us how China Materiala works, and the investors you have, why and how they are investing.
We must be a very unique firm in the sense of having both government investment and multinational companies in one fund, and it was a long and challenging process to bring all parties together. It is important to have government backing in the sense that the government plays an important role in the ecosystem. And a lot of entrepreneurs look for firms with government backing as a credibility mark.
We appreciate interaction with multinational companies. Each of our investors is a little bit different, but they are all first time in China, directly investing in China through our fund. So they are all doing this as their first experience.
The corporates bring to our fund a lot of industry insights, what they see globally, but more importantly also they bring their local access, their local markets and engagement to bear. That is very important to our startups. So almost all the companies in our current portfolio interact with our corporate investors. And it is one of the reasons they want our money – there is a lot of value added by our corporation.
It probably makes a lot of sense to invest in a fund because you need time to understand the market, to look at steadier flow and also to get together to have a bigger presence. Ours is a $60m fund and it is still not a huge fund in China. But if you do it alone and you only have $10m to play with, then you are much less visible in the marketplace.
Also, as the market is very dynamic and very chaotic, you need a local partner with a team to screen and understand the changing picture of the startup field.
China’s technologies and scale and new ways of doing online and mobile commerce are important in generating what I term “innovative new value chains”. How is China playing in these innovative new value chains globally?
We had this big Innovation China Conference sponsored by GE with speakers from a dozen multinational companies and startups. One of the core things that came out of that conference is that if you look at China’s huge manufacturing base, the digitisation of traditional industries not only changes manufacturing but it really impacts how the business model for traditional business-to-business will work. So it has a far-reaching implication in terms of the new value chain. For example, previously equipment was sold, but usually 95% of equipment actually is not utilised the whole time. So there is a trend to purchase the services rather than purchasing assets.
GE talked about predictive maintenance, where you are predicting when the equipment needs to be maintained and giving the service provider revenue as well as saving customer costs.
Business-to-business is learning from business-to-consumer in terms of how the products are sold, the customer service and so on, because right now, with the digital tools, your product can create an opening for you to connect with your customers directly, rather than shipping the product to a distributor.
How do you think views of China are changing?
We are seeing a whole lot more entrepreneurs. These days, entrepreneurs are getting younger and bolder, and they also have more global mindsets. A recent example is this bike-sharing already coming out of China, spreading globally within a very short time period of starting up in China. It is a good example of how these companies had a global market in mind when they started, even in China.
We are really seeing accelerating innovation. People say China was good at copycat, but while you can copy a product, it is actually very difficult to copy a business model, because China is so structurally different, especially if you are in the business-to-consumer business. Consumer behaviour, consumer pace, the culture, the way of doing business are very different. So even if the product is similar, how it is structured and the product features, how they are sold, how they interact with consumers, are very different. Those are all innovations.
I think the level of service is also very different. In China it is very difficult to just sell products. You need a whole lot more customisation. You need a very short response time. There is less standardisation. You need to respond a lot quicker to the market, which is a lot more brutal than the US because it is less structured, so there are more opportunities, but these opportunities are also fleeting, and you have a whole lot more complications. So Chinese companies are very agile.
I feel like China actually was never able to just copy the US companies and be successful in China. Certainly as we go forward, we see more and more truly local innovations. All the companies we invest in have US or global patents. They are globally leading in terms of their technology or their products and their business models.
Could you illustrate one or two companies where they are doing things, either in technology or in business models, and why they are thinking globally?
I can give you an example from both our funds. In our first fund we invested in a company in industrial internet of things. It started with an radio frequency ID chip that can track industrial assets. The first vertical the company went into had millions of gas cylinders circulating around the world. Being able to individualise the tracking for each cylinder really has huge implications for how the industry is going to change. This industrial gas company can now connect directly to consumers, and they have a whole lot more data to analyse. In five to 10 years’ time you are going to see a very different model of how industrial gas is going to be sold. Really it changes the traditional industry.
In our second fund we have invested in a 3D printing company which prints 10 times faster than other 3D printing methods. All our corporates are engaged with the company, so we have them doing business with GE, with BASF, with Sabic.
We are investing in an industrial big data company looking at the data from manufacturing and improving the product yield and efficiency. Even a 1% improvement in traditional industrial manufacturing gives you a huge output.
What do you do to relax?
I run round Century Park. I like walking in nature. There are more and more blue sky days in Shanghai, so I really enjoy that. And I enjoy reading, so I will take a glass of wine and read a good book
You can listen to this and other interviews on a podcast, subscribe at gaulesqt.podomatic.com. Andrew Gaule develops the capabilities and expertise of organisations leading open innovation, venturing and corporate venturing programs to drive strategic benefit. He supports innovation programs and collaborations with “innovative new value chains” in global organisations. If you have interview ideas, email andrew.gaule@aimava.com or James Mawson jmawson@globalcorporateventuring.com