News provider the Economist has this past week updated its chart for when China will overtake the US by gross domestic product (GDP, at market exchange rates) and out pops the year 2018 (with suitable caveats).
But for entrepreneurs and venture investors the more interesting question is when or whether China overtake the US as the place entrepreneurs want to go to be funded?
In this context, our "Big Deal" for this ezine (a new section launched as part of reader feedback for how we can improve this free marketing service and as a way of encouraging people to try the rest of our data and information available to subscribers#Big Deal) is two deals by publisher Interactive Data Group (IDG’s) China-based corporate venturing unit.
IDG Capital Partners is understood to have invested less than $50m* in Razer, which makes computer game peripherals, such as keyboards and mice, and $10m* in software application provider BlueSprig that launched its first products in October. The money came from IDG-Accel Growth Fund and IDG-Accel Capital Fund for Razer and BlueSprig respectively, which are two funds the China-based IDG unit manages in collaboration with US-based venture capital firm Accel Partners.
What makes these a big deal, and why they act as a pointer for the China versus America innovation countdown clock, is the two portfolio companies are domiciled in the US.
Hugo Shong, managing partner of Beijing-based IDG Capital Partners corporate venturing unit, said: "Both IDG-Accel Growth Fund and IDG-Accel Capital Fund are China-focused funds and though both Razer and BlueSprig have their headquarters outside the country their software and manufacturing and marketing teams are bigger in China."
Both Razer and BlueSprig, which was founded in May by serial entrepreneurs Jason Johnson and Hugo Dong, have strong links to China. Dong is based in Chengdu, China, to run its development office while Razer has strategic partnerships with some of IDG’s former portfolio companies, such as media group Tencent.
Shong, who’s team has backed Baidu, Tencent, Sohu and Soufun, said depreciation of the US dollar and strong cash balances in Chinese corporations and its government would encourage further investment overseas.
And a number of private equity and corporate venturing firms, such as computer maker Legend’s Hony Capital (the buyout sister to corporate venturing-focused Legend Capital) and equipment maker Huawei, have started investing overseas even as its domestic industry reached the same size by number of firms as the rest of the world combined. Accountants PricewaterhouseCoopers said there were 3,500 private equity firms in China versus 3,000 to 4,000 in the world pre-2008. (Global Corporate Venturing will be presenting at April’s corporate venturing conference in China a month before our second Symposium in London on May 14 and 15.)
China’s attractiveness, however, remains less about the money (in most regions outside of south east Asia, Africa and other emerging nations) than the lure of its domestic market and its innovation efforts in important areas, such as clean-tech and mobile internet.
Shong said: "China has the world’s biggest number of internet users at more than 600 million people and large numbers of mobile phone users. We are now in the mobile internet age, which is creating very exciting opportunities, especially for China. The mobile internet will be the prevailing technology that will drive economic development in the next five to 10 years. "
In an interview with news provider Forbes, Jim Breyer, partner at Accel who led its $12.5m investment in social network Facebook, a stake which is now worth an estimated $5bn, agreed with China’s potential and said he had invested more in China than the US this year. He added that while the US would be home to the top 1% of entrepreneurs, over the next decade "you will see at least half of the top 10 or 20 internet companies come from China. China remains a phenomenal mobile internet consumer market."
But for potential investors and entrepreneurs without family or other ties to China, there remain question marks over whether China will overtake the US for innovation and as the primary venture market by amount invested and raised – and whether it is safe to enter and leave.
As Carl Walter and Fraser Howie note in their book, Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, the private economy outside of the state sector’s national champions (pulled into shape by US investment banks) are "outside the system" and vulnerable to rule changes or other governance pressures. External investors also face challenges in investing and exiting with their cash. (The state’s rulebook currently runs to 29 pages about what industries foreign capital is welcome or to be avoided, according to newswire Reuters.)
But the trend line is clear: over the past 10 years, real GDP growth has averaged 10.5% a year in China and 1.6% in America and the Economist’s "best guess for the next decade" is for it to be 7.75% per year in China and an annual 2.5% in America.
Given such growth differential, and the fact that (corporate) venture capital is a cyclical business, means entrepreneurs, investors and innovation in its wider sense will be drawn there unless an exogenous factor breaks the trend.