Long story short, I think we're about to observe a great wave of Chinese capital moving into Europe in the form of venture investment, both in direct form and through Funds of funds. And this is gonna have some profound meaning for VCs in France (and Europe in general) in terms of exit channels and fund-raising.
Due to the capital control of Government of China, historically money flowing out of China was stigmatized as rich people moving their money of dubious origin to developed countries or tax havens. But over the past few years things have been changing.
While oversea investments by giant corporates in China are no news at all, we're now seeing Chinese funds, piles of cash in hand, seeking exposures to geographies other than their own country. It's probably inspired by the expected slow down of GDP growth, the discussion of which had first surfaced a couple of years back and is now a fact. More importantly, I believe as the investment environment in China become more and more mature, geographical diversification becomes one of the objectives for the super big funds especially. While it might have already happened in mutual funds, now the Private Equity people are also extending their reach west-ward.
It's already happening in PE
Take the giagantic Fosun International (復星國際) for example. A household name in China due to its success as well as its colorful history of being founded by 4 college students back in 1992 with only $4,000, Fosun put its name on the map in France last year by co-investing with Ardian Private Equity (then AXA Private Equity) to take Club Med private. The deal was valued at more than 550M€, a notch lower than the monstrous LBOs usually done in the States but significant enough in France.
They then moved on to acquire 80% of the shares and voting rights of Portuguese Insurance Group, dispensing a whopping 1.038B€ this year in May. What's more significant is that the signing was done in Beijing witnessed by none other than Chinese President Xi. This is a clear signal that the government is positive about fund-level investment capital outflow. If it's done in the way that the government prefers with a size big enough, you might even be able to have a high-level official taking photos with you!
What about VC?
So that's PE deals you say, it's hardly surprising that with the amount of capital accumulated over the crazy decade, Chinese PE funds are now expanding globally. But what's intringuing is now we might be seeing VC funds also moving into Europe.
In my personal experience, a very large investment group from China recently visited our fund to explore opportunities of collaboration. In the group it's mostly VC funds in China but a Fund of Funds as well. One would have thought that for the relatively small size of a typical VC investment, it'd be too much a hassel for them to even try to move beyond the continental border.
But my discussion with the contact from their side tells me that at least the intention for investment is solid. It's true that they're just beginning the exploration and might eventually pass, but there's no doubt that the goal is to gain exposure to European venture investments, either through direct investments or through Fund of Funds.
Assuming that this is a real trend, we the VCs in Europe should all pose and think what it would mean to us.
The implication on fund-raising
The « 2013 European Private Equity Activity » report by EVCA shows that 14.3% of the annual PE fundraising in Europe came from Australia and Asia, up by 1%. Detailed breakdowns are not available so we don't know how much source of fund is currently from China. It is, however, not difficult to envision an upward trend in general as the capital market of China becomes more mature and diversified.
As for France, the spreadsheet provided by EVCA shows that 55% of Venture Capital fundraising in 2013 derives from government agencies, which is hardly surprising as France has always had this quirky aspect of individual investors seeking only to save tax by placing money in qualified funds, which are in turn invested in growth funds of VC funds.
What's interesting is that only 1.9% comes from FoFs (Fund of Funds). This could be due to the general lack of "homerun" startup stories in France but it could also be due to the conservative natures of French capital providers. In any case, I see this as a great opportunity to grow the fundraising base if we factor in the Chinese capital movement. Just as Western investors look for local partners to invest in China, the reverse is entirely true. Chinese funds are well aware of the pitfalls in both regulations and culture differences in private equity investments. An exposure via FoFs investment is the most reasonable first step.
Now this also means that the traditional fund-raising networks for European GPs now have a new dimension to explore. How that is gonna shape up we still don't know. But I wouldn't be surprised if some sort of intermediaries, say brokers or consultants, will surface during this rule-setting period. In any case, this is great opportunity for the PE/VC funds in France, especially the rare ones that have already had exposures to China such as Ventech, which has had a investment branch in Beijing for years, and of course the franco-chinois fund Cathay Capital.
The implication on co-investments
This is also an interesting possibility. Despite the general pessimistic outlook of French startup environments, the one thing this country does not lack is well-trained scientists and engineers. Compared to Silicon Valley where a huge amount of engineering talents are imported, either via graduate education in UC Berkeley and Stanford or simply via L1 or H1-B visas, France has the good old tradition of respecting — though not monetarily — science and engineering. It also means that home-grown technologies in France do, in various areas, enjoy a world-class level of innovation. The biggest problem has always been there are too few real entrepreneurs in this country that could turn those technologies into commercial success, and hence the bleak outlook.
Given all that, it's very likely that a Chinese VC could choose to invest or co-invest in a French startup, expecting to do a trade sales 3-4 years down the road to some of the Chinese technology giants such as Huawei or Alibaba, who might be seeking either good technologies to integrate into their offerings or simply geographical presence if we're talking about data marketing.
The implication for French VCs then, is that you now have another source of capital partners that could either join you in Series A or better, in a later round of funding that could give your portfolio companies a solid valuation and a chance to expand into the Chinese market!
The implication on exits
One of the reasons that France hadn't been seen from the outside as a sexy startup land is because it rarely had any IPO homerun that hit the press. One of the rare exceptions is Criteo, a data marketing firm that listed its ADR on Nasdaq late last October. It has been a huge success and the market cap for the firm right now is around $2B.
But this kind of feel-good story is really rare. On the contrary, most foreign investors or acquirers remember vividly the disastrous block of Yahoo!'s acquisition of DailyMotion by the government. This typically French tragedy sent a very bad signal to ventures around the world, that even in the fast-moving world of startups where competitions usually kill you before any bureacracy does, French government still manages to introduce a government risk that will leave the b-school professors rewrite their Corporate Strategy curriculum.
In any case, while exits are always on the mind of a VC, in France it definitely weighs more heavily compared to the other issues. And therefore the potential participation of Chinese VCs in France has a profound implication on this.
While sponsor-to-sponsor deals (also called secondary exits) are very common in PE industry today, it's quite rare in VC world for obvious reasons — if a startup cannot go IPO or become strategically attractive to corporate acquirers, it should just die and both the VC and the entrepreneur should move on. That's the way this business should be and is indeed. However, the way the large investment groups in China are structured, usually there are more possibile deal scenarios.
For example, it is entirely possible that such a giant investment group also, via its other investments, owns a big regional telecom company. While it might not be in the interest of the VC funds to buy startups from VCs in Europe, it's entirely possible that they could find some interesting acquisition targets for the said telecom company that is related to the mother group.
This might sound far-fetched to most American investors but with my background from a similar culture as that of China, I will not rule out the possibility.
We are the world
Bottom line is, I would venture to guess that in VC investments we will be seeing the same trend as in PE, where capital flows internationally for previously unfathomable reasons. Come to think of it, startups are actually better foreign investment targets than SMEs, for the following reasons.
First, most of the startups are relatively small with fairly simple books. Due diligence is simply much more straightforward and less costly. Once the decision to invest has been made, a Chinese fund also does not need to worry about the tons of regulations and dossiers in a PE buyout deal.
Second, the global startup environment largely speaks the same language — that of Silicon Valley. Whether you're a coder in Tokyo or a big-data analyst recently hired by Alibaba, the core oral and technical language is the Silicon Valley English. That means right off the bat a Chinese investor would already be able to read and analyze a French startup better than a family business in Bordeaux selling processed beef. The fact that both sides also share admiration for certain global vedettes such as Steve Jobs or Jack Ma also means the ice is much easier to break.
Last but not the least, while a PE buyout placement in a French SME doesn't usually come with any possibilty of cross-continental expansion, an investment in a technology is definitely without borders. A big-data algorithm developed in the suburb of Paris could be relatively easily adapted to the Chinese market. The processed beef probably has to wait another decade to enjoy the latest breakthrough of their cousin saucisses!
All in all, this is an exciting trend on the rise. I wholeheartedly look forward to contributing to the coming of it and share more thoughts on progress with all of you in the near future!