1. Many more US growth stage and pre-IPO startups will attempt to break into the Asian market.
The recent trend in venture capital is that fewer startups receive funding at higher valuations (see more on hypergiant VC rounds). To support high valuations, many US tech startups and established companies are relying on the story of global expansion, particularly growth in the Asian markets, even though Asian markets have proved to be difficult to penetrate. The voracious appetite of Asian investors and governments, the size of consumer demand and the amount of ambitious, educated talent in Asia further increase the appeal.
FANG continue to make overtures and investments across Asia. Tesla’s gigafactory in China is expected to finish construction this summer. After diving into China last year, WeWork continues its expansion effort throughout SE Asia. Recently, Classpass and Glassdoor also planted flags in SE Asia with an acquisition and a new hub, respectively.
In spite of the exciting opportunity, important questions remain:
- Will the value of these companies translate locally or will they only cater to expats/Westernized locals in Asian markets (and, if so, is that enough)?
- Can local versions of US startups defend their territory?
- Will local government step in to fend off US companies?
2. More oversight is needed in technology while technology also becomes indispensible for domestic governance.
Given technology’s role in society, governments in the US and across Asia have moved away from a free enterprise model. With all the misconduct and implosion of major tech companies in 2018 — from Theranos’ fraud, Uber’s business tactics, Facebook’s Cambridge Analytica involvement and the recent unveiling of a research program on minors, to Google’s anti-competitive practices, which resulted in a $5 Billion fine by the EU — people are realizing that tech companies need oversight and to be held accountable. On the other hand, media and investors are wary about how the Chinese government will guide BAT and other rising Chinese tech and social media giants in their day-to-day operations, and guide companies’ impact on society. Some of the more notable headlines include the Toutiao content ban, China’s gaming freeze to combat youth’s addiction to games, and the Social Credit Score.
Global media has used Social Credit Score System and surveillance as the poster child for China’s control of the internet, and it may be overlooking how China is leading the use of new technologies (e.g. facial recognition, biometrics, big data analytics) and methods (e.g. Social Credit Score) to manage society. With widely-deployed surveillance in China, the police can leverage software to catch criminals at large even in the midst of a crowded concert. To discourage bad actions, the Social Credit Score system penalizes citizens for not stopping the car at a stop sign or playing too much video games by taking off points of their credit score which may result in travel, spending or other restrictions. China further demonstrates that they will hold companies and CEOs accountable for their impact on society, such as in the case of Ofo’s founder and CEO, Dai Wei.
Though not necessarily to the same extent as is happening in China, governments and companies have growing power and access to all facets of society. As technologies allow companies and governments to penetrate deeper levels of people’s lives at scale and in an omnipresent fashion, the power dynamics of the government, companies and the people are being redefined and require our engagement.
3 (a) In spite of more political disputes and regulations, (b) global investors are ready to invest with newly-raised funds.
The dynamics described above are further complicated when international politics and cross-border issues are involved. Overall, the US and Asian governments want to attract foreign investment and top talent into its border (and keep them there), but they must also balance that with the interest of the local ecosystem (see India’s ban of Amazon and Walmart), national security and other geopolitical considerations. To expand successfully, companies need to better navigate these powerful undercurrents that are becoming less predictable and transparent.
Some of the key areas to watch:
- FIRRMA. The Foreign Investment Risk Review Modernization Act of 2018 passed late last year expands the powers of the Committee on Foreign Investment in the US (CFIUS) to review a much broader scope of transactions (the “covered transactions”) involving foreign individuals/entities. The Act provides the general contours but specifics are yet to be enacted as CFIUS continues to roll out regulations and pilot programs. Both direct and indirect investors (e.g. LPs) may be impacted depending on factors, such as the size of a transaction, control, and information obtained through an investment. The results may include longer timelines for transactions to close, more disclosure from the company and the investors, to a complete ban on certain types of deals. If you are interested in on how others are strategizing about FIRRMA, connect with us to learn more.
- Huawei Trade Secret Theft and 5G Ban. Regardless of what the US’ motivation may be, neither the Huawei CFO indictment or the 5G ban looks like it will be resolved soon. Beyond 5G networks, countries are concerned about China’s involvements in infrastructure and other technologies (leading to the termination of China’s rail project in Malaysia and the Senate of the Philippines blocking Chinese CCTV installation in the palace).
According to a recent study by Preqin and Insead, around 70 China-focused venture funds raised just over $15B in the first 11 months of 2018. A Bloomberg Opinion piece estimates that Chinese guidance funds managed by local government have ~US$856B to deploy. It is unclear how much of that will go in domestic or foreign channels but the funds are ready to be deployed.
On the US side, Tiger Global raised $3.8B at the end of 2018 (to invest in US, China and India), Carlyle Group raised $1.6M for a fourth lower-mid-market tech fund beginning of this year, and they were among a number of other firms to raise funds over $1B in 2018: Lightspeed Venture Partners, which closed $1.8B last July, and announced a $560M fund for China last month; General Catalyst closed $1.375B; and GGV Capital $1.9B. Note that these are all just 2018 or 2019 vintage funds and we will likely hear soon about Mary Meeker’s new tech fund, Bond, since they first spun out in September last year. VCs are prepared to spend money on top companies and their funds reflect it, even in the midst of an uncertain stock market and political outlook.
Playing the global game, Sequoia can cut checks for up to $1 billion
As the shadow of SoftBank (and its $100 billion fund) looms large over the investment landscape, Sequoia Capital is…
4. Asian companies are expanding worldwide, but US and Europe are no longer the first stops.
Asian tech companies are expanding around the globe and across Asia at a much faster pace than Western companies, and many no longer look at the US and European market as their top choice for expansion.
Pandaily put together a great article on key strategic moves by Chinese companies. Also, companies have started branching outside of China (TCL and Foxconn expand in India) to manage potential risks from the US-China trade war. Asian companies have refocused their strategies to capture the rise of the SE Asian market and gain footholds in the Middle East (particularly Israel) and Africa. These experiences may create a strategic advantage for Asian companies not only geographically but also in cracking the code for reaching the next billion users.
Asian companies, however, tend to have trouble (or simply don’t prioritize) shedding their skin to become “global” companies regardless of how much of a global presence they may have. Time will tell whether 2019 is the beginning of some interesting corporate culture changes for these companies.
5. Asia sets its eyes on deep tech with China leading the way.
Globally, we are pushing the boundaries of many technologies that each have the potential to fundamentally change how we live. The rise of the Asian tigers has shown how harnessing the right economic trends can transform a country and, in this era, each Asian market strives to find their niche while China and the US compete to be the world’s best.
Last year, Asian governments and investors overwhelmingly bolstered deep tech programs, and other support initiatives to foster its own ecosystem of advanced science and engineering companies (a.k.a. deep tech). A number of Western companies have taken advantage of these opportunities to grow its presence in Asia and forge access to new pools of talent and startups but they are still the minority and we expect to see many more continue on this path this year. Below are a few examples:
- Taiwan — Taiwan’s transformation as an AI hub with support from IBM, Microsoft, Google, Amazon to name a few.
- Singapore — Government initiatives to foster deep tech community.
- Thailand — Digital Ventures, a subsidiary of Siam Commercial Bank, on fostering deep tech.
- India — Recent investments from Qualcomm, Rolls Royce, and Bosch.
China and the US are investing heavily in the development of all technologies but we wanted to point out a few areas in particular:
6. While the US clamps down, Asian governments use attractive policies to win talent and business opportunities.
Though international political tensions have risen, many Asian governments continue to embrace foreign entrepreneurs, investors and companies with visa programs, government incentives, business introductions, workspace, and mentorship. We have aggregated a list of these entrepreneur visa programs and incentives here. If you have others to add, please let us know!
7. Cybercrimes continue to grow and create both collaborative opportunities and new sticking points between US and Asia (particularly China).
The IBM-Redhat and Dropbox-Hellosign rank among some of the most noteworthy acquisitions in 2018, and 2019 looks like a good year for cybersecurity companies to raise money and find exits in the US and Asia. However, as threats originate from around the world and often outside of North America, established companies and cybersecurity startups will benefit from looking to Asia for talent and to learn early about the threats on the horizon, especially as SE Asia steps up in this area.
As data collection and analytical insights become even more crucial for companies and governments to achieve their goals and technologies become more advanced, cybercrimes will also continue to increase. Top data breaches in the US in 2018 include some of the most well-known brands and the size of breach and costs are rising dramatically. To add a political and cross-border layer, the HPE and IBM hack right before Christmas was reportedly by hackers affiliated with China’s Ministry of State Security.
However, Asia is seeing its share of cybercrimes as well, with HK reporting record data breaches in 2018, a 20% increase from 2017. (For more updates on cybersecurity in APAC, check out IAPP’s Dash Digest.) Even companies providing productivity tools must guard against how and by whom their products are used (e.g. Whatsapp under fire for not stopping the spread of child porn in chat groups; Slack instituting ban of users linked to Iran.) So it’s no surprise that Accenture Research finds that cybersecurity and security breaches are becoming a regular topic in earning calls of S&P 500 companies.
International collaboration and integration of talent from East and West may greatly benefit consumers and the tech community. Amazon has long had to manage issues with fraudulent review and click farms, and, Alibaba, with IP infringement of its sellers. New forces, such as the “wool-pulling party,” are causing e-commerce platforms in China to lose over millions of dollars in short periods and who is to say e-commerce company abroad won’t be next. It’s no wonder that we are seeing the likes of Honeywell (industrial cybersecurity center in Singapore mid-2018), Cisco and others launch new cybersecurity hubs in Asia, with the support of local governments.
8. Companies are globalizing their workforce at unprecedented speed and scale.
The most successful companies are aggressively adding global talent and becoming even more global by establishing new hubs, growing local teams, and providing experiential training. Netflix’s expansion to 190 countries in 7 years made it imperative to adapt quickly. In addition to AI R&D labs and hubs, Facebook and Google are each adding data centers in SE Asia as millions continue to come online and discover new internet services. For more and more internet companies, such as LinkedIn, a growing majority of its users come from outside the US (e.g. around 75% in the case of LinkedIn).
These global initiatives are also reflected in the types of new job postings that we are seeing at SGA.
As you may see from our examples, we believe that the future of tech is more global and more Asian. There are many exciting developments as we head into the year of the Pig and we look forward to opportunities to help you expand in Silicon Vally and Asia!
Many thanks to Elise Jiang, Sophia Shao and Randall Tran for their help on this piece!