The TikTok Dilemma: What’s at Stake for Cross-Border Venture Capital?

By Julie Ruvolo, Managing Director, Venture Capital, EMPEA [This article originally appeared in the August 27 | 28 edition of the VC Cache, a bi-weekly newsletter covering cross-border tech transactions and innovations with cross-border applications in a rapidly changing world.] The TikTok dilemma playing out on the global… Read More

The TikTok Dilemma: What’s at Stake for Cross-Border Venture Capital?

By Julie Ruvolo, Managing Director, Venture Capital, EMPEA [This article originally appeared in the August 27 | 28 edition of the VC Cache, a bi-weekly newsletter covering cross-border tech transactions and innovations with cross-border applications in a rapidly changing world.] The TikTok dilemma playing out on the global tech stage highlights an existential question for Asia’s venture ecosystem: can Chinese consumer-facing startups scale globally if they have the ‘right’ investors or ownership structure in place? Is there any acceptable such structure? Today, ByteDance-owned TikTok faces bans and forced divestiture negotiations in key markets, and the outcome will have implications for cross-border tech startups across the globe. TikTok developments are moving quickly — catch up on a brief timeline of key events below, current as of August 27. ByteDance is funded by some of the biggest names in global finance, including Sequoia Capital China (led a USD100m Series C in 2014); General Atlantic, KKR, and SoftBank, all of whom participated in a USD3b investment in 2018; Morgan Stanley and Goldman Sachs, who provided USD1.3b in debt financing in 2019 alongside Chinese banks; as well as previously undisclosed investors including Xiaomi (invested in 2014) and GIC. Tencent acquired a 2% stake in 2016 but has since divested. In 2017, ByteDance acquired US-based, which had been backed by SIG, Greylock, and others, and then rolled it into TikTok in 2018. But ByteDance’s all-star roster of global backers, and founder Zhang Yiming’s efforts to keep TikTok’s data out of China, has not staunched national security concerns in TikTok’s largest market, the US. While TikTok is a casualty of geopolitical confrontation between the US and China, skirmishes on the Chinese-Indian border also led to TikTok’s banning in its second largest market, India. Now, TikTok’s Indian platform could be acquired by Reliance Industries subsidiary Jio Platforms, of which Facebook is recently the largest minority shareholder (9.99%), alongside Google (7.73%), Intel (.39%), and Qualcomm (.15%). China’s WeChat is also at risk of an impending ban in the US, with potentially broader ramifications, as it is a central artery of communications and business-making for people based overseas, as well as foreign companies, connecting with China. If TikTok and WeChat, some of the most popular Chinese-made apps, were banned from American app stores, what would be the collateral damage to other Chinese apps? What would be the cost to Apple and Google who make significant revenues on these apps? And how would Apple and Google also stand to benefit, as potentially new investors in Jio Platforms, were Reliance Jio to acquire TikTok’s India operations?  China is the world’s second largest and second most active venture capital market – leading global venture firms, and an even larger universe of institutional investors, are heavily exposed to Chinese tech. At the same time, Chinese VCs and the companies they back have been expanding into Southeast Asia and other global emerging markets.  So what is at stake today? Implications for the flow of Chinese VC investment into India? Two months before the Indian government’s ban on TikTok, WeChat, Weibo, and 56 other Chinese apps, India imposed new restrictions on foreign investment from its land neighbors. Indian grocery delivery giant Zomato is the first affected by the new regulations, as its USD100m investment from Ant Group (formerly Ant Financial) is pending government approval. Ant Group already has a 25%+ stake in Zomato with over USD500m invested. For context, China-based VCs participated in 35 India deals in 2019, according to EMPEA’s 2019 VC+tech report. Will Chinese VCs and tech giants invested in the US and India double down on less considered emerging markets? Will we see more investment in Southeast Asia, which has already seen a growing influx of capital from Chinese investors? China-based VCs participated in 27 deals in Southeast Asia in 2019, according to EMPEA’s 2019 VC+tech report. Will Chinese investors take a more concerted look at Latin America, after sporadic investments, including Tencent in Brazilian fintech unicorn Nubank, Argentine fintech Uala, and spacetech Satellogic; and Ant Group in Stone Pagamentos’ 2018 IPO? Or perhaps Africa, where Chinese VCs participated in three of the top six VC transactions in 2019? What are the implications for Tencent’s prolific cross border investments in gaming and elsewhere? What does this mean for Chinese tech companies looking to expand overseas? Chibo Tang, a partner in Hong Kong at Gobi Partners (which manages the Alibaba Entrepreneur Fund) to the NYT: “...increasingly, his advice to Chinese tech companies was to steer clear of the US when expanding overseas — to follow instead the Chinese government’s diplomatic overtures and investments in places such as Southeast Asia, the Middle East and Africa.” Lightspeed India partner Dev Krare shares another angle: “[Blocking market entry is] something that China did a long time ago. If this is what China does to the rest of the world, then the rest of the world has the right to do it to China.” Finally, as the US heightens listing restrictions and warns of outright de-listing of China firms, and China doubles down on tech-friendly changes to its domestic listings, could TikTok’s fate affect where the next Chinese tech giants choose to list? Despite notable recent US listings of Chinese tech companies, including EV maker Li Auto (reportedly, Xpeng Motors is next), and gay dating app Blued, as well as SoftBank-backed online real estate brokerage Beike Zhaofang, we’re already seeing a movement towards China tech IPOs in local markets: Hong Kong of course, as well as Shanghai’s STAR Market, and Shenzhen’s ChiNext startup board. China-based chipmaker SMIC raised USD6.6b in an IPO on Shanghai's STAR Market, and saw its share price more than triple during its first day of trading. It will continue to be listed in Hong Kong, but earlier gave up its NYSE listing. Pro Rata: “This is the largest mainland China IPO since 2010, and makes SMIC the most valuable Shanghai-listed tech company with a market cap north of USD84b.” Ant Group (formerly Ant Financial) is planning to list on exchanges in Shanghai and Hong Kong in a dual listing that could value the company over USD200b, according to the WSJ, but did not consider a US listing, despite sister company Alibaba’s historic NYSE listing in 2014. Chinese online retailer launched a secondary listing on the Hong Kong stock exchange in the largest HKEX listing so far in 2020, ahead of the USD2.7b raised by NetEase. DiDi Chuxing is also considering a Hong Kong listing, according to TechNode.   Zooming out, it is instructive to look at the TikTok dilemma as part of a broader China-US battle over the future of the global internet, where geopolitics and tech are inextricably linked. Notably, the US-Hong Kong leg of Pacific Light Cable Network (PLCN), backed by American and Chinese investors alike, including Google, Facebook, and the Dr Peng Group, among others, is on hold and considering alternate destinations. Apple’s “Made in India” iPhone 11 has begun production at Foxconn’s Chennai plant, as Foxconn “plans to split its supply chain between the Chinese market and the US, declaring that China’s time as the factory to the world is finished because of the trade war.” Not to mention the future of 5G infrastructure and mobile hardware. Read More

LP Perspectives in 2020

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Valuing Private Capital Investments in the Global Pandemic

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Fintech Investments: Regulatory Challenges in Asia, Africa, and Latin America

The last two years have seen a significant increase in private equity and venture capital investment into fintech, as valuations and opportunities for returns grow. Emerging market fintech attracted a record USD18.4b in private equity-led investment in 2018, according to EMPEA data. 2019 saw another record toppled—this time, transaction volume—with… Read More

Legal & Regulatory Bulletin – Issue No. 29, June/July 2020

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