The talk of the town this year in European VC has been the increasing presence of US money into the continent.
Early Facebook-backer Sequoia has been hiring a European team while Tiger Global has been doing a wild number of deals.
But data from GP Bullhound shows that Asian investment into European tech reached an all-time high in the first quarter of this year in terms of number of deals.
This came after a dynamic 2020 as well, with Asian funds surging into companies like flying taxi startup Lilium and Robotic Process Automation (RPA) platform UiPath. GP Bullhound also found that fintech was China’s top investment focus in Europe for Q1 2020.
So what’s going on? Why the rise in interest? And will this trend continue?
According to Tom Xiong, the Shanghai-based founder of the fitness startup Move Shanghai, there is much more talk in the Asian VC world about European deals and European tech.
He says this is partly due to the friction between China and the US which ramped up during the Trump presidency. “Many bigger, more serious investors are looking into European tech investments more than ever now after the trade war debacle,” says Xiong.
“Until now, Chinese investors have been overexposed to the US and India. The trade war became something of an awakening, reminding them of the risk of the US being able to cut off their access to the market,” he adds.
The Spotify effect
Elsa Hu, executive director at GP Bullhound, says that after a series of success stories such as Spotify, European tech has slowly gained a better reputation than a decade ago and now people are more ready to take the continent seriously.
“The rise of bigger companies like Spotify has helped a lot with spreading the knowledge about European tech companies,” she says. “Gradually Chinese investors have realized that these companies are equally good, or sometimes even better. They often have a more reasonable valuation – without restrictions on investments”.
Benefits for startups
Hu says that this trend of more Asian money is great for Europe, and she highlights three advantages with having a Chinese investor.
The first is helping to open doors internationally. “If you are a tech company looking to get out of Europe, which is a relatively small market, you have two directions: US or Asia. If you have a Chinese investor, you open the door to the East.”
Depending on the venture firm, an investment may also be a key to access specific technologies and platforms. She points out social media, content and new retail as some categories where China is at the forefront.
“If you are in one of those sectors, a Chinese investor might get you access to a more advanced operational model, a proven technology platform, as well as some fresh understanding of the market and industry”, she says. “And of course with someone like Tencent for instance, you get a lot of expertise with their global portfolio.”
Lastly, she points out that a Chinese investor rarely differs from one based in Silicon Valley, except for in terms of geography. “Chinese investors want to find returns and good examples of future fundraising. In that sense it’s no different than a European fund. They are usually quite good at staying passive.”
There is always the risk that companies with Chinese investors could become embroiled in politics in a way they might not want.
In 2019, game developer Activision Blizzard banned a famous esports player after he expressed his support for the Hong Kong protestors during a competition live stream. The media accused the US company, with Chinese Tencent as a shareholder, of censoring individuals in favour of the Chinese government.
Another example is Silicon Valley startup Pilot AI Labs, which according to reports in the Wall Street Journal regretted taking on Chinese VC firm Digital Horizon as an investor as it impeded its ability to work with the US Department of Defense.
Hu, however, says that generally speaking pressure from Chinese investors is the same as pressure from any other investors, related to money and strategy rather than politics.
“I don’t think that Activision Blizzard is a good example of what can go wrong,” says Hu. “China and the US are the largest esports markets in the world. If you look at it from a money perspective you understand why that decision was made. It was mostly business driven, rather than political.”
She continues: “As long as you have the right model of management it doesn't really matter who is sitting on the board. I’ve heard clients complaining about their investors trying to dictate what they should do. So if you have an investor that is trying to swing the way you manage then it doesn't matter who that investor is or which country they come from. They will do it anyway.”
Tom Xiong, however, has made an active decision to keep European investors as a majority in his company.
“I’m operating in the lifestyle and fitness segment that is relatively new in China. It’s easier for European investors to relate to my service. Secondly, I don’t want to strive for unprofitable economic growth. Launching a company in China is a rather pressured situation, and it often comes with the expectation of rapid growth,” he says.
According to Xiong, cultural differences regarding business and investment might be the biggest challenge for European startups.
“I’d say that China has a whole other definition of what the word ‘fast’ means. They have been spoiled with an extremely fast growing market. Many investors might not have the patience as those used to the European market.”
However, a good investor is well informed of this difference, he believes.
“When the younger generations are taking over we will see a generational shift. They have a different understanding of the world. They have been studying abroad, maybe worked at McKinsey. Their interests also lay outside of China. And because of this I believe that the capital within Europe, not just in tech, will increase even more.”
This article has been changed to show that it was Asian investment in Europe that was at a high Q1, not just Chinese