Blog Article | Rohit Kulkarni
Posted: May 3, 2017

VC Sentiment Remains Strong, Sovereign Wealth Funds Bullish

Are Chinese VCs a New Source of Capital for Private Tech Growth Firms in U.S.?

As part of our “ear-to-the-ground” approach to research, we attend key conferences where leaders in the venture-backed asset class debate emerging trends and issues. We recently went to an investor conference hosted by F50 in Palo Alto and discovered a number of surprises regarding current valuation levels, a potentially “mild winter” in the venture ecosystem, and the growing impact of non-traditional venture investors. Here are our key takeaways and views on what will happen next.

Thoughts on broader VC sentiment: Among conference participants, there was a general consensus that valuation trends of the first quarter of 2017 imply healthy normalization in both the number of deals completed as well as the valuation levels for private companies. Veteran investors compared the ongoing level of activity to that of 2012–2013. In other words, valuation discipline has returned, and diligence has become important again. Late-stage activity seems to have dipped below 2014–2015 levels, but remains clearly above 2012–2013 levels. However, the number of early-stage deals, a key leading indicator for the VC ecosystem, have declined sequentially for the past eight quarters, and they now sit at a five-year low.

Our take: We’d characterize the venture ecosystem’s sentiment as “cautiously optimistic.” Many investors have raised large pools of capital over the past couple of years. They see the strengthening appetite for IPOs and healthy M&A activity as positive signs and offsets to the ongoing “valuation discipline.” This year is off to a strong start and suggests improving VC sentiment and fundamentals compared to Q1:2016 levels.

Growing interest among international and non-traditional investors: Sovereign wealth funds (SWFs) are increasingly interested in this asset class. Investors from Malaysia (Khazanah) and Abu Dhabi (Mubadala) said they have started forming deeper relationships with key stakeholders in the Valley. We believe that private tech companies make up only a tiny fraction of investment portfolios for SWFs. Most funds have invested in conventional, fixed-income, and equity investments, and long-term projects like hotels, shopping centers, and ports. According to the market research firm Sovereign Wealth Fund Institute, fewer than 15 of the world’s 80-ish SWFs have made sizeable investments in private tech companies to date. However, that is starting to change. SWFs are clearly moving toward more allocation in alternative investments. This change in asset allocation strategy is part of a broader trend among global institutional investors to seek better returns against the backdrop of lower investment performance from public markets.

Our take: There is a clear love-hate relationship between classic Sand Hill Road VCs and deep-pocketed SWFs. Private tech companies still make up only a tiny fraction of the investment portfolios of SWFs. However, in the past 12 months, several SWFs (Singapore, Norway, Qatar, and Malaysia) have set up shop in the Valley, and they have the dry powder to exert their influence on the private tech investment landscape over the next several years to come.

China’s looming shadow on the U.S. private tech ecosystem: Over the years, we have often encountered companies claiming to be the Chinese equivalent of the next Google, Amazon, Facebook, Uber, or Airbnb. Recently, we have also learned how the differences in competitive dynamics, consumer demographics, technology adoption, and access to capital have likely led to the creation of 60+ Chinese unicorns in the past five years. At the F50 conference, a keynote presentation from China Investment Corporation’s CIO, Xiangjun Guo, reiterated China’s growing appetite for innovative global tech companies. We attended a panel discussion titled “How Can U.S. Tech Startups Find Chinese VCs?” that featured investors from Andreessen Horowitz, BlueRun Ventures, Sinovation Ventures, and Fosun Kinzon Capital. Chinese investors still tend to face incremental obstacles in leading funding rounds of U.S.-based startups. Regardless, Chinese investors have continued to broaden their access to U.S. private tech companies. At the conference, attendees discussed a possible tidal reversal of influence, as well as the potential for Chinese unicorn business models and technology to influence the development of U.S. tech companies.

Our take: Given the softening of the VC-funding environment in the U.S., particularly for early-stage companies, entrepreneurs are increasingly curious about seeking international investors. We believe U.S. private tech companies will continue to seek global and strategic capital sources. The good news is that there are willing and cash-rich Chinese investors. Such investments could become strategic stepping stones to access the Chinese market, and could also provide opportunities for U.S. entrepreneurs to learn about new strategies and business models.

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Rohit Kulkarni
Article Author

Rohit Kulkarni

Rohit is the Managing Director, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, Rohit was a Vice President, Senior Analyst at RBC Capital Markets.

PLEASE READ THESE IMPORTANT LEGAL NOTICES AND DISCLOSURES

This blog post is being published by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management, LLC., an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with and owns the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report.

None of the information contained in this blog post represents an offer to buy or sell or a solicitation of an offer to buy or sell any security and no buy or sell recommendation should be implied, nor does it constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

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