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The Scene from China: VC and Tech Reach New Scale

2019-02-04

Last year, venture capital investment in China surpassed North American totals for the first time in history, bringing Chinese business models to a stage and scale that "the entire world needs to pay attention to" in the eyes of Goldman Sachs Research's Piyush Mubayi. Corporate venture capital plays a major role: the country's big tech companies are active investors domestically, and now they're also setting sights on new markets. In this episode, Mubayi joins Jake Siewert to discuss developments in China's corporate venture capital space, as well as trends he's seeing in the broader tech sector.

This podcast was recorded on October 24, 2018.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2019 Goldman Sachs & Co. LLC. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is extremely scope and sanctuary: discuss developments, curly shaping markets industries in the global economy, objects. You are cold. Have corporate communication to the firm today were Hong Kong to have a closer look at asian markets and will be talking about how to space market technology of european by health beetle tell called internet media team and commons acts. Research ever gonna, listen to his views on China's tech industry in how to bald over recent years piecework this problem. So you recently were big report on the venture capital landscape in China in the contribution of Asia, specifically China. That There's a brief overview of the visa fee. Landscape in Asia and explain to us will be eighty Jamie's. We ve been riding pieces on VC and busy investing globally.
Would be realised in the second quarter is for the first time we ve had China exceed North America in terms of total DC investment. So that's a big big thing for us and it does proves to us that the child, business models- are reaching a stage. Training a scale that makes them something that the entire world needs to pay attention to, and that's been transferred, given our minds, so the total numbers we're talking about spent- or investments of about three thousand one hundred and thirty two billion dollars in the second quarter versus North America. That is now it's about twenty eight billion or so four total investment play believe. Seventy billion dollars plus. so the scale and China has gone up a lot. You asked about what be eighteen J by the way, that's now expanded with us initiating on Mitch Pain this morning. So it's be T J and there are a couple of others that gets thrown in
as near a new companies get created and the raising of capital gets consolidated around certain companies in China be is, of course, by do that's the Google of China. It's the search engine that has dominated the market for awhile was launched in two thousand and six from an IP perspective investment perspective. Alibaba is the e giant that has expanded across the horizontal and vertical both in China internationally and tea, ten cent which started out you know cleaned, messaging and kooky messaging in a pc era, and then his evolved to becoming the world's largest gaming company. So if you look at assets like fortnight, ten cent has forty percent ownership of that acid via its forty percent ownership of it,
games. They also own some of the largest games in the rest of the world, including honour of kings in China and, of course, legal later, and so all of that is sitting under the ten cent umbrella said that be a tea. Now the last part of the question that you also the last letter there's J and that's daddy dot com, which is the economist, form that ten times has invested in. You talked about the eighty J B, eighty j m- maybe an industry today any disrupted now becomes part of their ecosystem. Rather competitor is that the design from the beginning. It may not have been the design from the beginning, but these business models have you old. You might say that their like a conglomerate approach to businesses, but is also the fact that these businesses do not believe in traditional borders to wear their businesses are so. This is not like a business
case. The two would be starting where they would believe in what they call. Competence wasn't wouldn't touch other areas, so it's a slightly different model that they adopted, but the chinese businesses have generally been fair successful. They know their limits, they will always reach out, but it's a discipline around capital allocation that we have seen with some of these companies that has been positive from an investor perspective. I'll give you ample. It was about five years ago. The ten cent was investing in five different businesses over about their core business they were spending roughly a hundred million? U S dollars per business, which is a large sum of money, but the markets were reassured because they felt that if these businesses would not result in a positive return over the medium term, the company would have the discipline to be able to check these businesses, which is exactly what tents and did so. It grew out of this thought. Process drew out too
storing view that traditional business borders do not apply. You might say it was the old conglomerate models that we have seen, but those of worked fairly successful because the ability to leverage existing assets and tell him who these companies put very differently in venture capital ethics. There's lots of corporate VC spending areas be less. We're tends to be led by traditional Silicon Valley, Lizzie firmly because its corporate is their different shape to enter the investing, vary in jail, seas or idea investing across the then first across Corazon, pool sometime, sometimes to cross the vertical, but what it means is that the capital raising dense to get concentrated around the larger companies, and it's not the case of us looking at ten companies that might be successful in a certain vertical in the. U S and all tend in fighting for the ability to raise capital and then that's baseball, narrow, that's the way the model is evolved traditionally with ventures in the: U S: market in the western market in China. So much of that tends to
concentrate around the abilities of these four companies with five companies to be able to fund ventures in China and that's what makes so different. What is now started to happen? Is we ve started to see the Chinese expand outside the home market and enter into the EAST, Asia and South Asia, with business models that sometimes similar, but they're. Looking for investments that are broadly areas of their own expertise, but that's brought a lot of money into these new market too. Some of the big issues that are facing the technology industry in China and how our clients responding to them. on the common side we ve now cross to or approaching levels of penetration of twenty percent, these unprecedented levels of penetration of physical goods that us Kohl's online. The question always is To be where does this get too? So that's probably the first question now might say this was the question a couple of years ago, also with where the industry was, but in our view,
will remain an issue, but what the companies have done is changed the business model in a manner of speaking by targeting the sales of everything else it's offline in bringing those online, and that includes this, and also transforming the nature of some of the cells that takes place in the offline by integrating offline and online without does. Is it encourages the merchants to then be able to leverage the infantry that they have both offline sales and on line cells and run that concurrently? So we think we're at that stage where we should start to see. Companies and department stores benefit from the ability to sell across offline and on line on the concurrent basis. Those are the transformations that we think we're in the midst of. We think this will prove to be effective and beneficial for company. So that's one on the economy,
front on the entertainment sun and by entertainment? I include games where we started to see is that game broadcasting has become a big event. It's like twitch in the? U S, except that in China, I suspect, is bigger, given the breath of game broadcasting that we see on single platforms such as who we're so the ten percent is changing and were setting wondering whether gaming will like it used to be in the past, with the people will spend as much time gaming online gaming that is versus the past, so entertainment will continue to evolve. In our view, the third would be with regard to how we look at specific businesses. We started to see companies that leverage exist
assets pin Dodo is one that was leveraging social e commerce in a manner that we ve never seen before. It was really team shopping on a social platform that was very different from the model is adopted in the past and, to our surprise, was very successful and when I say surprise in the second quarter of two thousand and eighteen, the yearning growth rate and revenue was twenty four times as our twenty four hours. and you're only a growth rate was twenty four times, so models are changing their growing very rapidly the once at a successful. So those of the kind of changes were saying: where do you think is investments being made within twenty wire clients worth exploring Let's say: if you look at the areas where we started to see investments, sort of arab those have been international. Maybe traditional media was recently dominated by companies like I t where the need for funding was so they can create more content. So that was the scarcity at that point
and the companies are spending up to ninety percent of their revenue on creating content. We moved away from. Add to investing in areas such as fantastic one of the largest capital raising exercises in the second quarter was, and financial fourteen billion dollar capital rays, which valued and financial at a hundred fifty four billion dollars. Clearly that's the largest fan tech company in the world. As far as we can say, it's a those have been areas that have been able to attract a lot of money. The business models will continue to evolve. and they'll be assets that have gone public recently, such as PIN dodo that are now sitting on generation. Three assets Jem three assets of assets like we chat, dominated the market from a messaging perspective and the ability of companies like pity to leverage we chanced to be very successful. Socially commerce platforms are what is new in China. You know near appointed China has his prayer or national landscape can be partially too
forms that were implemented by the government to talk a little bit about how the government has made it easier for the venture capital landscape to thrive. The government likes to see investment that takes place, that is value, creating and is not just about growing the gdp, but it's about creating employment in a manner that is sustainable, so that the overall goal received and the investments have been continuing in that area. We think that that focus will continue from a regulatory perspective. Very specifically, we seen certain changes that have been put in place in the last one area, which is, of course, a little bit of panic amongst the market at least, must stop market perspective. It remains to be seen where these regulations and up but view remains that these will be constructive. We will see controls being put in place in several areas which will lead. To a sustainable growth in these companies over the medium term, the need for venture
capital would remain, and we will continue to see new book This model emerge that will help China grow in the future. All investors, fearful about regulatory Basin, where they weren't able to stifle innovation, or they worry about the business models of Sunday startups business models are always ahead of regulation. So that's the problem. You always face. Looking at business models that get created, then regulations have to catch up that's intuitively. The problem you face if it's a private company than there is less of a worry there. But if it's a publicly listed companies, which often times is the case, then you have to wait to see how the landscape will evolve and how the company will be able to manage new regulatory structures. So those of the issues that you have to deal with every
time you see a new set of regulations being put in place. There is a certain purpose behind it. We think that if you go through different sectors as an ultimate purpose here and all of it is without doubt an online constructive in terms of where the industry will it of all and it's all about having checks and balances in place that are necessary in chinese and big emphasis over the past decade, or so that shifting from a capital intensive industrialization infrastructure led economy to more consumer based on me, and this is an important part of that illusion. When you are blogging about attack industries involved. How do you think we got where we are today? The move away from
capital. Intensive industries where China, you would argue had excess capacity, has happened and has been facilitated by some of the companies that we're looking at today, for example, Alibaba is key and creating employment at this point in time historically days to talk about generating seventeen to twenty million jobs, some of them will be at the lower end, but a lot of them will be at a different stage, the different leg, so that the overall employment and a country tends to not get impacted. So you will continue to see some of the bricks and mortar businesses in China get impacted. They cause, as you scale down capacity in some of the older businesses and that's necessary change that
economy will go through and then its companies like again Alibaba or may Twond that tend to change the landscape, generate much more efficiencies, encourage consumer spending to take place, and all of that should continue to lead to what I think is a better sustainable business model from a country perspective in the United States, often being around technology companies. They tend in south, every small, employ bases and the disruption Marjorie industries. They had one. But here is fostering small business and more innovation. When you see seventeen million jobs or number like that, it's not, as the latter option point, seventy million people them she created ecosystem around themselves. This is a different kind of business model. Maybe then we ve seen in the U S with the companies are wrong I different the focus tends to be on making sure that you're, not disrupting too many in the economy. We write a piece recently and
about where we pointed out that Ali Baba goes to the extent of ensuring that six million small shopkeepers are not displaced by the EU, Urgent commerce, as we are seeing today, as more than twenty percent of the economy, goes on line. This is from a physical goods sales standpoints. If that happens, the fear is that some of the smaller merchants might get displays, so small shopkeepers might get displaced from the company makes an attempt to make sure they are acted first. Second, if you look at the scale of these platforms, Alibaba marketplace has around ten million merchants, which is a very large number, and this will expand and as they go rural in rural China, the focus is for the two way: economic development, both in terms of selling goods to those in rural parts of China, as well as taking goods that are produced in rural China and selling them to the rest of it.
Country now whether the model can take it to one level. Food which is to be able to facilitate the sale of what's made in China to other parts of the world is something that in its early stage, of course, that was the genesis of Barbara back in time that we could take that to the next step and that might again ameliorated. with the excess capacity has a built in China. So you talk a little bit earlier about how it yet to be proven how these companies will evolve overseas outside of China. Do we know the innovation in Asia or China specifically influencing how other companies are evolving globally, or is it still uncertain? How much pure innovation there is in Asia? in China Verses Silicon Valley, the influences chinese companies on a global basis It's very early days to point out that the chinese business models are getting adopted. You might Do that the way Amazon runs is similar to the business models that we see in China and Amazon
has gone into cloud very very effectively and it did something that clearly nor the company had done in the past and it mood recently into media. We think that that model similar to the way Alibaba has evolved over time. So I'm not hundred percent or you would say that the model is gone one way or the other, because both of adopted to certain conditions that were just happened to be similar in that both were able to get into the cloud business and the entertainment side. So we're just waiting to see how this evolves but the fin tech side of China is very interesting. Its early stages there in terms of how we have seen that acid evolve, where they ve been able to leverage high frequency transactions across different platforms, it was in the online world then move to the offline world, and then, if you can leverage. The information are able to assimilate and use them.
to make lending decisions to both the S Emmy customer base or the consumer base, then you start to see a business model. Its unique now conduct business man, be replicated in a similar manner elsewhere. Well, that depends largely on regulation, so its thirty days, but the aspect, Action of some of these companies is to take successful business models from China elsewhere, having covered as industry for number years, what would you say is most interesting about it at the current moment be scale if in whence it missing in the visa fee, space is now much larger in China than wasting and North America that at first sight and as we see this space continue to evolve. We think the business models a unique and they will continue to evolve in that manner and FED we're at that stage. Where that I have had the technically speaking of which honour to open up and we'll see the battle lines being redrawn, but given how competitive the chinese companies are at this stage, given how they penetrated their respective markets,
there are better understanding of their consumer base, in particular, give them a tremendous advantage of anyone else that tries to come into the market it has no track record today of anyone really gaining scale from the outside. So far is already. You feel may not be on people's radar today that you think we'll get allow attraction of the next few years that he trends you're. Seeing we always like to point to what we say and entertainment and gaming, that's one. It's the online entities meant or the living in a virtual world description that we ve talked about in the past. It matters a lot. I'm not sure whether the rest of the world has the same unique demographic structure, as we say in China, because if the unique household size house structure that you haven't China, the virtual world ends up becoming as real as the real world in a manner of speaking, which is why
Your gaming experience your time spent on line, and that could be on your messaging app. That could be on social networks that could be on shortfall Your long form video, so many different areas of that time spent. That gets to be so different. Now the jury is out and whether the rest of the world will become as engaged in their virtual world and the virtual identity. Potentially, as China has become, will wait to see whether that'll take over, but clearly with the success of some of the games in the west. Those business models are beginning to look more like the business models proven to be very successful in China, and the game are referring to in particular yet taken over the world, can over the world, but the business model is a very similar business model to every other game that was launched in was successful in China are right. Well, please, thanks again for joining me. Today's fastening discussion that concludes
This episode of Exchanges Goldman Sachs thanks for listening, and we hope you join us again. Next, on the spot, gas was recorded on October, twenty fourth, two thousand eighteen, all price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any represented,
or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs, is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity
Transcript generated on 2021-09-19.