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Why Alibaba's Snapchat Stake Could Touch Off a Wider Investment Binge

A flood of Chinese investment dollars to U.S. startups will help them expand into China's complex market. But competition will also increase at home.
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Chinese investment in U.S. companies has skyrocketed over the last few years, particularly as monoliths such as Alibaba Group prepare to go public. That company, founded by multi-billionaire entrepreneur Jack Ma, has invested hundreds of millions of dollars in U.S tech companies that will be valuable to Alibaba as it continues to expand.

But it's a two-way street, and one with some unforeseen turns. U.S. tech companies are likely to profit from a strategic entree into a difficult-to-tackle, and often-opaque Chinese market, many investors say. At the same time, competition for some of the hottest Silicon Valley startups is likely to increase an already white-hot market, according to other venture capitalists.

"Imagine if Alibaba set up a joint venture with Snapchat, to bring a native version to China, and Alibaba had 25 percent of the joint venture," says John Backus, founder and managing partner of New Atlantic Ventures. "They make more money than a growth equity investor would, because they make money on the investment and the joint venture." 

Snapchat, the mobile chat application that swatted away a $3 billion offer from Facebook, is reportedly in negotiations with Alibaba for a financing round that would value the company at $10 billion.

Chinese investment in the U.S. doubled in 2013 to $14 billion, according to Rhodium Group, an investment management and strategic planning consultancy in New York. Through the first quarter of 2014, Chinese companies announced $8 billion worth of U.S. deals.

Similarly, China's appetite for initial public offerings in the U.S. has also increased, with 10 IPOs year-to-date for 2014, according to IPO fund manager Renaissance Capital. That's about one quarter of all non-U.S. companies that have listed here, but only a sliver of the 181 total IPOs for the same time period. Nevertheless, it's five times the number of Chinese listings for the full-year 2012.

Besides Alibaba, other Chinese companies purchasing U.S. tech companies include Huawei and Lenovo. (It's not all tech though: Shuanghui International recently acquired pork producer and American stalwart Smithfield for $4.7 billion last year.) 

Despite the money pouring in, many venture capitalists scoff at the idea that Chinese investments and its gargantuan purchasing power could cause a run on valuable tech companies.

"These investments represent access to the Chinese market," says Maha Ibrahim, a general partner at venture capital firm Canaan Partners, of San Francisco.

Its portfolio company Kabam, the mobile gaming concern, announced Thursday it had received $120 million from Alibaba. Ibrahim led Canaan's Series A investment of $3.5 million in Kabam, of which Canaan is a majority owner today. Alibaba's investment has pushed that company's valuation to $1 billion.

Give and Take

More than the money, Alibaba's ownership stake will allow Kabam to continue growing, says Ibrahim. She adds that Kabam, which has 200 developers in Beijing, has seen important revenue growth in China and elsewhere.

"Kabam is committed to the Asian market, and Alibaba is increasingly committed to the U.S. market, so a partnership is really a bi-directional thing," Ibrahim says.  

Going forward, investors speculate that Alibaba will continue looking for tech companies that will help it expand in electronic payments, mobile commerce, and gaming. More generally, other Chinese companies will look at strategic investments in tech startups, much the way Google and Intel do now through their venture capital arms.

And, as a side note, as U.S. search and content firm Yahoo looks to unwind its 23 percent ownership stake in Alibaba when Alibaba goes public in September, it could end up competing with Alibaba for companies to acquire as it looks to reinvent itself. Or, it could even be acquired by Alibaba itself.

"Chinese companies and investors see an opportunity [in Silicon Valley]," says David Zilberman, a partner at Comcast Ventures, the venture capital affiliate of Comcast Corp., in San Francisco. "That certainly makes investing more competitive for VCs, but that's part and parcel of current market conditions."

How I Did It: Jack Ma, Alibaba.com

Last updated: Aug 1, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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