Sparking New Business: US Innovation, with Chinese Funding

By Brooke Salkoff

For Alex Gruzen, CEO of wireless charging pioneer WiTricity, working with a tech-focused venture capital firm in China seemed a natural fit. Gruzen knew China well from his time at Compaq, Hewlett-Packard, and then Dell, where he led the company’s global notebook business. Since joining Boston-based WiTricity, Gruzen’s priorities included getting the tech right, growing the US customer base, and then breaking out in China, where the automotive and consumer electronics industries – the company’s primary targets for licensing and embedding its technology – have seen meteoric growth.

The Chinese investor in this case was Haiyin Capital, a Beijing-based venture firm deploying its third fund with a new cross-border focus. Yuquan Wang, Haiyin’s founding partner, had experience partnering with American firms; early on in his career as a consultant for US consulting firm Frost & Sullivan, he helped China Mobile grow to become by market cap the largest mobile telecom company in the world. With a decade of venture capital experience, Wang had a profound appreciation for the potential of untapped synergies in the Chinese and US tech worlds.

“The next Steve Jobs won’t come from China,” Wang noted, referring to Apple’s former CEO. “But he’ll need China if he expects to build a global company. Our idea is to find those companies in the US and help them use China to achieve explosive growth.”

To Wang, private US tech companies engaging in cross-border investment have great opportunities for outsized returns. Currently, the United States delivers a disproportional share of technological innovation to global markets. Among 148 nations, America accounts for more than a quarter of all international patent applications, according to the US Department of Commerce. The United States is home to 15 of the top 25 research universities in the world, as well as many more top-flight research institutions. And in a win-win cycle for American innovators, both reflecting the talent for innovation and solidifying it, 33.8 percent of the world’s R&D investments are made in the United States.

WiTricity and electric vehicles

In late 2014, WiTricity, spun out of the Massachusetts Institute of Technology in 2007, caught the attention of Wang’s Haiyin Capital. WiTricity’s primary research focus lies in developing the technology for wireless power transmission, enabling the charging of personal electronics to medical devices to cars without clunky cords and plugs. In the car market this means a small pad on the garage floor – or perhaps embedded in it – transmitting energy to a receiver on the car’s undercarriage.

This technology is of particular relevance to the fast-growing global electric car market—and to China’s growing demand for efficient and low-emissions vehicles. China has become a beehive for the global automotive industry, both as a market and producer of cars, as well as a source of automotive components. In recent months, Chinese buyers have ramped up their purchases of electric vehicles, putting China on track to become the largest electric car market in the world. In May 2015, sales of electric vehicles in China totaled 11,000, continuing the uptick in car buying that started in late 2014. To Gruzen, the prospect of WiTricity weaving itself into the Chinese automotive supply chain offered the tantalizing opportunity, through car sales, to land its technology in millions of households a year.

In reaching out to Gruzen, Wang knew China could help WiTricity achieve that explosive growth. Gruzen put the venture fund’s connections to the test, submitting a list of the kinds of companies that could be helpful to WiTricity’s growth in China. Wang and his team coordinated an introductory trip and delivered the high-level contacts Gruzen sought.

WiTricity and its technology were a good fit for Haiyin Capital’s portfolio of companies involved in cutting-edge technologies. The Chinese fund’s portfolio includes LightSail Energy of Berkeley, California, with funding from Bill Gates, and Khosla Ventures, which uses compressed air to store wind and solar energy. Another Haiyin-backed firm is Boston-based 1366Tech, which streamlines production of silicon wafers with the goal of bringing the cost of solar energy below the cost of coal. In Woburn, Massachusetts, the Chinese fund invested in Terrafugia, which is producing a flying car. In Middleton, Wisconsin, Wicab received $3 million in Haiyin investment in 2014, and recently gained FDA-approval for a device that helps blind people “see” with their tongues, by translating visual information from a video camera into gentle electrical stimuli for the tongue. The Chinese fund also invested in the leading US marketplace for buyers and sellers of private market investment opportunities, AngelList.

Chinese investment overseas

By serving complementary aspects of tech company growth, Haiyin’s venture approach offers a model for mutually beneficial investment cooperation between the United States and China, and feeds a growing appetite for cross-border investments on both sides of the Pacific. Chinese investments in US businesses, something far off the radar just a decade ago, now total nearly $50 billion and could reach $200 billion by the end of the decade, according to a recent study. Geographically, California was the top destination, with Chinese investors putting $5.9 billion into almost 370 businesses that provide about 8,300 jobs, mostly in the Los Angeles and San Francisco metropolitan areas. Chinese investors are targeting a broad range of US technology sectors, including automotive technologies, information technology, machinery, aviation, and medical devices.

Politically, US and Chinese leaders are taking note: opportunities for further investment cooperation were a formal agenda item in the two countries’ Strategic and Economic Dialogue talks in Washington, DC in June. With Chinese president Xi Jinping scheduled to visit the United States in September, both sides are looking t0 reach agreement on a high-standard bilateral investment treaty, which would broaden investment opportunities on both sides of the Pacific.

Over the past five years, President Obama has stepped up efforts to attract foreign investment, including expanding the US government’s investment promotion activities. In 2011, the administration launched SelectUSA, a US government program to bring jobs and investment from around the world to the United States. Operated by the US Department of Commerce, SelectUSA serves as a single point of contact for ready investors, coordinating investment advocacy and providing services and support for US regions and communities to compete globally for investment.

In its first two years of operations, SelectUSA claims to have facilitated more than $18 billion in new investment for the United States, and provided services to nearly 1,000 potential investors and economic development organizations per year. From 2008-2012, according to SelectUSA statistics, China-sourced foreign investment into the United States grew faster than any investment from any other country, clocking nearly 71 percent annual growth during that period.

This foreign investment has resulted in an increase in US jobs, rather than the reverse. According to one group monitoring M&A in the United States, Chinese investors have bought or created 1,583 US companies during the past 15 years, and these companies grew five-fold in terms of workers. These firms now employ more than 80,000 full-time employees, many of whom are engaged in both high-skill and high-compensation jobs in manufacturing and other sectors.

According to The Los Angeles Times, Chinese investors have been active in a wide variety of US sectors. AMC Entertainment Holdings Inc., based in Leawood, Kansas, reported 900 full-time and nearly 19,000 part-time employees at year-end 2014. The US theater chain management group is partly owned by Dalian Wanda, which took a $2.6 billion majority share in 2012. In another high-profile deal, in 2013 Shuanghui International Holdings purchased Smithfield Foods Inc. for $4.7 billion, taking over a company with 46,000 employees worldwide, including 10,000 in North Carolina. In 2011, Tencent, a leading provider of social networking and online portals in China, bought a $250 million majority share in Riot Games. The LA-based producer of popular video games employs over 1,000 game designers, dubbed “rioters.” And in mid-2014, Golden Dragon Precise Copper Tube Group started production at its first US facility, a $100 million plant making copper tubing in Wilcox County, Alabama. The plant employed 150 initially, with plans to expand to 500 workers.

Forces for new investment synergies

In part, these investments represent the next steps taken by a maturing Chinese economy. Rising energy and labor costs in China in recent years have also fueled interest in outbound investment. There are social, political, and economic forces as well:  a surge in the investor class in China; interest in immigration incentives for individual investors (Chinese investors now account for 85 percent of the 10,000 EB-5 visas issued by the United States to foreigners who invest more than $500,000 each); greater freedom for private firms; and increased interest in dollar-denominated investment opportunities.

From the Chinese government’s perspective, Chinese companies that invest abroad are likely to cycle some of their business back to China, both in manufacturing and distribution partnerships and in products destined for domestic consumption. Finding foreign high-tech partners also plays into a new ten-year plan announced in May by the State Council. “Made in China 2025” aims to improve both innovation and efficiency in the nation’s manufacturing capacity, with a focus on ten sectors, including high-end computerized machinery and robotics, aerospace equipment, renewable-energy cars, and biological medicine.

The Ministry of Industry and Information Technology (MIIT), which led the creation of the plan, said the strategy is intended to give China an edge in innovation and green development. US companies, for their part, are looking for opportunities in many of these sectors, while keeping an eye out for possible concerns over preferential policies, security reviews, and other measures that unfairly target foreign firms.

Haiyin’s portfolio companies would seem to fit neatly into these very sectors. Indeed, Wang targets the distinct sophistication gap between the products Chinese factories were built to manufacture, and the products US tech companies are looking to produce. “China is far behind the United States in innovation,” he notes. “Chinese are still students and what we need are new teachers. Not the multinationals but the smaller companies that hold the newest technology and the need to grow it.”

During a recent trip to China, a number of Haiyin’s US portfolio companies found potential investment connections, as well as potential partners in manufacturing and distribution. In Guangzhou, for instance, the Haiyin-backed companies introduced their technologies to Chinese companies with manufacturing and distribution experience ranging from textiles to toys to one of China’s big three automakers.

The strong interest in US emerging technologies seemed to validate Wang’s approach, which is based on the premise that there are complementary needs to fill on both sides of the Pacific in the process of growing a company from innovator to global player. Wang described this as “building block innovation,” more like a Lego than a lab: “Plug it in and it works,” says Wang.

LightSail Energy is one company using Haiyin’s investment to make this shift. LightSail’s Chief Scientist Danielle Fong noted that the May introductory trip offered a way to learn about the market for energy storage in China. “We met at least five organizations that could be valuable partners for us,” says Fong. Now looking for manufacturing partners, customers, and investors in China, LightSail and one of these potential partners have agreed to explore a joint venture.

For WiTricity’s part, Alex Gruzen is bullish on his company’s roll-out in China and the impact it will have on operations at home. “China is one of our biggest market opportunities in the world, but growth of our team is largely happening here in the US,” Gruzen says.

“In the end, the reality for American companies is that China is not something to fear, but something to take advantage of and participate in.”

If Haiyin Capital and other venture firms with a similar approach are successful at fostering rapid adoption, significant revenue, and higher valuations for the companies, there could be a lot of money made on both sides of the ocean—and the potential for new synergies in innovation and collaborative investment among Chinese and US firms.

[author]Brooke Salkoff is a venture consultant for Beijing-based Haiyin Capital. Brooke has been a tech fund partner and tech startup founder, and previously was a national correspondent for NBC News, providing daily live coverage of presidential campaigns and inaugurations, the 9/11 attacks and aftermath, and top national stories of the day.[/author]

(Photo by Tech Cocktail via Flickr)

The post Sparking New Business: US Innovation, with Chinese Funding appeared first on China Business Review.