How the Rise of Beijing and Shanghai Tech May Impact Silicon Valley
When it comes to startup tech hubs, U.S. cities from San Francisco to Austin to Boston come first to mind. But that is starting to change, as Asian cities—particularly in China—are snapping up more tech venture capital funding and exits, according to a new report from CB Insights.
Silicon Valley tech startups pulled in the most funding of any metro region globally during the last six years at $140 billion, according to CB Insights’ Global Tech Hubs Report, which the New York-based research firm published Tuesday. But Beijing and Shanghai startups appear to be working to keep pace, reeling in $72 billion and $23 billion, respectively—meaning startups in the two cities added $95 billion between 2012 and 2018, according to the document, which focused on the top 25 metro area tech hubs in the world.
That level of investment in Beijing and Shanghai is thanks to large rounds for companies such as Didi, Toutiao, Mobike, and Ele.me, CB Insights says. On top of that, the two Chinese cities have 40 “unicorn” tech companies between them (companies with billion-dollar valuations), compared to the 57 that exist in the Silicon Valley.
The number of equity funding rounds for Beijing companies rose dramatically in 2017 to almost 600 deals, up from about 350 a year earlier and fewer than 100 in 2012. Later-stage startups in Beijing have received 128 funding rounds worth more than $100 million since 2014, compared with 158 for Silicon Valley tech businesses, according to CB Insights.
Venture capital has been flowing as both U.S. and foreign investors, such as sovereign funds and family offices, look to put money into high-profile startups, particularly in tech. In the first quarter of 2018, venture investors poured more than $28.8 billion into U.S. companies—the highest mark in more than a dozen years, as Xconomy reported in April. Sovereign wealth funds increased their investment in U.S. technology companies to $13.2 billion in 2016 from $2.1 billion in 2010, according to the Sovereign Wealth Fund Institute.
Hearing about the high level of investment in Beijing and Shanghai is absolutely amazing, says Blair Garrou, a managing director of early-stage investor Mercury Fund, based in Houston. That’s because it may mean that more foreign investment is flowing into foreign deals, rather than into big U.S. startups that have often been the target, he says.
“Will they then look to their own country—especially with a lot of the new congressional acts and laws going on—and just focus on investing in China, because that market is becoming more robust?” says Garrou. “If that is the case, there could be some severe consequences for these [U.S.] unicorns, in terms of big flights of capital.” (Garrou didn’t read the full CB Insights report and was commenting based on a summary of part of it.)
Middle Eastern and Asian funds propped up the U.S. venture market for years, paying high rates to invest in late-stage equity rounds for big unicorn startups, Garrou says. That has helped large, coastal venture firms not only continue to raise new funds, but also made it so companies could avoid seeking the public market if their business operations didn’t match up to their valuation, he says. If foreign money becomes more limited in the U.S., it could mean potential down rounds for startups, slower fundraising cycles for VCs, and a correction in the early stage market, Garrou says.
“If you’ve got great deals of your own in your backyard, and you don’t have to pay up for them, like you do here, what are you going to do? You invest in your backyard,” he says. “If the public markets retract at all, and it’s harder to go out, and these companies with these high burn rates can’t access capital from abroad because the international investors are investing in their backyard, that’s a massive scratch on a vinyl album for the coast.”
Other cities globally are attracting lots of foreign investment, too. About 49 percent of the money invested in Berlin companies was foreign, for example, while Toronto businesses got 46 percent of their funding from investors outside of Canada, according to the CB Insights report.
Beijing and Shanghai weren’t the only Asian cities with significant growth, though the cities did lead growth in most categories. Both Tokyo and Seoul saw the number of startups created annually more than double between 2012 and 2018, according to CB Insights.
While Asian tech startups appear to be attracting more venture funding, cities like Beijing and Shanghai still don’t compare to Silicon Valley in terms of large exits for companies. In excess of 200 businesses had exits worth more than $100 million in the Valley since 2012, according to CB Insights. That compares with 30 for Beijing and 20 for Shanghai during the same period.
“Large exits are the best indicator of a healthy tech ecosystem,” CB Insights wrote in its report. The thing to watch will be how long Silicon Valley can keep its lead there.