Yes, China is taking over the world. Or at least the Internet. No, this is not like the WE’LL-ALL-BE-WORKING-FOR-JAPAN-oh-nevermind scare of the 1980s. Why? Because China has more than 1 billion people. It already represents the largest online audience in the world and is less than 30% penetrated and has Internet spending per capita that’s less than one-third of the United States.
That means two things are true that aren’t usually true at the same time: It’s a monster now and it’s barely gotten started. The Internet– more than any other industry– is about building huge, mass audiences. China wins at that. Accept it. You can’t spend 15 years arguing size and eyeballs matter and not be impressed by what is happening in China right now.
Chinese Internet companies make up two of the five largest Internet companies on the planet. And if Alibaba can wrestle away from Yahoo, and take Taobao and Alipay public, it may have three of the largest in the near future. (Especially because Yahoo’s value would plummet.) No other country aside from the US has come anywhere close to achieving that level of business success online.
Three giants would be impressive enough. But it’s not just Tencent, Baidu and Alibaba. If you need any more evidence that the hub of Internet returns has shifted from Silicon Valley consider the interplay of these three macro-stories.
One: Nearly every outspoken Valley-centric VC and super angel is blogging and Tweeting about strategies for surviving this “bubble” of seed investing, whether it’s Ben Horowitz saying Andreessen Horowitz is looking more at later stage deals in this over-priced climate, Fred Wilson saying that he’s seeing “storm clouds,” or Mark Suster getting applauded for his defense of relationship-driven venture capital, as opposed to hopping into a deal with no due diligence at any price. Ladies and gentlemen, there is an early-stage pricing bubble in the Valley, and we are past the point of inevitable carnage if this many people are sounding the panic alarm.
Two: The Valley is largely a bubble that doesn’t actually have returns yet. Exits have mostly been confined to a bunch of industry insiders selling for less than $100 million and employees cashing out shares in the secondary market, and yet prices are going up insanely. Huh? That is like a purple unicorn. It shouldn’t exist in nature. It is purely a function of supply and demand, a scarcity of good deals and a glut of willing capital. Of course, there are companies that will make huge amounts of money when they chose to go public like Zynga and Facebook and, I’d argue, the comparatively reasonably valued Twitter. But no one actually has and best case there are only a few names you can put in that category.
Ok, Bill Gurley, we get it. IPOs are increasing, and there is an appetite for more. But there are a few important points the Benchmark GP and defender of the not-totally-dead IPO market makes in this post. First, the reason companies that have gone public like OpenTable are soaring is because the giant Valley companies do not want to go public right now. For years now, people have been talking about this great backlog of companies. Guess what? It’s still a backlog mostly.
“A good year” relative to 2009, isn’t the same thing as good when you have an industry investing between $15 billion and $20 billion a year in startups. That math does not work on a macro-level, no matter how badly everyone in this ecosystem would like it to. Gurley argues the bar for “a good year” also shouldn’t be 1999. That’s true, but if there’s this much money going into startups, the bar can’t be pre-1999 when the asset class was a fraction of its current size either.
The last important point Gurley makes is that the bulk of the IPOs that are happening are from companies outside Silicon Valley, partially because of this shift in the Valley’s cultural desire to lead a public company. Which leads me to…
Three: Five trips to China ago I met with a wide array of startups. They were all pretty much blind stabs in the dark of who might be an up-and-coming Web company. Three of them that I wrote about at the time have filed paperwork to go public or priced right in a row: BitAuto, Tudou and YouKu. I am just not that good at picking startups in a country where I don’t speak the language and didn’t know a single contact. No one is. Chinese IPOs are just huge right now– both in the Internet and in other “old economy” sectors as well.
Chinese companies generally are making up about one-third of US IPO activity this year, according to Peter Astiz, co-head of DLA Piper’s global technology sector practice. Most high-growth Chinese companies–especially in technology–are choosing to list on US exchanges, Astiz says.
Part of this is that culturally there’s a massive preference for an IPO over an acquisition in China. That’s the exact reverse of what Gurley aptly describes as going on in the Valley. You think China is still a “communist” country? Get. On. A. Plane. It is authoritarian, sure, but it is capitalism gone wild. “I’ve been in this business 25 years including when everyone was saying we should learn Japanese, and it’s clear to me China’s cultural model towards entrepreneurialism is the closest to the Silicon Valley model of entrepreneurialism I have seen anywhere,” Astiz says. I haven’t spent 25 years doing this, but I have spent more than a decade in the Valley and half of the last two years meeting with entrepreneurs in eleven different countries, and I couldn’t agree more.
The Valley is not anything like 1999 right now, no matter how much term sheets and deal negotiations look like it. In 1999 the deals were driven by the fact that you could take a company public at inflated values in 18 months and exit. To date, only YouTube has had a $1 billion-plus exit and Web 2.0 has been going on for about five years. And the truth is, China isn’t just like 1999 either. Companies aren’t exiting at the same speed, some have spent years building their companies and a lot of them are making money. But unlike the Valley, everyone in China wants to go public, and it’s hard to argue some values aren’t getting inflated as investors grapple for position in a market that is going to be huge and one where US companies have not proven they can succeed.
And yet, when I travel to other emerging markets, I always get questions about why all the big Web companies still come out of the US. The world needs to wake up. Value-judgements aside, the Internet will be transformed as more of the aggregate Internet market value flows east. Just like when new-world AOL suddenly bought old-world TimeWarner, one of these Chinese companies will be smart enough to leverage their inflated position while they can. (And an ensuing good v. evil media/political brouhaha is going to explode.)
I’ll tell you who isn’t surprised by anything I’ve written in this post: Valley venture capitalists who started investing in China eight-to-ten years ago. Are many of these companies over-valued? Yep. But that doesn’t mean it’s not lucrative for VCs who got in early and a huge wave of Chinese entrepreneurs. And like our own Internet bubble, it doesn’t mean there aren’t real fundamentals and lasting companies buried in all that hype.
You remember those bumper stickers spotted in the early 2000s that read “Please, Lord, Give Me One More Bubble”? Well, hallelujah, Sand Hill Road, if the flurry of recent Chinese Internet paperwork, pricings and rumors of both are any indication, your prayers might be answered. Only a few years ago there were widespread worries that VCs investing in China were throwing their money down a black hole. This week several firms have told me their China funds might out-perform their US funds– at least in the short term.