NewCo Shift Forum 2018 — Signal P&G Talks
SVB’s Erik Peña on how China is different — and why it matters.
If you want to understand the future of business, you best study China. At the Shift Forum this past February, we asked Erik Peña to help us better understand the world’s fastest growing superpower. Below is the full transcript and video from his fascinating survey.
Erik Peña: Good evening. I wouldn’t call myself an expert in China, but I’ll give you a very quick overview on SVB to set the stage of our role in China. Then we’ll dive right into China, as soon as I figure out the clicker. There it is.
SVB has been around for about 30 years. We worked on it here in Silicon Valley as the bank to the innovation economy. We fund almost 50 percent of all of the venture capital backed companies in the US.
That is from the two-ladies in the garage, all the way up through growth and companies that are now scaling and public. We have over a hundred billion in client funds internally. We have about 20 billion in loans out to companies.
We have a private bank that serves all the individuals and the families within that ecosystem. We bank about 70 percent of all of the venture capital funds in the US. We also have probably the most sought after group in the bank, which is our premium wine division, banking about 300 wineries from here to Oregon, all the way up to Washington State.
30 global offices, one in Shanghai, one in Beijing. We have the first JV in Shanghai, which we opened about 15 years ago. It’s the only JV that has a license for on-shore China banking. Let’s turn to that a little bit and the Chinese economy.
Let me start with fundraising. What we’ve seen is that VC fundraising in China has reached the US levels. In 2016, there was 50 billion that was raised, actually exceeding the US by a little bit. That is the highest it’s been in 15 years, for either the US or China.
On the bottom right there, the other interesting stat for me is that the number of new VC funds in 2017, it was 200 new ones were formed in the US. Almost 900 were formed in China, just to give you a sense of the activity and the new investment that’s coming into the market.
All of that is translating to a booming economy in China. I picked three examples here. We probably could have picked another 10. E-commerce, 42 percent of total global e-commerce transactions were in China. Some of the largest e-commerce deals were broader in Asia.
If you look at AI, which I know we’ve talked about a lot today, 50 percent of the dollars in AI are going to China. Beyond that, it’s not just the dollars but the patent applications, the next wave of innovation, China has surpassed the US on that front.
Mobile payments value, almost 800 billion in China, which is 11 times the value of the US. All of that activity is translating to very, very valuable startups. China has bred about a third of the world’s unicorns.
I say that just as an example. Two interesting pieces here. The unicorns in China are catering to the needs of the consumer as opposed to the enterprise, which we see more in the US.
On the right-hand side, they’re focused a lot more on the nascent sharing economy, which continues to get a lot of investment funding.
If I switch for a minute to the role of government in all of this, let me start with the foreign perspective. If you look at that graph, Chinese foreign investment in the US went from nearly nothing 10 years ago to 45 billion in 2016.
There is a dramatic drop-off that happened in the last year. It lost about a third of its value, going down to 30 billion, but it’s both governments that can be implicated there.
The Chinese government severely curtailed outbound capital flows, and the US government has put increasing regulatory hurdles on foreign investment in the US.
I saw a recent article on what’s going on with the Waldorf-Astoria and its Chinese ownership in the past week or so.
Domestically in China, it’s a very, very different situation. The Chinese government is an incredible supporter of the innovation economy in China through policy, through investment, through innovation itself. That gets underreported and underappreciated, particularly for US startups.
They don’t realize they’re not just competing with the Chinese startup, they’re competing with the Chinese government. The Chinese government there in the middle on the investor’s side, they have a 15 billion plan for AI, everything from agriculture, to wearables, to military applications.
They have opened deep learning labs with their top Internet companies, like Baidu. They have their own incubators that municipal governments fund as well as funding 2,500 others from the private sector.
They have a 30 billion fund to make direct investments in companies. Their own state-owned enterprises run tech pilots. One example there, the state-owned companies are going to spend 180 billion to build out the world’s largest 5G mobile network over the next few years.
One other advantage that China has is the war for talent. On this slide, what we did was we mapped all of the AI and ML research centers for the US giants and for the Chinese giants. If you look on the far right there, Google is the only company that has a dedicated AI ML center in China.
If you look on the far left, all of the Chinese giants, Baidu, Alibaba, Tencent have labs in the US that they are drawing talent. It’s not just the US, it’s worldwide. That’s a major advantage for the Chinese firms.
Another one in the cross borderlands is the business models that we’re seeing coming from China, not just to the US but broader in the world. Live streaming companies, bike sharing companies, digital education, social media apps.
The bike sharing ones, Mobike and Ofo, are interesting. For me, there are two highlights there. One is the level of investment that they have already received, over a billion dollars each. What they’re exporting is it’s an infrastructure play backed by digital technology. It’s not about bike sharing.
All of that, for us, points to the fact that China has a tremendous impact on the global innovation economy, whether it’s as an investor. 15 percent of the VC investment outside of China is coming from Chinese VCs.
Global M&A, the bat pack, if you will, Baidu, Alibaba, Tencent doing more global deals than Facebook, Google, and Microsoft. Technology partnerships with countries, South Korea, and the US. Then the business models that we talked about.
I’ll leave you with this quote from an economist article that came out just last week. It was comparing how Chinese tech firms are stacking up against US firms. The quote was, “It’s time for Silicon Valley to be paranoid.”