Could Chinese venture capital back African innovation?

Chinese venture capitalists have clearly stated their desire to see the success of the western venture capital process replicated in their country. State and private firms have begun to take initiatives and institute policy reforms in recent years in order to meet that target.

The Hualu Group, one of the biggest Chinese state-owned enterprises which focuses on the audio and video industry, has been quietly forging ahead in the tech sector. In 2010 Hualu Group’s new video website adopted a business model which combines videos with e-commerce, including the broadcasting of popular TV series, interactive advertising, and sales of Blu-Ray discs.

The company has gone head-to-head now with a multitude of privately-funded Chinese online video ventures such as Tudou.com and Youku.com. With state-owned Chinese investments focused heavily on commodities which fared well despite recession, will a trend emerge that is focused on investing in the tech sector?

Already, China Tech News reports that Asian “privately-owned companies try to fight a losing battle against companies backed with Chinese government resources”. Clearly the Chinese government wants to take advantage of the web. But state authorities do not have a record of good investments in start-ups, largely because major successes that were once backed as small seeds received support from flexible, adaptable individuals or small firms, not bureaucratic entities.

Africa is an enticing proposition for the nascent VC industry in China.
Pretoria has welcomed investment by the Chinese company Huawei Technology in South Africa’s human capital. Government told Huawei Technology “to use South Africa as a gateway to access the region and indeed the continent” at a recent Pretoria meeting.

What makes Huawei different is that it is rewriting the rules of competition in a global industry, as a Wharton case study puts it. Unlike the stated-owned Hualu Group, it’s the first non-state-owned Chinese company to successfully expand its operations internationally. Huawei serves 45 of the top 50 telecoms operators and puts 10 per cent of revenue into R&D each year, certainly no small feat.

It has taken to small acquisitions in the United States, angering the US government in the process.
Last year 3LeafSystems, a San Francisco Bay Area firm that specialises in linking up servers to make more powerful computers and networks, was bought by Huawei for US$2-million without prior permission from the Committee on Foreign Investment in the US (CFIUS). The Pentagon argued it should have been notified to allow a review.

The reason Huawei is required to notify the US authorities when making acquisitions is due to previous accusations that the firm is closely involved with the Chinese government and military which, in American eyes, makes it “a potential threat to national security”.

Indications are that Chinese private equity remains close to the Chinese government, relative to the way private capital is ordinarily separated from state governments in South African and Western private equity.

Private firms in China may not “go it alone” in looking for African opportunities. The opportunity for foreign venture capital firms to form joint venture operations with Chinese players under the new Chinese legislation favourable to VCs are especially enticing given China’s financial appetite and vast market opportunity.

As has been in the case with Western markets, it’s the private VCs who are likely to exploit start-up opportunities. And while state-backed investments meant startups fell far under the radar with China’s massive global investments, the new dynamic of private Chinese capital in Africa may signal some new opportunities ahead.

It’s a simple fact: Private firms have been far more flexible, adept and successfully opportunistic in finding startup’s big ideas. By definition, sniffing out investment opportunities hasn’t been a state endeavour and that’s what makes the emergence of expansive private Chinese capital cause for optimism.

Already the proof is in the pudding. The New York Times reports that Asian firms, amongst them Chinese outlets, are gaining the edge, going as far as to back Silicon Valley startups in the US. Last year the Times revealed that “Chinese manufacturers have created an investment network in Silicon Valley operating under the radar that pumps money into a variety of chip, software and services companies to gain the latest technology”.

Tech companies from Google to IBM have been increasing their presence on the continent according to the Wall Street Journal. China is lining up its entrepreneurs behind a vision which is based on securing mineral supplies and building future markets, notes the International Marketing Council’s John Battersby in the UK. While he may work for our rather pro-Chinese administration in Pretoria, Battersby’s comments are far more than simply rhetoric. And judging by China’ record so far, it may be a matter of time before that is good news for African tech entrepreneurs.

In 2007 it was commonly reported that “funding options are simply few and far between for Chinese startups”. As with most things Chinese, it didn’t take long for a new VC industry to emerge searching for opportunities anywhere on the planet.