On valuations: The deals that are getting done are with the better companies that have done well in 2016 and are therefore able to raise money in 2017 at a higher valuation.
On deal terms: We see less SAFE structures than before, especially in early stage deals. The number of these have definitely come down.
On the IPO climate: Investors are more cautious as to what IPO valuations will be, therefore fewer deals are currently getting done. There will definitely be an uptick, given the size of many private companies.
On US-China dealflow: I’m not sure that it will be at a scale of a Uber-DiDi or Baidu-Uber, but I think a China mega deal is likely to happen over the next 24 months.
Have you had a chance to look at any of the quarterly financing information that we sent over based on deals we’re seeing?
Some of the numbers seemed a bit surprising to me. Based on what I have seen, I would not recall Q2 2017 as having the highest median pre-money valuations. I don’t know where that data comes from, but Seed, Series A, Series C, its last quarter was the most expensive, and for Series B and D, it’s the second most expensive in the last two years. So that’s definitely not our impression.
The data we shared with you is based on deals that we were involved in in Q2 where we represented either the company or the investor, so it’s only a slice of the macros world. You’re not seeing those trends in median pre-money valuations?
Maybe you’re getting better clients and hotter deals, so we all got higher pre-money valuations!
I don’t know about that. Hans, elaborate a little bit on what you’re seeing as far as valuations across the deal stages.
Basically, back in 2015 we see a huge ramp-up in valuations. Based on my recollection, most of the expensive deals raised money in 2015. In 2016, there were fewer deals that got done. As I recall, the first half of that year, the tech market was terrible. People were saying, “This is 2008 all over again.” This year we are seeing that the numbers have crept up, but not to 2015 levels.
That’s across all the deal stages that you’re seeing?
Correct. Across all stages. Now, having said that, one could argue the deal, the down rounds are not being done yet – or not enough of them. Or you’re not representing them. Therefore, the deals that are getting done are the better companies that have done well in 2016 and are therefore able to raise money in 2017 at a higher valuation. Since they’re good companies, they’ve been around for a while and their performance compared to 2015 has been even better, hence the higher rounds. When I see data Series C and B, I can get that. It’s the earlier stage where the picture is less clear.
Right, so those median pre-money valuations in the early stages are a little bit mysterious to you.
Yes. You have all sectors. Life sciences, technology and other industries. We tend to look at IT more, and maybe that explains some of the discrepancies. People are looking for the next big thing – is it AI, is it machine learning, is it autonomous driving? It is possible that there’s some blip that happened this year that somehow accounted for people paying a premium to get into the hotter sector deals, which we’re not part of. Maybe you have clients who are doing that and they’re willing to pay a bit more early on just in case the sector becomes hot.
What about deal terms? What are you seeing as far as trends in deal terms during the quarter?
We see less SAFE than before, in early stage deals. That definitely has come down. The YC type of deals from early 2010 – 2012 tend not to be as popular. We still see them – I’m not saying they all disappeared – but they have happened a lot less.
I think that in later-stage deals, people are expecting some to be done with protections. For the most part, the deals we saw didn’t have that much protection in them. The few that did tended to be in the on-demand services area. Not naming any names, but some of the deals that got done in that bucket had to raise money with favorable terms – very favorable terms – to investors. For the most part, though, they are doing well, or pretty well, or still promising. We don’t see a lot of investor-friendly restrictive terms in them.
Based on valuations trends in the later stage, what is your view on what that’s going to mean to the IPO market for the rest of this year and 2018?
People are more cautious as to what IPO valuations will be, therefore fewer deals are currently getting done. There’s definitely going to be an uptick. We have a number of unicorns in our portfolio. Heading into 2017 we had discussions [about IPOs], but most of them want to spend 2017 getting ready for 2018.
I’ve read some articles that say that cross-border M&A is kind of cooling. What’s your take?
You could say it’s been a pretty hard year or so for China-US deals with the Chinese company as acquirer. A lot of Chinese companies who shouldn’t be buying companies in the US were buying companies that tended to be in the traditional industries – not internet, not in tech industries – that have high P/E ratio from being listed on Chinese stock exchange. They want to come here to buy assets. Now, given the currency control, it makes it a lot harder for them to take money out of China to convert their RMB into US dollars to do those acquisitions. Those kinds of deals have gone away. As such, you could argue that the market has cooled down. To be frank, they shouldn’t be the buyer in the first place. They’re just playing for some kind of arbitrage or some kind of storytelling to boost their stock in the Chinese retail market in China.
As far as US companies acquiring Chinese businesses – any change there?
Not much. There hasn’t been a lot of internet companies from the US or tech companies from the US going to China to buy assets. If that happened, it happened in agriculture, in food, in more non-IT related sectors. Partnerships, I think, are the most important thing to note. The biggest profile partnerships in China will be Baidu’s investment in Uber in 2014, and then, of course, the DiDi-Uber China deal in 2016. In between, you had Apple investing in DiDi. I think those deals caught a lot of attention in 2016 and for good reason. Apple’s investment in DiDi was the first investment they ever made in China and probably the largest of its size as a passive investment in the history of Apple.
It underscores the rise of China as a market you just can’t miss now. We have been working with Airbnb to help them go into China with some local business partnerships. No equity tie-up like the way that Baidu and Uber did, but they had people who sent out feelers about potential equity tie-up as well. I think going forward, you will see more reasonable, rational deals getting done in the tech internet space that will be higher profile like a Baidu-Uber. It will take more time to get them done, but when they get announced, it will be for the right strategic reasons.
Do you see some of those megadeals potentially happening in 2018?
2018 is possible. I think it will be 2018 and 2019. I’m not sure that it will be at a scale of a Uber-DiDi or Baidu-Uber, but I think something comparable is likely to happen over the next 24 months.
Interesting. The pace of change in China has been amazing, right?
The reason is China has gone up so much in terms of internet usage and e-commerce growth. The e-commerce market in China is more than a trillion dollars in market cap now, and Alibaba controls 75%-80% percent of it. People are very used to shopping online, shopping on mobile, using mobile payment to do it. You can even walk around in China without any cash and use WeChat pay coming from Tencent and then Alipay coming from Alibaba to pay for everything. You can buy stuff or you can be in taxis. You could get a ride from DiDi or share a bike from Mobike and Ofo. You can get around without cash, which was unthinkable five years ago. So when you have a market that’s extremely developed from a mobile shopping standpoint – many will argue even further ahead of US – it becomes very interesting for the giants in each market either to learn from each other or to tie up across different sectors in the way Baidu did.
A mobile search company with traffic to do a deal with the mobile service company that owns the transportation sector like Uber. You can modify the traffic from search into something that’s going to be more service- or commerce-oriented. It’s likely to be more like a tie up, where one company owns traffic overall for a particular category partners with another company in a different geography with expertise on how to monetize that traffic for a specific service. Whether its China going to US, or US going to China – we expect to see more of this kind of tie-up. I’m not saying there will be 10 or 20 of these, but for the few that do happen, it will be of sizable scale and influence.
That is a phenomenal transition in just five years, to reach a trillion dollars of e-commerce.
I went to China in 2005, and it was two years after Alibaba launched Taobao. Back then, eBay was saying all kinds of things about how they were going to cross Taobao because Taobao was going to be two years old, had no business experience, doesn’t charge any commission for a transaction, etc. From 2005 to now, what a big difference it makes.
I want to go back to just my final question for you, Hans, which is just specific sectors that you’re excited about when you look out in the next 12 to 18 months. Where is your focus going to be?
As a firm, we have three sort of primary areas of practice, and they all converge.
One is frontier tech. My partner Jenny Lee leads our effort. We are looking at things anywhere from AR/VR on the one end to machine learning and AI on the other, with autonomous driving in between. Anything we think has a strong technology component that will disrupt or create new industry and services in a way that people hadn’t thought of before, but given the evolution of technology could make sense – that stuff we look at. It’s a combination of frontier technology and SaaS and consumer internet. Those are the three big buckets we focus on, and all three of them converge with different area of emphasis in this mega trend I just mentioned.
We look at the population problems or the transportation problems or food problems that are happening around the world. There are plenty of areas where technology or a sharing economy, internet services with some combination of hardware, software and internet services all bundled together can help us solve that problem.
We look at DiDi, we look at Airbnb, we look at bike sharing, all of that has some components of that. There’s a hardware component, the device that people buy, there’s a software component to capture all the data and make it easier for people to track the devices, and then there’s a service component where you have to use a mobile payment method to complete a transaction and use a service with a review method that makes sure the quality was good. This kind of tie-up is going to be extremely popular, continuing in popularity of the category selectively going forward. Because there’s a lot of offline sectors in the economy that are still very inefficient.
We also look at emerging markets, where existing players in the offline economy are much more inefficient than their counterparts in the US or Western Europe. There is more room for disruption to happen using a combination of hardware, software and internet services.
The three practices could work in some kind of synergy for solving a common problem, whether it’s transportation, population, food – you name it.
Any final remarks that summarize the current environment that would be helpful for us, Hans?
The pessimism from the first half last year has rebounded. People are increasingly interested to explore new areas, to find out what is the next big thing. For us who are lucky to have a global vantage point and have data points from multiple large technology markets – whether it’s China, Southeast Asia or US – we have the benefit of seeing things over a longer timeframe. We feel that there are still a lot of global problems that need to be solved, and a combination of hardware, software, internet services that can iterate quickly, that would share resources, get user feedback and crowd sourcing can help us provide better solutions to solve these issues. We’re excited to partner with entrepreneurs who have that kind of vision and want to change the world.
About Hans Tung
Hans Tung joined GGV Capital in 2013 as a managing partner to focus on consumer mobile internet, cross-border ecommerce, IoT and mobile social communication investments in both China and the US. Hans led GGV’s investments in and serves on the boards of Wish, Xiaohongshu, Poshmark, GrubMarket and OfferUp. Hans has been ranked as a top VC on the Forbes Midas List since 2013 and was recognized by The Founder and CBN News magazines in the past as a top 10 most entrepreneur-friendly VC in China. Hans’ prior work experience spans venture capital, internet startups and tech investment banking over 18 years. He started his career at Merrill Lynch as an investment banker focused on the technology sector. He received his BS in Industrial Engineering from Stanford University.
About GGV Capital
With $3.8 billion under management across eight funds, GGV Capital has been successfully partnering with leading technology entrepreneurs in the US and China for more than 17 years. With 29 portfolio company IPOs since inception, the fund focuses on identifying the next big trends in tech, internet, mobile, hardware, cloud and SaaS in the world’s two largest tech markets.