Chinese firms trying to gain presence in the U.S. venture capital sector are facing difficulties but despite this, Chinese investments in tech deals continue to increase in the last five years.
The Wall Street Journal reported that Chinese investors were involved in at least 576 deals with U.S.-venture backed companies, between 2011 and the third quarter of 2016, based on data from Dow Jones VentureSource. The percentage of tech deals with Chinese investors also rose from 1.7 percent to 4.2 percent during that period.
According to the report, this phenomenon was driven by several factors. Chinese businesses and individuals are looking for ways to diversify their wealth outside China and they choose Silicon Valley startups whose valuations are lower compared to Chinese counterparts. In addition, many of them wanted to have access to technology and talent to help them raise their level in the global value chain.
Even Chinese tech giants such as Alibaba Group Holding Ltd and Tencent have established their investment offices in the U.S. Some wealthy investors from China, called traveling angels, fly in to the U.S. in search of potential deals.
Some Chinese businesses hire people to help them look for investments. One of them is Gopher Asset Management, a unit of Chinese wealth manager Noah Holdings Ltd., which has set aside more than 10 percent of its assets to invest in the U.S. and other markets.
Earlier this year, the firm hired Elise Huang, a veteran investor, to help them focus on the U.S. market. According to Huang, getting into deals for a Chinese fund is not easy as their U.S. counterparts can provide more coaching and support to startups.
On the other hand, Huang said that U.S. startups and investors also crave for Chinese capital. She added that U.S. venture investors, who welcome Chinese money, hope that Chinese investors would join in the future funding rounds. Although some U.S. tech firms suffer some setbacks in China, the country is still a major attraction for U.S. startups.
Jay Zhao, partner at San Francisco-based Walden Venture Capital, said they plan to accept a few Chinese investors in its new fund next year, so that they can invest in companies with similar technologies in both China and the U.S. and allow them to learn from each other.
However, the problem for some Chinese investors is not getting access but how to go about it. Some investors said that Chinese investors, who are more familiar with high startup valuations in China and know less of U.S. deals, tend to overpay. Others use negotiating tactics that sometimes leave bad impressions to investors, the report said.
George Zachary, a partner at Charles River Ventures, said he met some Chinese investors who tried to negotiate terms at the very last minute.
"The range of 'negotiating tactics' of some China-based venture funds is far more hardball than other [U.S.] venture firms," Zachary said, adding that such behavior could make a bad reputation with founders and with others in the venture community.