Why I Invest in China

Even as US/China tech relations remain fraught, the country is at the cutting edge of AI, e-commerce, and mobile payments, among others. China investing expert Yeung tells us how to think about the country and where it shows the most promise.
The following transcript has been lightly edited and condensed for ease of reading.
 
Drew Ianni: Edith is tweeting her appearance right now, so this is good. Real time.
Edith Yeung: Tweeted.
Ianni: So I’m Drew Ianni of CDX. I run a digital transformation conference series called CDX and I’m now part of the Techonomy family, so we’ll tell you more about that later. You have a flight to catch, so we’re going to jump right in, right?
Yeung: Yes.
Ianni: So why don’t you tell us just a bit about who you are, background, Proof of Capital—you just started the firm two weeks ago, obviously you’ve been at 500 Startups for a while and that’s where I got to know you years ago, but tell us briefly who you are and what’s going on at Proof of Capital and we’ll jump right in.
Yeung: Yeah. My name is Edith Yeung, we literally just launched a brand new fund called Proof of Capital two weeks ago focused on blockchain and privacy-related technology, particularly fin tech-related exchanges, custody payment remittances, not the crazy crypto. It’s really about like true use cases. But we also need to think about what’s going on with Facebook and just more aware for the whole world realizing, you know what, we really should own our own data. So we’ll be messing in technology sort of related, sort of supporting sort of the privacy-focused internet, so we’re very excited about that.
Ianni: That’s great. And you’re still involved with 500 Startups as an advisor?
Yeung: Yeah, I’m very supportive of 500. And also when I was—I think I met you when I was at Dolphin Browser.
Ianni: Yes, that’s right.
Yeung: It was a Chinese company and we grew from zero to 200 million installs. So I’ve been spending time with 500 and Dolphin sort of back and forth between here and China. Been learning a lot—I love particularly focusing on cross-border, bringing great US technology to Asia. And vice versa, you’re seeing more and more really interesting Chinese companies coming to the US and growing, but obviously there’s a lot of really interesting challenges lately.
Ianni: Yes. Well that’s a good place to jump in, so let’s start at kind of a macro level in regards to sort of the state of business in China, which I suppose relates to just the state of China, like there’s a lot obviously—not just the tariffs but, you know, ongoing concerns about intellectual property, the perceived difficulty of doing business there.
What’s the state of business in China, particularly for people with a lens of looking to invest in China?
Yeung: I think the Chinese economy certainly has slowed down a bit, and there’s no—I’m not like an economist, so obviously, you know, most of my knowledge is focused on more early stage start ups and really just talking to friends locally.
I think the sentiment is a tiny bit depressing. Not—but having said that, there’s still a lot of, like, massive big investment that is happening in China, which we sort of talked about earlier. I think a lot of my friends in the tech space, looking at the past 12 to 18 months, you know, sort of the most well-known IPO, for example, like Xiaomi, which the expectation at one point was 70, 80 maybe even 100 billion IPO and was about 47 billion, which got listed in Hong Kong in July last year.
And there are a lot of really interesting IPOs that are going on, [INDISCERNIBLE 0:03:09.3] music, that also launch in the US, went public in the US. I think they are now worth about 25 billion, and I actually do think that they have a monopoly and they will do well.
So in general I think the IPO market—sort of hit and miss, some do well and some not, you know, up to expectations similar to what happened to Uber. But at the same time China, just long term, right, and I’m not, you know, I’m not going to go short all the stocks, but long term it’s still a huge market, right? You know, what I just tweeted is, just to set the stage, is 1.4 billion in population. I think US is about 330 million, it’s at least 4 times the population. Mobile internet population is about 819 million, and mobile payment is over 500 million. So if you think about this, right, just—even just mobile payment users is already almost double the size of the US, you can see there are a lot of really creative business models and just the frequency, and it’s still a huge market, so even though it may not have the double digit growth that we’ve seen in the past, it’s still a really, really exciting market.
Ianni: And for most of the population, particularly, say, younger consumers maybe 35 and under, I mean it’s mobile first, right? The internet is mobile.
Yeung: Absolutely. And in fact, not even 35 and below. Now I’m really spending a lot of time hanging out with my friends’ kids and really want to learn from them what do you use, so the number one app actually even scare Tencent, is a app called Douyin, the US version of it is called Tik Tok.
Ianni: Yes.
Yeung: I think, if I remember correctly, and don’t quote me on it, probably about 200 million.
Ianni: That’s right, it’s about 200 million.
Yeung: And some people actually ask me, “Do you own any of their shares?” I’m like, “No.” So I have no relationship whatsoever. But what I’ve been super impressed is, as I talk to some literally teenagers, I would sort of tease them, “Hey, I’m guessing you spend at least a couple hours a day.” And they were shaking their heads, it’s like a lot more. They actually go to sleep with it. So five, six hours per day just watching super short—some of them are live some of them are prerecorded—video. They treat it like new TV, so.
Ianni: Right. And it is gaining traction in the US in a big way, too.
Yeung: Yeah, absolutely. So ByteDance, which is sort of the mother company in China that owns Douyin, in the US it’s Tik Tok, and they also started with a news app called TouTiao. And all of them are at least 200, 300 million MEU [INDISCERNIBLE 0:05:55.6], so you can imagine, you know, the time being spent on mobile is insane.
Ianni: Right. In terms of, you know, if I’m an investor and I want to invest in companies in China, say startups, right, you know, you can invest in Ali Baba or Tencent on the various exchanges that they’re on, but if I want to invest in start ups in China is that difficult right now? Is it getting more difficult just because of the political climate, because of trade disputes, just because of the general relationship between, you know, China and not just the US, but maybe western markets? But how do I actually get in and invest in Chinese startups, or is it even possible for, say, US investors?
Yeung: It’s absolutely possible. If you think about it VC funds like Sequoia, Matrix Partner, Qualcomm, sort of well known funds in the US have been investing in China for a long time. And, you know, in the past, which is still true today, a lot of the Chinese internet companies—and if you, just to start with, look at Ali Baba, Tencent and Baidu, Baidu and Ali Baba both listed, you know, in the US and Tencent listed in Hong Kong. So a lot of the internet companies in China felt that the US stock market have a better understanding what internet business is about. So you don’t—I mean, there are many, many more now listed within mainland soil in Shanghai or Xiangshan, but the true giants still in many ways prefer to get listed in the US.
Ianni: Do they list in both? Are they listed on the SSC as well as maybe Hong Kong as well as New York?
Yeung: It’s possible to do both. And Chinese government definitely would like to welcome some of these companies to come back and list. But there’s it’s own challenge, so there’s—a lot of companies go back and forth.
Ianni: In terms of investing, if I want to invest in startups is it, you know, I could be an LP, a limited partner, in your fund? Is that, you know—or Sequoia? Or, how do I go about sort of, you know, getting investment capital into Chinese start ups at a very sort of tactical level?
Yeung: Yeah, so most of the VC funds in China, so usually set up US dollar fund and also RMB.
Ianni: Yeah.
Yeung: So, in a super early stage they usually would invest in an RMB fund, but a lot of times even like for the US dollar fund, it’s either a Cayman fund, it’s not necessarily pure, pure, you know, completely Chinese US dollar fund. So it’s actually very common, and I’m aware of many sort of US family office or big investors do invest in some of these Chinese funds to invest in Chinese startups.
But having said that, for a complete angel to invest in a Chinese, Chinese entity, there’s definitely some complicated things.
Ianni: Right.
Yeung: And a lot of the Chinese companies that I’m aware of—let’s say my previous company for Dolphin Browser, the way we set up was it became an entity, Chinese subsidiary, and then Hong Kong [[INDISCERNIBLE 0:08:43.1], and then a US entity. So there’s a different set up, you know, for a US investor to invest.
Ianni: Right, so I want you to think of a question, I’m going to go to the audience here because we just have a little bit of time left, so I’ll ask one last question before we do that.
In terms of, you know, I want to focus on AI just a little bit. So China’s obviously come out and said they want to be number one in AI by I think it’s 2030. You know, how do you feel about, you know, artificial intelligence in China and is, from your perspective at a global level, is China really set up to dominate artificial intelligence and why or why not? And is it still, you know, sort of an open opportunity? I know you’re investing in AI companies in China.
Yeung: First off I think the Chinese government certainly wants to be the number one in AI and has done a lot of different things to make sure that will be happening.
To start with, from the investment side, I think in 2016 their article written about the $230 billion invested government backed-funds that supporting at the city levels, you know, local district levels to go all in on startups particularly focused on AI. So in terms of capital there’s definitely not a lack of that.
The second area is that okay, great, you wanted to, you know, build A.I. companies, you need talent. So we are talking about literally the Bei Da, sort of the Harvard, or Tsinghua which is the MIT of China, they are, they have so—they are literally pumping scholarship subsidies from the Chinese government to support the growing talent.
The third area, to have great A.I. companies you certainly need data. And it’s kind of scary but in some way, like, I can also explain why. There is very little data privacy in China. And in fact, you know, if you come to just Xiangshan across the river from Hong Kong, if you’re a Chinese citizen and you have Wechat and let’s say you jaywalk, then you could actually get recognized by CCTV and immediately get a traffic ticket, like that fast, like less than a minute. So in that sense, yeah, the computer vision is that good. Not like San Francisco, but beside the point. I think that there are a lot of things that the whole country—on top of that there’s a BAT and also IFly Tech, which is sort of the nuance of China, all these companies are really pushing for it. Regardless of generic NLP or Voys or Computer Vision, it’s also very vertically driven AI as well. Because—so if anybody hasn’t read it I highly encourage, Kai-Fu Lee who is a friend and mentor, he wrote this book that—China A.I. superpower—really well-written, that really talks about only, not about what is going forward, but some of the history of why. And I think it’s so educational for everybody to learn from.
Ianni: It is, it’s a great book, I’ve read it as well. So let’s—we’ve got one over here, mic is coming to you, if you could also introduce yourself.
Malcomson: Hi, Scott Malcomson. I just wanted to ask about the new tech innovation board on the Shanghai exchange and how you think that will, if at all, change in terms of the environment, in terms of non-Chinese investment into Chinese small tech companies?
Yeung: So, first off, just to—I am not a, I don’t actively trade on the Chinese stock exchange, one. But having said that, I think there have been multiple conversations, just friends asking, “Hey, you know, 60% of the companies get listed on Shanghai or Xiangshan, 60% are state-owned enterprises. And the fact that they’re state-owned enterprises, which means that there’s communist party on the board and all that, what do you think about that?”
I think that it’s not—another thing, also, there isn’t a—there’s a couple companies that I’m aware of, one is called Win, I don’t know how to actually spell it in English but sort of like the Bloomberg terminal but for Chinese companies, these sorts of software do exist. I’m not the user of it but these sorts of companies actually been around for about ten plus years. So I think more and more these sorts of terminals are actually available. I don’t know if they’re in English but they are—I think in general the Chinese government wanted to welcome more foreign money to come in. And I think they will, even though it may not be completely transparent today, there’s definitely a movement to make it more available for somebody like you and I to get more educated so you can get more transparent data when you wanted to invest. But these sorts of things take time, unfortunately.
Ianni: We’ve got one over here. Well, sorry, the one in the back, I should have time to get to you. Oh no, it’s a battle. There you go.
Audience 1: Thank you. So crypto in China has obviously been exploding and with the ICO explosion it was truly a gigantic opportunity, but now that security characteristics have crept into the Chinese market, it’s beginning to slow down as much in China as it is in the US. So I’m curious from the perspective of you putting money into new startups, especially crypto-based startups, where you see the opportunity for growing scalable startups as opposed to just technology capabilities. And how the Chinese market can subsist separately from the US market, because obviously US security regulations are inhibitive of Chinese growth as well.
Yeung: Yeah. To start—so, crypto is different from blockchain. And, you know, Chinese government has a love-hate relationship. And really, really interesting in February, March, president Xi actually had sort of the report for the year and that actually talked about AI, autonomous cars and blockchain as sort of the future for the country. Now, all of a sudden, after that—I’m not even making this up, you can go on YouTube and find these—it’s sort of the state owned TV station—immediately had these TV shows that educate the normal citizen, I actually watched it with my mom, and, talking about blockchain. Blockchain 101, to start, this is the best thing that’s happened since Internet. And the second, a definition of it, which, I found it hilarious, is not about decentralization, it’s about this intermediary. And the government is one giant node in the network. They didn’t say that, but essentially that’s what they’re trying to imply.
So, you see, BAT—the Baidou, Ali Baba, Tencent, they all have blockchain as a service, as an enterprise offering. And there’s many different levels of government using blockchain for trade finance, capturing health records, logistics, supply chain, all that is happening. But in terms of crypto, it is not legal to use RMB to buy any sort of crypto in China, which from an investment point of view is super interesting.
One is, if I’m talking about finance, the crypto side of things, the top ten crypto to crypto exchanges in the world, the top three are all Chinese, Binance, Huobi, OKEX and the Koreans and some Russian and Japanese and Coinbase is not even in top ten. Actually Bitmex is out of Hong Kong. But beside the point, all of these guys, because they are sort of tiptoeing to operate in China, so in many ways really good for me because I’m really, really into helping Chinese companies go overseas. And many of these are Chinese founders, but when they set up their entity it’s outside of China. So it could be Singapore, Switzerland, Hong Kong, Cayman. So in many cases, our positioning at least, you know, for our fund, is actively helping these entrepreneurs to—in the Chinese word qù hǎiwài, which is, you know, go overseas—and I think there will be more and more of these. Not just the Binance of the world, but certainly for blockchain side of things.
Ianni: We are at time, I’m sorry, and she has to catch a flight. So, I can always talk to you for another 20 minutes, but I want to make sure you get your flight. But everyone, round of applause for Edith, thank you very much!