Founded in America, funded by China.
For Alex Gruzen, CEO of wireless charging pioneer WiTricity, fielding a half-dozen investment inquiries from complete strangers makes for a normal week. Most offer nothing strategically valuable to the company, and many are not even accredited investors. In late 2014, however, an unsolicited inquiry made directly to Gruzen via LinkedIn seemed — potentially — different.
Notably, it came from a tech-focused venture capital firm in China, a market Gruzen knew well from his time at Compaq, Hewlett-Packard and then Dell, where he led the company’s global notebook business. Since joining Boston-based WiTricity, Gruzen’s priorities had been to get the tech right, grow customers in the U.S., and then break out in China, where the automotive and consumer electronics industries — the company’s primary targets for licensing and embedding its technology — have seen meteoric growth.
In replying to the inquiry, Gruzen steered WiTricity toward a game-changing investment, one reflecting a new potential model for U.S. and Chinese economic cooperation that addresses each nation’s strengths and needs.
Tapping a culture of innovation
Making the inquiry was Yuquan Wang (pronounced “You-chwen”) of Haiyin Capital, a Beijing-based venture firm deploying its third fund with a new cross-border focus. Wang had his own experience partnering with American firms; early on in his career as a consultant for U.S. consulting firm Frost & Sullivan Wang helped China Mobile grow to become by market cap the largest mobile telecom company in the world. Since then, Wang’s decade in venture investing has given him a unique view of untapped synergies in the Chinese and U.S. tech worlds.
“The next Steve Jobs won’t come from China,” says Wang, referring to Apple’s longtime CEO. “But he’ll need China if he expects to build a global company. Our idea is to find those companies in the U.S. and help them use China to achieve explosive growth.”
To Wang, private U.S. tech companies offer the greatest opportunity for outsized returns on an investment. Indeed, the U.S. delivers a disproportional share of technological innovation to global markets. Among 148 nations, the U.S. accounts for more than a quarter of all international patent applications, according to the U.S. Department of Commerce. The U.S. is home to 15 of the top 25 research universities in the world, as well as many more top-flight research institutions. And in a virtuous cycle for American innovators, both reflecting the talent for innovation and solidifying it, 33.8 percent of world R&D investments are made in the United States.
WiTricity and electric vehicles
It is little wonder then that WiTricity, spun out of the Massachusetts Institute of Technology in 2007, caught the attention of Wang’s Haiyin Capital. Backed by Toyota and Intel, WiTricity’s technology provides transmission of power over distance, enabling the charging of personal electronics to medical devices to cars without clunky cords and plugs. In the car market this means a small pad on the garage floor — or maybe embedded in it — transmitting energy to a receiver on the car’s undercarriage. No wires needed, nor thought by driver or passenger.
In light of the fast-growing electric car market, the prospect of WiTricity weaving itself into the automotive supply chain offers the tantalizing opportunity, through car sales, to land its technology in millions of households a year. And, as Gruzen and Wang tracked independently, China has become the world’s beehive for the automotive industry: the world’s largest market and producer of cars, helping to fuel the tripling of the number of automotive-supplier plants in just the past decade. Most relevant to WiTricity, China is also poised to become the largest electric car market in the world, reflecting its growing demand for efficient and low-emissions vehicles. “My excitement,” says Gruzen about rolling out in the largest market in the world, “was how do we hook up early with local brands that really want to differentiate their products for the China market?” In reaching out to Gruzen, Wang knew China could help WiTricity achieve that explosive growth, aligning their interests from the outset.
Gruzen decided to test Haiyin’s value beyond capital itself, submitting a list of the kinds of companies that could be helpful to WiTricity’s growth in China. Wang and his team coordinated an introductory trip and, according to Gruzen, fulfilled every high-level introduction request Gruzen had made: a half-dozen significant brands, even a government minister who sets industry standards in the wireless market. “We learned [the Haiyin team] is really connected, really sincere, and really wants to help grow our business,” Gruzen says. Within a matter of days the conversation shifted to the terms of the investment.
The deal is among a dozen cross-border bets for Haiyin, together representing a novel investment thesis: take some of the more ambitious high tech intellectual property abroad, and help the companies work closely with China to ramp their growth and penetrate the Chinese market as necessary step toward becoming a global company.
The companies represent cutting edge technologies: LightSail Energy of Berkeley, California, with funding from Bill Gates and Khosla Ventures, uses compressed air to store wind and solar energy; Boston-based 1366Tech streamlines production of silicon wafers, promising to bring the cost of solar below the cost of coal, and is funded in part by the U.S. Department of Energy; Woburn-based Terrafugia produces a flying car; Middleton, Wisconsin-based Wicab, with funding from the U.S. Department of Defense and Google, just last week won FDA-approval on a device that helps blind people “see” with their tongues, by translating visual information from a video camera into gentle electrical stimuli for the tongue. And in the only software presence in its portfolio, Haiyin has invested in the leading marketplace for buyers and sellers of private market investment opportunities, AngelList, as China edges toward a potentially transformative opening of its currency, and structuring of private market investment both domestically and globally.
Chinese investment overseas
By serving complementary aspects of tech company growth, Haiyin’s venture approach is a potentially highly lucrative and mutually beneficial model for deepening investment cooperation between the U.S. and China, and feeds a growing appetite for cross-border investments on both sides of the Pacific. According to Pitchbook, the number of rounds U.S. companies raised with participation from China-based investors tripled in three years, from 67 in 2012 to 201 last year. In that same timeframe, the total deal value surged from $1 billion to $4.3 billion.
Politically, leaders in the U.S. and China are taking note: opportunities for further cooperation were a formal agenda item in the two countries’ Strategic and Economic Dialogue talks in Washington, D.C. in June. With Chinese president Xi Jinping scheduled to visit the United States in September, both sides are looking t0 reach agreement on a high-standard bilateral investment treaty, which would broaden investment opportunities between the countries.
President Obama has encouraged efforts to attract foreign investment, including expanding the U.S. government’s investment promotion activities. In 2011, the Administration launched SelectUSA, a U.S. government program to bring jobs and investment from around the world to the United States. Operated by the U.S. Department of Commerce, SelectUSA serves as a single point of contact for ready investors, coordinating investment advocacy and providing services and support for U.S. regions and communities to compete globally for investment.
In the first two years of operations, SelectUSA claims to have facilitated more than $18 billion in new investment for the United States and provided services to nearly 1,000 potential investors and economic development organizations per year.
Forces for new investment synergies
In part, these investments represent logical steps in a maturing Chinese economy. Rising energy and labor costs in China in recent years have fueled interest in outbound investment. There are social, political, and economic forces as well: a surge in the investor class in China; interest in immigration incentives for individual investors (Chinese investors now account for 85 percent of the 10,000 EB-5 visas issued by the United States to foreigners who invest more than $500,000 each); greater freedom for private firms; and increased interest in dollar-denominated investment opportunities.
What’s particularly appealing to the Chinese economists and government officials who support Haiyin’s approach is the prospect of cycling some of their business back to China, both in manufacturing and distribution partnerships and in products destined for domestic consumption. The upgrading of the country’s manufacturing capabilities has become an urgent need in China, as developing countries like Indonesia and Vietnam grow increasingly competitive and threaten to erode China’s status as the world’s factory.
To address this head-on, China’s State Council in May unveiled a 10-year plan, “Made in China 2025,” for improving both innovation and efficiency in the nation’s manufacturing capacity. The plan focuses on ten sectors, including high-end computerized machinery and robotics, aerospace equipment, renewable-energy cars, and biological medicine.
With Haiyin’s broad network — including the prominent Chinese economists shaping this and other economic initiatives — perhaps it is no coincidence that the firm’s portfolio companies fit neatly into these very categories. Indeed, Wang targets the distinct sophistication gap between the products Chinese factories were built to manufacture, and the products U.S. tech companies were looking to produce. “China is far behind the U.S. in innovation,” Wang says. “Chinese are still students and what we need are new teachers. Not the multinationals but the smaller companies that hold the newest technology and the need to grow it.”
The hunger in China for high-tech products to manufacture was on full display in late May, when Haiyin Capital coordinated a trip for its portfolio companies to travel to three cities in China, present their technologies and make connections both to potential partners in manufacturing and distribution and to potential investors.
In the commercial and manufacturing hub of Guangzhou, third largest city in China and home to 16 million Chinese, the Haiyin companies introduced their technologies to a standing-room only crowd of 500 in a cavernous conference center, then shifted locations to engage in smaller, direct conversations with Chinese companies looking to be their partners. These Chinese companies, with manufacturing and distribution experience ranging from textiles to toys to one of China’s big three automakers, waited in line for nearly three hours to court the high-growth innovation that would warrant a retrofitting of their factory’s machinery to mass manufacture a high-tech product.
The interest seemed to validate Haiyin’s approach, based on the premise that there are complementary needs to fill on both sides of the Pacific in the process of growing a company from innovator to global player. Wang describes the approach as “building block innovation,” more like a Lego than a lab: “Plug it in and it works,” says Wang.
LightSail Energy is one company using Haiyin’s investment to make this shift. LightSail’s Chief Scientist, Danielle Fong, noted that the May introductory trip offered a way to learn about the market for energy storage in China. Now looking for manufacturing partners, customers, and investors in China, LightSail and one of these partners has agreed to explore a joint venture.
Security and jobs
A review of the record on foreign direct investment from China helps to allay concerns that deeper engagement with Chinese businesses will compromise U.S. security interests and send manufacturing jobs overseas. Indeed, this foreign investment has resulted in an increase in U.S. jobs, rather than the reverse.
David Marchick, a managing director at DC-based private equity giant The Carlyle Group, writes for the Council on Foreign Relations that “openness to foreign investment generally benefits the United States, generating high-paying jobs, facilitating investment in R&D, and strengthening the country’s manufacturing base.”
According to one group monitoring M&A in the United States, Chinese investors have bought or created 1,583 U.S. companies during the past 15 years, and these companies grew five-fold in terms of workers. These firms now employ more than 80,000 full-time employees, many of whom are engaged in both high-skill and high-compensation jobs.
Chinese investors have been active in a wide variety of U.S. sectors. According to The Los Angeles Times, AMC Entertainment Holdings Inc., based in Leawood, Kansas, reported 900 full-time and nearly 19,000 part-time employees at year-end 2014. The US theater chain management group is partly owned by Dalian Wanda, which took a $2.6 billion majority share in 2012. In another high-profile deal, in 2013 Shuanghui International Holdings purchased Smithfield Foods Inc. for $4.7 billion, taking over a company with 46,000 employees worldwide, including 10,000 in North Carolina. In 2011, Tencent, a leading provider of social networking and online portals in China, bought a $250 million majority share in Riot Games. The LA-based producer of popular video games employs over 1,000 game designers, dubbed “rioters.” And in mid-2014, Golden Dragon Precise Copper Tube Group started production at its first US facility, a $100 million plant making copper tubing inWilcox County, Alabama. The plant employed 150 initially, with plans to expand to 500 workers.
Historically, China’s current growth in direct investment in the U.S. can be compared to Japan’s three decades ago, when Japan was the world’s rising export powerhouse.
Then, the Japanese government encouraged the country’s automakers and other very large manufacturers to open factories in crucial U.S. congressional districts as a way to blunt pressures for legislation limiting imports to slow heavy American job losses.
Now, Japan’s investment in the U.S. totals some $300 billion, employs 700,000 Americans, and helps to foster a strong and stable U.S.-Japan relationship. Despite continuing political tensions between the U.S. and China, investment and trade between the two countries show similar promise today.
Yuquan Wang of Haiyin Capital is spending most of his summer on the U.S. East Coast, in the same time zone as the largest concentration of Haiyin’s portfolio companies. While in China Haiyin’s work amounts to opening doors from the inside, in the U.S. he can support his portfolio companies in nudging doors open from the outside.
Among other activities, Wang appeared on CCTV-America in connection to the countries’ Strategic and Economic Dialogue talks in Washington, D.C., and travelled to Boston to attend WiTricity’s board meeting.
For WiTricity’s part, Alex Gruzen is bullish on his company’s roll-out in China and the impact it will have on operations at home. “China is one of our biggest market opportunities in the world, but growth of our team is largely happening here in the U.S.,” Gruzen says.
He credits Wang and his team at Haiyin Capital as a major accelerator of that growth. “Having a sage voice that help you navigate your work over there, whose financial incentives are aligned with your success as a start-up — that’s hard to find,” Gruzen says. “In the end, the reality for American companies is that China is not something to fear, but something to take advantage of and participate in.”
Haiyin’s proposition to serve as match-maker between U.S. innovators and Chinese partners who deploy and scale their technologies commercially, and at a time when both sides have different but complementary business needs, is in the early stages of its test. If Haiyin Capital and other venture firms with a similar approach are successful at fostering rapid adoption, significant revenue and higher valuations for the companies, there could be a lot of money made on both sides the ocean.