San Diego Sees Increased Chinese Venture Investment
Chinese capital is creating globally competitive companies and heralds a maturing San Diego ecosystem.
Xiaodi Hu chose San Diego. The CTO of TuSimple could have based his billion-dollar technology unicorn nearby Caltech where he was finishing his PhD. Or, he could have chosen his native Beijing. Instead, he drove south and founded the company in San Diego. This is not an obvious decision for someone planning to revolutionize an industry with artificial intelligence. But we should be thankful for it. The company has been extremely successful — skyrocketing to a billion-dollar valuation in five short years. This success has produced jobs, many in artificial intelligence, that promise to burgeon San Diego’s economy for years to come.
The company’s other office is based in Beijing — an increasingly common practice among the world’s preeminent artificial intelligence companies. Beijing has 82 technology unicorns, which are defined as privately held startups with a valuation greater than $1 B USD. This is more than the heart of the US’ technology industry, San Francisco, which boasts 55 unicorns. TuSimple’s connection to China’s technology ecosystem has assisted the company in raising four rounds of venture capital totaling $398 M. Most of that money has come from China.
Fig. Chinese venture investment in San Diego by year
TuSimple is not the only regional company that has benefited from a connection to the Far East’s technology heartland. We performed an analysis of San Diego venture financing rounds from 2013 to 2020 based on Crunchbase data. In total, we found thirty-five financing rounds with at least one financier based in China. 71% of these rounds were led by an investor from China. Stunningly, we found Chinese investment in San Diego has increased by 900% since 2015. 2015 had four venture rounds with Chinese investors totaling $57 M USD. 2019 had five venture rounds with Chinese investors totaling $514.4 M USD.
Fig. Chinese investment dollars by Company
There are several possible reasons for the increase in funding. US venture capital as a whole was up 61% from 2015 to 2019 [1]. However, this is far from the 900% increase in Chinese capital in San Diego. Instead, the increased investment is probably driven by San Diego’s hard to find expertise in high strategic industries. Companies seeing additional investment are in areas like genomics, artificial intelligence, and microchips. All these areas are emphasized in China’s “Made in China 2025” plan designed to achieve Chinese leadership in cutting edge industries. Across the country, Chinese investment in the United States tripled between 2015 and 2016 [2]. San Diego seems to be attracting proportionally more capital than other areas of the country. Washington largely regards the plan as a mercantilist effort to subsume the world’s high-technology supply chain into China. Bipartisan groups have taken up legislation to shore the US’ defenses. And Trump administration has made it increasingly difficult for Chinese investors to obtain equity in US companies. Still, the local trend showed no signs of slowing prior to the COVID-19 outbreak.
It is not easy to shrug off the geopolitical risks. But, the capital has clearly helped create leading companies in a region that has struggled to enter the top tier of technology hubs. San Diego’s engineering and research expertise is world-class — reflected in UC San Diego Jacobs School’s recent ranking in the top 10 US engineering schools. However, it has always needed more capital to catalyze innovation.
A few of these regional stars include TuSimple, Omniome, and Kneron. Omniome develops higher specificity genome sequencing technology and Kneron builds specialized artificial intelligence chips. All these companies are positioned to be industry leaders if their technology fulfills its promise.
Increased international capital flows indicate a maturing ecosystem. So do valuations — San Diego has been able to produce a series of companies valued over a billion dollars. Despite this, US venture capital has been slow to set up permanent residence here. Venture capitalists have preferred Los Angeles or Orange County. This is surprising (and insular) behavior given that relatively few cities can produce “Unicorn” startups. In a global economy, this gap gets filled by other sources of capital — in this case from China.
Given its current position, San Diego could seek to follow the same development pattern as similarly sized cities that have found ways to manage significant foreign inflows. Vancouver has taken an active stance towards promoting itself as an international hub. This resulted in a strong international reputation and relatively sophisticated capital markets. The Canadian city has a population of 2.5 million people and a GDP of $98 B, both figures significantly smaller than San Diego. Yet Vancouver boasts an international stature that San Diego does not have. Its real estate has long been a desirable international asset class — foreign investors pumped $885 M into Vancouver real estate last year. Vancouver is also the world’s mining capital with over 800 mining companies headquartered in the city. That is more than twice the size of Toronto (the world’s second-largest). Mining, which has always had a robust international fundraising market, contributes significant additional capital to Vancouver.
Capital influx has the potential to mark a city’s maturation but often comes with unintended consequences. In Vancouver, this took the form of skyrocketing real estate prices. In fact, the situation became so out of control that the local government passed Bill 28 to curb foreign investment. San Diego’s risk is two-fold. First from DC, where both sides of the US government have taken an increasingly hostile view towards China. This position, not without warrant, could cut off a capital supply that has contributed to the region’s economic growth. The second risk is passivity. San Diego needs to be aware of what is happening and actively manage the trend to minimize risk and secure its growth potential.
The best-case scenario is that San Diego uses the success of its Chinese investors to encourage other investors to participate. There are a limited number of venture opportunities that offer potentially outsized returns. Firms from all over the globe should be competing for these opportunities. The result will be an innovation economy that benefits from multiple sources of capital. Additionally, the San Diego government should form a committee on foreign investment. A combination of governance and promotion of existing economic activity will ensure San Diego safely encourages increased investment in the region.
The end goal is to manage this capital without dampening economic activity. The increased competition can be leveraged into even more activity. That future San Diego will be wealthier and more innovative.
