Gary Dushnitsky and Lei Yu from the London Business School and the Sun Yat-sen University in Shenzhen had to crunch five separate databases together in order to extract an answer to the question ‘What drives corporate venture capital (CVC) decisions in China?’
This has never been done before and the resulting answer will be a shock to many (especially Western) investors in this space.
Previous studies have looked at the experience in the U.S. and Europe and mostly conclude CVC is driven by a desire to acquire complimentary or out-of-reach technology. Which makes intuitive good sense.
This, however is not what motivates Chinese companies to acquire stakes in others. They instead are motivated by a desire to apply existing process and technology to capture complimentary or out-of-reach revenue.
The researchers brilliantly sum up the difference between Chinese new-economy businesses and peers operating in the developed west as the former being efficiency driven whilst the latter are innovation driven.
This highlights a failure of some investors to understand the ‘intrinsic’ value of Chinese new-economy companies versus Western peers.
When a Chinese company loses steam there is, in most cases, no proprietary technology, unique process or patent-well that can provide a value-floor. There are only sales; and when these wilt or growth is mined out, as we’re observing in many cases at present, it’s game-over.
The implication for investors is clear. Chinese new-economy companies (in most cases) have much lower intrinsic values than Western comparables. This makes the process of buying dips on the assumption of an intangible-value floor an especially dangerous strategy in the Chinese context.
If you’re a practitioner I’d urge a full read. You can access the work via this link Why Do Incumbents Fund Startups?
Happy Sunday.