From the Iron Rice Bowl to the Coffee Shop: Chinese Tech Sector Evolves Amid Economic Turbulence

In recent years, China has achieved record breaking economic development while the state has governed which companies can and cannot operate within the country. In the technology sector, domestic firms like Alibaba, Lenovo, and Tencent have flourished, while Google, Facebook, and Twitter have been kept out. Things, however, are starting to change.

China’s economic growth, which has been the envy of the world, has stagnated. Last year, for the first time ever, the Chinese Communist Party (CCP) admitted that it had failed to reach its target GDP growth rate goal. The 7.5% number it reported fell short of the 8% that is considered by many necessary in order to sustain the country’s growing and industrializing population, which will include 8 million new college graduates this upcoming year. Moreover, electricity consumption, considered by many to be an even more accurate illustration of growth because it is harder to tamper with than GDP, increased by only 5.1%.

The Iron Rice Bowl system, where the public sector supports guaranteed job security and benefits until retirement, is moving towards becoming a relic of the past, as the manufacturing base that fueled the country over the last thirty years has become unsustainable. “The current Chinese economy is in serious recession,” says Se Yan, an Associate Professor of Applied Economics at Peking University’s Guanghua School of Management. The Chinese Premier Li Keqiang, meanwhile, opts for the term “new normal.”

Whatever it might be called, China is facing an unfamiliar period of economic turbulence, at least in the modern era. Beijing has responded by emphasizing what has historically been considered a weakness: innovation. Li Keqiang used the word twelve times at the World’s Economic Forum Meeting in Davos this past January, where he described a specific vision for China’s future: “To foster a new engine of growth, we will encourage mass entrepreneurship and innovation…[they are], in our eyes, a ‘gold mine’ that provides constant source of creativity and wealth.”

Se Yan, the Peking University professor, classifies innovation as belonging to one of two types. “Maker innovation” is practiced chiefly in the U.S. “If it changes the way people live, it’s maker innovation,” says Yan, offering the most concise definition possible. Then there is “process innovation,” which perfects existing production processes and has fueled economic growth in Germany and Japan. With a move away from manufacturing, and a rising population of college graduates, Yan believes that innovation of the “maker” kind is needed if China is to realize its full potential.

The Innoway project, located in Beijing’s Haidian district, is one such initiative aimed at making China more technologically innovative. A joint venture between the Zhongguancun Science Park and a privately held asset management group, together they have purchased an alleyway that was previously lined with bookstores and converted the area into incubator space. The goal is to become the center of China’s emerging start-up culture.

According to the most recent data from the China Internet Network Information Report, the country has nearly 650 million Internet users. Around 560 million of them connect to the Internet through their smartphones. The opportunity in front of Innoway is clearly rich, but the question of how the group plans to capture it is still being worked out.

Many of the incubators in Innoway have the same model; that is, they are actually coffee shops. Member companies gain access to Wi-Fi, the camaraderie of other start-ups, and advice from the investors and sponsored events that are affiliated with the cafes, all for the price of a cup of coffee. Almost a year old (it opened officially last June), around 20% of the early stage companies that have frequented Innoway’s cafes have gone on to raise funding, according to the incubator’s PR officials.

It remains to be seen whether an organic approach can produce the “unicorn companies” that will fuel new growth within the Chinese economy. But in a place where people must use VPNs to connect to American websites, and euphemisms to search for information related to 1989’s Tiananmen Square Incident, perhaps a lack of structure is exactly what the country’s technology sector needs.

Intel could go all in on Altera acquisition

The first quarter of 2015 was the most robust three months for M&A activity since the start of 2007, with $843 billion worth of deals completed across all industries, according to data from Thomson Reuters. The semiconductor industry accounted for $21 billion of that total. Now Intel, possibly the most recognizable semiconductor company in the world, is rumored to be close to its biggest acquisition ever.

Intel’s target is Altera Corporation, the San Jose, Calif.-based manufacturer of programmable logic devices (PLDs) with a market cap that soared $3 billion to $13.4 billion last Friday, when The Wall Street Journal first broke news of the deal.

Altera specializes in the production of Field-Programmable Gate Arrays (FPGAs), specialized chips that as a whole are growing faster than the broader semiconductor industry, according to analysts. FPGAs are used primarily in networking equipment, cars, and servers. It is the last product category where Intel sees a big opportunity as it looks to grow its highly profitable Data Center Group, which is approaching $4 billion in quarterly revenue. Intel has had a long relationship with Altera, and has been using its advanced production capabilities to manufacture FPGAs for Altera since 2013. Bringing Altera in-house through an acquisition would obviously allow Intel to leverage the technology even more.

Intel has historically refrained from making big acquisitions, priding itself on its ability to develop cutting edge technology internally. When it has, it has almost always been to diversify away from its PC business, which still accounts for 60% of overall revenues. The Santa Clara, Calif.-based company’s biggest deal to date is the $7.6 billion spent in 2010 to acquire the internet security company McAfee. It has also in recent years reached deals worth around $1 billion for Wind River and Infineon’s Wireless Solutions business.

Financing the acquisition of Altera has its own set of considerations. First, it would require a considerable percentage of Intel’s current cash balance, if it chooses to finance the deal that way. The company currently has $14.1 billion on hand, and an overall market capitalization of around $147 billion, but Altera will certainly fetch upwards of $10 billion. If the deal does go through, it will be a big bet on a company with only $2 billion in annual revenue and a current P/E ratio approaching 30. To put that in perspective, Xilinx, the leading FPGA manufacturer (Altera is second) is currently trading at a P/E multiple of 17.76. The financial data is according to Yahoo Finance as of 1 PM ET Thursday.

Intel recently lowered its outlook for its Q1 earnings (to be announced April 14th) by $900 million, citing an expected underwhelming performance by its PC business, as SMBs are upgrading Windows XP computers at a slower clip than anticipated. That being said, the Data Center Group appears poised to continue on its 25% YoY growth rate, and Intel’s stock price shot up when news of the Altera deal first broke. A week later, though, and nothing official has been announced. As with all deals of this magnitude, there is a lot to consider.

Facebook Posts 34% Increase in Profits

Facebook reported a 34% rise in profits for Q4 of 2014, on the back of strong performance in mobile advertising. Facebook’s earnings of $701m or $0.54 per share also surpassed analyst expectations of $0.49.

For high-growth, consumer-facing Internet companies like Facebook, the snapshots of user engagement in the 10Q are arguably as important as the financials. On this account, Facebook also fared well. The number of daily active users jumped to 890 million, up 18 percent, while global mobile users increased 34 percent year-over-year to 745 million. Most of this growth is coming from Asia, where the company added 23 million daily active users, despite the fact that the service is banned in China.

One note of slight concern for investors was Facebook’s increased spending. The company spent $1.1 billion on research and development in Q4 of 2014, nearly triple the amount in the same period a year earlier. The extra spending meant the profit per dollar revenue decreased to 29% from 44% the previous year.

The monetization opportunities in Asia are rich; Facebook currently makes only $1.27 from each of its 449 million monthly active users in the region, compared to around $9 in the U.S. and Canada. Personal media sharing was also up. The company reported that nearly 2 billion photos are shared each day across Facebook, Instagram, Messenger, and WhatsApp, while Facebook users collectively consumed over 3 billion videos on a daily basis.

In the earnings conference call, CEO Mark Zuckerberg touted a recent report from Deloitte that claimed that Facebook created over 4.5 billion new jobs and more than $225 billion in global economic impact in 2014. He also spoke about Internet.org, a company initiative aimed at providing free Internet access to developing countries. Among the countries where the service has launched include Zambia, Tanzania, Ghana, Kenya, and Colombia; 6 million people have connected to the Internet for the first time through the program.

Despite the generally positive news, the notoriously fickle after-hour traders sunk the stock 1.5 percent. As of Thursday at 10 AM ET, it was trading at $75.31.

Super Bowl 2015: Technology Commercials Take Center Stage

With nearly half of America’s TV-owning households tuning into the Super Bowl, there’s no other event quite like it to advertise your products or services.

While there was no shortage of car and beer commercials, the in-game advertising this year also featured a steady onslaught of spots from digital technology companies, appropriate for a game that pitted teams from arguably two of the biggest innovation hubs outside of Silicon Valley.

On display weren’t high-art breakthroughs in AI (although Katy Perry’s mechanical lion could have qualified) or ingenious methods for crunching big data. Instead, they were commercials aimed at two major areas of consumer technology – websites and smartphone games.

Website publishing platforms Wix, SquareSpace, and GoDaddy all ran ads Sunday. But where GoDaddy has developed a reputation for kitschy and provocative Super Bowl spots, it was first-time participants Wix and SquareSpace that took up the strategy this year. Wix contracted with a number of high-profile retired football players, including Brett Favre, Terrell Owens, and Emmitt Smith, and Rex Lee (Lloyd from Entourage) and showed them pursuing hypothetical second careers, with help from their new personal websites.

While the Wix commercial was generally well-received, the SquareSpace ad was not. In it, Jeff Bridges (“the Dude” from the Coen Brothers’ The Big Lebowski), makes one long-winded “ommmm” as the screen directed viewers to the website dreamingwithjeff.com. Tim Calkins, who led the tenth annual Super Bowl Ad Review at Northwestern’s Kellogg School of Management, gave the commercial his only “F” grade.

Meanwhile GoDaddy, which in previous years has made racy ads with NASCAR driver Danica Patrick and supermodel Bar Rafaeli, did its best attempt to appear grown up as it prepares for an IPO. However, the company did originally have this planned, so who knows.

Perhaps the funniest commercial of the night belonged to Supercell’s Clash of Clans franchise, the top grossing app in 2014. Liam Neeson (or AngryNeeson52, his gamer tag) does his best Taken impression, plotting his revenge on BigBuffetBoy85 while waiting for a scone. Supercell, which hails from Helsinki, the same city where Angry Birds originated, received $1.5 billion in 2013 from SoftBank in exchange for a 51% equity stake in the company. It reportedly spent upwards of $9 million on the two minute-long production. Game of War, from the game developer MachineZone, also ran a spot featuring Sports Illustrated swimsuit covergirl Kate Upton.

The Seahawks lost at the goal-line yesterday, but Seattle natives can take solace in the fact that its proudest commercial achievement, Microsoft, strung together a series of inspiring bits under its “Empowering Us All” campaign, that aligns well with the brand revitalization underway with new CEO Satya Nadella. The first was a heartwarming piece about a six-year old boy named Braylon, who was born without bones in his tibia or fibula, while the second followed “Estella’s Brilliant Bus,” a mobile home equipped with computers serving underprivileged kids around Florida’s Palm Beach County. Both segments were narrated by the Chicago-born rapper Common, who was reading excerpts from speeches by Nadella.

Finally, BMW reminded viewers just how far we’ve come in the promotion of its new electric vehicle, the i3. It begins with a clip from 1994, where morning talk show personalities Katie Couric and Bryant Gumbel say some mind-numbingly dumb things about the Internet, including “what is Internet?” Twenty years later, and the two are good sports about what would now be a truly embarrassing admission.

Microsoft Profit Falls Despite Success in Cloud, Surface

Price cuts to two of Microsoft’s core lines of business, Windows and Xbox, contributed to shrinking margins in the last three months of 2014, according to the company’s most recent earnings. The results were nonetheless in line with analyst estimates and reflect CEO Satya Nadella’s strategic vision for the company.

Revenue related to the licensing of the Windows operating system fell 13% from the previous year, but it wasn’t all the result of declining partner PC sales. Last year’s sales were inflated after the company dropped technical support for Windows XP, necessitating a forced upgrade among those consumers and businesses still running that operating system.

Another reason for the drop in the Windows business was Microsoft’s decision to cut prices on Windows for academic and budget-conscious buyers. That move was a response to its declining market share in the academic and consumer spaces, where Apple’s Macbooks and iPads and Google’s Chromebooks have made significant inroads in recent years.

On the Xbox side, the company again cut prices to enhance market share. Its Xbox One, which originally sold for $500, is now retailing at $350. The lower price allowed the company to sell 6.6 million units over the course of the quarter and increase its overall market share, especially in the United States, but it was not enough to produce a gain on the year before. Instead, the division experienced a drop in revenue of 20%.

Microsoft was buoyed in the second quarter of its financial year by its cloud operations and sales of its Surface tablet. “We again saw enthusiasm and demand around our cloud offerings like Office 365, Dynamics CRM Online, and Azure, as well as Surface Pro 3,” said Kevin Turner, Microsoft’s COO. “Our sales engagement continues to focus on helping customers and partners transition to the cloud and navigate the shifting product mix related to our services and solutions.” Specifically, Microsoft self-reported that its commercial cloud business grew 114%, while quarterly sales of the Surface tablet surged 24% to crack $1 billion for the first time.

In aggregate, the company’s net income for the quarter was down over 10% year over year, falling from $6.56 billion to $5.86 billion, but revenue hopped 8% up to $26.47 billion. The earnings caused Microsoft stock to fall 4.3% in after hours trading Monday. However, for CEO Nadella, the dip is hardly a referendum on his tenure. Currently trading at $47.01, shares of MSFT are up 25% since he took over last February.

Google aims to expand reach with space and wireless carrier plans

Google has never been shy to announce an ambitious and audacious plan. The company has taken on self driving cars, flying delivery vehicles and the recently pulled Glass experiment, to name a few. But Google’s latest multi-billion dollar initiatives run a lot closer to its initial business plan.

The first announcement was that the company was teaming up with Fidelity to pour $1 billion into SpaceX, Elon Musk’s commercial rocket company, in exchange for a 10% equity stake. Financial reasons aside, the goal here is to properly equip SpaceX with the resources to go forward with its newly announced satellite program. The project would launch a network of hundreds of satellites which could provide Internet access to people in the most remote and unconnected parts of the world. As Musk explained in Businessweek, “the speed of light is forty percent faster in the vacuum of space than it is for fiber.”

This is not Google’s first attempt to expand Internet access to the 4 billion or so currently without it. Its Project Loon, which utilizes balloons that would fly lower than SpaceX’s satellites but would operate according to the same principles, has been in public testing since June 2013.

The SpaceX investment was followed up by news that it would be participating in what is called a Mobile Virtual Network Operator agreement with Sprint and T-Mobile. MVNO, the model for companies like Metro PCS and Cricket Wireless whereby network infrastructure is rented from a “Big Four” carrier (Verizon, AT&T, Sprint, T-Mobile), would make Google a wireless carrier.

Becoming a service provider is a natural extension of Google’s mobile ambitions. Android, the operating system Google developed, powers over half of the smartphones purchased in the United States, while the Nexus phone, manufactured by partners like LG and Motorola, is branded under the Google name.

However, like the SpaceX investment, becoming an MVNO is ultimately about growing the number of people who use the Internet (and Google as its portal). According to a report from The Information, which originally broke the news, Google is looking to undercut even discount wireless providers through a suite of low-cost communications applications based on existing technology like Google Voice.

While the payoffs of such wide reaching initiatives aren’t likely to come for some time, investors have expressed confidence in the decision-making. Stock in Google is up 7.27%  over the past five days.

Box Hopes It Has Timing Right for Long-Awaited IPO

“Timing is everything” is a piece of wisdom with a number of applications. One of them, of course, is the public markets, something that Box and its CEO Aaron Levie know well by now.

After originally registering with the SEC for its IPO back in March, the data storage company will finally take the plunge as a publicly traded entity later this month. Box will look to raise at least $137.5 million, selling 12,500,000 shares on the New York Stock Exchange, with an early price range of between $11 and $13.

As its $482.5 million deficit continues to escalate, and the market for data storage becomes more commoditized, the pressure is on Box to succeed in its IPO. The company will use half of the funds for sales and marketing purposes, an area in which Box has spent most of its money in the past. In the nine months ending October 31, the storage provider recorded revenue of $153.8 million, but sales and marketing expenditure of $152.3 million for the same period. Total expenditures for the same period totaled $242 million meaning a loss of $120.8 million for those nine months.

However, those figures should not spell complete doom and gloom, and are not likely to scare off investors. Box already boasts an impressive client list, and claims a client retention rate of 130% (due to upselling existing clients), meaning the money spent on marketing and sales won’t need to continue indefinitely, as the company will be able to rely on its existing subscriptions from major enterprises.

For the impending IPO, a buoyant market works in its favor. When Box was first preparing to go public, in May of last year, technology stocks, especially those in cloud services, were on the slide. Workday, an HR and financial management software company, was trading at around 20% less than its opening price, while stocks in SAP and Salesforce had lost 10 and 15% of their value from the beginning of the year respectively.

Couple the performance of these comparables with the problems facing Box, including a burn rate on sales and marketing expenditures that at the time surpassed total revenues, and the company was wise to postpone. Instead, it raised $150 million from TPG and Coatue Management at a reported $2.4 billion valuation.

Over six months later and the conditions for an IPO are decidedly better, even if the company has shed some of its value in the intervening period. Outside the firm, the company can expect to benefit from the rising tide of tech stocks, led by the strong market debuts of Lending Club, Hortonworks, and New Relic at the end of last year. For its own part, Box has reined in its expenses and narrowed its quarterly losses. But perhaps the main driver of the decision to go public is to do so before Dropbox.

The Exit Report: Etsy, Shopify, BlackBerry

IPO

Etsy, an online marketplace for vintage and handcrafted items like typewriters and jewelry, is reportedly looking to raise $300 million, and could do so within the next few months. If it does, it would be the biggest public stock market debut by a New York-based tech company since the Bubble. Etsy is backed by Accel Partners and Union Square Ventures, among others. Goldman Sachs and Morgan Stanley will lead the offering.

The e-commerce company Shopify is expected to raise $100 million through an IPO later this year, according to multiple reports. Shopify enables partner retailers to easily set up online storefronts, and has raised over $120 million in venture financing since its founding in 2006. The rumored terms of the IPO would value the Ottawa-based company at over $1 billion.

Apigee, an application tools provider to enterprise customers like eBay and Walgreens, has retained Morgan Stanley, Credit Suisse, and JP Morgan in anticipation of an upcoming IPO. The San Jose, Calif.-based company is seeking terms that would value it at $700 million.

 

M&A

Samsung reportedly offered to acquire the fallen mobile phone manufacturer BlackBerry for $7.5 billion. At $15.49 per share, the price would have represented a 60 percent premium over the value of BlackBerry’s publicly traded stock. BlackBerry’s stock responded to the rumors Wednesday by jumping 30%, to as high as $12.60, before falling back to $10.35 in after hours trading. Samsung, for its part, is denying the rumor. “Media reports of the acquisition are groundless,” a company spokeswoman told Reuters.

Alibaba announced this week that it had secured a controlling interest in AdChina, one of China’s biggest Internet marketing platforms. The deal marks a bigger push into online advertising for the e-commerce behemoth, which currently runs such operations through its Alimama group. Terms of the deal were not disclosed. AdChina had raised $40 million from American investors like NewsCorp and Norwest Venture Partners back in 2010.

Symantec has acquired Boeing’s cyber security division, Narus, for an undisclosed amount. The deal will bring 65 engineers and data scientists over to Symantec, which will break up into its component data storage and security businesses later in the year.

Public transit app Moovit grabs $50m Series C

Seed

North Technologies, a mobile app incubator started by Digg founder Kevin Rose, has raised $5 million in seed funding from Redpoint Ventures, Greylock Partners, Google Ventures, and True Ventures. The San Francisco-based incubator currently boasts two apps: Tiiny, a video and photo sharing app, and Watchville, an aggregator of wristwatch-related news. Along with the announcement came news that Rose would formally be stepping down from his current role as a venture partner with Google Ventures.

BlockCypher, a block chain web service that enables enables developers to build Bitcoin functionality into their sites, has secured a $3.1 million Seed round. Investors include Tim Draper, New Enterprise Associates, Granite Ventures, and AME Cloud Ventures.

Series B

GGV Ventures, AME Cloud Ventures, Digital Sky Technologies, and Founders Fund are among those to invest in Boxed‘s $25 million Series B. The Boxed mobile app facilitates bulk purchases that otherwise would take place at big box retailers like Costco and Sam’s Club. The company has now raised $32.6 million.

Data collection, storage, and analysis platform Treasure Data has raised $15 million from Scale Venture Partners and returning backers Sierra Ventures and AME Cloud Ventures. Treasure Data is a Heavybit Industries portfolio company.

Series C

The similarities between Moovit and Waze are obvious: crowdsourced traffic information platforms originally founded in Israel. It goes without saying then that investors in Moovit’s $50 million Series C, which included Sequoia Capital, Nokia Growth Partners, and Gemini Israel Ventures, are eyeing a Waze-type exit.

Growth Equity

Travice, the operator of the Chinese taxi hailing app Kuaidi Dache, has raised a reported $600 million from SoftBank and Alibaba. With the investment, Alibaba joins its two domestic competitors in the ride-hailing app market. Tencent has a stake in Didi Dache, while Baidu has invested in Uber.

Augmedix raises $16m to bring Google Glass to doctors

Seed

Percolata, an in-store sensor and retail analytics platform, has emerged from stealth mode to secure $5 million in seed financing from Andreessen Horowitz, Google Ventures, Foundation Capital, and Menlo Ventures, among others. In addition to the sensors that track customer behavior, through the combination of video and audio files with mobile fingerprinting, Percolata also offers a workplace management application designed to optimize how a retailers staff their stores. The company is based in Palo Alto, Calif.

Series A

Although not yet seen regularly on the streets, Google Glass has several compelling  enterprise applications. Augmedix and its backers, which include DCM and Emergence Capital, are betting that doctors will be one of the groups to adopt the technology. The San Francisco, Calif.-based company secured $16 million to build out an application for the device that will feed a patient’s medical information directly to a physicians line of vision.

Auckland’s peer-to-peer lending platform Harmoney has secured $10 million in venture financing from NZX, Trade Me, and Heartland New Zealand. The deal comes at a time when peer-to-peer lending is especially popular among investors. Two such American-based companies, Lending Club and OnDeck Capital, went public in the end of 2014.

Growth Equity

The leading NOSQL database company MongoDB has raised $80 million of the $100 million it expects to ultimately raise, according to a regulatory filing with the SEC. A list of investors who have committed to the round, or are expected to do so, was not disclosed. However, the latest cash infusion brings total funding to over $310 million. Previous investors include Sequoia Capital, Union Square Ventures, Red Hat, Intel Capital, and Fidelity.

The Chinese e-commerce giant Alibaba is hoping to get in on what it hopes will be Asia’s next big e-commerce company: One97 Communications, a mobile marketplace and payments platform based in New Delhi. Alibaba will reportedly pour $575 million into the company in exchange for 30 percent equity, which would give the company a valuation of close to $2 billion.