To get a handle on the situation, The Wall Street Journal’s editor in chief, Gerard Baker, spoke with the founder and chief executive of investment bank China Renaissance, Fan Bao, and Bill Gurley, general partner of venture-capital firm Benchmark. Here are edited excerpts of the conversation.
MR. BAKER: Bill, a year ago, you talked with one of my colleagues about valuations for some of these unicorns and about how choppy some of them looked. There’s been somewhat of an adjustment in the last year. Tell us what’s going on.
MR. GURLEY: It’s a bit of a mixed bag from what I’ve seen. You do have an increase in the number of bankruptcies, layoffs, downsizings. But you haven’t had the kind of wholesale kaput that you had in 2001 that scared everyone out of the water. As a result, you simultaneously still have new money coming in. That new money is not as educated as the previous money.
MR. BAKER: There’s concerns about a lot of overvaluations in the Chinese market. What’s your sense of where the Chinese tech market is?
MR. BAO: I think the early-stage deals, the temperature cooled down a little bit. But the late-stage deals, they still attract a lot of liquidity. The banks are providing financing behind that.
MR. BAKER: One big difference between now and, say, 2000-2001 is the rate environment. In 2000, the rates were starting to go up. Even though you’ve had a bit of a backup of bond yields in the last month, you’ve still got this very low-yielding environment.
MR. GURLEY: I don’t think there’s ever been a time where global interest rates have been this low for this long.
I’ll borrow from Stan Druckenmiller, who gave a speech a year and a half ago. He said, “You’re just going to see asset bubbles everywhere.” Certainly, real estate, energy. This is happening everywhere because money’s looking for a home.
MR. BAKER: Venture-capital investment in the U.S. from China, that’s something else that continues to drive up valuations or prevent them from falling back down to more earthly levels. Do you expect that to continue?
MR. BAO: I think on the demand side, definitely, there is a need. Just simply a lack of enough investment opportunities in China. Secondly, the currency issue, RMB’s depreciation. And obviously there is more demand on the part of investors to diversify assets outside China.
MR. BAKER: We haven’t seen the big IPOs that we’d seen over the last few years. Is the hunger for IPOs coming back?
MR. GURLEY: One of the things that is particularly unique about this moment is we have record venture returns and record-low liquidity.
I think of it as paper returns no different than you might have had in other financial bubbles where things get marked up, and they’re not actually trading at their value.
People that invest in the venture funds, they make distributions to their endowments and foundations. And they get bonused based on those returns. Because they’re clocking it and it’s working, their boss says, “Maybe we should give more money to this sector.” It’s a system that can be self-reinforcing in a very negative way.
MR. BAKER: Let’s talk about Chinese acquisitions in the U.S. Do you expect to see more of that in the next year?
MR. BAO: There’s been a lot of deals on the content side. There should be more deals on the technology side as well. Because if you look at our national champions, I think they realized they aren’t invested in core technology compared to their U.S. counterparts. So there is a lot of catch-up to do. The best place to pick it up is still in this market.
MR. BAKER: What about M&A among Silicon Valley companies? Whenever anybody’s in play, there’s a rumor that Google is interested. Time Warner. Do you expect to see Google, Facebook, Apple going big there?
MR. GURLEY: I think from a venture capitalist’s perspective, it’s almost an ideal situation. Because you don’t have a single kingdom.
When I first got started, Microsoft owned the world. You had to deal with what they did. Here, we’ve got five companies of significant market cap [Google, Facebook, Apple, Amazon and Microsoft] who are all competing with one another. Many of them have large cash balance sheets. So that sounds to me like a perfect recipe.
Source: Wall Street Journal (Link)