Europe’s Newest VC Is Cocoon Networks, A $713M Fund Backed By Chinese Investors
As stocks in China continue to see a lot of volatility, some tech investors from the country are setting up a £500 million ($713 million) fund in London and are looking to back startups here. Cocoon Networks, as the new group is called, is backed by China Equity Group and Hanxin Capital, and plans to invest in UK and European startups in areas like fintech, the creative industries and biotechnology. Alongside it, Cocoon will build a cocoon of sorts: it’s partnering with the University of London to build what it claims will be the city’s biggest incubator.
John Zai, the founder and CEO of Cocoon Networks, said that the group plans to start making investments later this year. Individual backers have already started to put money, he said, although he would not reveal which companies have been backed nor any deal sizes.
China Equity Group may not be a household name in Europe or the U.S., but it’s been a part of some significant deals in the Chinese market. Among them it was one of the first investors in China’s search and Internet giant Baidu. Hanxin Captial is a fund that has focused on backing Chinese cloud computing and biotech companies.
Zai told TechCrunch that the decision to base the new fund in London came out of a couple of different reasons. The first is that the group had been considering multiple locations but decided that London was the best bridge between the U.S., Europe, and their own home country. It helped that Hanxin’s executives have been building relations with universities in the UK for some time, too.
The other is that Zai believes that China has been too fixated on the U.S. market for investing, and the same forces — competitive rounds, high valuations for startups in the Valley — that are compelling some U.S. investors to pay more attention to Europe are the same that have brought Cocoon here.
“We believe that in the past 15 years China has been very focused on the US market, but not so much on early stage investments in the UK,” he said.
He added that the Chinese market is overvalued, too.
“In China the valuations is quite high, and we see the same quality of compannies in europe at one-third of value in China and one-fifth of the value of the same companies in the U.S.. We are very overvalued, ” he said.
The other opportunity is to look for real innovation, he said.
“I’m Chinese and hate to say this but in all of the successful companies in China, the ideas are coming from Europe and the U.S. They are all trying to imitate.”
It also appears to be part of a wider trend: London has seen a surge of Chinese companies move into the city, with some 28 committing to setting up operations in London over the last nine months. And they are also investing here, with one notable round coming from Beijing Kunlun Tech Co putting £23 million ($34 million) into peer-to-peer mortgage lending marketplace Lendinvest.
In addition to the 70,000-square feet incubator facilities, Cocoon hopes to bring startups into the fold with another sweetener: help expanding startups’ businesses to the Chinese market. This is no small leg up: earlier today Reid Hoffman, speaking at DLD talked about the challenges of expanding a business to China (which is the only major country where Netflix is not launching in its big global expansion announced earlier this month).
Using Apple as an instructive company for how to do business in China, Hoffman noted that Apple approached the market with patience, and it paid off compared to Google’s fractious relationship with China. “You need partners and government permission,” he said. “It may take a couple of years but we’ll be patient, too.”
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