- Two Chinese companies announced funds for UK startups totalling almost £1 billion.
- More than one year later, one fund has yet to invest in UK startups.
- Sources told Business Insider that Chinese capital controls mean funds have difficultly bringing money in from China.
In early 2016, it was looking like there would be a big new pot of investment money for British startups, backed by China.
Last January, Chinese company Cocoon Networks announced a venture fund worth £500 million, along with a massive co-working space in east London and, apparently, a partnership with UCL. (UCL told Business Insider there was no partnership, and that Cocoon had used its logo on its website without permission.)
And in March this year, the press reported that another Chinese firm, Silk Ventures, had raised a $US500 million fund (£388 million).
That’s close to £1 billion in promised funding.
But where is all of it?
It’s more than one-and-a-half years since Cocoon Networks announced its fund, and the company doesn’t appear to have invested in anything.
What has materialised is the coworking space in east London, a massive £1.5 million renovation with a massive gym, five floors, and space for catwalk shows. But investments haven’t followed.
Cocoon’s chief executive, John Zai, did not respond to multiple requests for comment. But two sources close to Cocoon said Chinese capital controls were slowing the firm’s ability to bring money out of China.
Cocoon is backed by private equity firm China Equity, which did not respond to a request for comment.
Last year, the Chinese government made it much tougher for individuals and companies to move their capital offshore. The idea was to preserve its dwindling foreign exchange reserves. According to Dr. Kent Deng, associate professor of economic history at LSE, it was also a way to clampdown on rich individual Chinese.
“[Many] wealthy Chinese are seeking for ways to take their money out of China. Buying properties and businesses is the standard practice,” he told Business Insider. “The logic is simple, money inside China is not secure.”
But, he added, the government is becoming stricter. “[Even] if an investment contract has been signed, a Chinese investor may not get his or her money out of China. From the authorities’ point of view, every rich Chinese is guilty unless proven innocent.”
There is a restricted number of institutions which can invest abroad, according to Silk Ventures founding partner Angelica Anton. That poses challenges for raising a fund.
“It is indeed a challenge and we were subject to the same restrictions,” Anton told Business Insider. “There are only a number of Chinese corporations and investment firms that either have money offshore already or have the approval from the government to transfer money overseas.”
Silk Ventures is, she added, a partnership with a governmental entity that has “got the green light to invest overseas”.
Anton also told Business Insider that Silk Ventures had not closed its $US500 million fund, as earlier reports suggest, but was closer to raising half the round. That’s enough to start investing soon, she said.
As for Cocoon, Business Insider spoke to James Griffiths, chief investment officer of a green technologies fund supported by the Chinese firm called Adapt Cocoon.
Adapt Cocoon is based out of the University of East Anglia, and is in the process of raising around £20 million in funding to invest in startups tackling environmental problems. As yet, Cocoon isn’t actually an investor in the Adapt Cocoon fund, but is providing introductions to other Chinese investors.
Griffiths said: “The thing about money movement is very true. It changes some of your investors, and we’re in a the midst of fundraising. Anyone trying to raise a fund from China right now will be delayed.”
There’s no evidence that there’s anything untoward about Cocoon. Griffiths and several well-known UK investors who know the company and praised the company’s activity in the UK tech scene to Business Insider. The company’s links to China are as promising as its prospective funding activities, they said.
“A big part of what we’re selling is to make connections to companies in China,” said Griffiths of Adapt Cocoon. “Funds do take time, [whereas] Cocoon has proven they’re good at networking. They have good networks.”