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Behind China's $720 Million Bet on British Tech Startups - Bloomberg

"Frankly, we invited so many of you because we didn’t expect all of you to come," John Zai, the chief executive officer of Cocoon Networks Ventures joked as he surveyed the hundred or so guests gathered on the top floor of accounting firm Ernst & Young’s London offices last Friday.

Zai shouldn’t have been surprised: after all, it’s not every day that a new venture capital fund rocks up in town with 500 million pounds ($720 million) in its purse and an ambitious plan to help British startups in fields from hardware to biotechnology.

Cocoon Networks is one of the first Chinese venture funds to open for business in the U.K. -- and one of the largest of any kind aimed at early stage investment in the country. Among the firm’s several backers is Beijing-based China Equity International Holding Co., a company affiliated with China Equity Group that was an early investor in search engine and Web services company Baidu. Another investor is Wuhan-based Hanxin Capital Equity Investment Management Co., which has primarily invested in Chinese cloud computing and biotechnology startups.

More Valuable

Zai said Cocoon was targeting the U.K. in part because startup valuations were more attractive than in China, where there is too much money chasing every good idea, or Silicon Valley, which has already seen an influx of Chinese investment in recent years. He said valuations in the U.K. were about a third of that in China currently.

Cocoon will be looking at investments ranging from seed through Series C financing rounds -- but focused more heavily on early stage, with a target range of between 250,000 pounds and 1.5 million pounds per investment, he said.

Another draw is the U.K.’s large and growing population of Chinese students -- nearly 100,000 of whom attend university here every year, said Weiguo Wang, a founder of Hanxin Capital, which has been building relationships with U.K. universities over the past several years. He said he hoped Cocoon Networks would help some of these students to found tech companies either in the U.K. or in China.

London has seen a surge in Chinese investment in recent years -- nearly 30 Chinese firms set up in London last year, a 30 percent increase from 2014. Notable Chinese investments include Kunlun Tech Co., a Beijing company best known for its investments in gaming, that put 23 million pounds into Lendinvest, a London peer-to-peer mortgage marketplace.

Largest Incubator

But no Chinese firm has made as big a splash so far as Cocoon -- and not just because of the venture firm’s large bankroll. Cocoon is planning to open this summer what it claims will be London’s largest incubator and co-working space: 6,500 square meters spread over five stories near Liverpool Street Station in East London, where many startups are based. The building will include desks for 300 people, labs and 3-D printing, plus a rooftop bar, a members’ club, a gym and a sauna. The facility will be run by Rainmaking Loft, a Danish company that already operates co-working spaces in Copenhagen, Berlin and London. Cocoon also plans to partner with University College London to run the incubator.

"The Chinese economy is going through a transition and it realizes it needs innovation," said Koen Vandecaveye, a senior business manager at London & Partners, the official promotion company for England’s capital, where he specializes in attracting Chinese investment to the city. He said Cocoon Networks realized that it could help startup companies based in London go back to Asia and build a global presence.

Northern England

Cocoon is not limiting its vision to London. It will also have a presence in England’s North and East, with a branch in Norwich. Here, Cocoon is teaming up with the University of East Anglia’s ADAPT Low Carbon Group to establish an accelerator for startups in green and renewable businesses. Cocoon and ADAPT have received a 100 million pound grant from the Mulberry Green Technology Fund to establish this program and plan to have the accelerator’s first class of startups in place by September 2016.

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Yu Xiong, a Cocoon director who is currently a professor of technology and operations management at Newcastle Business School, part of the University of Northumbria, said he hopes to build ties to not only Newcastle’s tech scene, but tech coming out of other northern universities, such as the Durham University Innovation Observatory. The U.K. has been trying to direct technology investment -- both domestic and foreign -- to the country’s North, which has suffered from the decline of the country’s industrial base, but which still hosts a number of science and engineering-oriented universities and where startup costs are less than in London.

Yuebing Lu, managing director and vice chairman of China funds for the Shanghai office of Siguler Guff & Company, a U.S.-based private equity firm, said that Cocoon was seeking to find technology that would not just have an impact in Europe, but which would make a difference back in China too. "Before, the Chinese economy was all driven by cheap: cheap labor, cheap land," he said. "Now it needs to be driven by innovation."

(Corrects name of Chinese investment company in third paragraph and clarifies relationship with University College London in eighth.)

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