Venture capital, IPOs, M&A and revenues follow users to international Internet markets

This blog post is part 2 of 3 in a series by Eric J. Gerritsen – Principal of Global Internet Advisors, a Silicon Valley-based international strategy consulting firm.

Are U.S. financiers missing the new global Internet party?

As Internet action grows overseas local financial groups have stepped up with money and international stock exchanges are offering serious alternatives to a NASDAQ offering – the ultimate Web 1.0 status symbol. For example, since Google’s spectacular 2004 IPO, the largest Internet IPO globally has been from Hangzhou, China-based Alibaba, which raised a whopping $1.5 billion in its Nov., 2007 IPO. Notably, this money was raised on the Hong Kong Stock Exchange – not on the NYSE or NASDAQ. One third of the 15 Chinese Internet IPOs since 2004 (that collectively raised $5.1 billion) listed in China.

In venture capital the size of non-U.S. Internet deals has also become impressive. In April, 2008 Japanese telecoms firm Softbank invested $430 million in Beijing-based Oak Pacific Interactive, owner of leading Chinese social network Xiaonei, dwarfing the $240 million that Microsoft invested in Facebook.

For American Internet VCs these trends should be particularly distressing as they try to find and fund the next round of $100 million Internet companies. This new value creation and exit cycle – where Chinese Internet companies get funded by Chinese money; serve Chinese users; exit on Chinese stock exchanges or get sold to other Chinese companies – leaves no oxygen for American VCs, investment bankers, and stock exchange operators.

With the rise of Asia on the Internet we can expect an increase in intra-Asian expansion activity like Baidu launching its search engine in Japan and Softbank investing in social network Xiaonei. We will also likely see more activity from Asian and European Internet companies buying U.S. operations, like Rakuten buying Linkshare, Daum buying Lycos, and Russia’s SUP buying LiveJournal. Direct Asian financial investments from Asia into U.S. Internet companies – like Hong Kong’s Li Ka-Shing (one of Asia’s richest men) investing $60 million in Facebook – can also be expected to happen more often.

These developments are a net positive for U.S. Internet entrepreneurs. Asia can be a valuable source of development capital and foreign buyers could well represent a new source of exits for American Internet firms, particularly during this period of closed IPO markets.

International revenue outstrips U.S.:

That financing options for Internet companies are increasing outside the United States is not surprising as Internet audiences grow faster globally and advertising and e-commerce revenues are following. America’s share of global B2C e-commerce, for example, is expected to be only 34% of the roughly $500 billion in revenues expected in 2009.

The trendline to international is beyond the tipping point: Google now reports more than 50% of its revenue from outside the U.S. They are not alone. Yahoo gets 32% of it revenues from non-U.S. sources; eBay 51%; Amazon 45%; and Cisco 46%.

For ad-supported firms in particular these figures can be expected to grow substantially. Of the $106 billion to be spent on online advertising by 2011 less than half ($45 billion) will be spent in the United States. China leads the pack again on adspend growth rates, growing by 50% this year.

Beyond China the fastest growing regions for global online adspend next year will be Central and Eastern Europe and the Middle East and Africa with average annual growth rates of 42.1% and 29.8% respectively.

U.S. Internet experience abroad: 1999-2009: Mixed Bag

The results of the last 10 years of international expansion by U.S. Internet companies have been very mixed, with the singular exception of Google, and have rarely created market leadership positions.

In China eBay has tried and failed to knock off Chinese rival Taobao; Yahoo has tried and failed to overcome Chinese portals Sina and Sohu; and Google has tried and failed to close the gap with local search champ Baidu.

Other notable examples in specific international Internet sectors where non-U.S. companies lead include:

  • Bebo, which leads both MySpace and Facebook in Europe.
  • Huawei, which leads Cisco in infrastructure in China.
  • Rakuten, which leads Amazon in online shopping in Japan.
  • NTT, which leads everyone in Japan’s wireless Internet.
  •, which leads Facebook by a huge margin in Japan.
  • Xiaowei and Zhanzuo, which beat MySpace and Facebook in China.

In the social network market Asia is the prize but Asia will be a tough nut to crack for companies like MySpace with 61% of its users in the United States.

In Japan MySpace is 1/10th the size of the leader and Facebook only has around half million users in Japan. Neither company has made much progress in China. Local social media players Naver, Daum, and Cyworld dominate Korea.

Moving ahead in places like China, where foreign-ownership restriction laws prohibit control, has been difficult for American firms. Yahoo and eBay have had to take minority stakes in their China-equivalent sectors: Yahoo owns 39% of Alibaba; and eBay owns 49% of Tom Eachnet, a JV with Tom Online.

But giving up control is not necessarily a bad thing. 

Yahoo Japan, controlled by Softbank of Japan, has been a notable international success. It sits in the number one position in Japan with revenues of $3.3 billion in 2008 and a public market capitalization of $17 billion.


If the last 10 years of American Internet company international expansion has taught one thing it is that global plans need to be baked in to overall strategy from the beginning.

Waiting two or three years to take control of international opportunities is a mistake. Competitors watch everything happening in the American market and American firms that wait will usually find that when they do go overseas their market position is occupied by fast-moving, plugged-in local firms. Facebook’s experience in China is a good example.

Another common mistake has been to confuse strategy with localization. Language localization is hugely important but is a second-tier consideration.

Strategy comes first, including an understanding of fundamental objectives; cultural fit; user experience needs; partner and alliance possibilities; local economics; competitive grid; M&A opportunities; local pricing; executive and technical talent availability; and government regulatory environments.

Perhaps the more fundamental mistake has been to see international Internet traffic as less valuable than U.S. traffic and somehow deserving less attention and investment.

No doubt monetizing U.S. traffic has been easier, and on a per-capita basis U.S. eyeballs are generally more valuable, but the simple math says that international traffic in toto is worth more.

Money follow users.

Eric J. Gerritsen is Principal of Global Internet Advisors, a Silicon Valley-based international strategy consulting firm. Gerritsen can be reached at eric@globalinternetadvisorsDOTcom. (info sources available on request).