“China’s technology boom was forged to a remarkable extent by American investors.” Those are the words of Sebastian Mallaby, from his excellent 2022 history of venture capital investing, The Power Law.
Mallaby’s reporting is a corrective to the question asked by Douglas H. Ginsburg, a judge at the U.S. Court of Appeals for District of Columbia. Part of a three-person panel overseeing TikTok’s appeal of its legislative ban, Ginsburg expressed skepticism about Singapore-based TikTok’s desire to avoid divestiture from what is frequently referred to as “Chinese ownership.” Ginsburg asked TikTok’s lawyers “Why is this any different from a constitutional point of view than the statute precluding foreign ownership of a broadcasting license?” If we ignore that TikTok isn’t a broadcaster as much as it’s a brilliant reflection of what its users want and might like to see, the problem can be found in Ginsburg’s question.
It implies Chinese ownership of TikTok when in reality, Chinese technological advance has long been financed right here in the United States. Despite all manner of laws limiting foreign ownership of any Chinese company with a “.com” connected to the name, the reality is that dollars are dollars. And American dollars, per Mallaby, have made “all the difference” on the matter of technological advance in China.
To understand just how instrumental U.S.-based investment is in China, consider a company not TikTok. The U.S. owners of Jack Ma’s Ant.com include gilded names like Silver Lake, Warburg, T. Rowe Price, and Carlyle. Even though Ant is domiciled in China in such a way that bars foreign ownership, it was still able to raise $10 billion through a company that Ant set up outside China, and that was formed to raise money in U.S. dollars.
TikTok is no different in this regard. Where there’s innovation, American finance finds it. More important, China’s equity markets remain provincial. Absent American sources of investment and knowhow, Chinese technology would be a fraction of its present growing self. Consider just one of TikTok’s American owners, Sequoia Capital. Arguably the most successful VC of all time, Sequoia brings more than money to companies like TikTok: it brings a brilliant track record of shepherding businesses from start-up phase to soaring private valuation to successful exit via public equity markets.
The reality is that absent substantial and prominent American investment and insight into how to grow a business, TikTok wouldn’t be TikTok. Ginsburg’s question furthers the perception of a Chinese-staffed company that’s a creation of a China-based investment. TikTok’s private valuation is a hint about the false nature of the perception. The robust, intrepid funds required to back risky ventures like TikTok (its aforementioned high valuation is loud evidence now of what low odds the company had of succeeding when it launched in 2016) don’t presently exist in China, which explains its rather substantial American ownership.
That these American owners aren’t interested in divesting is logical, both for them and for TikTok. For one, TikTok in the hands of just anyone not ByteDance threatens its ongoing success, and by extension, its valuation. Anyone who doubts this need only consider the so-far unsuccessful efforts by U.S.-based technology companies to innovate around TikTok, and subsequently win its substantial global market share.
Second, for TikTok’s owners to sell the business would be the equivalent of the Kansas City Chiefs selling themselves, albeit minus head coach Andy Reid and quarterback Patrick Mahomes. The owners are a substantial driver of TikTok’s success, not to mention what their ownership has meant from a talent-within-the-company standpoint. Which means a forced divestment would come at a sizable discount that, as evidenced once again by TikTok’s ongoing success against U.S. technological giants, would imperil TikTok’s future.
All of this matters simply because TikTok’s American owners have investors too, and they want a return. As Mallaby makes plain in The Power Law, the rare VC success pays for all manner of failed investments. Divestment would not only levy a substantial haircut on TikTok’s American owners, it would greatly imperil returns necessary to attract future investment capital. Which is why all the expressed fears about TikTok are so overdone as is.
TikTok’s popularity in the U.S. explains why. Its 170 million American users are plainly what makes TikTok, and for that matter any global corporation, so valuable. To presume TikTok would abuse its U.S. prominence to spy on the United States for the CCP suggests its American owners are actually willing to endure a much bigger valuation haircut that would almost certainly result from any valid discovery of TikTok as a Chinese spying vehicle.
Meaning, it’s not going to happen. TikTok’s American owners will make sure of that. Such is the beauty of profit-motivated investment. If TikTok were in fact a front for the CCP, it wouldn’t possess the American investment to be a front.
