Why Magento Scored $250 Million from China

When a foreign investor decides, seemingly out of nowhere, to pump huge sums of money into a U.S-based software company, it’s hard not to attract attention. Since the beginning of January, it seems as if the software world has been abuzz with what this might mean for the future of e-commerce. But for those of you that missed this interesting tidbit of news, let’s begin with a quick recap:

Hillhouse Capital, one of China’s largest investment firms, decided in early January to invest $250 million into the California-based Magento Commerce. According to the Financial Times, this puts their estimated value to $700 million; that’s more than a 50% increase.

Who’s Who?
If you are unfamiliar with Hillhouse Capital, here’s what you need to know: it was founded in 2005 by Zhang Lei with $20 million in seed capital from the Yale Endowment. They currently manage over $20 billion, and they normally like to keep a very low profile. That is what makes this investment such an interesting play.

You may know that Magento was originally developed by Varien, Inc. in 2008. It was eventually sold to eBay, which eventually spun off the company. Since then, it has been increasingly successful as a competitor to software like WordPress and Joomla, and has been steadily growing every year. Magento boats some pretty big clients, from Ford to Coca Cola to Nike.

But why this and why now?

Shifting Economy

This staggering move was explained by Mark Lavelle, Magento’s current CEO, to be for global expansion of sales and marketing operations (namely in Asia). This will allow them to dip into the increasingly large pools of consumer spending there.

China, while having a long-standing reputation in the United States as being a producer economy, has been rapidly shifting. As Chinese companies continue to expand and outsource production to nearby countries while China builds its middle class, consumer spending in China has been on a sharp increase. Many business-wise investors are looking more and more to China and Southeast Asia for opportunities to grow their wealth and build the budding economies there.

This impromptu infusion of funding says a lot about what types of markets we can expect to see spiking in China and its surrounding nations. With the infrastructural investments we have been seeing by the Chinese government as of late, it looks unmistakably like the impressively fast construction of a functional middle class to support and create new industries that will further solidify China as an economic powerhouse in the world market.