BEIJING-New government regulations may have slowed the pace of new investments here, but they have not slowed unprecedented fund-raising for new venture capital funds targeting China, according to proprietary research conducted by VCJ.
Of the more than 65 China-centric private equity funds in the midst of being raised, at least 40 are venture funds, while some portion of the rest will inevitably be invested in venture deals as well. Notably, several brand name U.S. firms-like Accel Partners and New Enterprise Associates (NEA)-are entering the market through partnerships with domestic firms. Others, like Sequoia Capital, are raising dedicated funds to be run by China experts.
You can be sure that there will be more to come. Pat McGovern of IDG Ventures, which recently struck a joint venture with Accel to raise a new China fund, notes that seven other VC firms vied for the partnership, including three “major” firms. Adds Accel Managing Partner Jim Breyer: “I am certain that you will see several top-tier venture firms over the next few months announce strategies for China.”
It’s not terribly surprising, given the success of recent venture-backed Chinese startups that have gone public including Baidu.com (Nasdaq: BIDU), China Medical Technologies (Nasdaq: CMED), China TechFaith Wireless (Nasdaq: CNTF) and Focus Media (Nasdaq: FMCN). Venture capitalists across Asia blithely refer to the “giant sucking sound” coming from the vicinity of China as it draws funds, interest and newsworthy events to its epicenter.
And that was before Baidu blew the doors off the records for VC-backed IPOs when its stock rose to 6x its original pricing. Backed by Draper Fisher Jurvetson, IDG Technology Ventures, Integrity Partners and a host of other venture funds, Baidu debuted on Aug. 5 at an offering price of $27 per share and promptly soared as high as $153 before retreating to under $90 in September.
That resounding success has added impetus to the already intense attention being given to China by VCs. In September, two large U.S.-based VCs made their first China investment: Bessemer Venture Partners and Mobius Venture Capital joined Granite Global Ventures and Softbank in a $10 million round for Bokee.com, a hyped blog portal based in Beijing.
U.S. and European firms are steadily increasing their investment activities in China, opening new offices, initiating new joint investment ventures and expanding relationships. There are so many deals getting done that it can be difficult keeping track of all of them. Following is a rundown of recent partnerships and new funds:
Accel Partners. Fund-raising for the IDG-Accel China Growth Fund was expected to start after Labor Day and be completed by Q4 or early Q1 2006. The fund has a target of $250 million and will invest in maturing Chinese startups in the IT, health care and consumer technology sectors. Unlike IDG’s previous two funds-which focus on seed and Series A rounds that range from $500,000 to $2.5 million per investment-the new fund plans to invest $4 million to $8 million in companies that are in expansion mode.
It’s not surprising that so many U.S.-based VCs wanted to partner with IDG. Its two China funds have a combined IRR of about 46 percent, McGovern says. They have collectively invested in about 140 Chinese companies and have exited from 37 of those investments (seven through IPOs on U.S. or Hong Kong stock exchanges).
DCM-Doll Capital Management. DCM, which has been investing in China on its own for almost a decade, recently anted up $50 million to participate in Legend Capital’s most recent fund, LC Fund II, a $100 million fund raised in 2003. Legend, the venture arm of the Le Novo Group (which recently acquired IBM’s PC business), is one of China’s most savvy VC firms, as one might expect of a firm that is privy to all of the contacts generated by China’s largest PC Company. DCM, while taking advantage of access to the two-dozen plus firms in Legend’s VC portfolio of early to middle stage technology companies, continues to invest in China by itself. For example, it recently invested $10 million in Shanghai-based 99Bill, a micro-payment company.
Granite Global Ventures. Though Granite is based in Menlo Park, Calif., half of its 10 investment professionals are located in an office in Shanghai, including one of its four general partners. Among its notable investments in China are Hurray Solutions Ltd. (Nasdaq: HRAY), a Chinese wireless services provider that went public in February, and Alibaba.com, a Chinese e-commerce site that sold a 40% equity stake to Yahoo in August for $1 billion.
Roughly 30% of Granite’s first fund of $160 million went to deals in China and the rest to U.S.-based companies. It expects to maintain that ratio with its second fund-a $225 million vehicle that closed in January. Managing Director and firm co-founder Scott Bonham describes Granite as a “generalist” that looks for opportunities in both IT and biotech, with a focus on companies with proven technology that are expanding their sales. One of Granite’s big selling points is that it can help U.S.-based startups navigate China-whether it’s finding engineering talent, office space or customers.
Granite has a “close relationship” with Venrock Associates, which is a Granite limited partner and helped with its founding in 2000, but Granite is a “completely independent firm,” Bonham says. In addition to Venrock, Granite has co-invested with the likes of New Enterprise Associates, Norwest Venture Partners, Sequoia Capital and U.S. Venture Partners, he says.
Intel Capital. After a decade in China, Intel has set up its first fund dedicated to this country. Cadol Cheung, a managing director at Intel Capital Asia Pacific and head of venture capital investing for Intel in China, says the $200 million fund will invest primarily in cellular communications areas, including telephony, infrastructure and Wi-Max, but will also consider backing semiconductor design companies and startups working on technology for the “digital home.”
Intel said in August that its new fund had invested in three companies: fabless chip developers Chipsbrand Microelectronics of Shenzhen and Verisilicon Holdings of Shanghai, plus broadband entertainment technology provider Onewave Technologies of Beijing.
Mayfield. Mayfield has a strategic relationship with GSR Ventures, a Beijing-based venture firm with three managing directors, including one (Richard Lim) who is based in Mayfield’s office on Sand Hill Road in Menlo Park, Calif. Mayfield plans to put up 10% of GSR’s first fund, according to BusinessWeek. GSR invests in early stage technology companies in China, with a focus on Internet and semiconductor startups. A typical first round ranges from $500,000 to $3 million. “We believe that some of the world’s leading technology companies will emerge from China over the next decade and we formed GSR Ventures to support the development of these companies,” the firm says on its website. A GSR partner told VCJ: “Our lawyers have advised us not to issue public statements until the final closing of our fund.” Mayfield declined to comment on its relationship with GSR except to say that it looks at deals in China that GSR finds.
New Enterprise Associates. NEA has been investing directly in China for about three years and has has sunk more than $100 million in half a dozen companies, including semiconductor play SMIC (NYSE: SMI) and Tivo China. Now it’s going a step further, throwing its financial support behind a new independent venture firm called Northern Light that was co-founded by NEA Venture Partner Min Zhu. (Zhu joined NEA in March 2004 to scout opportunities in China. He previously co-founded and was president of WebEx Communications (Nasdaq: WEBX), an NEA portfolio company.)
Northern Light plans to raise a first fund of $100 million this fall. NEA General Partner Scott Sandell describes his firm as a “special LP” for Northern Light: Northern Light will not only receive part of its institutional backing from NEA, but will also provide NEA with deal flow.
In addition to Zhu, the founders of Northern Light are Chinese entrepreneurs Feng Deng and Yan Ke. They will share office space with NEA Venture Partner Xiaodong Jiang, who is relocating back to China to open an office for NEA there by year-end.
Sequoia Capital. The firm is raising a $200 million fund dedicated to investing in China, according to Sequoia GP statements to the Asian Venture Capital Journal and TheMarker.com, an online Israeli business magazine. “We’ve had a lot of genuine interest in China by our limited partners and it’s largely the same LPs who have been with us who are behind this fund,” General Partner Mark Stevens told AVCJ. The fund, to be called Sequoia Capital China I, is expected to focus on both early and late stage IT deals. Stevens told AVCJ that he expects Sequoia to close its first China deal by the end of this year. Sequoia’s China operation is headed by Neil Shen, co-founder and former CFO of Ctrip, a Chinese travel website, and Fan Zhang, whom Sequoia poached from Draper Fisher Jurvetson’s ePlanet Ventures.
Sutter Hill Ventures. Sutter Hill got into China relatively early, but it has taken a cautious approach, partnering with experienced professionals on the ground: Chengwei Ventures and Venture TDF China LLC. Both of the Shanghai-based venture firms have recently closed on their second funds. Len Baker, a managing director at Sutter Hill, wrote in an email to VCJ while on a 10-day business trip to China in early September: “We’re trying not to go too fast and to take a long-term view.We do not plan to open a China office or start a China fund. We are investing directly into Chinese companies only as co-investors with either Chengwei or TDF.”
Chengwei makes early stage and expansion stage investments in semiconductors, software, security and games. It started out with a debut fund of $60 million in 1999 and raised a second fund of $100 million last year. Sutter Hill is an LP in the fund, but not the largest. Baker notes that Sutter Hill has co-invested in three companies with Chengwei, including acoustic component maker AAC Acoustic Technologies Holdings, which went public on the Hong Kong Stock Exchange in September.
Venture TDF was founded in 2000 and has five investment professionals. Its portfolio includes several Chinese companies that launched hot IPOs this year: Baidu.com, Focus Media and Hurray! Solutions. Baker says that Sutter Hill backed TDF in a new $120 million fund that was expected to hold a final close in September.
3i. Long active in China, London-based 3i currently has seven portfolio investments in China, according to its North-Asia Head, Jamie Paton. Despite that, 3i, much like DCM, decided to invest as an LP in one of China’s leading domestic VC firms: CDH China Holdings Management of Hong Kong. 3i in April committed $45 million to CDH’s second fund, CDH China Growth Captial Fund II, which has a target capitalization of $310 million. The fund has already held a first close on $162 million. Paton told VCJ that 3i will continue to invest directly in China, but like DCM, it now has access to a large VC organization on the ground through its new strategic partner.
CDH is one of the best-performing independent venture funds in China. It was founded in August of 2002 by Wu Shangzhi as a spin-off from Chinese investment bank China International Capital Corp. and raised $102 million for its first fund, CDH China Fund I.
Telos Ventures. The venture arm of Cadence Design Systems in July was reported to be planning to open an office in China and hire two to three new investment professionals to staff it. General Partner Charlie Huang told VCJ in September: “Those were our plans, but now is not the best time to talk about it.” He added that Telos likely wouldn’t be ready to talk about its China strategy for “a couple of months.” Telos has made a single investment in a Chinese fables semiconductor company, but Huang says he can’t discuss it because the company is in stealth mode.
Telos held a final close on $50 million for its third fund in August 2004. The venture unit was founded in 1996 and focuses exclusively on startups developing next-generation EDA and fabless semiconductor technology. It usually invests $1 million to $3 million in first or second rounds. All of Telos’ deals are reviewed by an advisory team that is made up of the members of Cadence’s board of directors, including Lip-Bu Tan, chairman and founder of Walden International. Telos beefed up its investment team last year with the addition of Huang and General Partner James Hogan, both of whom were executives at Cadence.
Venrock Associates. Venrock made its way into China in 2000 by helping to found Granite Global Ventures. It has made at least 14 co-investments with Granite, according to the MoneyTree Survey by PricewaterhouseCoopers, Thomson VE and the National Venture Capital Association. Venrock Managing General Partners Ray Rothrock and Tony Sun sit on Granite’s Investment Committee.
Walden International. Among the firms that continue to go it alone in China is Walden International, which is raising a new $400 million fund to invest in semiconductor and Internet deals in the Greater China region. It declined to say when it expects to close on the new fund.
While it’s easy to fixate on the growth of funds and the amount of capital being raised for investment in China, it’s worthwhile noting that several China-centric funds haven’t had an easy time with fund-raising, including Actis, AsiaTech Ventures, Crystal Ventures, Diamond TechVentures, Gobi Partners, Orchid Ventures, Vertex China and W.I. Harper.
Actis, one of China’s most successful investors, has been raising its second fund for nearly two years, despite a highly successful first fund. Actis’ China Fund 2 recently hit $160 million for a first close, as the U.K.’s CDC invested in the fund, so it looks like it will be successful.
Shanghai’s Gobi Partners, formed in 2002 by three former members of the W.I. Harper team, announced a first close on its first China Fund, Gobi I, in 2003, taking anchor investments from IBM (said to be IBM’s first participation in a Chinese VC fund) and NTT DoCoMo, in the amount of $35 million. Co-Founder Lawrence Tse says that the firm is closing on another $45 million in September, all from a top-tier Sand Hill Road VC that he declined to name. Gobi, which invests in early stage technology companies, has made five investments from the fund in companies in Beijing and Shanghai.
Other China-centric funds haven’t been as lucky as Actis and Gobi. Vertex China, the VC arm of Singapore Technologies in Beijing, has closed its office. W.I. Harper, which has suffered repeated staff losses, declined to comment on its progress with the new fund it announced in January 2005.
In addition, a number of other, relatively large funds declined to respond to VCJ’s requests for updates on their activities in China. That group includes CDIB, Crimson Venture Partners, Pacific Venture Partners and Sycamore Ventures.
There is no single reason why some of these funds are entering a second year of fund-raising with little progress. Most of them have participated in notable exits via regional stock markets or trade sales, but they still appear unable to raise a new fund. A few have notable Nasdaq exits. A variety of factors are evidently responsible for some of these firms’ difficulties raising new funds, including frequent turnover in management teams, government or corporate sponsors that are unwilling to continue to provide the majority of their capital, limited domain expertise, and insufficient management skills in an era of growing demand for management experience. In some cases their ROI for prior funds does not demonstrate their ability to reach top-quartile status.
It is both confusing and ironic that new venture investments in China during the first half of the year have come to a near halt, while the pace of new fund raisings and venture-backed IPOs has returned to near-record levels. Welcome to the wonderful world of investing in a controlled economy. The public markets appear to be confident that China’s government will eventually right the problem created by its State Administration of Foreign Exchange, which put a stop to ownership by Chinese citizens (and resident foreign PE professionals) of overseas-based startups. The explanation for why so much new money is going to funds however, is less clear. Perhaps LPs are willing to bet, like public market investors, that eventually China will do what it takes to keep foreign funds rolling in to build its industries. In both cases it’s a big risk of capital, but when Draper Fisher can point to the monster return for its investment in Baidu, there is little chance that LPs are going to stop and ask questions.
Constance Loizos conributed to this story.