No sleep till Sand Hill for GSR partners

Working as a VC in Silicon Valley isn’t what most people consider a relaxing gig. But after two years of shuttling between Beijing and Menlo Park for China investment fund GSR Ventures, managing director Richard Lim looks forward to the downtime he gets in California.

“People don’t have meetings on weekends here,” says Lim, speaking from the Sand Hill Road offices the firm shares with Mayfield Fund. When in China—where the Singapore native and Stanford grad spends about half his time—appointments run all week, including Saturday morning through Sunday night.

The hectic pace is understandable if one considers that the GDP of the world’s most populous nation is growing at a rate of more than 10% a year. Venture capital investing, meanwhile, is up more sharply. VC funds invested $1.6 billion in Chinese companies in 2006, up from $1.2 billion in 2005 and $1 billion in 2004, according to Thomson Financial (publisher of VCJ). Venture funds backed 136 companies, investing an average of $12 million per deal.

GSR (short for Golden Sands River), which raised $200 million to close its second fund in January, is part of the wave. This quarter, directors plan to finish making investments from their first fund, GSR I, which raised $75 million in 2005. With the second fund, GSR plans to continue its strategy of making early stage investments primarily in Internet, mobile and semiconductor startups.

Beijing blitz

Looking at U.S. IPOs for Chinese Internet and technology companies, it’s no surprise that GSR’s latest fund was oversubscribed. The handful of Chinese firms that went public on U.S. exchanges in the last two years has included a disproportionate number of blockbusters. Among the top performers are Beijing-based Internet portal, photovoltaic equipment maker Suntech Power, and travel website, with market caps of $4.1 billion, $5.5 billion, and $2.2 billion, respectively.

Hong Kong’s stock exchange offers an even more vibrant venue for exits. In 2006, Hong Kong brought in more capital through initial offerings than any other exchange, accounting for 17% of the total raised worldwide, according to Ernst & Young and Thomson Financial. IPOs on that exchange have included technology and Internet high-flyers like Tencent, a Chinese instant messaging company with a market cap of $6.5 billion.

Exit prospects could be dimmed by regulations put in place over the past few years by the Chinese government that impose restrictions on establishing offshore holding companies, which venture funds typically set up for deals in China. Today, a Chinese company registered offshore must get approval by China’s Securities Regulatory Commission before launching an IPO, according to law firm Morrison and Foerster, and that could delay exits.

GSR has yet to preside over an exit for a portfolio company, but that’s on par with expectations, says Lim, who estimates it will take at least four years for the early stage companies it backs to be ripe for an IPO or acquisition.

I don’t think we’re going to get away from night and weekend meetings [in China] for a long time.

Richard Lim, Managing Director, GSR Ventures

To date, GSR Ventures I has made 11 direct investments in China. Portfolio companies range from pure Internet companies such as matchmaking website to materials plays such as LED-based light developer Lattice Power to wireless technology developers such as mobile chip company Mobert Semiconductor.

While exits aren’t on the immediate horizon, sales and profits are ramping up at GSR-backed startups, Lim says. He points to Shenzhen State Micro Technology, a fabless semiconductor design company for digital television products, which posted a profit in the fourth quarter. With China’s Internet user base increasing at more than 20% per year, Web startups are also well-positioned for fast growth. In addition to Baihe, GSR is behind online travel service and home furnishing site Co-op Land Media.

Wisdom of crowds?

But China’s rising stature as a venture capital destination also means increasing competition for GSR. Rival funds that raised money in the past two years include Sequoia Capital China Partners, Northern Light Venture Fund, and China Seed ventures. Others, such as ePlanet Ventures, AsiaTech Ventures, IDG Ventures and Intel Capital, have a lengthier history of investing in China.

Lim sees GSR’s deep expertise in local business culture as a competitive advantage. GSR’s directors spend the bulk of their time in Beijing and most have prior experience managing startups in China. Directors of the new fund also have VC experience, as the original team is staying on to manage GSR Ventures II. In addition to Lim, managing directors include Alex Pan and Sonny Wu, founding members of Chinese mobile network operator Asia Wireless Technology, along with James Ding, co-founder of Nasdaq-traded Chinese telecom service provider AsiaInfo.

On the other side of the Pacific, GSR continues to lean on Mayfield for venture expertise and Silicon Valley connections. Mayfield managing director Kevin Fong holds the same title at GSR. Also, Mayfield’s chief financial officer, James Beck, serves as GSR’s CFO.

Virtually all the investors in GSR’s second fund were Mayfield LPs, backers of GSR I, or parties with some prior relationship to the two funds. Mayfield XI and XII, early stage funds raised in 2000 and 2005, are also top co-investors in GSR’s portfolio companies.

Given the relative immaturity of the Chinese venture industry and the nation’s blistering pace of economic growth, Lim envisions VC deal volume will grow by 30% to 50% annually for the next several years. That’s a good thing for workaholic VCs, he says. But for those who like to sleep in on Saturday morning, it might be wise to stay away from China. Says Lim: “I don’t think we’re going to get away from night and weekend meetings for a long time.”

GSR Ventures

Founded: 2005
Locations: Beijing and Menlo Park
New fund: Raised $200M for GSR Ventures II in January.
Previous fund: Raised $75M for GSR Ventures I in 2005.
Sample LPs: Horsley Bridge.
Focus: Early stage investments principally in Internet, semiconductor and mobile startups.
Team: Managing Directors are James Ding, Kevin Fong (also managing director at Mayfield Fund), Richard Lim, Alex Pan and Sonny Wu. CFO is James Beck (also CFO of Mayfield Fund).