Sand Hill Road makes big bets and has done well funding very nascent technologies. But these same deal makers are doing things differently in China. Venture capital firms, such as GSR Ventures, ePlanet Ventures and DCM, still committed to looking for the next big tech breakthrough from China are no longer in the majority. Yet this core group remains convinced that Internet, clean tech, gaming and mobile deals will hit the next home run. Now that fewer rival firms are bidding for an equity stake in Chinese tech startups and upping deals valuations, they could be right. (Rebecca Fannin, Forbes.com)
Bets there are in a wide range of areas--health care, financial services and consumer businesses. Some are surprisingly non-tech, including women’s shoes, lotteries and dairies. Many China-based companies getting funding are further along than the guys in a garage of Silicon Valley legend. Sequoia is hardly the only U.S. venture firm in China that’s branching out from the higher-risk deal making that’s central to the Valley culture. It’s a who’s who of Sand Hill Road--Kleiner Perkins, GGV Capital, Accel Partners and NEA--that have opted to spend more time and money cultivating a broad array of later-stage emerging companies in China.
In the U.S., Sequoia Capital made its name and fortune with such trophies as Google, YouTube and Oracle. The firm got into China in 2005 with a $200 million fund to seed the champions among Chinese start-ups. But by 2007, Sequoia had begun investing from two funds: $250 million for venture and $500 million for growth-stage businesses.
The challenges of early-stage tech deal making are pronounced in China, requiring good connections with government officials, hand-holding with entrepreneurs who lack managerial experience in a capitalist-like economy, expert lawyers to navigate regulations and intellectual property issues--and most of all, patience to realize a payback for all the hard work and time. The end goal is the same: Make these companies profitable, sizable and publicly listed. Growth deals by comparison seem so much easier. All it takes is a well-conceived business model in the right market sector and an economic boom that can send revenues skyward. With limited partners demanding better performance results now, the appeal of growth capital is undeniable.
A look at the growth deals in Sequoia’s China portfolio--including China LiNong International, a highly profitable and rapidly expanding supplier of freshly packaged and premium-priced vegetables--shows just how far this legendary tech investor has strayed from its Sand Hill Road roots. Their reasoning? Growth capital in China can mimic the more adventuresome spirit of venture capital deal making--and with potentially less risk.
Financing emerging businesses and helping them scale in the more mature, slower-growing U.S. market isn’t all that exciting, but China’s booming economy, wide-open market sectors and low costs offer a big runway for small businesses to scale quickly and profitably--precisely what entices venture capitalists. Certainly, with less competition, early-stage tech investors in China could do better than growth capitalists who took what looked like the surer path to riches.
So-called growth capital investing may not turn up the NASDAQ and NYSE winners that Chinese tech deal-making did--think Tencent, Focus Media and Shanda. But many U.S. venture capitalists in China believe these later-stage investments can generate solid and steady returns--if not the huge returns of stellar tech deals.
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And guess what? Sequoia’s three exits so far from its 50 deals in China are all from the growth fund. Count them: two Hong Kong IPOs--sports apparel retailer Peak Sport Products in September 2009 and underground shopping mall developer Renhe in October 2008--plus a NASDAQ listing in December 2007 of outsourcing vendor VanceInfo Technologies.
Neil Shen, Sequoia’s founding managing partner in China, says that by no means has he given up on scoring a big hit with early-stage tech investing. But it simply makes sense to follow where the money-making is now--despite the fact that Shen has his heart in venture investing, given his own entrepreneurial background. Shen founded two NASDAQ-listed Chinese companies, travel booking service Ctrip and economy hotel chain Home Inns.
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