DCM bets bigger on China

DCM Fund VII reached a final close of $330 million last week, $80 million more than the amount sought when the vehicle launched in July of last year. About $220 million of the corpus will be invested in Chinese start-ups. This compares to $150-$180 million in each of the two previous vehicles, which closed on $500 million and $400 million in 2005 and 2010.

"The China-based team, comprising two general partners and four senior investment professionals, is larger than the US team. We're also hiring two more junior investment team members," says Hurst Lin (pictured), a general partner at DCM China. "We have an additional $30 million to invest, which means two more deals. It's not a dramatic change."

Like its predecessors, the fund will focus on Series A and B rounds. Series A commitments are usually around $6 million, rising to $8-12 million for Series B and up to $20 million for Series C.

Lin says VC firms are facing more competition when seeking out deals in the telecom, media and technology (TMT) space from a combination of newcomers and newly active Chinese strategic investors. The risk is valuations might spiral out of control, but Lin plays it down. "I don't worry too much about strategic investors as they are more focused on later stagy types of deals," he explains. "We do more early-stage investments."

He adds that few strategics beyond Alibaba Group, Tencent Holdings and Baidu are willing to pay rich enough valuations to dissuade portfolio companies from pursuing IPOs.

However, DCM still needs to differentiate itself from others in the market. It does this by finding attractive niches within the mobile, digital media, e-commerce, and cloud computing landscape. The firm also puts a lot of emphasis on helping start-ups recruit management talent and optimize business performance.

Lin cites VIPshop as an example. The flash sales site went public in 2012 with a market capitalization of $600 million and DCM had a 20% stake. It is now worth $7.6 billion. "We thought its strategy of selling mass-market branded products, rather than luxury goods, would be an advantage," Lin says.

DCM also invested in 58.com, a classifieds marketplace that has more than tripled in value since its IPO last year. The firm was attracted by 58.com's strategy of hiring a sales team to teach Chinese shopkeepers how to advertise online. Competitors simply copied the Craigslist model, which offers no guidance to business owners.

The investment themes likely to dominate Fund VII are internet finance and online-to-offline businesses. Online gaming, once the sector's poster child, has lost its luster, Lin says.

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• DCM-Doll Capital Management