AVCJ Awards 2015: Fundraising of the Year - Venture Capital: Banyan Capital

Banyan Capital's fundraising has been concentrated and seamless. The GP, which spun out from IDG Capital Partners in 2013, closed is debut fund at $206 million in early 2014, raised a $362 million second vehicle 12 months later, and then three months after that raised $100 million for follow-on investments in Fund I portfolio companies.

Within two years of coming into existence, the VC firm has three US dollar-denominated funds and two RMB funds, with around $700 million and RMB1 billion ($156 million) in assets under management.

"When we set up the firm, we didn't think it could actually grow to the scale it has today," says Xiang Gao, co-founder of Banyan. "There are a number of factors responsible for this result."

Over the last two years, we have seen many new faces in China’s venture capital industry. However, we were the first to team to spin out from a reputable traditional venture fund and that meant we got a lot of attention from investors - Xiang Gao

Perhaps the most important is the investment environment in 2013. Domestic and foreign investors were worried about China's internet industry; the prevailing view was that innovation had reached a bottleneck there would be few new technologies for VCs to look at.

"We viewed it differently, we thought the real internet age had just started," Gao explains. "Prior to that, the development of internet was only on the infrastructure side. Over the next 5-10 years, starting from 2013, we expected internet technology to penetrate even further into every industry. When we made presentations to LPs, there was an important slide that said, ‘The internet will ultimately change everything.' That was and is our belief and we have expended a lot of effort based on this."

What's in a name?

Banyan was founded by Gao, Zhen Zhang and Bin Yue who focused on technology, media and telecom (TMT) investments for IDG. Zhang and Gao, who were both partners at the firm, have been working together for about 10 years. Yue also previously worked at advisory firm China Renaissance Capital.

The three founders first came up with a Chinese name for the firm "Guao Rong," a kind of fig tree with large spreading evergreen crown intended to represent the widespread entrepreneur and LP network built by the firm. As for the logo, the founders used the first letters of each of their given names - X, Y and Z - and arranged them as if the branches of a tree.

"Our firm started with only three partners but we now have a team of 26 people," Gao says. "Zhang is based in Beijing and I'm in Guangzhou, but we communicate very well on project decisions even though we are in different cities. That is only possible because we already had a close working relationship."

Although Banyan was a first-time fund in 2013, its principals were not first-time managers. They had witnessed the growth of the Chinese internet over a period of 10 years, building up a track record in the process, and this helped LPs get comfortable with the team. They were also reassured by Banyan's ties to local entrepreneurs.

"In the past, you might have been successful without any supports from entrepreneurs. In today's competitive environment, that doesn't work," Gao explains. "We invited many Chinese entrepreneurs and executives to become our LPs - we have executives from at least 20 listed internet companies in our funds. They not only provide capital but also refer good deals to us."

The launch of Banyan's second US dollar-denominated fund came sooner than expected. The firm originally had Fund II penciled in for the second quarter of 2015. This plan changed when sit-downs with a handful of international LPs - in Asia for annual general meetings of other GPs - crystalized into prospective commitments.

In response to this interest, the team decided to begin fundraising in the fourth quarter of 2014. Banyan Partners Fund II was substantially oversubscribed with demand reaching $500 million. The fund also saw a transition from an LP base dominated by high net worth individuals (HNWIs) to one featuring institutional investors.

"Over the last two years, we have seen many new faces in China's venture capital industry. However, we were the first to team to spin out from a reputable traditional venture fund and that meant we got a lot of attention from investors," Gao adds.

Early-stage priority

Banyan typically focuses on early and growth-stage TMT investments. While Series A rounds remain the primary focus of Fund II, the firm plans on participating in more Series B investments. Vertical e-commerce platforms, mobile internet, intelligent hardware, and online-to-offline (O2O) businesses are priority targets. If specific companies have strong growth prospects, the GP will also consider joining Series C or D round as well, although this will be a minority focus.

The primary reason for raising a fund solely for follow-on investments was that capital was being deployed from the main fund - including the reserve set aside for subsequent rounds - faster than expected.

"What we found in 2014 was that it might be the best time in 10 years for VCs to invest in high-quality companies," says Gao. "Since the second half of 2013, a wave of Chinese companies had gone IPOs. The overall market for technology firms had picked up and this is inspiring more entrepreneurs to start their own business.."

"What we found in 2014 was that it might be the best time in 10 years for VCs to invest in high-quality companies," says Gao. "Since 2013, a wave of Chinese companies have gone public and the overall market for technology firms has picked up. This is inspiring more entrepreneurs to start their own businesses. We were excited about this opportunity and we deployed our debut fund quickly and didn't have enough left to support our existing portfolio companies."

However, he adds that the annex fund should not be seen as part of a strategic shift from early to late-stage investments. The team's biggest strength remains identifying promising ideas and entrepreneurs before everyone else.

Furthermore, the overexcitement in this space appears to be easing off. "The market is always up and down, that's happened over the last 10 years," Gao says. "We have nothing to fear from the market cooling. In fact, we think it's a good time to nurture new innovative ideas."

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• Topics
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