Profile: AlphaX Partners' Chuan Thor

Chuan Thor met Liming Networks, a Shenzhen-based systems integrator that took the Shanghai Stock Exchange from paper to digital transactions, in 1995. The company was building internet platforms for cities in China and needed capital to support its efforts. Thor spent two-and-a-half days explaining the term sheet to Liming’s CEO, going through the document line by line. 

A deal was completed the following year, marking a first successful China investment for the then youthful associate at Japan’s Jafco. But the process was fraught. At one point the CEO told Thor: “I still don’t get it, but I feel you are trying to steal my company.” 

Fast forward 10 years and Thor, by this point leading the China operation for Highland Capital Partners, was in Beijing for negotiations with the founder of internet security business Qihoo 360. The term sheet was finalized within three hours. This is one of numerous reminders from a 23-year career of how far the China VC juggernaut has traveled – even though some of the recent market dynamics look worrying familiar.

“The solutions Liming was using in 1995 were 10 years behind Silicon Valley. By 2005, the gap was about five years and a lot of entrepreneurs were copying their peers in Silicon Valley. Starting in 2015, I found that Chinese entrepreneurs didn’t want to be copycats anymore. Now they are creating products and business concepts that are ahead of Silicon Valley,” says Thor, who established his own Chinese VC firm, AlphaX Partners, in 2016, and raised a debut fund of $270 million earlier this year.

This evolution has also been characterized by an increase in the sums of money involved. Yahoo bought 3721, a search engine launched by the team that would go on to establish Qihoo, for $160 million in 2003. Qihoo itself listed on NASDAQ with a market capitalization of about $250 million eight years later, but this pales into insignificance against the $23.8 billion valuation attributed to social e-commerce site Pinduoduo on listing two months ago.

Made in Japan

It is no coincidence that Thor cut his teeth with a Japanese investment firm. Born in Malaysia to parents with mainland Chinese ancestry, he fast became multilingual, speaking Cantonese and the Fujian province dialect at home and then Malay, Mandarin Chinese and English at school. But he had no desire to pursue his education in Malaysia beyond high school level. Japan was always the target, in part due to the availability of scholarship funding and opportunities to get part-time work.

“I couldn’t speak Japanese before I got to Japan, but on the third day I started my first part-time job and I ended working about 30 different places through graduation,” says Thor. “In 1994, before graduation, I was offered a scholarship by the Japanese government to study for a master’s degree, but I really wanted to find a job and look around before doing that. Then I found out about a business called venture capital.”

There were only three VC firms in Japan at the time, the largest being Jafco, which was then the venture arm of Nomura Securities. Thor became the firm’s first full-time foreign employee in Japan, joining the global high-tech investment team that was parachuted in to examine technology-related opportunities sourced through Jafco’s various offices. Semiconductors and telecom network infrastructure were the primary areas of focus, not the internet. “Netscape had just been released – we printed out the URL and it ran to four or five pages of A4,” he recalls.

These activities took Thor to China and Liming Networks, but most of the  deals were in Silicon Valley. Jafco had established US IT Fund I in 1995 with a corpus of $70 million, and Thor found himself linking up with the local team. They visited the top US venture capital firms in search of co-investments, though to little effect. The breakthrough came with Ciena Corporation – a deal that enabled Jafco to emphasize its Asian value-add.

“The burn rate was really high because the company was building fiber optic networks. They had a great product, but no US carrier was willing to put a start-up solution into its core network,” Thor recalls. “We suggested that instead of waiting for feedback from Sprint, which was conducting months of trials without signing a purchase order, we take the company to Asia where it might have a better chance of getting a customer.”

By the time Ciena went public in 1997, two of its three customers were Japanese. Jafco made a 60x multiple on an approximately $3 million investment, and just as importantly, other companies started to take notice of what it could offer. With additional homeruns like Nvidia, the fund generated a 5x return.

Bubbling over

Thor formerly joined the Jafco US operation in 1999, relocating to Palo Alto. There, he witnessed the emergence of the dotcom bubble and its bursting as companies that had gone public on the back of little more than strong web traffic disappeared from the market. Jafco rode the wave, raising $140 million for Fund II in 1998 and $440 million for Fund III in 2000. The former returned 4x while the latter just managed to reach 1x.

“We raised too much capital,” he says. “With $70 million and $140 million we could be very selective and still invest the capital in two years. But for Fund III, the senior partners said we couldn’t do just a few deals, which meant we had to bring down the qualification level. That was another lesson learned. If your fund is too large, the quality of deals will be discounted because the investment period is still 2-3 years.”

Thor admits that parallels can be drawn between the craziness of the dotcom boom and the investment climate of the past two years. At the same time, much has changed: the internet is an essential part of people’s lives; supporting infrastructure is in place; and business models have been commercialized. He expects an adjustment rather than a turn-of-the-century style meltdown, although late-stage investors are likely to suffer for the bravado that saw them enter pre-IPO rounds at elevated valuations. 

China is not immune to these conditions. A slowdown in renminbi fundraising has drained the market of competition in recent months, contributing to a softening in valuations. Many VCs are relieved that the pressure has abated. Entrepreneurs now come to AlphaX’s offices and talk about monetization plans rather than how a fivefold increase in daily active users justifies a jump in valuation of equal magnitude. 

“I feel more comfortable investing today than I did two years ago,” Thor adds. “Only smart entrepreneurs can raise capital and they can focus on running their businesses rather than fight off competitors that raised capital easily and burned cash quickly. It’s exactly what I saw in 2002-2003 in Silicon Valley. The bubble burst, entrepreneurs got smarter about how to use capital, and a lot of great companies emerged.”

This incremental improvement in the entrepreneur quality is something he tracked over the course of a decade with Highland. In 2005, the Boston-based GP – which didn’t even have a Silicon Valley presence at the time – was one of multiple US venture capital firms looking for ways to address the China market. It needed someone with local experience and language skills to see whether the Highland strategy could work in China. Thor, who was looking for a new challenge, became that person.

They agreed he would make one investment in the first 12 months, and if that worked out, a longer-term partnership would follow. Highland duly backed Qihoo, paying $17.5 million for a 20% stake in the one-year-old company. Qihoo’s growth trajectory soon won over the team in Boston – the deal ended up generating a 100x return – and Thor relocated to Shanghai as head of Highland China.

The sniper approach

No more than 10% of the firm’s global fund could be deployed outside of the US and so the China team had to be highly selective. Ten investments were made in total, of which seven have been exited for a realized IRR of more than 60%. Qihoo and package tour provider Tuniu both went public in the US and a third company is expected to follow suit before the end of 2018.

The key to this “sniper approach” was close working relationships with entrepreneurs. In the case of Qihoo, these ties continue to pay off. The Chinese company is an LP in AlphaX’s debut fund; one of its founding team, Guangdong Yu, joined the GP as a partner; and AlphaX’s first investment was 360 Enterprise Security, a B2B software provider that spun out from Qihoo. 

However, fitting in with the Highland investment committee wasn’t easy. “I had to ask Chinese entrepreneurs to come to my office around 10 p.m. because that’s 10 a.m. on the US east coast. And I had to ask them to speak in English, even though many found it difficult,” says Thor. “Entrepreneurs weren’t always willing to do these things. They could talk to other VC firms that didn’t have overseas investment committees in China time and face-to-face.”

Thor was one six equal partners in Highland globally, so striking out on his own came at an economic cost, but this was superseded by the desire to offer a truly local solution. AlphaX has so far made more than a dozen investments, with two themes coming to the fore: enterprise services, typically involving one or more of artificial intelligence, blockchain, cloud services, data, and 5G; and consumer internet plays that are driven by social engagement.

The latter category, best exemplified by the rise of social e-commerce platforms in China, is especially appealing to Thor for its potential to upset the established order – which he sees as one of the fundamental characteristics of venture capital. “Alibaba faces a significant challenge from social e-commerce,” he notes. “There is always the possibility that giants in technology could be replaced by newcomers in 5-8 years. You don’t get that with traditional businesses.”   

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• Topics
• Greater China
• Technology
• Venture
• GPs
• China
• AlphaX Partners
• JAFCO
• Highland Capital Management
• TMT