Asia Awards: VC Professional of the Year – Richard Liu

Will the snowball melt? In June Chinese online financial information platform Snowball Finance received $10 million in Series B funding from Morningside Technologies and Sequoia China, the latter having provided the first institutional round two years earlier.

The company, which operates news site iMeigu and social network Xueqiu, is one of a host of financial start-ups using innovation to remove sector inefficiencies that restrict the reach of services. In this sense, the internet is a democratizing force and Snowball Finance is ultimately helping drive information flow, bringing opportunities to small-scale investors.

"Deregulation is supposed to open up financial services to all private businesses and that is good news for everyone," says Richard Liu, managing director at Morningside.

"On the other hand, the sector has a problem in terms of a mismatch in the risk-return profile, so the internet is a means of providing more match-making opportunities. There are so many opportunities in online finance but ultimately it will be like e-commerce 2-3 years ago with all the hype. Only a few will survive."

However, the transformation taking place in financial services does fit in with Morningside's take on the evolution of internet businesses in China. The explosion of venture capital interest in physical goods-driven e-commerce is giving way to service-oriented e-commerce and from there it is penetrating all kinds of traditional industries, from travel to education to legal services.

Morningside also has an interest in the latter. In August it provided just under $2 million in Series A funding to Legalsiri, investing alongside ZhenFund. The company draws its inspiration from LegalZoom, a VC-backed platform staffed by a team of lawyers that handles routine documentation online, offering a low-cost alternative to small businesses and individuals.

Then and now

Liu has been with Morningside for nearly 14 years, leading the firm's tech, media and telecom coverage. In 2007-2008, his unit spun out from its family office parent and launched independent funds, although the Chan family, which runs Hang Lung Group and set up Morningside, remains the anchor LP. The first fund raised $150 million in 2008 and the second closed at $225 million three years later.

But the change has been far more pronounced in the space in which Liu invests. When he started out, the market was limited from both a demand and a supply perspective: an entrepreneur looking for funding would travel to Shanghai, meet with the handful of VC firms present in the city and whichever ones were willing to take the risk got the deal.

Morningside's early successes, such as web portal Sohu, travel booking site Ctrip and online games operator The9 all came this way, and each one ended up going public in the US.

"In the early days, you could cover all the investment opportunities by backing 20-30 companies. Today, the number of deals probably goes into the thousands," Liu says. "You can't cover all of them. And the competition has become so fierce - US dollar funds, renminbi funds, institutions and angel investors, private equity, hedge funds."

Deal sourcing is a product of Morningside's top-down sector research with a peppering of direct approaches from entrepreneurs. A sign of how the market is maturing, the VC firm has been a repeat investor with a handful of these entrepreneurs. Morningside has partnered with Lei Jun, the Kingsoft CEO turned angel investor, no fewer than eight times and co-invested with Lei's VC unit, Shunwei Capital Partners, in other start-ups on several occasions.

Xiaomi, a hugely successful smart phone brand, is the most famous example. Liu and Lei spent 12 hours on the phone discussing the business model one night in 2009. Morningside and Qiming Venture Partners provided seed funding the same year and then Xiaomi took off. DST Advisors led the Series C and D rounds in 2012 and 2013, which valued the company at $4 billion and $10 billion, respectively.

Liu notes there are other serial entrepreneurs with whom he has worked multiple times, such Bob Xu, co-founder of New Oriental Education & Technology Group and founder of ZhenFund, and Hongyi Zhou, co-founder of internet security software provider Qihoo 360.

Competition issues

While competition from renminbi-denominated funds has dissipated with the slowdown in public market exits, it is debatable to what extent they were a rival to Morningside in the first place. Liu argues that US dollar and local currency funds are very different creatures: their ideal IPO candidates can be poles apart and a renminbi fund's investment horizon is much shorter.

Interestingly, one area where Morningside does see post-crazy valuation opportunity is e-commerce. It largely steered clear of the space, concerned that firms were burning through capital in order to buy market share without creating sustainable value. Now, though, consolidation is taking place and this has eased pressure on the survivors.

"This year we realized most of our competitors have died," says Liu. "I believe in the e-commerce model in the long run but in the past 2-3 years most of the businesses were not sufficiently innovative or sustainable. We will continue to explore the space but we want to identify platforms and communities that are differentiated from Taobao and the rest."

This has also placed the onus on Morningside to provide more support to its portfolio companies. Entrepreneurs, though the driving force behind their businesses, are at times the principal obstacle to development once a certain scale is achieved. Assistance is require in terms of hiring additional talent and developing expertise in particular areas, as well as ensuring the firm retains focus and doesn't spread its resources too thinly in pursuit of multiple strategies.

"We are usually the earliest institutional shareholder in our portfolio companies so we have the trust of the entrepreneurs," Liu adds. "We are not an external investor so much as a partner and the cost of communication is low. When a guy calls you with a long list of problems it's a good sign; if he says everything is great, it's a warning sign."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Venture
• Greater China
• Technology
• Early-stage
• Venture
• Morningside Technologies
• China
• TMT
• AVCJ Awards