AVCJ Awards: Fundraising of the Year - Venture Capital: Qiming Venture Partners

Having been on the cusp of a US listing two years ago, Chinese online clothing retailer Vancl has experienced a painful reality check. A strategy involving expansion into a variety of categories in order to build up market share clearly failed. Vancl has now returned to its roots, selling high-quality, own brand apparel. A group of VC investors put in $100 million this year to support the restructuring.

Rather than hang his head in shame, Vancl founder Chen Nian has become a hit on the conference circuit. "He is still giving speeches, telling people about his not so successful story," says J.P. Gan, managing partner at Qiming Venture Partners, which is still an investor in the business. "I just attended a conference and he was the last keynote speaker. His story was, ‘I made a mistake but now I'm coming back,' and people loved it."

Gan sees this as evidence of venture capitalists and entrepreneurs' innate optimism. It is a quality that might see Vancl bounce back - e-commerce verticals, from travel to real estate to automobiles to apparel, are expected to prosper in the next phase of the development of China's internet industry - but also arguably contributes to a bullishness that is driving up valuations to potentially unsustainable levels.

Highly successful IPOs by the likes of Alibaba Group and JD.com make everyone think they are on to a winner. "As long as the bigger companies are getting bigger and doing better no one will pay attention to the little failures," Gan adds.

Positive vibes

It was against this backdrop that Qiming - alongside a host of other VC firms - raised its latest fund. Qiming Venture Partners IV closed at $500 million, just $50 million larger than its 2011 vintage predecessor but heavily oversubscribed. There was space for only four new investors, notably the Massachusetts Institute of Technology (MIT) and the University of Pittsburgh Medical Center.

"We have a pretty blue-chip, endowment-heavy LP base. MIT has got to know us over the past year or so and a few of their peers are also investors. Pittsburgh is small and also fit in well with our healthcare strategy," says Gan. "It was a relatively easy process and we didn't spend time with people we couldn't accommodate. The sentiment towards China - and China venture specifically - is still very warm."

Qiming has benefited from the stream of liquidity that lies behind this warm sentiment. Shanghai-based car rental business recently raised $120 million through an IPO in the US and there have also been partial exits from smart phone maker Xiaomi and online listings provider Dianping as strategic investors came into later rounds.

With the five-largest listed Chinese internet companies holding an estimated $80 billion in cash on their balance sheets - with Alibaba in possession of almost $30 billion on its own - exits to strategic players are expected to become a fixture of the industry. "All those guys are very paranoid. They see the stories about Yahoo and Sina and they know if they don't move forward, they go backward," Gan adds. "That is why they raise so much money and they don't hesitate in pulling the trigger."

At the same time, it leaves Qiming looking for deals in a market characterized by ever-larger private rounds at ever-higher valuations. The notion of becoming - or being bought by - a Baidu, Alibaba or Tencent Holdings drives up entrepreneurs' expectations, although a lot of the pressure is being exerted at the seed stage, before the traditional VCs get involved.

Qiming focuses on Series A and B rounds, taking businesses that have launched a product and developed a nascent user base to monetization and beyond. A company that might have received $5 million in first-round funding a few years ago is now getting $2-3 million in angel capital and then a Series A of $10 million before it has even released a product. Qiming's typical entry point has been pushed into Series B and C territory.

"It is all about the availability of capital," says Gan. "In China over the last few years, the number of VC funds in our range has more or less stayed the same, but a lot of new funds focusing on pre-Series A have been created, often by entrepreneurs. They are deploying their own capital and raising capital from other people."

Virtuous circle

However, this same vintage of entrepreneurs - many of whom have learned their trade at Alibaba, Baidu and Tencent - is also responsible for a surge in start-ups. Seven years ago, people were starting companies on the back of three years with a multinational. Now 10-year Alibaba veterans who have managed multi-million-dollar budgets and thousands of staff are getting into the business. As a result, top-tier start-ups tend to be better run than before, with clearer ideas of what they want to be.

There are also long-term fundamentals that favor continued internet industry growth: rising internet usage, particularly via mobile devices; the adoption of more sophisticated technologies; and the migration of retail from offline to online. Gan suggests that, if Alibaba is a $300 billion gorilla, there are 500 companies trying to grab a piece of its business - and even a 1% market share would be worth $3 billion.

So the overall pie is growing, but aren't valuations inflating just as quickly, with capital flowing to the many rather than the few that actually deserve it?

"What can I do about it?" is Gan's response. "I am just a small participant in this huge market and the market is God. I don't like the smog in Beijing but is there something I can do about it? No. And I still go to Beijing because that is where my business activities are. There is nothing I can do about it apart from stop doing deals and retire."

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• Topics
• Greater China
• Fundraising
• Venture
• Fundraising
• Venture
• China
• Qiming Venture Partners
• AVCJ Awards