New opportunities breed new VCs in Asia – AVCJ Forum

“The reason for me to spin out is very simple. I saw innovation really happening in China, but my English was not good enough to explain my global investment committee to back that kind of innovative start-up,” said Wei Zhou, founding and managing partner at China Creation Ventures – and formerly a managing director at KPCB China – told the AVCJ Forum.

Due to cultural differences, US investors sometimes have difficulty understanding Chinese consumer behavior, he noted. For example, Zhou recognized the potential of a China-based mobile karaoke app, but Western counterparts couldn’t grasp why users in China would want to sing into their smart phones. “The company’s valuation has grown from $7 million to $70 million within a few weeks,” said Zhou. 

Bike-sharing is another business model that has taken a unique twist in China and the VC investors who foresaw how the market would evolve – and acted on it with early-stage commitments – are now sitting on substantial paper gains. The bike-sharing start-ups, like many other technology-related companies, have become very big very quickly, and this is forcing GPs to consider how they engage with these businesses across multiple stages. This has implications for interaction between spin-outs that retain ties to their former parents, as is the case with New Enterprise Associates (NEA) and Long Hill Capital.

“Healthcare services, an area that NEA was focused on in China, has moved significantly over the last three years. NEA invested in nine companies in that sector, mostly in Series A and B rounds, but many of them have gone from nothing to be worth billions of dollars today. We need a new way to organize ourselves – being independent but remaining connected with a global fund – in order to better pursue new opportunities,” said Xiaodong Jiang, a long-time managing director in China for NEA who launched Long Hill last year.

NEA and seven NEA partners made commitments to Long Hill’s $125 million debut fund. Jiang said the relationship with NEA has worked out much better than he expected, with the two parties working together on cross-border deals. The arrangement is like the one Feng Li, a founding partner at Frees Fund, has with his former parent IDG Capital. They have co-invested in 10 deals following the spin-out.

The venture capital spin-out phenomenon in Asia follows a similar pattern to the US. Andrew Chung was the only East Asian investor and board member at seven cleantech-related companies when he was at US-based VC firm Khosla Ventures. During board meetings, other investors would tell the US companies to focus on their local market first and then expand overseas. Chung viewed it differently and helped the companies address emerging markets in Asia first.

“Also in [Khosla’s] investment committee, when we came across a deal which didn’t have a US angle but potentially had a massive global angle – meaning the company’s first commercialization point would be in China or Malaysia but not in the US – oftentimes we would pass on the opportunity. By seeing some of these white spaces over time and also seeing that American companies could get a significant amount of attention in Asia, I think there is an opportunity,” said Chung, who founded 1955 Capital last year.

However, it’s not easy for managers to raise their first-time funds after leaving a large financial institution or internet firm. Richard Peng, who left his job as head of M&A at Tencent Holdings to found late-stage VC firm Genesis Capital, had to meet 150 LPs before closing at his $400 million target. Meanwhile, on the investment side, he had to adjust his style to focus on a smaller number of deals, rather than the 100 per year when he was at Tencent.

“Now we only do 2-3 deals per year, and 10-15 companies in total from a fund. That means we have to be much more careful on due diligence and spend more time supporting portfolio companies. Also, we wouldn’t think about exits from day one when we were at Tencent, but now we have to,” said Peng.

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

• Topics
• GPs
• Fundraising
• Technology
• Venture
• Asia
• China
• AVCJ Events
• 1955 Capital
• Long Hill Capital