China VCs cautious on strategic capital – AVCJ Forum

Baidu, Alibaba Group and Tencent Holdings (the BATs) dominate China's internet scene and they are aggressively pursuing acquisition opportunities in order to diversify their businesses and consolidate market-leading positions.

Other strategic players are emerging in the tier below, notably anti-virus software provider Qihoo360 Technology and online retailers Vipshop and JD.com, and forming their own M&A teams to look for deals.

"This facilitates more trade sale opportunities. They offer $100-300 million for companies or sometimes even higher," said James Mi, co-founder and managing director at Lightspeed China Partners. "But what we are interested in is a trade sale model created when Baidu acquired Qunar, which hasn't been seen in the US before."

When Baidu bought a 60% stake in the travel site Qunar in 2011, VC backers GSR Ventures, Mayfield Fund, Tenaya Capital and GGV Capital retained an equity interest. Baidu took Qunar to go public in the US last year.

"Although Baidu is a majority shareholder, they encourage the travel site to realize its full potential. The company is now valued at more than $3 billion, compared to $600 million when Baidu sealed the deal," Mi said.

Following the same strategy, Lightspeed and other VC investors recently made partial exits from advertising and marketing firm MediaV as Qihoo acquired about 60% of the company for over $100 million. An IPO is planned for within two years.

Qiming Venture Partners' technology, media and telecom (TMT) portfolio companies have raised about $2 billion over the last 12 months, of which more than 60% came from strategic investors. J.P. Gan, managing partner at the expansion stage-focused VC firm, noted that entrepreneurs should be careful in agreeing terms with strategic investors before accepting their capital.

"I tell portfolio company founders, unless you're in a critical moment and need a large amount of cash, don't go for strategic capital. Raising venture capital keeps you more independent and so you can cooperate with every strategic investor. If a founder decides to partner with one of them, he should make sure the buyer has a clear strategic angle and that the assets are quantified and written into a legal document," he said.

Renminbi-denominated fund managers are also seeing exit opportunities via trade sales to A-share listed companies or internet giants such as the BATs. Local investors are less cautious about selling to strategic players than their US dollar counterparts.

"In the domestic market, companies and VC backers are more than happy to sell to the BATs because it is like an endorsement from a king, bringing them into his kingdom," said Alex Zhang, chairman of Shenzhen Cowin Venture Capital. "But of course sometimes it ends up going to the hell."

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• Topics
• Venture
• Greater China
• Exits
• Technology
• Venture
• Exit
• Trade sale
• China
• TMT
• Lightspeed Venture Partners
• Qiming Venture Partners
• Cowin Capital