Fund focus: Sinovation gets new firepower

Innovation still works for Kai-Fu Lee, formerly head of Google China, but after seven years of having his early-stage VC firm trade under one name, he opted to rebrand as Sinovation Ventures. "China is to rise up to become a leader in innovation. ‘Sino' represents China, so that's China leads innovation," says Lee, the firm's chairman and CEO.

Last week, Sinovation closed its third China-focused US dollar fund and second renminbi fund vehicle, having accumulated more than $674 million in aggregate commitments in less than 12 months. The US dollar fund, Sinovation Fund III, closed at $300 million, surpassing a target of $250 million. It is consistent with previous vehicles in terms of size: the GP raised $275 million for Fund II closed in 2012 and $180 million for its debut vehicle in 2011.

The renminbi fund, however, is five times larger than its predecessor, at RMB2.5 billion ($374 million). "Awareness and recognition of PE and VC as an important alternative investment is beginning to grow, but I wouldn't say it is mature," says Lee. "For many of our LPs, this is the first time they have invested in a VC fund. It will probably take another five years before we see widespread institutional interest in VC."

He notes that the newly-established government-backed VC fund is an example of how long-term capital is starting to be injected into the system. Similar initiatives have proved effective in other countries such as Israel and Singapore.

With 54 investment professionals in China and Silicon Valley, Sinovation has the resources to target artificial intelligence, enterprise software and entertainment content-related start-ups in both markets; the portfolio includes autonomous technology developer Uisee and AI specialist 4th Paradigm, both of which are based in China, as well as US robotics start-up Wonder Workshop. However, no more than 10% of the US dollar fund's corpus can be invested in US-based companies, while the renminbi vehicle will concentrate solely on onshore deals.

Sinovation initially operated under an incubation-plus-investment model: the incubator identified companies or individuals with potential and got them started; and those deemed to have sufficient potential received backing from the VC fund, with other investors brought in as the companies gather momentum. As the fund sizes have grown, Sinovation has morphed into more of an early-stage investor rather than an incubator.

Last year, the incubation business was spun off and listed on the on the National Equities Exchange and Quotation (NEEQ) in order to access funding from secondary market. Lee says Sinovation is looking at ways to make money from the business, but the priority is generating deal flow for the VC funds. "And another purpose is to help spread the word about entrepreneurship and help entrepreneurs in smaller cities, in response to government initiatives," he adds.

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• Topics
• Greater China
• Technology
• Fundraising
• GPs
• Venture
• China
• Innovation Works