Fund focus: AlphaX tracks evolving China VC story

Qihoo 360 Technology was one of Chuan Thor’s (pictured) most successful investments at Highland Capital Partners. Having first backed the company in 2006, Highland held an approximately 20% stake when Qihoo went public in the US five years later at a valuation of more than $250 million. Now at his own venture capital firm, AlphaX Partners, Thor has found that the connection keeps on giving.

First, Guangdong Yu, who was part of the Chinese internet security company’s founding team, joined Thor and fellow Highland alumnus Yaping Yao as a partner at AlphaX. Second, the VC firm’s first investment was 360 Enterprise Security, a B2B software provider that spun out from Qihoo. Third, Qihoo is an LP in AlphaX’s debut US dollar and renminbi-denominated fund, which recently closed at approximately $270 million. A small strategic vehicle is expected to follow.

Thor started fundraising not long after leaving Highland in mid-2016. The goal was to raise $200 million, half in US dollars and half in renminbi. As it turns out, just over 60% of the corpus is in local currency, with commitments coming from China International Capital Corp and CreditEase as well as strategic partners such as Qihoo and Focus Media. On the US dollar side, endowments and family offices are the key contributors, including several Highland investors.

The two pools of capital will invest alongside one another where regulation and expediency permit. Some industry segments are still off-limits to foreign participation, while others are likely to command higher multiples for domestic rather than offshore IPOs, thereby necessitating the use of renminbi. Thor identifies internet-enabled consumer plays as an attractive area for joint investment. 

“We think about consumer internet in terms of C2B and DIY retail. We have invested in two companies that enable consumers to use the internet to tell vendors what they want and create personalized products,” Thor says. “There will be more of these social e-commerce opportunities as traditional offline stores and restaurants become part of the internet world.”

The fund has so far made 12 investments, with enterprise services the other key theme. Internally, AlphaX refers to this opportunity set as ABCD5 – shorthand for artificial intelligence (AI), blockchain, cloud services, data, and 5G. The rationale is that a world-class technology company cannot be built on just one competency: AI doesn’t work without big data, and blockchain has broader financial services applications than bitcoin. 360 Enterprise Security, for example, would be categorized as A, C, and D. 

“In the past, we haven’t seen big IPOs by Chinese enterprise companies. This is because corporate users were only willing to pay a one-time fee for systems integration,” Thor says. “But from around 2012, users started relying on cloud services and the industry switched to a holding business model. They wouldn’t ask a systems integrator to build a customized system, they just paid a subscription fee.”    

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• Topics
• Greater China
• Venture
• Technology
• GPs
• Fundraising
• China
• TMT
• AlphaX Partners