Fund focus: Unicorn sticks to early-stage remit

Over a three-year period from 2013, China experienced a surge in new venture capital managers, typically spin-outs from established GPs and technology companies. “At one point we would joke that any VP [vice president] and a dog could raise a fund,” says Tommy Yip, managing partner at China venture capital-focused fund-of-funds Unicorn Capital Partners. “Maybe at the peak of the phenomenon the VP was no longer needed.”

The flow of new entrants has since slowed but identifying up-and-coming managers remains a challenge. Yip estimates that only 5% of players in the market can generate the kinds of returns investors expect from the asset class. “If you aren’t focused on venture full time or you aren’t plugged into the tech ecosystem to help you validate people and the deals they did, it’s difficult,” he adds. “Fund-of-funds investing is all about investing with the right people.

Yip started building his network while heading the research team at AVCJ and continued at Emerald Hill Partners, an Asian fund-of-funds where he spent 10 years. Unicorn was set up in 2015 and accumulated a small corpus of around $60 million before closing its first official vehicle at the end of the year at $210 million. The firm recently raised $250 million for Fund II, comfortably beating its $200 million target.

The corpus is larger but little else has changed. US endowments and foundations still account for about 80% of Unicorn’s LP base, with the rest of the capital coming from sovereign wealth funds, corporates, and Chinese entrepreneurs and VCs. These investors are united in their understanding of the asset class and consequently willingness to be patient. The lifespan of Unicorn’s funds is longer than a typical PE fund-of-funds, given its focus on early-stage venture.

As with previous vintages, the firm will deploy capital with four types of managers: 15% of the corpus to top-tier VCs, some homegrown and some with ties to US venture platforms; 50% to emerging managers, including spin-outs; 20% to micro VC, a high-risk area but essential for boosting the overall portfolio return; and 10-15% to healthcare, specifically managers investing in pharmaceuticals, medical technology, and healthcare IT.

There is a natural bias towards Series A rounds but up to one fifth of the portfolio is expected to comprise direct investments made alongside portfolio GPs in later-stage rounds. These tend to be companies that Unicorn has been monitoring for at least six months through fund positions. 

While the emerging manager frenzy has quietened in recent years, Yip expects a resurgence at some point. First, the phenomenon is cyclical. Second, it has strong fundamental drivers. “Many of these teams came out of big VC platforms, and even though they were responsible for these managers’ track records, they haven’t really seen carry,” he says. “They are relatively young, hungry and highly motivated to disrupt the old-school VCs.”   

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• Topics
• Greater China
• Fund-of-funds
• Technology
• Fundraising
• China
• LPs
• TMT