Fund focus: Cherubic continues to scale

For years, LPs didn’t really understand what Matt Cheng (pictured) was trying to do. An entrepreneur turned angel investor turned VC fund manager, he wanted to pursue early-stage deals in Greater China and the US. Not a cross-border strategy that bridges the two markets, rather independent samplings of the best entrepreneurs from each one.

It was 2014 and the dominant forces in China venture capital were still affiliates of US-based GPs like Sequoia Capital and Matrix Partners, which had sponsored local teams to capture more local deal flow. Cheng’s firm, Cherubic Ventures, ran contrary to this trend.

“My experience as a founder was in China and I wanted to do the US and China – no one thought you could do that with a single team,” Cheng explained. “LPs said, ‘You could do a growth-stage fund because at least you know where all the companies are.’ When I told them I wanted to be the first cheque, they started asking how much time I spent in the US and how much in China. The message was: ‘How do you know if someone is starting a business if you’re not there?’”

Cherubic initially struggled with fundraising. One fund-of-funds committed capital to its USD 42m debut vehicle (labelled Fund II), with the balance coming from founders that Cheng had backed as an angel investor.

Gradually, the firm began to gain traction. The next two vintages came in at USD 80m and USD 89m, and Fund V recently closed on USD 110m. The LP base is now 90% institutional, with most of the capital coming from US-based endowments and foundations. There is also a scattering of Asian money, including a multi-family office in Korea, corporates in Japan, and families in Hong Kong.

The business is built on founder referrals. It relies to a large degree on Cheng’s start-up connections in Greater China and his network in the US, which was first cultivated in 2014 when he completed a solo IPO roadshow for Tian Ge Interactive Holdings, a video-sharing platform he co-founded. Cherubic also has a relatively small core team spread across Taipei, Shanghai, and San Francisco.

Different qualities are prioritised when assessing start-ups in the US and China. “In the US, we focus on defensible technology. That’s also important in China, but we look first at user acquisition, scalability, and the ability to find product-market fit with limited capital,” said Cheng. “You need to move fast in China and get more money. Go too slow and you’ll get left behind by the competition.”

The Cherubic portfolio is 60% US, 20% Greater China, and 20% in other global markets. Ten of the 150 start-ups backed to date have become unicorns and there have been around 27 exits. Standout exits from 2021 included commerce solutions provider 91app going public in Taiwan, digital health start-up Hims & Hers merging with a US-listed special purpose acquisition company (SPAC), and Japanese buy now, pay later platform Paidy being sold to PayPal.

Cherubic is mindful of geography when mapping out likely exit strategies, preferring Chinese start-ups that can list overseas. However, Cheng claims to focus less on location than before, noting that pandemic-driven remote working habits mean a start-up might be targeting Asian or global customers from a base in Dubai or the Bahamas.

The surge in Chinese founders and funds targeting Southeast Asia, with a view to executing business models that are proven in China, is one contributing factor. Cherubic’s growing interest in web3 – and the reluctance of blockchain start-ups to be defined by borders – is another.

The firm’s first investment in the space was Magic.link, a developer of user authentication and security technology that bridged web2 and web3, five years ago. Cheng is interested in non-fungible tokens (NFT) and blockchain-enabled gaming, but infrastructure is generally preferable to apps.

“Even though we are in a crypto bear market, people know blockchain will be here forever because there is more regulation and more ways to access it,” he said. “Users are minimal, but it will reach a tipping point and security, user experience, and other tools will help start-ups build better products.”

Half the Fund V corpus has been reserved for follow-on investments, so Cherubic can back companies all the way through pre-IPO rounds. This compares to 40% of Fund IV, while Funds II and III weren’t large enough to hold back capital. The turning point was US-based logistics digitisation player Flexport, where Cherubic re-upped in Series D in 2019 at a valuation of USD 3.2bn.

“We are one of few investors that can double down from seed all the way to Series D, but we had to do it using SPVs [special purpose vehicles] for Flexport,” Cheng added. “LPs encouraged us to double down more often and that’s why we have scaled in fund size.”

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• Topics
• Greater China
• Fundraising
• Venture
• Technology
• North America
• Taiwan (China)
• Cherubic Ventures
• TMT
• blockchain
• USA
• China