China’s Banyan fast-tracks Fund II

This plan changed when sit-downs with a handful of international LPs - in Asia for annual general meetings of other GPs - crystalized into prospective commitments. "Few people expected us to close our debut fund in just three months, and they appreciated that we could invest in some good companies," says Xiang Gao, co-founder of Banyan.

In response to this interest, Gao and his two co-founders Zhen Zhang and Bin Yue decided to begin fundraising in the fourth quarter of 2014. Last week Banyan Partners Fund II closed at $362 million. The vehicle was substantially oversubscribed with demand reaching $500 million and re-ups from most existing LPs.

Fund I relied heavily on LP contributions from high net worth individuals, including the founders of companies the team backed while at IDG. A substantial portion of the commitments to Fund II come from institutional investors including sovereign wealth funds, endowments, and family offices. However, many of the high net worth individuals from the first fund re-upped for its successor.

Over half the Fund I corpus has been deployed in more than 20 companies, mostly in Series A rounds. Deals include leading a $35 million round for Huami, a fitness wearables start-up launched by smart phone maker Xiaomi and teaming up with Tencent Holdings to invest in express delivery mobile app Renrenkuaidi.

Series A rounds will remain the primary focus of Fund II, but the firm plans on participating in more Series B investments. Vertical e-commerce platforms, mobile internet, intelligent hardware, and online to offline (O2O) businesses - notably in the financial services, healthcare, education and real estate sectors - are priority targets.

Gao expects frothy valuations in the tech space to normalize in 2015. At the same time, backing more early growth-stage companies mitigates investment risk. "For internet businesses, especially O2O players, the amount of capital raised is a key to whether or not they are successful," he says. "If a company gets a lot of VC funding it can expand into more cities and achieve a larger market share."

A number of new Chinese VC funds have been set up since Banyan was founded. This, combined with the emergence of angel investors, has added to the volume of backers for start-ups, and contributed to rising valuations. Nevertheless, Gao says the industry is not as competitive as some might think.

"Competitiveness depends on fund size and mainstream VC firms still dominate the market," he says. "The size of our first fund limited our opportunities to invest in good projects. With Fund II we can develop our strategy."

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• Topics
• Fundraising
• Greater China
• Venture
• China
• Venture
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• Banyan Capital