Fund focus: GGV targets entire venture spectrum

The separation of GGV Capital's latest fund into three parts arguably reflects a new maturity in the Chinese venture capital industry. In adding a dedicated early-stage tranche to an existing strategy driven by a traditional VC fund and a top-up vehicle, the GP now covers the entire venture spectrum: It could theoretically support a company from seed through late-stage growth rounds.

This is largely a response to changing market dynamics. First, GGV expects to see more serial entrepreneurs starting new businesses and wants to team up with these proven players from an early stage. Second, China is transitioning to a truly innovation-driven economy - producing start-ups with original technologies rather than business models that replicate the US market - so the opportunity set will broaden. And third, the exit environment is changing.

"In the past, a lot of exits were through IPOs, but in the future a smaller number of companies will go public and they will be much larger when this happens. There will also be a lot more M&A [smaller companies getting acquired by large corporations]. That's another reason we want to play early," says Jixun Foo, managing partner at GGV.

Multiple strategies

More than 80% of the capital from this early-stage vehicle - the $250 million GGV Discovery I - will be deployed in China, although the firm has a Sino-US investment remit. GGV has also raised a $900 million main fund, comprising the $657 million GGV Capital VI and a $225 million parallel top-up vehicle called VI Plus, and then a $50 million entrepreneurs fund. The latter allows members of the GGV network - primarily the founders of Chinese start-ups - to participate in deals.

The $1.2 billion total is slightly more than GGV was aiming for due to demand for allocations easily exceeding supply. Existing institutional LPs account for the majority of the corpus. They include National University of Singapore (NUS), Northwestern University, Los Angeles County Employees Retirement Association (LACERA) and Oregon State Treasury. There are also a few new Asian LPs representing the sovereign wealth fund, endowment and corporate communities.

"The main fund will continue to invest in what we have invested in previously. The top-up vehicle allows us to write larger checks for certain companies, in a range of $30-$50 million. We'll continue to see consolidation, and that consolidation will drive the emergence of real and large unicorns," Foo says.

At present, 15 privately-held companies in GGV's portfolio qualify as unicorns, with valuations in excess of $1 billion; half of these were at Series B or earlier when the GP initially invested. Nevertheless, the very existence of these unicorns - there are said to be more than 170 globally, of which 36 are based in China - has prompted concerns about the health of the start-up market globally. A substantial influx of later-stage capital into the market since mid-2014 is blamed for inflating valuations across the board.

Topping up

With companies taking this capital and therefore putting off IPOs, GGV was one of numerous China-focused VC firms to raise an overage fund that enables participation in larger, later-stage rounds. A year after closing its fifth fund in April 2014 at $620 million, the GP raised a $475 million top-up fund to make follow-on investments in portfolio companies from Funds IV and V. Despite the market beginning to cool from the second half of 2015, GGV believes high-quality companies will continue to raise larger rounds.

However, unlike the previous fundraises, when the main fund and top-up vehicle went to market separately - this time the firm closed everything at the same time. The parallel top-up vehicle will therefore mainly invest in portfolio companies from Fund VI. "The top-up fund is now better aligned with the main fund, with a fixed ratio of participation by all LPs," Foo says. "When we raised two vehicles separately there were some conflict considerations between LPs that we needed to consider."

While focusing more on seed and Series A rounds involves more risk, GGV will seek to mitigate it by concentrating on sectors with which it is familiar. The new fund will target three main sectors - social and mobile commerce, internet-of-things (IoT) and robotics - plus software-as-a-service (SaaS) and cloud technology.

Valuations of these early-stage companies have remained reasonably stable, but they become more volatile by the Series B and C rounds because investors are worried about business sustainability. Foo claims that some start-ups have responded by pulling fundraising plans to focus on operations, although he expects conditions to improve - at least for the strongest players.

"I think the funding cycle will become more apparent in the next 3-4 quarters. Companies will need to raise capital to fuel the growth," Foo says. "I think the market in the next one to two years is actually the best time for us to put money to work, funding these strong companies. The chances for them to emerge as category leaders actually has become higher, because there is less competition among them."

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• Topics
• Greater China
• Venture
• Fundraising
• Technology
• GPs
• GGV Capital
• TMT