Of the same mind

Tiger Global has agreed to buy a minority stake in Alibaba from Giant Interactive, a Chinese online game developer, for $199.1 million. Giant originally invested $50 million in the company via limited partnerships managed by Yunfeng Capital, a PE firm set up by Jack Ma, founder of Alibaba, and David Yu, founder of Target Media.

The investment was announced in September 2011, the same month Yunfeng and several other investors paid $1.6 billion for a 5% stake in Alibaba, valuing the company at $32 billion. Assuming the size of Giant's shareholding has not changed, the exit valuation suggests Alibaba is worth $127.6 billion.

One month prior to last week's divestment, Giant issued a clarification regarding the involvement of its chairman, Yuzhu Shi, and an independent director, Jason Jiang, in Yunfeng. This was in response to accusations of fraud made by an independent research firm, which said that Shi and Jiang failed to disclose a conflict of interest. Giant stressed that, while Shi and Jiang were among the 20 well-known Chinese entrepreneurs who put up the capital for Yunfeng's debut fund, they are both passive investors.

It is unclear whether the two events are linked. Shi and a PE-backed consortium are in the process of trying to privatize Giant and it has been reported that the divestment will help deleverage the company's capital structure, making the banks more comfortable. Equally, Giant might have decided it didn't need the hassle while under the spotlight and exited for a tidy profit.

The efficacies of the investment in Yunfeng are for another time, although it was board approved. Shi and Jiang's involvement in the private equity firm was hardly a secret and the notion of leading Chinese entrepreneurs clubbing together to make investments isn't necessarily bad for the tech sector.

AVCJ Research has records of 62 private equity-backed IPOs by Chinese companies on NASDAQ since 2000. By this measure, the entrepreneur community - at least in terms of those plugged into foreign VC networks - is relatively small. It should come as no surprise that everyone knows everyone else and, to a certain extent, is investing in everyone else.

Indeed, a lot of threads can be traced back to one man: Lei Jun. Two transactions in the past week speak volumes for his influence. First, Lei led a $100 million round of funding for online clothing retailer Vancl. The founder and CEO of the company, Chen Nian, previously co-founded online books and music retailer Joyo with Lei. Second, Xiaomi Ventures, a VC unit of the mobile phone company Lei founded, invested in a gaming subsidiary of Kingsoft Corporation, which Lei co-founded and where he now serves as non-executive director and chairman.

Whenever we write about nurturing start-ups in Asia, contrasts with Silicon Valley lurch into view. Fewer mentors are available - entrepreneurs who have been through the several start-ups - to guide newcomers; and the entire supporting infrastructure - experienced early-stage financiers and service providers, not to mention the plethora of like-minded individuals looking to share ideas - is lacking.

The single biggest reason why the VC markets in China and India are by some distance the region's leaders is scale - not only for the capacity to identify business models that can be rolled out nationwide, but also in terms of the robust entrepreneur communities that have emerged. And just like their Silicon Valley counterparts, those who have created successful start-ups are contributing capital and expertise to the next generation.

While Yunfeng's investments in Alibaba have received a lot of attention, the PE firm has participated in 17 other transactions by AVCJ Research's count - and this almost certainly doesn't reflect the full extent of its activity in a sometimes opaque small-cap space. Ten of these were Series A or B rounds.

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• Topics
• Technology
• Greater China
• Venture
• TMT
• China
• Alibaba Group
• Venture
• Yunfeng Capital