China VC: Class society

Tales of fundraising practices among the world's elite venture capital firms are well-known: existing LPs receive notification informing them what their allocation to the new vehicle will be and how long they have to decide whether or not to take it up. Prospective new entrants wait and see if there is space.

This practice is normally associated with the US market, but China appears to be moving in a similar direction. There is a logic here: certain US firms that have China affiliates already run tightly coordinated fundraising efforts, with exposure to one fund perhaps offered as a sweetener in return for backing another; and those with Sino-US funds run integrated processes by necessity.

What has become apparent in recent years is the emergence of a select group of well-established China GPs characterized by stable LP bases and consistently oversubscribed funds. These are the survivors from the early to mid-2000s - including but not restricted to Sequoia Capital, Qiming Venture Partners, Matrix Partners, GGV Capital, and Morningside Ventures.

The upturns in China VC fundraising that can be seen, to varying degrees, in 2008, 2011 and 2014 are partly due to these GPs raising capital around the same time. An LP recently offered the following tidbit from his exchange with an executive from one of these groups: "I like you," he was told, "but if you want to get into the fund I need an answer in two weeks."

The existence of a top tier of VCs in China is not unprecedented - it is simply following the same evolutionary path as the US, of which one industry participant observes: "There are only 12 guys that really matter and they account for 5% of the market."

The growing maturity of the China market is also apparent in the presence of other tiers. A swath of domestic GPs has emerged in recent years, either spin-outs from established players (Banyan Capital and Furui Fund from IDG Capital Partners, Source Code from Sequoia, Marathon Venture Partners from Northern Light Venture Capital) or entrepreneurs who move from angel investing to managing third-party money (such as Lei Jun, co-founder of Xiaomi and Shunwei Capital Partners).

These GPs often start out by raising capital from the founders' own networks - successful entrepreneurs they have either backed before as VC investors or partnered with on start-ups. This networking effect is also apparent in a third industry tier, micro VC players such as Zhen Fund or Cherubic Ventures. Their LPs frequently include larger venture capital firms that want access to deal flow.

Needless to say, the ecosystem thrives when the market is going up. Most of the top tier would be able to withstand a deterioration in investment conditions and LP interest, but less proven players might struggle.

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• Topics
• Venture
• Greater China
• Fundraising
• Technology
• TMT
• China