York Chen of iD TechVentures (formerly Acer Technology Ventures) recently sent me his slide deck for some presentations he gave last month on the recent rush of Sandhill Rd VC’s into China. I thought his framework was a good one to help understand exactly how funds are taking the leap. He presents 4 different models for entering the China market:
- Start your own China fund
- Form a joint venture fund
- Participate as a strategic LP
- Set up a local office
Below is a summary of the 4 models with some of the examples provided by York. I have also included some additional examples and links of my own.
1. Start Your Own China Fund - The idea is simple: set up a fund in China, for China. The tough part is finding the homegrown partners to locally manage the fund. A prime example of this approach is Sequoia’s recent US$200m China Fund and its experienced and local partners:
- Neil Shen (co-founder and CFO of Ctrip)
- Zhang Fan (from DFJ ePlanet)
- Zhou Kui (from Legend Capital)
- Steven Ji (from Walden International)
With Sequoia’s endorsement and support, the fund was quickly over-subscribed by Sequoia’s LP’s. In return, Sequoia will benefit from having a presence in China and also earn a share of the carried interest.
2. Form a Joint Venture Fund. Rather than recruiting a top local team from scratch, another way to quickly leverage the experience of other firms is to form a JV. A good example here is the US$290m cooperation between IDG and Accel. According to the IDG press release:
IDG-Accel China Growth Fund will be managed jointly by IDG Technology Venture Investment LLC (IDGVC) and Accel Partners, with the capital mostly from leading institutional investors, who are long-term partners of Accel worldwide.
The new fund will be focused on expansion stage deals (reportedly, IDG’s own US$150m fund will only be doing early stage deals of less than US$2m). Accel senior partners will take turns participating on the fund’s investment committee as a chance to enhance their understanding of the China VC market. Accel will enjoy a share of the carried interest while building a local platform for future China activities.
2b. VC Franchising. In a variation on a theme, DFJ has signed up DragonVenture as its latest franchisee to be dubbed “DFJ DragonFund China.”
3. Participate as a Strategic LP. When Legend Capital raised its Fund II in late 2003, DCM joined as an LP and ushered in a new collaboration model. Some such couplings are rather loose:
And, some are a much tighter strategic alliance including full endorsement and operational support:
- Sutter Hill > Chengwei and -separately- TDF (article)
- NEA + Greylock > Northern Light (article)
- Ignition > Qiming (blog)
- Mayfield > GSR (article)
Economic arrangement for US parties varies. On top of potential financial returns as an LP, some are participating in investment committees and/or sharing carried interest. But, the common objective is to gain a China base.
4. Set-up a Local Office. Of all the options, this is the lowest risk, slowest return way to go. Setting up a local office in Shanghai, Beijing or Hong Kong will help develop a presence and provide a platform for making initial China investments. It will also help in recruiting for future activities. However, it will take years for the operations to be seasoned, localized and fully functioning, like their peer group with many years presence in China:
The old guard:
New comers include:
Despite the fact that Beijing statistically has more start-up activity, it seems Shanghai is attracting most of the new VC entrants. One indication is that Silicon Valley Bank has established a common office near Shanghai’s bustling Xintiandi area to accomodate clients from home such as NEA, Bessemer and Atlas.
In conclusion, the bottom line is this: Be Local.
