Friday Letter: No help required

Statistics will tell you that the Chinese venture capital market is still in its early throes of development. Last year, according to a survey by IndUS Business Journal, US companies raised just over $20 billion from early-stage investors, compared with a little more than $1 billion raised in China. But there is sufficient anecdotal evidence that the Chinese dragon is stirring.  

Consider the case of SAIF Partners, which was originally managed by Softbank and had just one limited partner in the form of Cisco Systems when it launched its debut $400 million fund in 2001. The firm did not start making investments in earnest until 2003, but, thanks to the smorgasbord of deal flow it has been able to feast on, the fund is now fully invested. Not only that, but it has already begun exiting some highly profitable transactions, notably cashing in its chips to the tune of 14x money when online gaming firm Shanda Interactive floated on Nasdaq last year.

SAIF has demonstrated that it’s possible to go from launch to brand name investor in the space of four years and after just a couple of years of making investments.

These successes haven’t gone unnoticed. SAIF recently raised a new fund after going independent from Softbank. In the process of trouncing an initial target of $400 million, SAIF’s $643 million haul included commitments from an impressive roster of blue-chip LPs such as Princeton University, the Rockefeller foundation, AlpInvest Partners and LGT Capital Partners. While still a major supporter, Cisco this time accounted for less than half of total commitments.

Increased self-confidence is an inevitable by-product of adulation on the fundraising trail. In SAIF’s case, this translated into the rejection of a proposed partnership with a Silicon Valley VC. Declining to identify the party concerned, SAIF partner Brandon Lin told PEO the firm was approached by a “leading” US venture capital outfit in the latter stages of its fundraising with a view to a strategic partnership that would have seen the US firm invest anywhere between $50 million to $150 million in the fund.

Such partnerships have become commonplace as Silicon Valley’s finest seek to jump aboard the Chinese bandwagon. One such example was seen earlier this week when Palo Alto-based Trident Capital announced a strategic tie-up with Mustang Ventures, a new venture capital firm investing in the Chinese technology sector. But while the benefits from the point of view of the “guest” firm are obvious, not least as a way of negotiating China’s legal and cultural idiosyncrasies, the advantages to “host” GPs are perhaps less clear. 

After all, SAIF has demonstrated that it’s possible to go from launch to brand name investor in the space of four years (and after just a couple of years of making investments). So is there any point in having a strategic partner? Capital clearly isn’t in short supply. Perhaps the point lies in the application of Western business practices. But, to stick with the example of SAIF, a clear majority of its senior executives graduated from top US institutions and most have extensive experience from within leading Western corporates and investment banks. There seems little shortage of the requisite skills amongst such a group.

A more plausible argument to consider is that Western partners can help Chinese VCs and their portfolio companies penetrate Western markets. And yet, with a 1.3 billion population, a growing and increasingly affluent middle class and a thirst for new technology, it would almost seem surprising if Chinese practitioners considered expansion into foreign markets a priority at this stage. 

Of course, the appeal of China’s domestic market is precisely why US and, indeed, other venture firms around the world are so keen to gain a foothold. An embarrassment of riches seemingly awaits. But investing directly in the country as an outsider is not really an option. Aside from being a regulatory minefield, China is the type of market where relationships really count and where local businessmen would rather do business with local investors speaking their language – both literally and metaphorically.

For the time being opportunities to form strategic partnerships are still there. But they will only continue to exist for as long as they are deemed to be of mutual benefit. The two reasons cited by Lin for SAIF’s “thanks but no thanks” response to the offer of outside help were the desire to preserve the firm’s newly won independence and to avoid the strategic drift that a major new capital commitment may have brought in its wake. He might have added, had he been less modest, that the firm appeared to be doing very nicely on its own. The dragon is increasingly confident that it can stand on its own two feet.