Venture capital rocket zooms to new heights

Big funds are still getting bigger, and the hunt for the hottest new startups more bloodthirsty than ever.

Photo from CFP

Photo from CFP

By LOU Xiaojing


Fundraising has been a tricky business for venture capital funds this year. Previously globe-trotting fund managers are stuck to their computer screens zooming foreign partners who themselves are disoriented by the unfolding turmoil. Capital raised in the first half-year plunged to a new low. 

Fundraisers learned quickly to navigate the new normal and, against all odds, have raised more money this year than last. It’s an unequal bonanza, however. Leading funds happily found themselves over-subscribed, while the total number of rounds declined significantly, but hitting on China’s next trillion-dollar company will take more than money.

Coast-to-coast, cam-to-cam

In normal times, fund managers meet limited partners to make pitches in person and build rapport. Now with conferences canceled and borders closed, fundraising has largely become a matter of luck, as one manager put it.

The inability to meet in person has been disruptive, impeding due diligence so existing relationships have taken on new importance. Cathay Capital closed a 650-million-euro round in May, exceeding its 500-million goal. Half came from previous investors, relying on the firm’s exceptional track record

According to LIU Yiran of Vision Plus Capital, funds have been largely hanging on past investor relationships. “Institutions in the US are flush with cash and many are bullish about China, so the money is out there. Some have given us more money than in our previous rounds, but it’s hard to establish new relationships without actually meeting in person.”

Cycles have accelerated, calling for a quick and flexible response from fund managers. Future Capital started raising money for its USD fund in February this year and closed seven months ahead of schedule with significant oversubscription, according to HUANG Mingming, its founder. In previous rounds, the team was forever juggling its coast-to-coast itineraries to meet with potential partners. On Zoom, they pack in more meetings than was ever possible before.

Fulcrum China

China is not only a vital market but also a leverage point and gateway to emerging global markets.

“The performance of China’s venture capital funds and a series of successful IPOs on Nasdaq, has gripped the imagination of foreign institutions, who used to see China as just another risky emerging market,” said Liu. “Having seen their more daring peers make money, no one can afford to pass.”

China has the largest and most developed mobile internet economy. Domestic venture capital funds have grown with the sector and are now poised for the expansion and export of Chinese business models to other markets.

Partners want to secure a spot in the next stage of the digital revolution by channeling money into first movers across the world.

Huang’s Future Capital led early rounds for several electric vehicle startups. He expects China’s technology sector to stay strong, catalyzing the transformation of all other sectors and creating the next trillion-dollar company.

“New technology triggers fundamental shifts throughout the economy. Our partners have seen this happening. China is producing world-class technology and products, so the next big opportunity might be right here,” he said.

The pandemic has accelerated consolidation: more money is managed by fewer funds. The number of rounds is down by almost a third, but the total raised is up 13 percent. With deeper pockets, funds are pouring money into promising startups, making deals ever more competitive.

Hot pie

Liu invested in the A round of Li Auto, then an underdog which IPO-ed for US$1.1 billion this year and only regrets not having invested more. He reckons he needs to raise more money to cover more growth-stage businesses. “Venture capital used to be able to make good money from the early or late stage only. Now that good deals are harder to find, we must get in wherever there’s a chance, regardless of which round. Or even join multiple rounds,” he said.

Future Capital has also upsized from angle and seed financing to later rounds, but Huang has called for restraint. Instead of trying to have a finger in every hot new pie, the fund can now focus its appetites. “It’s easy to give away money,” he said, “but finding a really hot deal is harder than ever.”