After a dismal 12 months for Chinese language tech firms, the $9bn that Sequoia China raised earlier this month to fund a whole lot extra start-ups was a show of star energy from the enterprise capital group’s billionaire founder Neil Shen.
Shen’s friends have struggled to lift cash this 12 months, following heightened political threat and Beijing’s crackdown on Large Tech, which has compelled some world establishments to place their China investments on maintain.
In contrast, Shen has raised funds by managing to journey China’s political currents and align with President Xi Jinping’s “widespread prosperity” coverage objectives, based on previous associates, rival traders and others near the nation’s tech and funding scene.
“Everyone is having to take inventory and reassess what it means to spend money on China,” mentioned David Brown, head of Asia offers at consulting agency PwC, talking in regards to the Chinese language investing atmosphere. He added solely the “creme de la creme” of funds with robust native information would survive.
Since launching Sequoia China in 2005 as an arm of Silicon Valley funding big Sequoia Capital, Shen has made a private fortune price $4bn following early investments in TikTok dad or mum ByteDance and ecommerce giants Alibaba and Meituan.
As the federal government has delivered to a halt a golden age for China’s web firms — the candy spot upon which Shen has constructed a agency with belongings below administration of round $50bn — it’s unsure how, or if, traders in China can proceed to search out alternatives that may generate the numerous returns they’ve been used to.
4 months in the past, Shen hinted at a brand new plan throughout a speech to the nation’s prime political consultative physique. He informed the viewers that China should prioritise rising industries like synthetic intelligence, autonomous autos and robotics, in addition to inexperienced vitality and pharmaceutical analysis.
The speech demonstrated an “eagerness to realign his funding themes with anticipated coverage trajectories”, mentioned a chief government of a rival enterprise capital agency.
“Politically right” sectors have emerged in China’s new financial system, based on enterprise capital traders. These embody “deep tech” resembling AI and robotics, and “onerous tech” like electrical automobile batteries and semiconductors. These are sectors the place Beijing has outlined plans to lower its reliance on international know-how.
“Invisibly there are crimson strains you can’t contact and the trick is navigating what these are,” mentioned Henry Zhang, president of Hong Kong-based Hermitage Capital. “In case you spend money on one thing the federal government encourages you’ll have a number of tailwinds. The federal government is pouring cash into these sectors so you may have each coverage and financial assist.”
Shen has lengthy nurtured shut political relationships. He’s the only real delegate representing the enterprise capital business within the Chinese language Peoples’ Political Consultative Convention, a key political advisory physique.
He has additionally prevented a lot of the latest scrutiny on tech tycoons resembling Alibaba’s Jack Ma, regardless of his fund’s connections to California-based Sequoia Capital.
Although run as an independently managed enterprise, Sequoia China passes a few of its carried curiosity again as much as the worldwide group, based on an individual aware of the construction. The China arm has a sprawling portfolio of greater than 900 firms, greater than 100 of them valued at over $1bn.
“Once we look again in historical past it appears apparent to us that Shen captured this chance, however at the moment there was no clear reply in China, what sectors to give attention to, which founders to again,” mentioned one of many traders in his funds.
However Sequoia China has additionally been extremely uncovered to the crackdown that wiped greater than $2tn off Chinese language shares within the US and paralysed the marketplace for Chinese language firms itemizing abroad.
In addition to being a shareholder in giant listed firms like ride-hailing app Didi and vaping group Relx, whose share worth has crashed 84 per cent since itemizing, it was additionally one of many largest enterprise backers of on-line training firms, which have been one other main casualty of the regulatory overhaul.
“It was a giant correction,” based on the investor. The returns of one in every of its funds had been reduce by as a lot as half following the regulatory motion, the individual mentioned. A second individual mentioned that general efficiency was secure throughout Sequoia China’s funds.
Shen’s political affect has not protected him from geopolitical turbulence up to now. The investor introduced each LinkedIn and Airbnb to China round six years in the past in what was then a progressive experiment in US platforms navigating China’s censorship guidelines. Each have since exited the nation.
DJI, a dronemaker that Shen backed earlier than any outdoors investor, has been blacklisted within the US over safety considerations. Shen has courted controversy with cryptocurrencies, which had been successfully banned in China in 2021. Shen entered a deal to again the world’s largest crypto alternate Binance in 2017. After the ban, a screenshot of Shen showing to say in an internet message he was “all in” on crypto went viral within the nation.
“Sequoia China has been excellent at using a bull market in tech for a lot of the final 20 years however you received’t get these multibillion-dollar client web offers anymore,” mentioned the chief government of a rival Chinese language enterprise capital agency.
Nonetheless, Shen has proven he can persuade international traders to pour new funds into Sequoia China, even whereas going through a vastly completely different investing atmosphere within the coming years.
“The short ‘unicorn-making, IPO, revenue’ enterprise mannequin is gone,” mentioned the investor in Sequoia China funds. “The subsequent section can be extra conventional enterprise capital: disruptive know-how and enterprise fashions, smaller offers and longer time horizons.”