When Silicon Valley venture firms set out to conquer China five-to-seven years ago, most of them picked one of three strategies.
There was the branch office strategy, whereby the China partners and Valley partners would still work as one firm, making all investment decisions together as a unit and sharing in the returns equally. There was the more common franchise model, where a brand name Valley firm lent its name to a group of local Chinese investors, but mostly left them to make their own decisions. And then there was the joint venture model, where a well known Valley firm didn’t seek to create a China office, it just partnered with an existing one.
That last tack – the join venture model – is the one Accel took, partnering back in 2005 with IDG Ventures– one of the pioneers of investing in the Chinese consumer Internet.
IDG already had a great hit-rate, having backed an all star roster of Chinese Web giants including Ctrip, Baidu, Sohu and Tencent. But it was investing out of a relatively small seed fund with no allocation for follow-on rounds. That meant a early IDG investment in Tencent netted a tidy 20x return– but paled in comparison to the return that South African media firm Naspers got when it bought the company out in the early 2000s. Naspers bought out existing investors for a cool $30 million, giving it 50% of what has become the third largest Internet company on the planet. Ouch.
The partnership with Accel allowed IDG to make sure that didn’t happen again, by co-raising two growth funds (which is more like what we’d consider a classic early-stage fund) and a capital fund over the last six years, a combined total of nearly $1.5 billion dollars that has already yielded seven IPOs. “Even though we did very well with previous IDG funds, we could have done better if we had larger fund sizes and could invest more aggressively in follow-on investments,” says Hugo Shong, the founding partner of IDG who negotiated the original deal with Breyer.
Last night, the two closed on the third growth fund totaling $550 million and the second capital fund totaling $750 million. Here’s the best part: The funds were raised entirely in seven weeks, mostly from Accel’s existing US limited partners. Ok, part of that is due to a raging Chinese Web bubble: One-quarter of all US IPOs last year were by China-based companies. But it’s still an impressive feat.
Breyer had nothing but positive things to say about the partnership thus far, noting that none of the senior IDG partners has left. Indeed, that’s something not even firms like Kleiner Perkins and Sequoia can boast. And IDG has a 99-person team spanning five cities in China. When I asked what hadn’t gone as well as planned — this is China after all– Breyer said, “The most challenging part is the pace of the market it China. It moderates fast when the market declines, and when it’s up and to the right as things have been in China deals are somewhere between being priced for perfection and outright euphoria. Navigating through the euphoria is a challenge.”
When I asked if he was worried about a China crash, he laughed and said, “I’m always concerned about crashes– both here and in China.”