As limited partners increasingly demand greater exposure to emerging market opportunities, venture capital firms with a focus on Asia are bulking up their funds and chasing deals in an increasingly competitive race to own stakes in the next generation of local startups with global aspirations.
Over the last year, firms, including DCM Ventures, GGV Capital, Matrix Partners China and Qiming Venture Partners, have all significantly increased the targets for their new funds. If each firm hits their targets, there’s roughly $4.4 billion in new capital that could be flooding into an already scorching market for investment into Chinese startups, according to SEC filings.
The largest of these new funds, by far, is GGV Capital, which has registered a new $1.8 billion fund with the Securities and Exchange Commission. Qiming Ventures has targeted $900 million for its latest fund, while DCM Ventures and Matrix Partners China are each looking for $750 million for their own new investment vehicles, according to securities filings.
Managing partners at the firms did not respond to a request for comment.
These four firms are among the last standing from the initial flood of U.S.-based venture capital firms that poured into Asia (and China specifically) in the first decade of the new millennium.
While marquee names like Kleiner Perkins, DFJ and others foundered in China, these four firms (along with global venture capital juggernauts like Sequoia Capital and NEA) put down deep roots and notched notable wins with investments in startups like Didi Chuxing, Kuaidi, Meituan-Dianping, Xiaomi and many more.
In part, these massive new funds are simply a response to the new world that venture investors find themselves in thanks to the massive amounts of capital raised by SoftBank with its $100 billion Vision Fund, or Sequoia with its $9 billion new investment vehicle.
Firms are also under pressure to raise more capital from limited partners, who want to reduce their exposure and consolidate their own investments around venture firms with track records of success and the ability to deploy capital into larger checks.
Couple those facts with the (still) low cost of capital given where interest rates are, and the sustained growth of technology companies across emerging market geographies, and you have a more willing pool of investors that want to commit more capital to emerging technology ecosystems (this is happening in Latin America, too).
But there are also some contours of China’s competitive environment that are pushing these venture capital firms to raise increasingly larger funds.
One is the sheer size of the opportunity that exists for new technology companies in China. As the WeChat messaging service increasingly evolves into a new operating system, there are opportunities to scale quickly with larger infusions of capital to capture the market.
Like their peers in the U.S., Chinese companies are also delaying their public offerings and spending more time to build a better outcome with their IPOs. That’s putting pressure on earlier-stage investors to raise capital so they don’t get crowded out in those later-stage rounds.
Chinese entrepreneurs are also often putting in their own money to finance companies at the earliest stages, which means startups are more mature when they’re seeking their first round. It’s this phenomenon that leads to the $100 million Series A and B rounds that crop up in the Chinese market more regularly than in the U.S.