China venture firm raises $648mn from Princeton, Duke

China’s economy may be slowing. The country’s startups may be headed for a shakeout. That isn’t stopping Gary Rieschel from making his firm’s biggest bet yet on the nation’s entrepreneurs.
His venture capital firm, Qiming Venture Partners, just raised $648mn from investors including Princeton University and Duke University. It’s the firm’s largest fund since it was founded in 2006 and brings assets under management to $2.5bn. It’s also the eighth largest China-based fund ever, according to consultancy Preqin. “It’s a bet on the entrepreneurship of China,” said Rieschel, Shanghai-based founding partner at the firm, also known as Qiming Weichuang Venture Capital Management Shanghai Co.  Qiming’s move comes amid fierce debate over the outlook for startups in China. Venture firms invested a record $37bn in the country last year, more than double the previous year’s total, as they sought to repeat successes like the record-setting public offering by Alibaba Group Holding. That has fuelled concerns there is a bubble in certain sectors, with too many companies burning their venture money on subsidies to draw customers.
Fundraising by venture firms did slow last year. China-focused funds took $4.9bn in 2015, compared with $7bn the year before, according to Preqin. Qiming’s fund is the largest amount of money raised since May 2014.
Anna Fang, chief executive officer of ZhenFund, said there is still plenty of investors looking to put money into startups.
Her firm, established by co-founders of tutoring giant New Oriental Education & Technology Group Bob Xu and Victor Wang, invests in early-stage tech companies and raised $150mn in December.
Rieschel contends that over the long term, there will be plenty of opportunity for venture firms to make money. In its decade in the business, the firm has backed smartphone maker Xiaomi Corp, restaurant review site Dianping and online education service iTutorGroup. Qiming backed Xiaomi when it was worth just $100mn, he said; its valuation topped $45bn when it raised money just over a year ago, making it the second most-valuable startup in the world after Uber Technologies.
“What you want to back today in China are the entrepreneurs,” Rieschel said. “The vast majority of juice in the economy is coming from private companies. If you can find and invest in private companies early that have technology that can become pervasive, or is plain unique technology that hasn’t been developed anywhere else before, then those should be bringing good financial returns.” Rieschel is seeing an end to the copycat syndrome where everyone wanted to be, say, the Google or Yahoo of China, or offered iterations of something already popular in another market. Instead, he said, there are more original, homegrown ideas and more skilled engineers creating better computer code.
“The companies we’re seeing are not just copying but doing something relatively unique to China,” he said “We’re getting better core technology teams in China. That’s something we expect to continue.” Most of the limited partners in the latest fund had previously joined Qiming, he said. Beyond anchor investor Princeton and Duke, they include the Robert Wood Johnson Foundation, Mayo Foundation and the Dietrich Foundation. Qiming plans to put its money into 45 to 50 companies at the early to middle stages of their development, Rieschel said, with a focus on health care, environment, consumer and industrial robotics, and enterprise software. Other companies already in their portfolio are Hangzhou Tigermed Consulting Co, a clinical researcher, and Mogujie.com, which merged with a rival to create a $3bn fashion retailer.
Qiming invested $5mn in Hangzhou Tigermed in 2008, providing capital for the company to expand its contract research services and then go public in 2012. It was the firm’s first IPO within China, rather than the usual approach of selling shares in the country’s startups abroad, and Tigermed is now valued at about $2bn.
Getting out of investments in China can be tricky these days. The stock market turned volatile last year, making it more challenging for venture firms to take portfolio companies public. Startups, including Qiming’s Dianping, have been merging with rivals to improve profitability, but that’s not the same as exiting through an IPO or outright sale.
Rieschel is optimistic that stock markets will stabilise over the next three to five years. By then, his and other firms should be ready to exit investments.“Right now, everyone will say they’re more successful getting money into – rather than out of – China,” he said.