Neil Shen’s Sequoia China seeks ‘politically correct’ investment strategy

After a dismal year for Chinese tech companies, the $9 billion Sequoia China raised to fund hundreds of other startups earlier this month was a demonstration of the star power of the venture capital group’s billionaire founder, Neil Shen.

Shen’s peers have struggled to raise money this year after rising political risk and Beijing’s crackdown on big tech, forcing some global institutions to freeze investments in China.

In contrast, Shen raised money by making it ride China’s political currents and join President Xi Jinping’s “shared prosperity” political targets, according to former employees, competing investors and others close to the country’s technology and investment scene.

“Everyone needs to take stock and reassess what it means to invest in China,” said David Brown, head of Asia deals at consultancy PwC, of ​​the Chinese investment environment. He added that only the “creme de la crème” of funds with strong local knowledge would survive.

Since founding Sequoia China in 2005 as a subsidiary of Silicon Valley investment giant Sequoia Capital, Shen has amassed $4 billion in personal wealth.

With the government halting a golden age for China’s internet companies — the sweet spot on which Shen has built a company with roughly $50 billion in assets under management — it’s uncertain how or if investors in China can continue to find opportunities, which will generate the usual significant returns.

Four months ago, Shen hinted at a new plan in a speech to the country’s top political advisory body. He told the audience that China must prioritize growing industries such as artificial intelligence, autonomous vehicles and robotics, as well as green energy and pharmaceutical research.

The speech showed “the eagerness to align its investment themes with anticipated policy developments,” said a CEO of a rival venture capital firm.

According to venture capitalists, “politically correct” sectors have emerged in China’s new economy. These include “deep tech” like AI and robotics, and “hard tech” like batteries and semiconductors for electric vehicles. These are sectors where Beijing has outlined plans to reduce its reliance on foreign technology.

“Invisibly, there are red lines that you can’t touch, and the trick is navigating through them,” said Henry Zhang, president of Hong Kong-based Hermitage Capital. “If you invest in something that the government is promoting, you’re going to get a lot of tailwind. The government is pumping money into these sectors so you have both political and monetary support.”

Shen has long maintained close political ties. He is the sole delegate representing the venture capital industry in the Chinese People’s Political Consultative Conference, a key political advisory body.

He’s also avoided much of the recent scrutiny of tech tycoons like Alibaba’s Jack Ma, despite his fund’s ties to California’s Sequoia Capital.

Although Sequoia China operates as an independently managed company, it returns some of its carried interest to the global group, according to a person familiar with the structure. The China arm has a sprawling portfolio of more than 900 companies, more than 100 of which are valued at over $1 billion.

“Looking back at history, it seems obvious to us that Shen seized this opportunity, but at that time in China there was no clear answer as to which sectors to focus on, which founders to support,” said one of the investors his fund .

But Sequoia China was also heavily exposed to the crackdown that wiped out more than $2 trillion of Chinese stocks in the U.S. and paralyzed the market for Chinese companies listed overseas.

Not only has it been a shareholder in large publicly traded companies like ride-hailing app Didi and vaping group Relx, whose share price has plunged 84 percent since going public, but it was also one of the biggest venture capitalists in online education companies, which was another big one Victim of regulatory overhaul.

“It was a big correction,” said the investor. The returns of one of his funds were cut in half after the regulation, the person said. A second person said that the overall performance of Sequoia China’s funds was stable.

Shen’s political influence has not protected him from geopolitical turmoil in the past. The investor brought both LinkedIn and Airbnb to China about six years ago, in what was then a progressive experiment with US platforms grappling with China’s censorship rules. Both have since left the country.

DJI, a drone maker that Shen has backed before any outside investor, has been blacklisted in the US over safety concerns. Shen has drawn controversy with cryptocurrencies, effectively banning it in China in 2021. Shen struck a deal in 2017 to support the world’s largest crypto exchange, Binance. After the ban, a screenshot of Shen appearing to say in an online message that he was “all in” on crypto went viral in the country.

“Sequoia China has been very good at riding a tech bull market for the past 20 years, but you’re not going to get those multibillion-dollar deals for consumers on the internet anymore,” said the CEO of a rival Chinese venture capital firm.

Still, Shen has shown he can persuade foreign investors to invest new funds in Sequoia China even as he faces a vastly different investment landscape in the years to come.

“The fast business model ‘make unicorn, IPO, profit’ is over,” said the investor in Sequoia China fund. “The next phase will be more traditional venture capital: disruptive technology and business models, smaller deals and longer time horizons.”

Neil Shen’s Sequoia China seeks ‘politically correct’ investment strategy Source link Neil Shen’s Sequoia China seeks ‘politically correct’ investment strategy

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