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

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

After a dismal year for Chinese tech companies, the $9bn that Sequoia China raised earlier this month to fund hundreds more start-ups was a display of star power from the venture capital group’s billionaire founder Neil Shen.

Shen’s peers have struggled to raise money this year, following heightened political risk and Beijing’s crackdown on Big Tech, which has forced some global institutions to put their China investments on hold.

By contrast, Shen has raised funds by managing to ride China’s political currents and align with President Xi Jinping’s “common prosperity” policy goals, according to past associates, rival investors and others close to the country’s tech and investment scene.

“Everybody is having to take stock and reassess what it means to invest in China,” said David Brown, head of Asia deals at consulting firm PwC, speaking about the Chinese investing environment. He added only the “creme de la creme” of funds with strong local knowledge would survive.

Since launching Sequoia China in 2005 as an arm of Silicon Valley investment giant Sequoia Capital, Shen has made a personal fortune worth $4bn following early investments in TikTok parent ByteDance and ecommerce giants Alibaba and Meituan.

As the government has brought to a halt a golden age for China’s internet companies — the sweet spot upon which Shen has built a firm with assets under management of around $50bn — it is uncertain how, or if, investors in China can continue to find opportunities that will generate the significant returns they have been used to. 

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

The speech demonstrated an “eagerness to realign his investment themes with expected policy trajectories”, said a chief executive of a rival venture capital firm.

“Politically correct” sectors have emerged in China’s new economy, according to venture capital investors. These include “deep tech” such as AI and robotics, and “hard tech” like electric vehicle batteries and semiconductors. These are sectors where Beijing has outlined plans to decrease its reliance on foreign technology.

“Invisibly there are red lines that you can’t touch and the trick is navigating what those are,” said Henry Zhang, president of Hong Kong-based Hermitage Capital. “If you invest in something the government encourages you’ll have a lot of tailwinds. The government is pouring money into those sectors so you have both policy and monetary support.”

Shen has long nurtured close political relationships. He is the sole delegate representing the venture capital industry in the Chinese Peoples’ Political Consultative Conference, a key political advisory body. 

He has also avoided much of the recent scrutiny on tech tycoons such as Alibaba’s Jack Ma, despite his fund’s connections to California-based Sequoia Capital. 

Though run as an independently managed business, Sequoia China passes some of its carried interest back up 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 them valued at over $1bn.

“When we look back in history it seems obvious to us that Shen captured this opportunity, but at that time there was no clear answer in China, what sectors to focus on, which founders to back,” said one of the investors in his funds.

But Sequoia China has also been highly exposed to the crackdown that wiped more than $2tn off Chinese stocks in the US and paralysed the market for Chinese companies listing overseas. 

As well as being a shareholder in large listed companies like ride-hailing app Didi and vaping group Relx, whose share price has crashed 84 per cent since listing, it was also one of the largest venture backers of online education companies, which have been another major casualty of the regulatory overhaul.

“It was a big correction,” according to the investor. The returns of one of its funds were cut by as much as half following the regulatory action, the person said. A second person said that overall performance was stable across Sequoia China’s funds.

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

DJI, a dronemaker that Shen backed before any outside investor, has been blacklisted in the US over security concerns. Shen has courted controversy with cryptocurrencies, which were effectively banned in China in 2021. Shen entered a deal to back the world’s largest crypto exchange Binance in 2017. After the ban, a screenshot of Shen appearing to say in an online message he was “all in” on crypto went viral in the country.

“Sequoia China has been very good at riding a bull market in tech for most of the last 20 years but you won’t get these multibillion-dollar consumer internet deals anymore,” said the chief executive of a rival Chinese venture capital firm.

Still, Shen has shown he can convince foreign investors to pour new funds into Sequoia China, even while facing a vastly different investing environment in the coming years.

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

Quoted from Various Sources

Published for: Ipodifier