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

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

Shen’s peers have struggled to raise funds this year, following heightened political risk and Beijing’s crackdown on Big Tech, which forced some global institutions to suspend investment in China.

By contrast, Shen raised funds by managing to follow Chinese political currents and align with President Xi Jinping’s “common prosperity” political goals, according to former associates, rival investors and others close to him. of the country’s technology and investment scene.

“Everyone needs to take stock and reassess what it means to invest in China,” said David Brown, Asia business manager at consultancy PwC, speaking of the Chinese investment environment. He added that only the “crème de la crème” 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 $4 billion from early investments in parent company Sequoia China. TikTok ByteDance and e-commerce giants Alibaba and Meituan.

While the government has ended a golden age for Chinese internet companies – the sweet spot on which Shen built a company with assets under management of around $50 billion – it’s unclear how, or So, investors in China can continue to find opportunities that will generate the significant returns they have come to expect.

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

The speech demonstrated a “readiness to realign its investment themes with expected political trajectories,” said a chief executive of a rival venture capital firm.

“Politically correct” sectors have emerged in China’s new economy, venture capitalists say. These include “deep tech” like AI and robotics, and “hard tech” like electric vehicle batteries and semiconductors. These are areas 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 to navigate those lines,” said Henry Zhang, chairman of Hong Kong-based Hermitage Capital. “If you invest in something that the government encourages, you will have a lot of tailwinds. The government is pumping money into these sectors so that you have both political and monetary support.

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

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

Although run as an independently managed company, Sequoia China passes on some of its carried interests to the global group, according to a person familiar with the structure. The Chinese branch has an extensive portfolio of more than 900 companies, including more than 100 valued at more than a billion dollars.

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

But Sequoia China has also been highly exposed to the crackdown that wiped out more than $2 billion worth of Chinese stocks in the United States and crippled the market for Chinese companies listed overseas.

As well as being a shareholder in major publicly listed companies like carpooling app Didi and vaping group Relx, whose share price has fallen 84% since listing, he was also one of the biggest large funders of online education companies, which have been another big victim of the regulatory overhaul.

“It was a big correction, according to the investor. Returns on one of its funds were cut in half as a result of the regulatory action, the person said. A second person said overall performance was stable across all Sequoia China funds.

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

DJI, a drone maker that Shen backed before any outside investors, has been blacklisted in the United States over security concerns. Shen courted controversy with cryptocurrencies, which were effectively banned in China in 2021. Shen struck a deal to back the world’s largest crypto exchange Binance in 2017. After the ban, a screenshot de Shen appearing to say in an online post that he was “all in” about crypto has gone viral in the country.

“Sequoia China has been very successful in riding a tech bull market for most of the last 20 years, but you’re not going to get those multi-billion dollar consumer internet deals anymore,” said the CEO of Sequoia China. a rival Chinese venture capital firm.

Still, Shen has shown that he can convince foreign investors to invest new funds in Sequoia China, even if he faces a very different investment environment in the coming years.

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

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