Five questions with Daniel Auerbach

Daniel Auerbach, managing director at Fidelity Asia Ventures, has been scoping out venture investments in Greater China since the late 1980s. It’s in the last few years, however, that the firm has recorded some of its largest exits, including the IPOs of drug developer Wuxi Pharmatech, telecom backend service provider AsiaInfo and auction site Alibaba (in which Yahoo previously acquired a majority stake).

Looking ahead, Auerbach tells PE Week Senior Editor Joanna Glasner that he’s bullish on investment opportunities in China, but that competition for good deals is getting fiercer.

Q: You’ve been in China for 20 years. What lured you there?

Before I became a venture investor, I’d worked actively on IPOs at Fidelity, where I interacted with the icons like Bill Hambrecht and Sandy Robertson. Later, when I wanted to focus internationally, I decided I would go as far away as possible, and Hong Kong made sense.

I was also a language major as an undergrad, so learning Cantonese and Mandarin came pretty easily.

Q: A lot of foreign investors in China fared poorly in the early 1990s. How’d you avoid losing your shirt during that time?

At Fidelity, we had an early stage orientation skewed to tech and health care. Those parameters allowed us to be a bit more long term in our thinking. They also kept me away from very industrial businesses that were transitioning from state-owned to private.

Q: China’s economy has grown at double-digit rates for years now. What’s it like being an investor in such a fast-paced environment?

From a cultural point of view, the work ethic in China is astounding. It’s 24/7 by nature, by culture, by practice and by philosophy. If you’re not prepared to work within that, then it’s very easy to be a marginal player.

Q: You’ve had some exits in the last few years, such as Alibaba, AsiaInfo, and Wuxi Pharmatech, to name a few. What’s your investment outlook?

We’re currently managing about $250 million and we’re forming a new fund for China of $250 million. China has been growing at the same high-pace rate for some time, so there is a momentum-based mentality that creates a sense of urgency among investors. Our focus continues to be early stage investing in technology and health care.

Q: As an arm of Fidelity, you’re different from most venture funds in that you don’t have limited partners. Do your investment strategy and techniques also differ from traditional venture firms?

First of all, over the past two years, the venture industry has changed here [in China]. Today, most of the top-tier U.S. firms are here, and most if not all the major buyout firms are here, too. It’s hard to measure the supply-demand equation, but I don’t believe the supply of quality investment opportunities matches the demand. So there is an extra layer of work required to find the relatively limited opportunities before anyone else.

But we’re no different from other venture firms in terms of how we are structured, how our pools of capital work, and how we motivate our teams.

Unlike almost all other venture firms, Fidelity Asia Ventures invests Fidelity’s own proprietary capital and does not manage funds on behalf of third-party investors. As a result, we do not spend time on fund-raising, nor do we have artificial fund deadlines that limit our investment horizon. That means we don’t feel overly hurried to deploy capital or to show realization.