U.S. Venture Firms Launch China Funds

Ray Charles had Georgia on his mind. VCs, on the other hand, appear to have China on the brain. The latest firms to declare their intent to head into the crowded market are New Enterprise Associates (NEA) and Sequoia Capital.

NEA has been investing directly in China for about three years — it has sunk more than $100 million in half a dozen companies, including semiconductor play SMIC and Tivo China. On Thursday, however, it told PEWeek that it has plans to financially back an independent venture firm called Northern Light, which is raising is first, $100 million, fund this fall. (NEA General Partner Scott Sandell calls his firm’s relationship to Northern Light one akin to a “special LP,” whereby Northern Light will not only receive part of its institutional backing from NEA but will also provide NEA with deal flow.) The new firm, which is being founded by Chinese entrepreneurs Feng Deng, Yan Ke, and Min Zhu, who co-founded and was president of NEA portfolio company WebEx Communications (Nasdaq: WEBX) will share office space with NEA venture partner Xiaodong Jiang, who is relocating back to China to open an office for NEA there by year end as well.

Sequoia Capital is also making a concerted push into the region. “We’ve had a lot of genuine interest in China by our limited partners and it’s largely the same LPs who have been with us who are behind this fund,” Sequoia General Partner Mark Stevens told the Asian Venture Capital Journal on Sept. 5.

Stevens did not specify the size of the fund, but General Partner Mike Moritz reportedly pegged it at $200 million in an interview with TheMarker.com, an online Israeli business magazine. Stevens told AVCJ that he expects Sequoia to close its first China deal by the end of this year. Sequoia’s China operation is headed by Neil Shen, co-founder and former CFO of Ctrip, a Chinese travel website, and Fan Zhang, whom Sequoia poached from Draper Fisher Jurvetson ePlanet Ventures. Sequoia partners did not return calls seeking more information.

VCs’ growing interest in China isn’t surprising. Many business analysts are confident that Asia will remain a key driver of overall growth in coming years, with South Korea, India and China the most promising markets. Plus, some Asian governments have made it easier for foreign private equity and venture investors to enter their countries and do deals or set up funds, sometimes in partnership with local firms.

In July, IDG Ventures, which has invested more than $100 million in companies in China, announced that it was partnering with Accel Partners to raise and manage a $250 million fund for IT investments in China. Accel joins Mayfield and Sutter Hill Ventures, which have also entered the market through partnerships with Chinese firms. And in June, Intel Corp., the world’s largest chipmaker, announced it has established the Intel Capital China Technology Fund, with $200 million.

Naturally, the IPOs of various China-based tech companies have also gotten the attention of investors. For example, Chinese search engine Baidu launched an IPO in August and saw its stock rise from $27 a share to more than $122 a share on the first day of trading. The company currently is valued at $2.6 billion. EPlanet Ventures – a DJF affiliate that focuses on IT and life sciences in Asia, the United States and Europe – owns 28% of Baidu, having invested alongside Google, Integrity Partners, Peninsula Capital, Bridger Management, China Equity, China Value and Venture TDF. DFJ ePlanet’s stake in Baidu, which varies depending on stock market gyrations, is worth about $1 billion.

Such successes aren’t being lost on VCs. On the contrary, between China’s 100 million regular Internet users – a figure expected to eclipse that of the United States in a few years – the successful hits that numerous stateside VCs have already enjoyed, and the emphasis that major players such as Microsoft, eBay and Google are placing on China, the news six months from now will likely not be about who is investing in China. Rather, it will question who isn’t.

Email Constance.Loizos@thomson.com

Additional reporting by Jerry Borrell