AVCJ Awards 2015: Venture Capital Professional of the Year: Neil Shen
Neil Shen, managing partner of Sequoia Capital China, on identifying stand-out entrepreneurs and the competitive dynamics of a maturing start-up ecosystem
Q: What major differences do you see in entrepreneurship in China now and when you set up Ctrip in 1999?
A: Go back 10 years and the opportunity was concentrated in the TMT [technology, media and telecom] sector. It is getting broader now. In addition to TMT, we see opportunities in healthcare, consumer and to certain extent cleantech and energy. Another difference is mobile internet, which has brought down entry barriers for entrepreneurs. During the PC era, it took time to come up with a product but today it's much faster - and that also means more competitions. The other important dynamic is that the whole ecosystem for entrepreneurship has now been well built in China. When I was an entrepreneur at Ctrip, there were only a few venture capital firms active. Today you get a full spectrum of investors, from seed, angel, and venture capital to growth capital. They are now also providing a lot of value-added services. If you're an entrepreneur and have a great business idea or technology, someone will help you not just financially but in other aspects as well. It's just like what you see in Silicon Valley.
Q: In the past year, a number of Sequoia portfolio companies have raised very large rounds at high valuations. What drew you to these companies in the first place?
When I was an entrepreneur at Ctrip, there were only a few venture capital firms active. Today you get a full spectrum of investors, from seed, angel, and venture capital to growth capital
A: That's the real excitement for us - making investments in the early stages. When we invested in Xing Wang, we didn't know that Meituan would become a one-stop shop for local services. Back then it was the early stages of mobile internet and his original idea was to provide discounted services from local restaurants. We knew some US players were doing that, but I didn't see Xing as just a copycat. He had learnt something from what Groupon was doing but he took the game to a different level, expanding into food delivery, movie tickets and hotel bookings. Whenever he achieves a milestone, he thinks, "How can I expand my business and make it more appealing? How I can compete in the whole O2O [online-to-offline] space?" That's the same spirit we had at Ctrip. From the very first day, I thought that hotel-booking market should be disrupted because the traditional call centers were a bit backward. Over the years, Ctrip has become a one-stop shop for all travel services. If you asked me in 1999 whether I could imagine this would be the case today, the answer would have been no. With Xing it was the same. We have grown with him and continued to provide help to him whenever possible.
Q: When Meituan emerged in 2010, many companies were trying to get into group-buying in China. What convinced you that company could be a market leader?
A: Sometimes we get it right and sometimes we get it wrong and hopefully much less in the latter case,. At that time, our conviction was really coming from the CEO like Xing himself. I looked at him and said, "I feel entrepreneurship from this guy and his business model makes sense and he also seems to execute well." We had met a few other entrepreneurs who wanted to do the same thing, but he was someone we felt understood that business the best and he shared a lot of similar ideas with us. That is the part of investment - you have to back the right people, even though many start out with similar businesses. A lot of companies wanted to be the Groupon of China at that time, but now there are only two players: Xing's Meituan and Tao Zhang's Dianping. With this competition, hundreds of others have died.
Q: Why did you invest in Meituan as well as Dianping, given that until the merger they were rivals?
A: We also invested in Dianping at a very early stage, when it was still in a shabby office in Shanghai nine years ago. We didn't invest for their group-buying business but the Yelp-like restaurant listings business. This was before we backed Meituan. Actually, when Meituan started its group-buying business, I asked Dianping if they wanted to enter the same area. The CEO said he wanted to think about it because he saw Dianping more as an advertisement service platform for merchants. So we invested in Xing and a few months later Dianping realized this was an important area to be involved in. These companies were not competitors when we started, but the boundaries in the internet industry are often unclear; as companies become bigger, they step into each other's territory. It is an interesting part of our business. When I invested in Lefeng, I didn't think it would end up competing with Jumei, a cosmetics e-commerce site. Lefeng wanted to be a lifestyle platform but then it started selling cosmetics as well. When I invested in Vipshop, I didn't think it would compete directly with JD.com; it happened because they were both very successful. As a venture capitalist, I have always been mindful of not getting into two companies in the same space at the same time, because it hurts the entrepreneurs.
Q: Do you encourage competing companies to merge?
A: Of the top five Chinese e-commerce companies, we are shareholders in Alibaba, Vipshop, JD.com and Jumei. As an early-stage investor, it's very difficult to say whether one day companies will end up competing with each other. In the case of Lefeng, the company had two options - work with Vipshop or Jumei. We talked to Lefeng, told the team they had to make a decision, facilitated a conversation between the parties, and advised each of them. But as to whether they merge or not and who to merge, it isn't my call. You also have to remember that every merger is different, and there doesn't have to be a merger between two competitors in a similar space. We didn't know Meituan and Dianping would merge, for example. Earlier in the year, the two CEOs still had different strategies and considerations.
Q: Are there any particular examples of companies or trends you've missed or joined too late?
A: Yes - Didi Dache [before the merger with Kuaidi Dache], unfortunately we only got into the Series C round. In fact, we backed the first Uber-type of taxi-hailing app in China, which was launched in Beijing. The founder couldn't carry it through competition with Didi and Kuaidi, and long after the battle was lost we turned out attentions to Didi. We got in at the Series C, which looks pretty good given the recent valuation.
Q: There are now a number of large-scale players in e-commerce and O2O services. Where are you looking for the next big opportunity?
A: There are many segments in the O2O space that have been addressed to a great degree, so opportunities are fewer compared to five years ago. In the meantime, new sectors are emerging. We started looking at financial technology about five years ago. Enterprise software is another area of interest. And then we have been investing in the internet-of-things space for the past two years. How big an opportunity will these be compared to e-commerce? It's too early to tell.
Q: Sequoia is supporting some privatizations of Chinese companies listed in the US. Do you expect this trend - and domestic re-listings - to continue?
A: Some entrepreneurs appreciate that a domestic listing might be a better fit, because investors in China would understand the business better. I tend to agree with them. Many Chinese companies in the US lack strong coverage on the research side, and this creates problems. As a result, there are situations in which turning into A-share listing could be a good move for the company, but I am not suggesting that entrepreneurs should take advantage of the valuation gap between the A-share market and overseas markets. Again, we just follow what the founders want to do. If they want to go back to China, we might back the company as a growth capital investor.
Q: It is suggested that some companies would be unable to list domestically without removing their variable interest entity (VIE) structures, which would require their foreign investors to exit. Would Sequoia raise a renminbi fund to address this ‘replacement capital' opportunity?
A: No. We have raised renminbi-denominated funds since 2008 and we have a substantial pool of local currency capital to deploy. We are probably one of the largest renminbi GPs in China. We won't raise money specifically for the take-private deals. Some companies de-listing in the US may ultimately re-list domestically, and so renminbi might be a better fit for them. Overall I think the renminbi market has become much deeper over the past seven years.