As startup valuations get eroded in the wake of the coronavirus pandemic and an economic downturn, China’s Qiming Venture Partners is ready with a billion-dollar war chest and a back-to-fundamentals approach to pick up “rare gems” in the market.
The Chinese venture capital major earlier this month announced the completion of its USD-denominated Qiming Venture Partners Fund VII at $1.1 billion, primarily for startups at Series A and B rounds in the fields of healthcare, IT, artificial intelligence (AI), corporate service, and consumer internet.
“I think – with this downturn – you’ll see a lot of excessive valuations being squeezed out,” said Helen Wong, partner at Qiming, in an online interview with DealStreetAsia. “The market may swing to an extreme and you might be able to find some rare gems. That could happen in a downturn. It often happens.”
Qiming has maintained a steady pace of investment, said Wong, despite “a bearish sentiment” in Asia’s markets that has worsened due to the impact of the COVID-19 outbreak.
“Overall, I think there will be a slowdown in the investment market. A lot of funds which have not gone through different cycles may turn bearish and cautious.”
Qiming is one of the few players that have managed to garner a staggering amount of capital in the Asia Pacific.
Statistics indicate that the average size of Asia-Pacific funds expanded to a record $282 million in 2019 from $226 million in 2018, underscoring an ongoing flight to fewer funds that closed 8 per cent ahead of their targets, according to Bain & Company.
Having navigated through difficult times including the 2008 global financial crisis and SARS in 2003, Wong said that there is “a lag effect” of deals being announced from the time when term sheets were signed.
This means that investors will probably reassess the longer-term impact of the virus in the second quarter, managing their own portfolios and doing triaging. It is expected that most of them will decide whether to continue to deploy money or wait-and-watch in the third quarter.
“I think the impact [of the virus] may take a longer time for the economy to recover,” said Wong.
The slowdown in dealmaking among Qiming’s counterparts might give the already deep-pocketed investor an even better shot to source good deals. The company, which distributed over $1 billion cash returns to limited partners (LPs) in 2019, has seen opportunities in healthcare, deep tech, and internet-enabled businesses like online education, online entertainment and e-commerce, as well as models that are cashing in on changing consumer behaviour amid the lockdown in many countries and regions.
The dampened startup valuations in the midst of crises, however, are not necessarily a benefit for venture capitalists since they are just “a better reflection of the risk you are taking,” Wong pointed out. “Probably a lot of late-stage companies will retreat from the market [because of this].”
She said that Qiming will also look for startups with “good fundamentals” and stay away from those that have excessive burn rates and lack strong unit economics.
Qiming, founded in 2006, mainly invests in China and the United States, alongside its efforts in Southeast Asia and India that are currently led by Wong. The company manages nine US dollar funds and five RMB funds with $5.3 billion in total assets under management (AUM).
The firm has so far made investments in more than 350 startups, including exits from over 30 initial public offerings (IPOs) and through about 70 mergers and acquisitions (M&A). It revealed that approximately 30 of its portfolio companies are currently preparing for IPOs.
With over 12 years of experience in the venture capital industry, Wong led Qiming’s investments in Hangzhou-based, India-focused e-commerce firm Club Factory, Indian literature portal Pratilipi, Southeast Asia’s new finance platform Akulaku, and budget hotel chain RedDoorz, among others.
Her exited deals include Beijing-based bike-sharing service Mobike (acquired by Meituan-Dianping), job-matching platform Lagou (acquired by China’s 51jobs), Ruhnn (listed on Nasdaq), and Chinese audio platform Luoji Siwei.
Wong shared her observations on the current investment sentiment, startup valuation squeeze-out, Asia’s overall investment landscape, as well as Qiming’s strategies to capture the current opportunities in China, Southeast Asia and India. Below are the edited excerpts of the exclusive interview:-