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:-
Could you take us through the funds you currently manage? It is understood that you have seven US dollar funds alongside five RMB-denominated funds. What portion of the funds has been deployed so far?
I can’t talk about where we are in terms of fund deployment. But in terms of exits, we have invested in three main areas, including the internet, enterprise services, and healthcare. We’ve had quite some IPOs lately. In the internet space, we had the IPO of Bilibili (a Chinese video platform that raised $483 million on Nasdaq in April 2019), Mobike being acquired by Meituan-Dianping, and Roborock, which went public on China’s STAR Market in Q1, as well as quite a few IPOs in the healthcare field.
We have seen a stream of very good exits in the past 24 months, and the pipeline of exits is also very good.
IPOs of Qiming’s portfolio companies since 2019
|Headquarters||Company Name||IPO Location||Listing Date||IPO Size||PE/VC Investors (Before IPO)||Sector|
|Hangzhou||Ruhan Holdings||Nasdaq||2019-04-03||$125 million||Qiming Venture Partners, Alibaba, Eastern Bell Capital, Legend Capital, SAIF Partners||E-Commerce & Internet Economy|
|Tianjin||CanSino Biologics||HKEX||2019-03-28||HK$1.26 billion||Qiming Venture Partners, Lilly Asia Ventures, Fortune Capital, SDIC Fund Management, Gopher Asset Management||Health Tech|
|Hangzhou||Venus MedTech||HKEX||2019-12-10||HK$2.59 billion||Qiming Venture Partners, Sequoia Capital China, Goldman Sachs, Cowin Capital, DCP Capital||Health Tech|
|New York||Schrödinger Inc||Nasdaq||2020-02-10||$232 million||Qiming Venture Partners, Bill & Melinda Gates Foundation, WuXi App Tech, Deerfield Management, GV (Google), Pavilion Capital, Tubus Management, Laurion Capital Management||Health Tech|
|Beijing||Beijing Roborock Technology Co Ltd||STAR Market||2020-02-21||4.52 billion yuan||Qiming Venture Partners, Gaorong Capital, GIC, Shunwei Capital||AI & Robotics (Intelligent Cleaning Robots)|
|Shanghai||Shanghai Sanyou Medical Co Ltd||STAR Market||2020-04-09||1.08 billion yuan||Qiming Venture Partners, Yingke PE||Health Tech|
What is your take on the current investment landscape in Asia? There are concerns over an impending slowdown in certain parts of the region. Do you see that impacting investors’ interest?
The venture capital market goes through cycles. Last year was very much a bullish year when valuations were getting expensive and big rounds were being raised, especially some unicorns which were probably valued excessively. The slowdown came before the pandemic. The COVID-19 just strengthened the bearish sentiment.
Overall, I think there will be a slowdown in the investment market. A lot of funds that have not gone through different cycles may turn bearish and cautious.
However, there are funds like Qiming who have ample capital to deploy and still keep our steady pace of investment. We have seen a lot of events unfolding around the world in previous cycles, like the 2008 global financial crisis, SARS in 2003, and the dotcom bubble bursting in 2001. Having gone through these different cycles enables us [to have] a more balanced view of things.
Like what Warren Buffett once said that as an investor, it is wise to be “fearful when others are greedy and greedy when others are fearful.” There have been a lot of very interesting things happening in the healthcare industry, both for companies within our portfolio and investment opportunities available in the market. We’re also seeing many exit opportunities in the technology and deep-tech space after the STAR Board opened last June.
In the consumer field, we need to access more [to identify] the interesting opportunities amid the downturn. There are many companies that will be impacted a lot more, while others like online education, online entertainment and e-commerce are key beneficiaries of this pandemic situation.
Investors have to be selective. We have to look at the key behaviours that will change after the pandemic, as well as things that are just temporary and will go back to how people used to behave after the virus.
I heard from an investor in Hong Kong who was talking about how this period is actually good for venture capital firms to make investments because it’s easier to bargain for a lower price when startups are trying to raise more money to navigate through the pandemic. Are you seeing the same trend?
I think valuations will come down for sure. But valuations should reflect the risk that we’re taking. If we are actually taking on more risks, then maybe the dropped price is still not cheap. It’s just a better reflection of the risk that you are taking.
I would say that obviously, 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. But the lowered valuation does not necessarily mean that it is cheap.
Are you seeing many startups rushing to raise a new funding round amid the pandemic and ahead of a potential recession that could follow?
Yes. In general, we do see companies trying to raise more money [during this period]. But whether they can or not, that would depend. Because a lot of VCs now focus on their own portfolio companies and also try to understand the longer-term impacts of the virus.
In March, we saw China’s VC market booked a record-high deal activity in the recent six months with $6.8 billion being raised across 68 transactions. In your prediction, will the VC market really take a hit from the virus?
A lot of deals in March were probably closed earlier – Maybe in Q4 2019 because we had Christmas, Chinese new year, and the lockdown. I think you are seeing “a lag effect” of deals being announced from the time that term sheets were signed.
Q2 could be the time when a lot of investors will reassess the situation. They will spend time on managing their portfolios and doing triaging. Probably in Q3, a lot more people will need to make up their minds on whether they want to continue to deploy money or watch and see. But I think the impact [of the virus] may take a longer time for the economy to recover.
In April 2018, Qiming announced the closing of three new funds totalling $1.39 billion, including Qiming Venture USD Fund VI with $935 million, Qiming Venture RMB Fund V with 2.1 billion yuan ($297 million), and Qiming US Healthcare Fund I with $120 million, which are primarily for markets like China and the US. Are you planning to earmark some amount for India and Southeast Asia?
Qiming predominantly invests in China. We also actively look into Southeast Asia and India, but it’s not based on the exact location but more on a deal-by-deal basis. I’m leading Qiming’s efforts to invest in overseas markets, mainly in Southeast Asia and India.
Could you share your observations on Southeast Asia and India? You have already led a few deals in the two regions in startups like Pratilipi, Akulaku and RedDoorz. Could you take us through your strategy going forward?
In general, we’re looking for companies that have high growth potential and are led by very strong entrepreneurs, as well as business models that we think can be quite scalable.
Qiming is different from other firms because we have a very strong Chinese internet experience. So we’re trying to take some of the learning we had here and bring it to Southeast Asia. I’m from Southeast Asia, so we want to combine the China experience with more localized knowledge of the region to identify the best opportunities.
Being in China actually helps, because the country has the scale for us to see companies develop from zero to hundreds of millions of DAUs (daily active users) or MAUs (monthly active users) amid stellar growth and fierce competition. A lot of companies in Southeast Asia and India are still at a very nascent stage and very much look to Chinese VCs to provide the experience.
The trends we saw are [more companies] looking at what worked in China and then trying to replicate it in Southeast Asia. I think last year was probably logistics, while the year before [last year] was fintech. Even some of the coffee chains became very popular because of the early success of Luckin Coffee. You can see a lot of people taking ideas that were evolved from China to Southeast Asia.
What makes the region attractive and are there any challenges you want to highlight?
It has been talked about a lot. The region is attractive because of the [huge] size of the market, which is also a very young demographic. People are really embracing social media and the internet.
Among the multiple challenges, first of all, it’s a very fragmented market as people speak different languages across different jurisdictions, so the scalability is not as easy as in China. And then obviously, the lack of talent, so it takes a lot for an entrepreneur to be able to assemble a good team and to have very strong execution.
I think valuations are not necessarily cheaper in Southeast Asia or India when you adjust for the risk you’re taking. The main reason why we’re looking at Southeast Asia is that China’s market – at least on the consumer internet side – has reached maturity.
China has 1.3 billion people, but WeChat already has 1.1 billion monthly active users. So there is not a lot of room to grow in terms of new user acquisition. The same problem is also faced by China’s internet giants. Everybody is looking for future growth. This is really the reason why we’re looking overseas, as well as big companies like TikTok (ByteDance), Tencent, and Alibaba.
What is your take on India? A host of Chinese investors are already present in the country, cashing in on new opportunities. Do you consider yourself a late entrant in the country?
So I would say that in India, the question is really not whether we are early or late but more of if we can find good companies that can capture the growth of internet users, but at the same time be patient enough to wait for the GDP per capita to catch up.
Do you think the valuations of early-stage internet economy companies in Southeast Asia are inflated, given that they are often sealed on the basis of speculation rather than taking the actual fundamentals into account?
There were deals that seem like being done at excessive valuations. But we always look at every deal on its own merits. At the end of the day, it is down to fundamentals like if consumers like the product, if they are willing to pay for the product, and if the business model is unique.
Do you think the Southeast Asian internet economy market is still kind of early-stage, or are we going to see big exits very soon?
I don’t know, but we definitely hope so.
Exits have always been tricky in the region because there is not so much debt in the capital market. I would say that the whole market is still nascent. But we are hopeful that as more and more people are interested in this part of the world, and as companies start to gain a certain scale, they can go public or get acquired by some of the larger internet companies at a good valuation.
We have seen a few US-listed Chinese companies involved in alleged scandals of posting exaggerated revenue numbers, including Luckin Coffee. What impact do you think this will have on sentiments among investors who have portfolios in China?
First of all, I think the scandal of Luckin Coffee is unique because frauds were involved. I don’t think people generally get affected by such a unique case. It happened in the US as well, like the Enron scandal*, which is a huge fraud case [in 2001]. There are clear legal implications for every fraud case since they are listed on the US stock exchange.
I would say that Luckin coffee was always a controversial deal. Some people really felt that it was a very risky bet because they pushed for growth at all costs. Taking a sight into a fraud, there is “back-to-fundamentals” thinking among VCs in China that we should not just push for growth, but also make sure that the growth is healthy growth. It [the Luckin Coffee scandal] would tighten scrutiny among all service providers.
But there will still be opportunities for Chinese companies with good fundamentals to go public, whether it is on the Nasdaq/New York Stock Exchange, Hong Kong Stock Exchange, or even local exchanges in the mainland. I think Chinese companies are quite privileged in the sense that they have three IPO locations they can choose from.
I just want to point out that a few bad factors do not sour the whole market. Overall, I think there are a lot of very good Chinese entrepreneurs trying to do the best and to build the success stories we hear about.
(*The Enron scandal, publicized in October 2001, eventually led to the bankruptcy of the American energy firm Enron Corporation. At Enron’s peak, its shares were worth $90.75; when the firm declared bankruptcy on December 2, 2001, they were trading at $0.26.)
In recent two years, we have seen the market valuation of many newly-listed Chinese companies far from expectation, sometimes even lower than the valuation endorsed by investors in the primary market. Do you see investments at an earlier stage becoming more attractive to investors in China than before?
Every firm has its own strategy and sometimes they may have to change it. Qiming has always been focused on Series A and B round.
I think the reason why you saw a lot of late-stage investors coming in before the IPO is that a lot of public market investors became more attracted to pre-IPO companies and the primary market. Because everybody is chasing yield, yet we live in a low-yield environment. To them, pre-IPO might be more attractive than investing after the IPO, which means that a lot of late-stage companies had pretty good valuation uptick and didn’t have to go public compared to maybe 10 or 15 years ago.
I think – with this downturn – you’ll see that a lot of excessive valuations are being squeezed out. So probably a lot of late-stage companies will retreat from the market. In the whole VC cycle that we’ve seen, this is often like “a pendulum” that swings backward and forward. But I think it is important for every firm to understand what’s their own investment strategy and to stick to it. They will probably do better if they stick to it.
According to Bain & Company, deal value in Chinese tech and internet assets dropped 42 per cent last year to $30 billion and return multiples in the New Economy fell to a median of 2x (times) from 2017 to 2019, compared with 4x for investments exited the previous three years. Are you also seeing the same depreciation of Chinese tech and internet companies? How has it influenced Qiming’s investment strategies?
There used to be a push for growth at all costs, overlooking fundamentals like the unit economics** of the business model. That led to companies being valued, probably, excessively and not in line with their fundamentals.
I think we will see a reversion of that. Qiming will also stay away from companies that have excessive burn rates and lack of strong unit economics.
(**Unit economics is defined as the direct revenues and costs associated with a particular business model and are specifically expressed on a per-unit basis. Unit economics are often seen as the fundamental or basic financial building blocks of a business.)