Despite the adverse impacts of the coronavirus crisis, GGV Capital has enjoyed a handful of initial public offerings (IPOs) of its portfolio companies, in which the global venture capital firm still owns shares worth about $1.5 billion.
To break down the numbers further, as many as six of its portfolio companies have hit the bourses to rake in capital since the fourth quarter of 2019. The most recent ones include Xpeng Motors’ $1.5-billion IPO on the New York Stock Exchange (NYSE) and BigCommerce’s $216-million Nasdaq IPO.
|Headquarters||Company||Date of listing||IPO location||Funds raised||Business|
|Zhuhai||WPS/Beijing Kingsoft Office Software||2019-11||STAR Market||4.5 billion yuan ($659 million)||Kingsoft Offce is best known for its WPS Office software, a free alternative to Microsoft's software suites including Word and Excel.|
|Guangzhou||Ehang||2019-12||Nasdaq||$40 million||Ehang Holdings is a Chinese developer of autonomous drones.|
|Boston||DraftKings||2020-04||Nasdaq (Through a blank-check company, Diamond Eagle Acquisition Corp)||N/A||DraftKings is a daily fantasy sports contest and sports betting provider.|
|Shanghai & Santa Clara, California||Agora||2020-06||Nasdaq||$350 million||Agora is a real-time engagement API provider.|
|Austin||BigCommerce||2020-08||Nasdaq||$216 million||BigCommerce sells small and medium-sized businesses software that enables them to create and manage e-commerce websites.|
|Guangzhou||Xpeng Motors||2020-08||NYSE||$1.5 billion||Xpeng Motors is a smart electric vehicle maker that now markets a four-door sports sedan and a SUV under the Xpeng Motors brand.|
“This year has been a bit of a roller coaster ride,” Jixun Foo, managing partner at GGV Capital, told DealStreetAsia in an interview. “The stock market demonstrated a fairly dramatic reaction … The whole market – the tech market in particular – is hitting the roof.”
The technology sector of late has been witnessing significant traction with the pandemic prompting companies to adopt digitisation across the world.
“Obviously, there is a lot of euphoria. But digitisation behind small and medium-sized enterprises and their consumers is real. That’s why the market is kind of paying ahead,” said Foo.
The sector has been staring at a fierce competition as risk capital investors jostle to clock the right deal even as valuations maybe a tad high.
That probably explains why the market is “rewarding” players who are promoting the digitisation process, he said. Take Xpeng Motors’ stock price for instance. It jumped over 40 per cent on its debut date of trading on August 27.
Foo is one of the six managing partners leading investment efforts at GGV Capital, that manages a total of $6.2 billion across 13 funds.
Each year, the firm deploys around 80 per cent of an investment budget of about $600 million in China and the United States. The remaining is invested in emerging markets in Southeast Asia, India, Latin America, and Israel.
Last week, GGV Capital was looking at a new deal in India. The China-India standoff “doesn’t deter us from looking at India….. In fact, the withdrawal of Chinese capital is actually good for us because it makes us even more competitive in India,” said Foo.
GGV’s portfolio companies in China include prominent names such as Baidu, Boss Zhipin, Xpeng Motors, and Didi Chuxing. Meanwhile, in SEA and India, it has investments in Grab and Udaan, among others.
Edited excerpts of an interview with Foo:
How has this year been so far for GGV compared to the virus-free year of 2019?
This year has been a bit of a roller coaster ride. We started this year on a fairly good note until the COVID-19 (crisis) hit Wuhan and later across China and then, the rest of the world. The stock market demonstrated a fairly dramatic reaction as well. Earlier, a couple of trillions of US dollars were being pumped into the economy, the whole market – the tech market in particular – is hitting the roof.
GGV’s portfolio kind of mimicked that cycle. Our portfolio companies have recovered around June and July, about four to five months post-February, with some of them doing even better than before because of the [accelerated] digitisation [process] on parts of the consumer and enterprise.
We see a strong recovery, which is also reflected in the valuation of our tech companies. For example, one of our portfolio companies in the US called BigCommerce launched its IPO three to four weeks ago and its valuation has gone up six times in the past few weeks. Obviously, there is a lot of euphoria. The digitisation process behind small and medium-sized enterprises and their consumers is real. That’s why the market is kind of paying ahead.
GGV has had six IPOs since Q4 2019 till now. The six IPOs combined have generated about $1.5 billion in liquid value [total market value of GGV Capital’s shares] for us.
We’ve been through a low point in late February and early March. And now we are at a high point. Having said that, we’re obviously operating in a very difficult and uncertain environment caused by geopolitical tensions and the COVID-19 impact.
What about your investment strategies during the period? Are there any changes in GGV’s dealmaking frequency and average deal size?
What it [the pandemic] has done is what we call “accelerated digitisation of the economy.” The whole digitisation effort drives up the valuation of some of our existing portfolio firms, leading to new fundraising opportunities. In terms of deal flow, there are a lot more deals coming in naturally because of the [heightened] valuation. It does translate into excitement and more entrepreneurs wanting to do things.
We look into deals across the early and late stages. I just had our weekly meeting… I must say that the competition on deals is pretty intense because all forms of capital are pouring into tech right now, even for [the types of] capital that used to look more into non-tech.
GGV recently made an investment in Copenhagen-based edtech startup Labster and we heard that the deal was done entirely online. How does it work to make the final call by just getting to know a new company and completing the due diligence online?
Labster is a very early-stage company. Obviously, we’ve engaged third parties like lawyers and accountants to complete verification and confirmatory due diligence on the firm’s legal structure, finance, and other aspects.
But for most early-stage companies, a lot of due diligence is centred around the team and their business direction. Due diligence is done mostly by references, leveraging the connections we have. What gets more difficult is when you have to write a $30-million or $50-million cheque. In that case, it’s more likely we’ll have to be on the ground.
This year, is GGV betting on more new startups, or more follow-on rounds as tech valuations have gone up?
I don’t have the specific datapoint or ratio now. We are investing about $300 million every half a year, so about $600 million per year. My best guess is that the ratio for new deals and follow-on deals is attractive even this year.
The ratio could shift up and down a little bit depending on the time, at either 40-60 or 60-40 in percentage for new deals versus follow-on deals. But I will say it’s still pretty even because there haven’t been any dramatic shifts.
You invested in Xpeng Motors whose stock performed extremely well in a $1.5-billion New York IPO. Why did Xpeng go public at a time when many of its Chinese peers have developed cold feet to list in the US?
NIO went public about two years ago (September 2018), while Li Auto got listed about one month earlier (July 2020). Xpeng started preparing for this IPO since 2019, so we’re just keeping pace.
The reality is that the market is rewarding again, [with] the whole digitisation of the economy. Emerging companies like Xpeng are [developers of] more than just EVs (electric vehicles), but also smart cars, which will become much more intelligent with semi- or even more autonomous driving functions, better user interface, and more affordability. That’s the kind of story that we’re telling.
Tesla, whose market capitalization recently topped $400 billion, sold about 25,000 cars in around 2014 and 2015. That is the sales target for Xpeng this year. Just to frame that perspective – between [Xpeng’s] $15 billion and $400 billion – there is still a lot of room for Xpeng to develop.
To draw an analogy: Today’s smart vehicles are like the first generation of Apple’s iPhone. Apple’s first-generation was very basic with little smartness, other than it’s a combo of phone and iPod. But it represented a smartphone evolution that everyone wishes they could have invested in. I think that’s how investors are kind of framing it.
Within your portfolio, are you seeing China-based companies’ appetite for a US IPO grow weaker as new and potentially more tightened listing rules are in the fray?
Possibly. It all comes down to the actual implementation… of what they [the US government] said, as well as how and when they will proceed with it.
The other thing is that China is opening up with the introduction of the STAR Market. It is going on a registration-based IPO rather than an approval-based IPO. Many of the companies I know are looking at multiple markets – Not just the US and mainland, Hong Kong is another option. We are seeing Ant Group seek for an A+H IPO (a dual-listing on the STAR Market and the main board of the Hong Kong Stock Exchange).
Is any of your Chinese portfolio firms having a second thought about its IPO location?
Yes, there is. America’s tightening listing rules are part of it, but the reality is that the Chinese capital market has been quite rewarding as well. One of our portfolio companies, WPS (Beijing Kingsoft Office Software), got listed on the STAR Market last November and is now trading at 150 billion yuan, equivalent to about $20 billion to $23 billion.
My point is – yes, there are more restrictions [in the US stock exchanges]. But a lot of our portfolio companies are considering the STAR Market anyway, even before the restrictions were first mentioned.
How far is China’s STAR Market from growing into a market as recognised and attractive to IPO hopefuls and investors – not only domestically but also internationally – as America’s Nasdaq?
Internationally, China’s STAR Market is still quite far from there; Domestically, I would say they’re more than halfway through.
Time will tell because it’s still too early to say right now. It’s been one month since investors in the first batch of IPOs on the STAR Market came out from their lockup periods. It will take some time for the market to go through a selection process to see good companies emerge and bad companies go down the list.
I think what the STAR Market is trying to do now is quite smart. They’re trying to attract the best companies to come back for a listing and Ant Group is just one of them.
What are the major improvements you would suggest for the domestic IPO market to retain homegrown technology companies?
Well, there are many things [to improve]. Right now, it’s not a completely market-based approach, but more of a rule-based approach with five to seven different classes of criteria for companies [to follow in order] to get listed on the STAR Market. Secondly, an IPO market is essentially a financing channel that needs to provide issuers with continuous financing options. How to create a market with more derivatives over time is another factor to consider.
The US market is very sophisticated. It is a completely market-based IPO location that offers many derivatives and refinancing options for companies.
Certain guidelines and constraints are important to help the capital market to do well and to filter out bad companies. But at the same time, what you really want is optionality and flexibility.
From the perspective of an investor, what do you consider as the major measurements to help your portfolio decide a listing venue?
I think the US is still a primary choice for many companies involved in enterprise SaaS (Software-as-a-Service), cloud, and high-growth tech businesses, while companies that develop more sensitive technologies like semiconductor, AI, and public security will probably prefer a listing in China. China is welcoming these companies, including those in the drug discovery field.
Hong Kong continues to be an option for their dual listings, like what Alibaba did. If the US-China [relationship] really goes south, some of the US-listed Chinese companies may choose to delist themselves from the US and keep on listing in Hong Kong.
What is your view on the current challenges in India? GGV has been an active investor there. But as Chinese investors are not really welcome there, how will the market shape up? Do you see a part of your capital that should have been committed to India going elsewhere?
First of all, GGV is a global fund that started in Singapore and Silicon Valley. The US and China have been our major markets where we invest and derive most of our value. We foresee that 80 per cent of our capital will be in the US and China, while about 15 to 20 per cent, or 10 to 15 per cent of capital will be outside of the two economies, in areas and countries like Southeast Asia, India, Latin America, and Israel.
That [the China-India standoff] doesn’t deter us from looking at India. Hans (Hans Tung, managing partner at GGV Capital) was just looking at a new deal in India last week. In fact, the withdrawal of Chinese capital is actually good for us because it makes us even more competitive in India.
Another important thing is that GGV is theme-driven, rather than region/market-driven.
While early-stage investments are picking up, scaling is often a problem with startups in India. Investors often seem to pull their purse strings when it comes to dolling out growth capital. What is your view on this?
For growth capital to win in India, it will need to identify the right company solving a problem that is big enough to influence the economy of the nation. It requires patience and precision.
For Southeast Asia, you had set up an office in Singapore and had mulled over a separate fund in the region. Any updates on it?
We are not thinking about a separate fund at this juncture.
The thing about a separate fund is that you need to have a separate team locally. But we’re not structured that way. We have only one team where we have aligned our interests among partners and have shared the common economy.
Broadly, you said GGV invests about $600 million every year. Given that you have raised new funds worth about $1.88 billion in 2018, I’m assuming that you’ve spent about 60 to 70 per cent of that capital in the past one to two years. Does that mean you’re in the market for several new funds?
Our last funds were raised in 2018 and started investing in 2019, so we’re just about 50 per cent into the funds. We still have some window before we start raising again. But I think if we do, it will be done quickly.
Among the funds that you’ve raised in 2018, there was an Entrepreneurs Fund where many entrepreneurs became LPs. How has that process been? Any examples you can share?
We’ve known many of these entrepreneurs for a long time, including Robin Li (co-founder and CEO of search engine giant Baidu) and Zhang Tao (founder of Dazhong Dianping, a restaurant review platform merged with Meituan to form Meituan-Dianping in 2015). We leverage our relationships from time to time. We’re having ongoing conversations with them, so I can’t really share any specific examples.
This is not a relationship in which they put money with us, and we try to make money for them. It is a relationship to stay connected.
The new sectors to watch out for growth after the COVID-19 crisis.
Not any new sectors per se, as we’re already looking in these areas before. But there’s [an] acceleration in edtech, telemedicine, contactless payment, and foodtech.