LPs now view China as ‘biggest venture market’ outside US: James Mi, Lightspeed China

James Mi Qun, founding partner of Lightspeed China Partners

Having deployed nearly $2 billion since it started investing in China, Lightspeed China Partners is looking to further step up investment efforts as global LPs, even those in the US, are piling in to commit to the country’s top fund managers despite continued geopolitical uncertainties.

Lightspeed China, an early investor in Chinese e-commerce firm Pinduoduo, has already completed 14 investments since January till now compared to only two transactions in the first quarter of 2020 when the Chinese market took a serious hit from the COVID-19 pandemic.

Founding partner James Mi told DealStreetAsia during an interview that Lightspeed China expects to close more deals this year, especially in enterprise services and deep tech, while taking on more limited partners (LPs) as interest in China portfolios is flying high.

“Although trade frictions persist, all top institutional investors are looking at China as the biggest venture investment market outside the United States, much bigger than any other markets,” said Mi. “It’s getting to the scale that can rival the US market in terms of producing unicorns and generating very high returns among top China VC funds.”

“The interest level is significantly intensified from top US institutional investors to invest in Lightspeed China’s funds, particularly in the past one year or so,” he said.

Lightspeed China, which spun off from Silicon Valley-based Lightspeed Venture Partners in 2011, manages over $2 billion across seven US dollar funds and an RMB-denominated fund from its China headquarters in Shanghai, as well as offices in Beijing and Hong Kong.

The firm’s latest fundraise was back in January 2019, when it gathered a total of $560 million for Lightspeed China Partners IV to back early-stage technology startups, and growth stage-focused Lightspeed China Partners Select I. The combined size of the two funds was later boosted to over $600 million.

Even in 2020, at the peak of the pandemic in China when fund managers largely remained on the sidelines, its global team moved ahead to raise $1.5 billion for Lightspeed Opportunity Fund to double down on winners in its international portfolio, including a rising proportion from China.

Globally, Lightspeed also invests across markets including North America, Europe, India, Southeast Asia, and Israel with over $10.5 billion in total committed capital.

According to investment data provider CVSource, the total capital commitments into newly raised private equity and VC funds in China decreased 2.8% to $451.8 billion – the same level as that of 2015. The number of new PE-VC funds in the country also reduced for the third consecutive year, by over 4.6% in 2020 compared to one year before.

Lightspeed China, alongside counterparts like Qiming Venture Partners, Gaorong Capital, and DCM Ventures, were some of the few investment firms in China to have successfully stocked up more ammunitions last year when LPs worldwide became more risk-averse in a market downturn.

“Their [LPs’] biggest challenge is actually how to get into the top funds [in China], which is a much smaller set compared with that in the US,” said Mi.

China’s startup ecosystem has come a long way from 2008 when Mi just left Google China – which he had built from scratch – to start off a new journey in venture investments with Lightspeed. China is now the second-biggest source of unicorns or privately held companies with a valuation of at least $1 billion. The country hosts 119 unicorns as of November 2020, following the US with 242 unicorns. Collectively, the two countries nurtured 72.2% of unicorns globally, according to US research firm CB Insights.

“If you look at opportunities, years around 2008 were the ‘golden time’ for consumer Internet in China. I think opportunities still exist in the consumer Internet. But more are now rising from enterprise services, and increasingly from technology, especially deep tech,” said Mi.

Edited excerpts of the interview with James Mi, founding partner of Lightspeed China:

Lightspeed China recorded over $2 billion in total AUM across seven US dollar funds and one RMB fund as of October 2020. How much capital has the firm deployed since it started investing in China in 2006?

By far, we have deployed close to $2 billion in startups predominately headquartered in China or somehow related to the Chinese market.

Lightspeed China’s most recent fundraise was in April 2020, when the team worked with Lightspeed US and closed $1.5 billion for Lightspeed Opportunity Fund. Do you have any plans of raising a new fund in the coming months?

We raise funds on a regular basis, and our funds are usually heavily oversubscribed. But we don’t publicly disclose fundraising plans due to regulatory requirements. Our limited partners (LPs) include sovereign wealth funds, university endowments, foundations, and pension funds that are well represented globally. They compose the bulk of our LP network.

Based on your conversations with LPs, what do you think of US-based LPs’ overall investment sentiment around China-based GPs & China portfolio amid US-China frictions around trade, and increasingly, around tech?

The interest level is significantly intensified from top US institutional investors to invest in Lightspeed China’s funds, particularly in the past year or so.

Although the trade frictions persist, all top institutional investors are looking at China as “the biggest venture investment market” outside the United States, much bigger than any other markets. It’s getting to the scale that can rival the US market in terms of producing unicorns and generating very high returns among top China VC funds.

For those who used to have limited exposure to China’s venture investment, they are all increasing allocations. Their biggest challenge is actually how to get into the top China VC funds, which is a much smaller set in China compared with that in the US. LPs would have different approaches. Some would try to build a relationship years earlier and maintain it to eventually find an opportunity to invest, while others are large-scale institutions that would finish due diligence by themselves even before we start fundraising.

In the meantime, we are also expanding our product offerings to cover not only early-stage funds for Series A and Series B investments but also growth-stage funds where new LPs can participate. As we evolve, we added new offerings like growth-stage funds and Global Opportunity Funds to capture more investment opportunities and take on additional LPs because the demand is too strong.

How many deals did Lightspeed China complete in 2020? What is the investment scale you are targeting for this year?

We completed over 30 investments in 2020. We don’t have any particular target numbers for this year, but we expect to close more investments. Due to the impact of the COVID-19 pandemic, we only made two investments in the first quarter of 2020, while we already completed 14 investments since January till now (March 22, 2021).

Also, congratulations on the listing of QingCloud on the STAR Market on March 16. It really came at a time when IPO candidates on the mainland seem to be facing a tightened scrutiny from the local regulator since the start of 2021.  What does that mean to your portfolio looking for a domestic listing this year? Are some of them having a second thought because of this?

In a long term, domestic listings through the STAR Market and the ChiNext board will continue to grow and become more important exit venues for VC companies, in addition to stock exchanges in the US and Hong Kong.

But just like any other stock market, the A-share market has its own IPO flow and market windows. It is a registration-based system [on Shanghai’s STAR Market and Shenzhen’s ChiNext board], but the process still requires approval [from the regulator].

Nowadays, a domestic listing takes a longer duration, partially because of the large pool of companies that have filed IPO applications since the STAR Market debut (in July 2019). Many companies are still in queue for a listing, and not each one of them is fully up to the listing criteria, so it is natural that the waiting time for approval would extend.

I think IPOs by Chinese companies in mainland China, Hong Kong, and the US will remain robust this year. Companies will choose listing locations depending on their own circumstances. For our portfolio companies at Lightspeed China, I think we would see more IPOs this year compared to 2020. These IPOs could take place in the US, Hong Kong, as well as mainland China despite the recently prolonged approval time.

From an investor’s point of view, do you think the A-share market has evolved enough to rival Nasdaq and the New York Stock Exchange (NYSE)?

It’s already at that level, but definitely growing fast in terms of the size of the A-share market and liquidity. It is substantial compared with Nasdaq or NYSE.

But I think, in an ideal world, each market has its own strengths. Hong Kong – once dominated by large-scale, traditional IPO issuers – is evolving to also host the listings of Tencent, Xiaomi, as well as Meituan – a portfolio of Lightspeed China. I think stock exchanges in all three regions are viable, and there is always a choice for bigger companies.

Could you share a bit of your journey before leading Lightspeed China? What opportunities you saw back then that motivated you to become a venture capitalist?

I had spent seven years at Intel’s headquarters in Silicon Valley doing semiconductor chip design and product R&D, until 1990 when I had an opportunity to join Google as employee No. 30. But I made a “not-so-wise” decision to turn them down and started my own startup iTelco Communications. The startup raised $8 million in a Series A round from Draper Fisher Jurvetson (DFJ) – the very first global venture fund in the US that also invests in China.

But Google was pretty persistent. They eventually convinced me to join them in 2003. I was tasked to build Google’s China operation from scratch. As the first chief representative of Google China, I set up the business operation, got the local license, and built a team – while along the way – invested in emerging local tech companies like Baidu, Dianping (which was merged with Meituan in 2015 before growing into a food delivery giant in China), and Ganji, all on behalf of Google.

Before I started to do VC work at Lightspeed in 2008, I really had seen opportunities in early-stage tech startups in China. I wanted to build a VC practice. But at that time, Lightspeed was mostly focused on the US while only investing in China out of its global fund. So, I made an agreement with the team in 2011 to spin-off and create Lightspeed China, which allowed us to make investment decisions locally in China. That move helped us grow more competitive with a China-focused team, as well as global resources, knowledge, and insights. Since then, Lightspeed has also branched out to cover markets in India, Southeast Asia, and Europe.

I think when I started my venture investment journey back in 2004, it was a very early stage when not many funds were looking at China. But today, the ambition of the best entrepreneurs in China is not just to be the top company domestically, but also to offer something to the global market. As many top Chinese companies are expanding globally, the Lightspeed platform can offer a unique value to be their global partner.

If you look at opportunities, years around 2008 were the “golden time” for consumer Internet in China. I think opportunities still exist in the consumer Internet. But more opportunities are now rising from enterprise services, and increasingly from technology, especially deep tech. It is an evolving investment landscape. The need for enterprises to be online, digitalised, and efficient have accelerated since the pandemic hit, while China’s deep tech is also catching up with America’s.

Under your focused areas of consumer Internet, enterprise services, and deep tech, what segments do you expect to show more traction this year? 

[I think it would be] the sector related to both deep tech and green technology. It is China’s clean energy, which historically relied on government subsidies until the market demands innovations to help address challenges in global climate change and meet the [pollution reduction] goals set by different countries. EV (Electric vehicle) is a sub-sector of it.

Globally, Lightspeed manages over $10 billion and invests in North America, Europe, India, Israel, and Southeast Asia. How does the global team create synergies for portfolios in China?

We constantly have discussions with teams across other regions to pick each others’ brains before making new investments. In 2014, Lightspeed China invested in InnoLight, a Chinese provider of high-speed optical transceiver modules for web-scale data centres supporting cloud computing.

They started in China and eventually became a global leader serving clients like Google, Amazon AWS, AliCloud, and Facebook. We helped them expand into the US market by leveraging our global resources to make business introductions and to design their go-to-market strategies.

China has moved on from the previous years of copying successful models from Silicon Valley to a global technology bellwether whose models are being adopted by markets elsewhere. From your point of view, what are the China stories that you think will continue to be employed by the global market?

InnoLight is a good example of it. The company is now listed in China (on the Shenzhen Stock Exchange) with over $1 billion in annual revenue. Its products, which present a product quality and R&D level even higher than counterparts in Silicon Valley, really address critical needs for cloud computing data centres.  Another Lightspeed China’s portfolio, Hesai Technology, develops highly complicated Lidar technologies for autonomous driving with global customers like Bosch and Aurora.

Companies worldwide are looking for the best products from Silicon Valley, but increasingly from China where firms provide cutting-edge capabilities in not only R&D but also advanced manufacturing. This gives them a sustainable competitive edge.

We’re also seeing some of China’s consumer-facing deep tech products, such as ByteDance’s TikTok, tapping the global market. But it may not be as easy because many geopolitical factors are getting in the way.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.