Hong Kong-based MindWorks Capital – an investor in HK-based logistics firm Lalamove and Taiwan-based travel e-commerce platform KKday – is seeking to tap commitments from limited partners (LPs) in the US for the first time through the launch of its Fund IV in H1 2021.
MindWorks Capital is targeting to raise $150 million for Fund IV with a hard cap of $200 million for investment opportunities in Greater China and the pan-Asia region.
“People are always looking for emerging fund managers, although a lot of LPs are unable to conduct site visits this year due to travel restrictions and thus opt to re-up commitments to their existing GPs,” said David Chang, co-founder and managing partner of MindWorks Capital, in an interview with DealStreetAsia.
“Interest in our Fund IV has been high,” he said. “I have not seen any slowdown of US-based LPs investing in the venture capital asset class in Asia.”
By far, the total market value of MindWorks’ shares across all portfolio companies has amounted to $714 million.
Chang co-founded MindWorks Capital in 2013 with Joe Chan after they returned from Silicon Valley to a domestic environment in which Chang says there was only “a small trickle” of Chinese tech firms going global – a trend that has grown to become a major theme for Chinese tech startups nowadays.
After seven years in, MindWorks Capital has made itself ready to take on US-based pension funds, university endowments and other LPs, after the past seven years of raising capital from an LP base of largely family offices, funds of funds (FOFs), and asset managers in Europe and Asia.
Its existing LPs include Hong Kong’s Innovation and Technology Venture Fund (ITVF), a HK$2-billion fund created by the Hong Kong government in 2017 to co-invest with VC funds in local innovation and tech startups. ITVF committed $50 million to Fund IV.
“Being situated in Hong Kong with a pan-Asia strategy, MindWorks’ China-Southeast Asia investment layout really resonates with a lot of US LPs’ preference of not allocating all their capital to the Chinese market,” said Chang, adding that the firm invests about 70 per cent of capital in Greater China while deploying the rest 30 per cent to Southeast Asia.
Chang said that most of the greatest tech companies nowadays are international companies with operations “across borderlines.” Hong Kong, thanks to its proximity to mainland China and Southeast Asia, is “a natural stepping stone” for the next multi-billion tech startup to go international.
Through Fund IV, MindWorks Capital plans to invest in 15 to 20 companies, with a total investment size of about $10 million into each startup including capital being reserved for their follow-on rounds. It has closed nine deals so far this year, including six into existing portfolio companies.
“Emerging VCs can offer better co-investment rights and investment exposure compared to managers of billion-dollar funds,” said Chang. He continued that mega-funds could easily miss out on opportunities at Series A and Series B stage, which is when investors can really build “invaluable, close relationship” with founders.
Edited excerpts of the interview with David Chang:
How has this year been for you in terms of portfolio management and new capital deployment?
At the beginning of this year, COVID has led to panic among all investors. MindWorks was extremely hands-on in monitoring all portfolio companies on a weekly basis to make sure that they had all the resources they needed, tracking their KPIs and other metrics.
Towards the middle of 2020, we realised that COVID actually boosted digitalisation and accelerated a lot of our portfolio’s businesses. COVID is certainly a tragedy to humanity, but it has forced the adoption of solutions offered by tech companies, especially the ones that we focus on, including B2B, B2C, and enterprise platforms.
For example, International Compliance Workshop (ICW), a compliance management platform that helps companies like Walgreens and Disney to source qualified and certified producers in China, saw a huge uptick in businesses when their clients’ purchasing departments cannot travel to China or visit factories during the pandemic. Qupital, a fintech platform that focuses on cross-border e-commerce financing, also had substantial growth as people stay online to purchase and firms like Amazon do phenomenally well.
What about the investment side? How much capital have you deployed since the beginning of this year?
MindWorks has closed nine deals so far this year, including six into existing portfolio companies. We also have a few deals in the closing stage, including an investment into a Chinese pharmaceutical digital transformation service provider, and another transaction into an international cross-border e-commerce logistics firm.
In Q1, I sent out a note to all my staff to pause investments, and we were also holding back and not really making any deals in Q2. What happened in Q3 was that we saw an obvious [economic] rebound in China and the overall Asian market, so we started deploying capital right at the beginning of Q3.
The number of new funds launched by Chinese PE and VC players has reduced by 11.8 per cent in the July-September quarter of 2020 compared to the same period of 2019, according to CVSource, as risk-averse LPs concentrate firepower on top-notch fund managers, leaving smaller investors to struggle to raise capital. How is your conversation going with potential LPs as you’re planning to launch Fund IV in H1 2021?
We’re working with US-based placement agent Eaton Partners to pre-market the Fund IV towards LPs in the US for the first time. Our first fund (launched in 2013) has significantly outperformed most funds worldwide with 19.3x DPI and a net IRR of 50.3 per cent. Fundraising is always hard, but we’re confident in closing the new fund.
People are always looking for emerging fund managers, although a lot of LPs are unable to conduct site visits this year due to travel restrictions and thus opt to re-up commitments to their existing GPs. But interest in our Fund IV has been high. We’re in a pre-marketing process, and once the market opens up – hopefully in Q1 2021 – we will be able to secure capital commitments from [agreed] LPs and get the due diligence done with the others.
The total market value of our positions across all portfolio companies currently amounts to $714 million. By far, we have fully exited from Dianrong (a Chinese P2P lending service) and Dolphin Browser (a web browser for the Android and iOS operating systems) through a trade sale and an acquisition by a listed firm. We have also sold part of our stake in Lalamove (a Hong Kong-based on-demand logistics services provider).
Our portfolio firm ecMax (a digital retail and e-commerce solutions provider in China) is on track for a STAR Market IPO that could happen as early as Q3 2021.
You mentioned that the fundraising of Fund IV is the first time MindWorks will tap American LPs. For your previous three funds, what are the proportions of LP commitments across regions? As a Greater China-focused pan-Asian fund manager, do you think geopolitical uncertainties could somewhat diminish the attractiveness of your new fund to US investors?
The bulk of our LPs in the previous three funds are family offices, funds of funds (FOFs), and asset managers in Europe and Asia, including Hong Kong’s Innovation and Technology Venture Fund (ITVF).
In terms of the potential influence from US-Sino tensions, I have not seen any slowdown of US-based LPs investing in the venture capital asset class in Asia.
Meanwhile, being situated in Hong Kong with a pan-Asia strategy, MindWorks’ China-Southeast Asia investment layout really resonates with a lot of US LPs’ preference of not allocating all their capital to the Chinese market. Our core thesis, which has remained unchanged since we started MindWorks in 2013, is to spend about 70 per cent of capital in China, while deploying the rest 30 per cent to Southeast Asia.
We always see tech, especially Asia tech, using a pan-Asia approach. Because, firstly, most of the greatest and best multi-billion tech companies in the world are international companies. Secondly, Hong Kong – thanks to its proximity to Southeast Asia – is a natural stepping stone for Chinese companies going outbound.
Thirdly, when we founded MindWorks in 2013 as a second-generation VC, we knew the trend of tech companies going global had been dominated by western players like Google in the past 30 to 40 years. It is only in the recent five to 10 years when a small trickle of Chinese tech companies started going global, such as TikTok and our portfolio firm Lalamove. This small trickle is certainly just the beginning of this mammoth wave of companies going outbound, and it will only accelerate. Headquartered in Hong Kong with offices in Beijing and Jakarta, MindWorks is positioned right in the centre of this juncture when the small trickle would turn into an inevitable trend.
If the COVID continues and the Southeast Asian market remains in lock-down mode, we will strictly focus on China out of our de-risk concerns. I have visibility in China in terms of where my capital goes into and how it works because the country has recovered from the pandemic. But in Southeast Asia, I cannot predict when the market will normalise and when my investment will start creating value. Since COVID, we have re-upped capital in some of our existing portfolio firms in Southeast Asia.
Which are your focus markets in Southeast Asia?
We see Southeast Asia as a whole because our investment is country-agnostic. Our investment style is also not restricted to certain verticals since I believe tech should always be dynamic and quickly evolving. All the great Southeast Asian companies that are able to scale are always across borderlines.
Consumer-oriented businesses have gained traction amid changing consumer behaviours since the outbreak of the coronavirus pandemic. MindWorks has invested in fresh produce e-commerce brand Meiri Youxian and virtual reality gaming firm SandBox VR. Could you share your strategies in the sector and your insights into how Chinese consumer-focused businesses and services will develop post-COVID?
Domestic consumption in China is rising with consumers’ growing emphasis on high-quality, high-standard services and products, so all consumer businesses that we invest in must fit in these consumer demands.
We’re seeing the emergence of local consumer brands developing in a way that could eventually dominate the local market in China. Gone are the days when Chinese domestic brands were associated with low quality. Last year, some of the best-selling products on the country’s e-commerce platforms are produced by home-grown companies. A group of new local brands is also coming up, as people get more receptive to how new brands promote their products through platforms like Kuaishou and TikTok to target new-generation consumers. Existing and pre-existing companies may find it hard to adapt to [these new online promotion and sales channels].
MindWorks will focus on new consumer brands and platforms, seeking to either work with brand operators, or multi-brand assets owners, or companies in the cross-border distribution field. Chinese consumer electronics products have already won over many global consumers through the success of companies like Xiaomi. What I’m seeing is that the country’s consumer brands in areas like fast fashion, clothing, and part of FMCG (fast-moving consumer goods), could also go global in the next five to 10 years after they dominate the domestic market. That’s why a lot of our portfolio companies like XTransfer, Inteluck, Qupital, and ICW are facilitating this big picture of cross-border e-commerce.
At the end of the day, China is still the manufacturing hub of the world and it is able to move faster than any other producers worldwide. I believe new consumer brands will keep emerging, and their market expansion will be much easier nowadays than 10 years ago because of the Internet.
How much capital are you looking to deploy across different industries in Q4 and 2021?
We usually divide our focused industries into enterprise-oriented and consumer-oriented tech. At least 70 per cent of our capital will be invested in enterprise-focused tech startups, which includes players in the fintech, logistics, and cross-border segments.
How many startups are you planning to invest in using capital from Fund IV, and how much into each transaction? Are you always granted a seat at the startup’s Board given the size of your investment?
We’re targeting to back 15 to 20 startups via Fund IV, with a total investment of $10 million into each startup including capital reserved for their follow-on funding rounds. We will always reserve some dry powder in case any of our portfolio companies need money to finance their growth development. This ensures them not to have to waste time raising capital in the market.
In Greater China, the emphasis is on seeking innovative and disruptive tech companies, typically at Series A; while in Southeast Asia, the emphasis is on investing in proven business models from the West and China, typically at Series B.
With a size of $10 million investment into each startup, we’re aware that it could be hard to secure a seat at the startup’s board, but we will fight for it. We also look to invest in earlier-stage companies that we can have the leverage to [help with their development]. We target an average duration of five years to exit from one investment.
For the sectors you have looked into since the inception of MindWorks, has anything changed in the past few years as certain sectors may have gained more prominence while others lost attractiveness in Greater China and the overall Asian market?
C2C (customer to customer) was something that we looked into but decided not to invest in. China’s C2C market is overcrowded, and players require too much cash burning. Companies like “nice” and “Poison” (*Both are second-hand sports shoe trading platforms in China) are so popular among consumers with great numbers in GMV (gross merchandise volume), large market shares, and well-known brands, but it’s just hard for them to turn a profit. During COVID, I think global investors’ mentality shifted a little to focus more on net profit margins and net EBITDA.
Another sector that we stopped looking at is the field of usually asset-heavy operators of co-working and co-living space, even for companies like RedDoorz and Oyo. We had taken a deep dive into the sector and had studied multiple players for about five months. Our conclusion is that it’s not a highly-scalable business in China. There is an oversupply in China of co-working and co-living space, as well as long-term rental apartments. Competition in the market is too fierce with most players being involved in a subsidy war.
We also stopped looking at players in the edtech space.
Greater China’s IPO market has been doing extremely well this year. Do you think we are looking at some level of froth in the public market since there is a large variance in some newly-listed firms’ after-market performance? Has it influenced the valuation level in the private market?
If there’s a froth, it is a global froth across all tech valuations. It is common because everybody is trading high – not just in Greater China, but also in the US and worldwide. I think this trend of high valuations of stocks will continue for a while, potentially due to the tech adoption driven by COVID, a huge amount of QE (quantitative easing) policies, and Beijing’s financial market reforms. Tech valuations have been high for years, but this level of low interest and large-scale money printing will continue to accelerate, or at least, sustain this IPO market boom.
High valuations on the IPO market may have affected late-stage PEs, but not VCs. In fact, I think investors are more cautious on higher-risk VC investments, especially during COVID. We care more about profit margin-focused companies, instead of companies with high cash burn rates.
How do you assess the geopolitical risks while making a new investment?
We always assess all aspects of risks while making a new investment, including geopolitical risks, systematic risks, and company risks. It depends on the specific business and its business model for us to decide how much the geopolitical risks could play a part in it. It is more important for us to consider geopolitical risks if it is a deal in the fintech or cross-border payment sector because this kind of business needs to comply with local regulations. That’s why I like logistics so much because all countries and industries need it. It’s irreplaceable.