The Alibaba tale attracts more VCs to China: VCJ

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In 2002, former English language instructor Jack Ma was struggling to find the cash required to expand his fledgling Hong Kong e-commerce site.

Ma, who was running the business out of his apartment in China, knocked on a lot of doors until Thomas Ng, the Asian-based co-founder of GGV Capital, came to his rescue with an $8 million infusion.

Now GGV is poised to become the grand prize winner when shares of Ma’s juggernaut, the Alibaba Group, begin trading in the U.S., most likely after Labor Day.

Pundits say Alibaba could float as many as $20 billion in shares in its debut, one of the biggest IPOs ever, and generate a market value of up to $250 billion, a behemoth by any measure.

Ma’s tiny apartment-to-palace tale illustrates one of the caveats of investing in China. It is a country of many risks, but sometimes big rewards.

China is generating increased interest on the part of U.S.-based VCs once again, thanks to Alibaba, which has muscled in on 70 percent of China’s e-commerce. That, coupled with a more accepting climate for Chinese IPOs is also part of the equation.

The ripples are already undulating across the Pacific Ocean.

In May, GGV, with offices in Menlo Park, California, and Shanghai, announced the close of its $620 million fifth fund, following the close of a $625 million fund just two years ago.

GGV joined other China-based firms with good news. IDG Capital Partners had earlier closed a $586 million fund focused on investments in early-stage technology, media and telecom in China.

“Our investors are pretty happy with the results and want us to recycle those profits,” said GGV Managing Partner Hans Tung.

Lately, he said, investors have been benefiting as China’s three largest Internet companies battle for supremacy in the mobile arena by snapping up emerging businesses right and left.

“Baidu, Tencent and Alibaba are extremely aggressive about making investments and acquisitions in the mobile Internet space,” Tung said. “They want to make sure they don’t lose out in this new frontier.”

He said his firm is targeting investments in the sector, including companies that can do business in U.S. markets as well as in China.

“We want to help facilitate that process,” he said of the cross-border activity.

Tung said GGV is especially interested in apparel, home furnishings, sports and travel, as well as wearables and related devices.

“We’re seeing a lot more software and hardware services offering new experiences,” Tung said.

China boasts the largest number of smartphone subscribers in the world, giving rise to a number of new business models not possible before. Moreover, Chinese consumers will purchase an incredible 400 million smartphones in 2014, adding to the 500 million devices already in use.

Still, only 31 percent of subscribers will carry smartphones next year after the explosive growth this year.

In early June, GGV led a $15 million Series B financing round in GrabTaxi, which provides mobile booking technology to cab drivers in Southeast Asia. The round included participation from Chinese-based travel services provider Qunar and Vertex Ventures.

Meanwhile, DCM is also benefiting from the newfound optimism on Wall Street for new companies being launched in China.

“There has definitely been a pickup,” said the firm’s co-founding General Partner Hurst Lin, who is also co-founder of Web portal Sinanet.com, the first Chinese company to go public in the U.S. 15 years ago. “There have been a slew of exits via IPOs this year; the confidence to invest in China has returned.”

DCM is currently investing out of its $330 million DCM Ventures China Fund VII, which closed in March. The firm has invested in more than 50 companies over the past two years and has cashed in three, earning investors $1.5 billion.

These days, Lin said that he’s been looking at opportunities in online education and training.

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ and other venture-related research products, click here for the Marketplace.

Photo illustration of People’s Republic of China flag from Shutterstock.

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