Zero2IPO, a research firm that tracks the Chinese venture capital market, is working with Silicon Valley’s Startup Capital Ventures to raise a VC fund.Zero2IPO, which is based in Beijing, filed a document with the Securities and Exchange Commission declaring its intent to raise the fund, which is listed as Zero2IPO China Angel Fund I and gives its location as the Cayman Islands. The phone number on the document belongs to Startup Capital.
Further details were unavailable. Catherine Ngo, a general partner at Startup Capital, said she couldn’t talk about the fund for regulatory reasons, but that she’d be willing to discuss it in September, presumably when the fund will close.
Startup Capital, which is based in Palo Alto, Calif., and operates an office in Hong Kong, invests in startups from a $25 million venture fund raised last year. It invested $1.5 million in Zero2IPO in April. (Other VCs in the round included American Pacific Ventures, Z2 Investment Ltd. and Authosis Capital.)
Startup Capital’s website highlights a lengthy quotation from Gavin Ni, the CEO of Zero2IPO. The quote touts Startup Capital General Partner Danny Lui’s involvement in Zero2IPO’s expansion strategy. Lui was one of the co-founders of Chinese computer giant Lenovo.DCM-Doll Capital Management’s David Chao compares the Zero2IPO fund to IDG Ventures, the venture arm of publishing firm International Data Group, and several other media companies that launched incubators and venture arms during the dot-com bubble. “It’s no different from media companies setting up their own media fund,” Chao says. “They would just need to manage the conflict issues.”
Zero2IPO’s fund comes as U.S. investors continue to increase their exposure to Asian startups. For example, DFJ Dragon, the Chinese affiliate of Draper Fisher Jurvetson, upped its fund size recently. The firm raised $54.5 million from 87 investors in its second close, according to a regulatory filing. The fund launched in March with $36 million and 57 investors. DFJ Dragon has five managing directors, including Tim Draper, who takes a position with each of the affiliate funds. The team consists of K. Bobby Chao, Tony C. Luh, Larry Guangxin Li and Andrew Tang.Other firms, such as Lightspeed Venture Partners, have opened offices in Shanghai to try to get a better sense of what’s going on in the Middle Kingdom.Some investors have even partnered across funds to have a foot in the growing market. In February, Ignition Partners teamed up with two GPs formerly with Mobius Venture Capital and Intel Capital China to raise a $200 million fund called Qiming.Meanwhile, VCs have poured more than $2.8 billion into more than 300 Chinese startups since 2004 according to data from Dow Jones’ VentureOne. About 70% of those investments have been in seed and first round deals, according to Research Director Stephen Harmston. But he notes that the Chinese version of an early stage company may already be shipping product, recording revenue or even booking profit.And it’s hard for U.S. firms not to want to get in on the action. It’s worked out well for Granite Global Ventures, which expects to invest about one-third of its $225 million second fund in China. The firm’s bet on Hong Kong-based online auction site Alibaba, which Yahoo bought a 40% stake in for $1 billion last August, paid off in a big way. The company raised more than $100 million in early and late stage rounds from Granite and other investors. Granite recorded a 33% return on its 2001 vintage fund, according to disclosures by the California Public Employees’ Retirement System.But some parts of the Asian market may be worth avoiding. As more investors have backed Chinese startups, the median deal size has gone up. The median investment size was $9 million during the first quarter of 2006, up from $5.2 million in 2004. That could be the sign of competition driving up deal valuations.
DCM-Doll’s Chao says there’s a bubble going on in later stage deals. “Many of the firms in the U.S. can’t really take on the early stage risks there,” he says. —Alexander Haislip