Neil Shen reportedly has stakes in nearly half of the most valuable internet companies in China, many of them household names, like Alibaba, JD.com, Meituan-Dianping and Didi-Chuxing.
This year, the founding and managing partner of Sequoia Capital China topped Forbes’ annual Midas List for the third consecutive year. Forbes, which ranks the world’s best 100 venture capital investors based on at least a $200m exit or rounds that have valued a company above $400m in the last five years, says Shen earned the spot in part due to his investments in TikTok’s parent company, ByteDance, and social commerce upstart Pinduoduo.
Actually, the billionaire investor himself has attributed his success to China’s huge and booming market. “It's because we consistently go long on China,” he once said. Even amid the Covid-19 outbreak, Sequoia Capital China under Shen's leadership didn't slow down its dealmaking and, against the headwind from the economic downturn, invested in 25 startups in February .
In a recent video chat with legendary investor Stephen Schwarzman, founder of Blackstone Group, Shen, a former Wall Street banker, again reiterated his confidence in China. “It’s probably the time to double down on China in many sectors,” he said. He is especially bullish on enterprise tech, which he expects to flourish as Covid-19 accelerates the need for companies to ramp up their digital upgrade and transformation. Healthcare is also worth noting, he says, as more money from private and public segments is flowing into the sector.
But he cautions against chasing after consumer trends, something that has come to characterize China’s startup scene. Entrepreneurs and investors alike have been quick to pile into the latest, hottest thing, whether it's bike-sharing, automated retail stores or live-streaming, only later to have the bubbles burst on them.
“What you should focus on is whether the business model is sustainable in the long term, as well as user needs, rather than the latest trends,” Shen said.
Get in early
Over the past decade, China has produced 13 “super unicorns,” each with a valuation of at least $10bn. Ten of them, including JD.com, Meituan-Dianping and Didi-Chuxing, were already in Sequoia Capital China’s portfolio when the companies were still in their early days. The VC firm was also the first to invest in drone maker DJI, which now controls more than 70% of the global market for consumer drones.
Now it’s probably the time to double down on China in many sectors
“Tencent has also invested tens of billions of US dollars in potential companies, but we found nearly every time that Shen’s team had already placed their bets on our targets a couple of years ago,” said Tencent founder Pony Ma. “He has very sharp eyes.” Another investor once joked that Shen is the kind of person who would have invested in Chinese basketball superstar Yao Ming when he was five, while others would not have had the courage to invest in him even when he was 20.
Shen attributed the ability to spot potential unicorns to Sequoia Capital China’s mature team and, more importantly, the “knowledge base” that the Sequoia Capital parent firm has been building since its founding 40 years ago and shared with its units across the whole world.
The knowledge base, which Shen has described as a detailed graph about specific sectors and companies, helps Sequoia Capital China not only to win the buy-in of their target investees, but also to offer them the right kind of support, such as a global network of partners, that will fuel their further growth.
And Shen is only interested in ambitious startups that build their business based on expanding beyond the Chinese market, from day one. “Every startup founder today not only needs to think big, they should also think global,” he said.
Investment banker turned entrepreneur
Born in Zhejiang province in 1967, Shen was a maths genius in his teens and later studied mathematics at Shanghai Jiao Tong University. After graduating from Yale School of Management in 1992, he became one of the first people from mainland China to work as an investment banker on Wall Street. But he always says that his career, first as an entrepreneur and later as an investor, only took off when he returned to China.
In 1999, Shen co-founded Ctrip, now the most used travel services provider in China. While running the venture, he sensed the demand for affordable, decent accommodation and founded the budget hotel chain Home Inn in 2001. The two businesses went public on Nasdaq, in 2003 and 2006, respectively.
A great entrepreneur will find the right sector eventually and figure out the business models that work
By 2005, Shen began to realize that it was time to combine the roles of investment banker and entrepreneur by taking the role of an investor. The same year, he decided to join Sequoia Capital, which had sent an invitation to him and promised “independent investment decisions from day one.” He became the founding and managing partner of its unit in China.
During the past 15 years, Shen and his team have invested in over 600 companies, among which about 90 have gone public and nearly 60 are currently valued at over $1bn in the private market. The business and investment success has made him China's richest investor with a personal net worth of $1.6bn as of this May, according to Forbes.
Long-term value investing
Shen describes himself as a long-term value-oriented investor. During the last decade, Sequoia Capital China has been invited to invest in mining and real estate, which usually produce quick and ample returns. But Shen resisted the temptation. While others are happy to make easy money, Shen and Sequoia Capital China would rather focus on the sectors that they know well enough.
After an investment has been made, Shen cares more about the business' sustainable growth, instead of generating returns through exits. According to Meituan CEO and founder Wang Xing, Sequoia Capital China has participated in the on-demand food delivery giant’s funding rounds from Series A to E, but Shen never pressured him to go public.
Shen is well known for investing in a company just because he has faith in its founder. In his eyes, investing in a company in its early days is an art, not a science. Believing human assets are a key to VC investment, Shen chose to believe in his judgement of the person. “When Wang Xing came to communicate with us, his business was not the best one. There was another one twice its size,” recalled Shen. “But his obsession with products impressed me.”
Qihoo's CEO and co-founder Zhou Hongyi, also a friend of Shen from Ctrip's early days, is another case in point. When Zhou started Qihoo in 2005, he focused on user-generated-content search and aggregation, which he called “Search 2.0.” Knowing nothing about it, Shen still invested in the venture. “We had doubts about Search 2.0, but I had faith in Zhou Hongyi, who understands products well and is a product manager himself.”
After changing courses several times, Qihoo has become China's largest internet security company. “When VCs make investment decisions, they give greater weight to the entrepreneur than to the sector [of the startup’s business],” said Shen. “A great entrepreneur will find the right sector eventually and figure out the business models that work.”
We tell them where the traffic jams or obstacles are, but they are the ones driving the car
Considering his role as to be the entrepreneur behind the entrepreneurs, Shen respects and believes in the leadership of CEOs of portfolio companies. He likes to compares an entrepreneur to a driver behind the wheel and himself as the one on the co-pilot seat examining a map. “We tell them where the traffic jams or obstacles are, but they are the ones driving the car.”
His own experience of building successful businesses enables him to better understand and serve startup founders. He would advise them on how to build a management team, which marketing approaches work and how to collaborate across divisions. However, “they would offer help when asked, and they’ve never interfered with our operations,” said Wang Xing.
Living with regrets and changes
Whenever speaking of the investment in ByteDance, which helped him top the Midas List this year, Shen always said he and his team made a mistake in the first place.
When Zhang Yiming, CEO and founder of ByteDance, pitched his plan of aggregating and recommending news to Sequoia Capital China in 2013, Shen didn’t like the idea and decided not to participate in the Series B funding of Jinri Toutiao, the news aggregator platform under ByteDance. “All big names including Sina, Sohu, Xiaomi and Tencent are working on this,” recalled Shen, “The market is too competitive for a small company.”
Contrary to what Shen had thought, Jinri Toutiao experienced exponential growth after that, with user numbers soaring from 1m to 10m and then 100m. Sequoia Capital China led the next round without any hesitation nine months later.
As for Shen, venture capital is a business of regrets. “The most interesting part of investing is that you have to live with regrets,” said Shen. “Even if I invested in Jinri Toutiao from day one, I might still regret that I didn't put more money into it.” For an investor, the more important thing is to learn from all the regrets from the past and make better decisions in the future.
Shen also insists that crisis is another "normal" that businesses, both startups and investors, should be always prepared to cope with.
“Even successful companies like Alibaba and Tencent still fear that their business models will be disrupted one day. So does Sequoia Capital China,” he said. “What’s crucial is staying focus on your core competencies and adapting to an ever-changing market.”