China is on the cusp of a new era, one of deep-tech-driven growth, which startups should lead, according to Neil Shen, Founding and Managing Partner of Sequoia Capital China.
“We see weak points or even gaps in areas such as advanced manufacturing, biopharmaceuticals, core software and new materials where startups need to play a role,” he said in a keynote speech at the HICOOL 2021 Global Entrepreneur Summit held in Beijing last month.
Some of the sectors Shen identified as needing startups are: semiconductor, quantum computing, brain-computer interface, vertical and horizontal SaaS, digital healthcare, AI-enabled pharmaceuticals and synthetic biology.
Not surprisingly, as of this September, startups working on hard-core technologies and enterprise tech accounted for over 80% of the Sequoia China Seed Fund portfolio. Even amid the recent tech crackdowns in China, the Fund has not slowed down. So far in 2021, the number of companies it has invested in has exceeded the total in the previous three years. The number is expected to be over 100 by the year-end.
Sequoia Capital China’s investment preference aligns with the Chinese government’s initiative to develop seven hard-core technologies including artificial intelligence, quantum computing and semiconductors from 2021 to 2025 for the purpose of technology self-reliance, which has been included into China’s 14th five-year plan. Premier Li Keqiang said in March that the country would increase R&D spending by over 7% per year during the period to achieve major breakthroughs in technology.
Still lagging the US
Zheng Qingsheng, Partner of Sequoia Capital China, who also oversees Sequoia China Seed Fund, pointed out that China is still lagging behind the US by 10 to 15 years in enterprise tech. Speaking at the 2021 DEMO CHINA Summit last month, Zheng said it’s a matter of time before China embraces its own enterprise tech boom, as businesses demand increased efficiency and decreased expenditure.
Sequoia China Seed Fund was launched in June 2018 to focus on TMT (technology, media, and telecom), healthcare and the consumer goods sectors. Since it was formed, it has invested in over 180 companies, with ticket sizes ranging from $500,000 to $5m. It is the earliest investor in 70% of its portfolio companies. The Fund currently manages RMB 5bn in assets.
About 70% of the Fund’s portfolio companies have secured at least one further funding round, and some, including product design collaboration platform Lanhu and fintech company OPay, have achieved unicorn status. In September, the Fund was ranked by 200 senior investors as the most admired early-stage investor in China, followed by Sinovation Ventures, GL Ventures and IDG Capital.
Sequoia China Seed Fund targets startups or entrepreneurs at very early stages. “We would like to reach out to those prospects who have only ideas and have not decided to start their own businesses yet,” Zheng said.
The Fund has developed targeted investment strategies based on research and judgments about founders, the market and prospects. It spends much time communicating with founders to understand their passion for and capabilities to do what they are doing.
An example is Hu Yuanming, the CEO and co-founder of Taichi Graphics. The Fund spotted him three years before his startup was launched. Hu was pursuing his PhD at MIT in 2019 when he used a new programming language he co-invented to create the complicated visual effects in the film Frozen with only 99 lines of code – his claim to fame in the field of computer graphics. The Fund soon connected with him, and a preliminary funding agreement was reached just as Hu was about to graduate and start a business in 2021.
“The investor [from the Fund] was exceptional – both technology- and business-savvy – and he gave me quite a lot of actionable advice,” Hu said. The Fund later become the only investor in Taichi Graphics’ seed funding round this April.
Zheng said that Sequoia Capital China Seed Fund adopts a more efficient decision-making mechanism than Sequoia Capital China. “After just one face-to-face meeting [with founders], we will decide the same day whether a term sheet will be offered or not,” he said.
The Fund also limits the length of a term sheet to one page, the shortest in the industry, and omits many complicated terms. This way, a founder can understand the document without lawyers and sign the paper on-site. “It takes less than an hour to get everything done,” Zheng said.
To help early-stage startups go further, the Fund is committed to long-term investing. According to Zheng, it would not consider generating returns through exits midway even if other investors offer to buy its shares in the portfolio companies. Once an investment is made, the Fund will provide the startup with a full suite of services from office space to talent recruitment.
Meanwhile, in September, Shen announced a new policy that once a startup has secured seed funding from Sequoia Capital China, it will automatically get at least RMB 1m from the investor in its next financing round. “It’s risky to invest in seed-stage startups, which also requires more inputs [from investors],” Shen said. He considers it a “semi-philanthropy” undertaking to help more people fulfill dreams and create social values by building businesses.
“If we can sharpen our focus, provide better services, and develop the capabilities to identify potential seed-stage startups, we can achieve a satisfactory result between philanthropy and business,” he added.