The Covid-19 pandemic has disrupted transportation, and online panel discussions have become popular as experts around the world try to gauge what’s next in badly strained U.S.-China relations. One this week brought together two prominent U.S. names: the National Committee on U.S.–China Relations along with the Rhodium Group. The message on venture capital was sober: U.S.-owned VC investment into China plunged last year and competition has grown. “This golden era is over” for outsized returns there, Rhodium Partner Thilo Hanemann said.
At least for now, though, things don’t seem so grim over at Shanghai-headquartered Qiming Ventures Partners. It raised $1.1 billion last month amid a global pandemic for a new fund focused on early stage healthcare and technology investments; that new money has increased its assets under management to $5.3 billion. Investors include Princeton University Investment Company, which has invested at Qiming for 15 years. Founded in 2006, Qiming has backed more than 30 Chinese “unicorns” worth more than $1 billion in valuation including Xiaomi, the world’s No. 4 smartphone market, China delivery platform Meituan, and online entertainment site Bilibili. Three of it China portfolio companies have gone public since in the past half year: Venus MedTech, a maker of cardiovascular devices, Shanghai Sanyou Medical, a supplier of orthopedic implants, and Roborock, a manufacturer of robotic home cleaners.
The presence last month of two managing partners — Duane Kuang (No. 69) and Nisa Leung (No. 33) – on the 2020 Forbes Midas List of the world’s top VC investors understates Qiming’s influence. JP Gan, an ex-Qiming managing partner who left after 14 years in mid-2019, also made the list (No. 13) under a start-up he co-founded only in July, INCE Capital. And Hans Tung, a partner at GGV who ranked No. 10 this year, is also a Qiming alum. Kuang in a telephone interview this month reflected on Qiming’s record. “We did some things right,” said the understated businessman, one of two co-founding partners along with American Gary Rieschel.
It helped to have a good starting point. Qiming was spawned from the optimism that permeated Silicon Valley and U.S-China ties during the three decades that started in the 1980s. Kuang, a China native, was among the first wave of mainland students to arrive in the U.S. after Beijing and Washington forged diplomatic relations in 1980. He holds a MBA degree from the University of California at Berkeley, a master’s degree in computer science from Stanford University and a bachelor’s degree in computer science from California State University in San Francisco.
After finishing school, Kuang worked for big tech firms and startups in Silicon Valley including 3Com. “People felt it was kind of crazy” back then to move from a large firm to a startup, he said. “But for me, it felt like the right thing. I wanted to see how the world of business works.” By the mid-1990s, Kuang had moved back to China with Cisco, where he first met Rieschel.
As the decade was winding down and U.S. internet businesses were taking off, “China was happening.” Current China internet heavyweights like Alibaba, Tencent, Baidu and NetEase were being set up. In 1999, Intel was looking for someone with Kuang’s background in its investment program, and he accepted a job as a director at Intel Capital China.
Though the U.S. tech bubble was collapsing, Kuang said, “the timing couldn’t have been better. Intel wanted to be in China, even as the bubble burst,”and big corporates, unlike start-up venture companies, had deeper balance sheets. Intel invested in 1990s-era China tech newcomers such Kingsoft, AsiaInfo and Sohu. “The opportunities back then tended to be small.” One important contact Kuang made then: Lei Jun, founder of software firm Kingsoft and the current Xiaomi CEO. Lei has gone on to become one of China’s top billionaires, and Xiaomi became an Qiming investment hit.
By 2005, China had survived the virus crisis of that time – SARS, entered the World Trade Organization, and the venture investment world was ready to jump in. “It was an interesting, almost pivotal year in China VC,” Kuang recalled. Prior to 2006, most if all venture funds dominated in U.S. dollars in China were tied to multinationals. On the heels of WTO, a group of new venture investment firms were formed – often with U.S. ties – Sequoia China, Matrix China and Northern Lights.
Qiming joined that vintage when Rieschel landed in Shanghai with his family in 2005, bringing investment experience and fundraising muscle. He had previously been with Intel, Sequent Computer, Cisco Systems, and SoftBank, having started his VC career by creating SoftBank’s U.S. venture group in 1995. Rieschel had earlier sponsored or helped found several of China’s early VC firms, including SoftBank China Ventures (2000), SAIF Partners (2001) and Ceyuan Ventures (2004).
“We got talking,” recalls Kuang. “We felt the opportunities in China were real.” What’s more, the international venture investment community was believing in the China story, he said. The two took the plunge, teamed up and founded Qiming in 2006. The Chinese characters from its name come in part from the names of Rieschel’s children. “He and my wife Yucca also chose the name of Qiming. Yucca came up with it and Duane validated that it would be a great name for a VC firm.”
“Duane is very professorial. He is very private and doesn’t give much away,” Rieschel said. ”When we were first raising money — which he had never had to do at Intel, it was a great effort to convince him to speak in the meetings.” Yet they succeeded. Qiming netted $200 million for its first fund, partly with money from Princeton. Other investors over the years have included MIT and Mayo Foundation.
The two embraced a Silicon Valley investment style, looking for a technology evolution curve on the rise, partnering with strong founder-entrepreneurs, and helping build their business. Today, Kuang says, although many others do that, “Chinese firms back then did growth-stage PE investing. It did work out nicely for a lot of folks.”
Another difference from local firms at the time: Qiming was also formed as a “true partnership” where managing partners had identical voting powers. “Most Chinese equity firms had a king,” Kuang said. And they also tried to stay focused. “By contrast, in China at the time, other firms that were staffed with generalists.”
To that end, tech specialists Kuang and Rieschel attracted healthcare investor Nisa Leung, who worked for Rieschel at Softbank, to Qiming as a partner. JP Gan, a graduate from the University of Chicago, joined from Carlyle, and Qiming started out eyeing three areas: healthcare, consumer Internet and IT. That produced a string of hits. “We had a stable team for 14 years,” Kuang sad.
By the end of that stretch, the investment environment changed. Hoped-for consumer internet growth had been realized, and valuations among those companies had skyrocketed. “This may not end well,” Kuang recalled thinking. A “winner will take most” model will continue, but there is “too much money pouring into that space,” he said, noting problems with China’s Luckin Coffee accounting “fiasco” this year as an offshoot. With partners more cautious on the consumer Internet area, JP Gan left to set up INCE.
To Kuang, the application and infrastructure side of the consumer boom today looks like a better investment bet than consumers themselves. He sees for gains in cloud businesses and database-related companies, such as SequoiaDB, which was set by a team from IBM, as well as Qiniu, which provides enterprise data management services.
Qiming is also now taking a closer look at an industry close to Kuang and Rieschel that it once avoided: semiconductors. “For a long time we shied away,” he said. “It’s a global business,” and China didn’t have any companies that rose to that level.
Today’s U.S.-China political dynamic is leading to a greater China emphasis on local sourcing, however, at a time when homegrown semiconductor talent is increasingly up to the task and market demand is huge, given the country’s big role in global manufacturing. Unlike the past, when many product design decisions were made in the U.S., more and more are made in China. “When a design happens in China, a lot of the semi decisions are happening in China,” especially for mobile and IT products, Kuang said. “Politics aside, designers would like to walk into the office to talk things over,” he noted. “Some of the local opportunities are becoming interesting,” he said.
With Rieschel relocating back to the U.S. to help with Qiming’s business there in 2016, Kuang, now 56, sees another test ahead: transition to younger leadership. To that end, Qiming now has about a dozen partners.
More than semiconductor business is at stake given the current strained state of U.S.-China relations. It “is an issue that is being carefully examined by nearly all (partners), but thus far we have not seen any of our major institutions reduce their China exposure as a result of the state of U.S. – China relations, Rieschel said. To date, Qiming has 80% of its money from overseas investors.
“In a fundamental way,” Kuang said, the current political tension “doesn’t change the way we think.” But he added, “the only constant thing is change.”
-Follow me @rflannerychina