VC funds backed by com­pa­nies to con­tinue to boom

China Daily (Hong Kong) - - BUSINESS - By JING SHUIYU jing­shuiyu@chi­nadaily.com.cn

Cor­po­rate ven­ture cap­i­tal or CVC funds will con­tinue to boom in China, in­dus­try ob­servers said.

CVC funds are dif­fer­ent from tra­di­tional ven­ture cap­i­tal or VC firms. While the lat­ter are by and large driven by the goal of max­i­miz­ing re­turns on their short-term in­vest­ments, CVC funds such as In­tel Cap­i­tal, Google Ven­tures and Alibaba-backed Blue Pool Cap­i­tal ac­cord pri­or­ity to strate­gic, long-term ob­jec­tives.

That’s be­cause fi­nanc­ing new ven­tures that prom­ise in­no­va­tions could help them dis­cover syn­er­gies with ex­ist­ing busi­nesses.

In the fourth quar­ter of last year, CVC funds in­vested $536 mil­lion in 14 star­tups, seven of them tech star­tups.

CVC funds are on the rise be­cause the prod­uct cy­cles have been get­ting shorter. So, big busi­nesses need to be nim­ble to adapt to the lat­est in­dus­try trends and con­sider out­sourc­ing some of their re­search and devel­op­ment work to star­tups, said Tian Xuan, as­sis­tant dean and pro­fes­sor at the PBC School of Fi­nance, Ts­inghua Univer­sity.

“Think about it. Is it pos­si­ble that Co­caCola could keep com­pet­i­tive power over decades by re­ly­ing on only one sin­gle prod­uct? No,” said Wang Yue, part­ner of Bei­jing-based in­cu­ba­tor cy­zone.cn. “What will re­place smart­phones in the fu­ture? Even hand­set com­pa­nies may not know. So, it’s im­per­a­tive for large cor­po­ra­tions to find ways to in­no­vate faster.”

CVC funds could help in this con­text. In re­cent years, Chi­nese CVC funds such as those of Ten­cent Hold­ings Ltd, Alibaba, JD.com and Baidu Inc, have gath­ered mo­men­tum in terms of in­vest­ments.

Chi­nese CVC funds in­vested a record $4.25 bil­lion yuan in the third quar­ter of 2015. That was partly due to ride-shar­ing com­pany Didi Chux­ing’s F round fi­nanc­ing of $3 bil­lion.

Tian said CVC funds have two ad­van­tages. One is that it is easy to exit the star­tups they back via an IPO, merg­ers or ac­qui­si­tions. The other is that star­tups backed by CVC funds tend to have high val­u­a­tions, which could make ex­its prof­itable.

“CVC funds al­low star­tups to test ideas on an im­mense scale of the par­ent. The long-term funds also en­able star­tups to take the trial-and-er­ror path to suc­cess,” he said. “Many star­tups go through 99 fail­ures and may suc­ceed at the next at­tempt. A tra­di­tional VC firm can’t wait that long.

“But CVC funds have a rel­a­tively weak in­de­pen­dence, as they are con­trolled by par­ent com­pa­nies and have to fol­low the strate­gic plan.”

Han Jingyan contributed to the story.

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