It’s so exciting. If some of the top companies in China were funded originally by Sequoia, wouldn’t you be excited if you were me?
- Neil Shen
Sequoia Capital China's Managing Partner Neil Shen has topped the annual Forbes Midas list of the world's 100 best VCs for three consecutive years, leading some of the field's most iconic figures like Bill Gurley, Ben Horowitz, Mary Meeker and Roelof Botha. Shen also topped a table compiled by CB Insights, which used a more rigorous methodology that weighs not only exits, but also networks, consistency, unrealised portfolio value and recency.
Rumours of Shen eventually succeeding Doug Leone as the Global Managing Director of Sequoia Capital are founded on Shen's wildly successful investments in the likes of ByteDance, JD.com, Meituan-Dianping and Alibaba. To put this into perspective, Sequoia Capital China's returns on the Meituan-Dianping investment were on a par with Sequoia stalward Michael Moritz's legendary investment in Google.
Since taking on the reigns in 2005, Shen has personified the home-run or strike-out mentality that Chris Dixonof Andreessen Horowitz calls the "Babe Ruth" effect. Babe Ruth was an American baseball player who holds the record for both the most career strikeouts and the highest slugging percentage of all time, owing to an incredible 714 home runs. In that vein, the great venture capitalists have always swung for the fences.
Shen's home-run bets, however, were intrinsically tied to the evolution of China's digital economy. In 2005, 2.83 out of 100 Chinese had broadband subscriptions. Only 8.52% of the population used the Internet. That was about to change, and fast.
In 2006, Shen made an investment in Dianping. At the time, Dianping was an online restaurant review site. The success of an online review site like Dianping was predicated upon widespread internet adoption and a rising middle-class with discretionary income.
As we now know, internet adoption was just about to shoot through the roof. A sharp rise in the affluence of the Chinese middle-class, however, was not a foregone conclusion. The 'BRICS' acronym for the five fastest-growing emerging economics first entered the lexicon in 2006. As the chart below illustrates, China's GDP per capita was still lagging far behind Russia, Brazil and South Africa.
The subsequent ten years are a different story altogether, as China grew its GDP per capita at a rapid clip with impressive consistency. A comparison of the Chinese growth story over the past 15 years with the remaining four 'BRICS' constituents would be flattering to the latter.
The technological inflection point was the mobile phone. In line with the rise of internet usage, mobile phone subscriptions rose sharply after 1999, reaching 30 subscriptions per 100 people by 2006. Conversely, broadband subscriptions only reached 27 per 100 people by 2016. As the Chinese came online, they were doing so as "mobile-first" consumers.
This provided fertile ground for mobile internet companies to thrive. In 2010, Shen invested in Meituan, a Groupon clone where you could buy voucher codes for various services. Both Meituan and Dianping would soon evolve into behemoths in the food delivery market, and in 2015 Shen persuaded the companies to merge. Not long after that, Shen's home run was complete.
Shen's other hallmark investments were also deeply wedded to China's digital and economic revolution. ByteDance, known in the West for TikTok, has amassed 400 million daily active users for Douyin, the domestic version of TikTok. Shen had passed on ByteDance in the past, as Yuri Milner of DST came in with an offer that blew everyone out of the water (he's got a knack for it). But in 2014, when given the opportunity to invest at a valuation of $400 million, 6.5x higher than the last round, Shen characteristically swung for the fences. As of the last round of funding, ByteDance is valued at $110 billion. Oh, in case you're thinking that ByteDance owes its success to its foreign ventures, ByteDance’s overseas business only brought in around 1 per cent of its Rmb130-140bn ($18-20bn) revenues last year.
Shen would also go on to invest in JD.com, the Chinese equivalent of Amazon, and Alibaba, the conglomerate responsible for Ant Financial and AliPay. JD.com would have the biggest IPO of the year on NASDAQ in 2014, whilst Alibaba has a market capitalisation of $596.6 billion at time of writing.
In light of these cases, it could be argued that Shen's ascent to the top of the Midas list is as much a product of Shen's qualities as an investor as it is of the digital and economic revolution that was beginning when he took on the mantle in 2005. Indeed, as Roelof Botha recently noted about the oft-cited successful cohort of companies born in the aftermath of 2008,
"[A financial crisis] doesn’t necessarily guarantee that a new crop [of companies] emerges. The previous crisis, in 2008, was shortly on the heels of the launch of the smartphone and the launch of cloud infrastructure. Those platform shifts, I think, would have propelled many interesting companies independent of a financial crisis. If you look at what happened after 2000, it’s probably not until 2002, 2003 that innovation really reemerged in Silicon Valley."
As we noted in a previous post, inflection points enable previously untenable ideas to flourish. The megatrends of widespread internet adoption, an affluent middle-class, and "mobile-first" consumers paved the way for waves of Chinese mobile internet companies to rise.
It's no wonder, then, that Shen was joined by 21 other Chinese investors in the Midas list. Alibaba and Tencent are aggressive investors in startups. Seasoned entrepreneurs seed the early-stage ecosystem. More and more Chinese internet companies are expanding their operations internationally.
The playbook is there. Lee Fixel became the most prolific investor in Indian startups during his time at Tiger Global, backing the likes of Flipkart, Ola, CaratLane, Saavn and more. Fixel was only behind Shen on the CB Insights list of the world's top venture capitalists, after FlipKart was acquired for $16bn by Walmart in the world's biggest ecommerce deal. Kalyan Krishnamurthy, CEO of Flipkart and a former colleague of Fixel's at Tiger Global, would remark:
"Lee Fixel was among the very early investors who not only saw the potential of transforming India through tech, but also encouraged Indian entrepreneurs to be audacious in this bold journey of tech-led transformation of the country"
If we take a cursory look at the trajectories of Indonesia, India, the Philippines and Nigeria, four of the world's most populous countries with relatively high internet adoption rates and mobile phone subscriptions, we may well be looking at the future hunting ground for the world's top VC firms.
The increased affluence of the middle-class in each economy is to be expected. Far more striking is the Philippines' advantage over China when it comes to internet penetration and mobile phone subscriptions. Indonesia's comprehensive advantage in mobile phone subscriptions over the cohort is equally revelatory. The nominal broadband penetration rates suggest that consumers coming online in these economies will have a far higher propensity to use mobile internet tools.
The sheer scale of the opportunity in India, however, is illustrated below.
The 2030 Midas list look will different. What do you think it will look like? Get in touch and let me know your thoughts.
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"There is no reason for any individuals to have a computer in their home"
- Ken Olsen, President and founder of Digital Equipment Corporation, 1977