Practical analysis for investment professionals
20 March 2012

Venture Capital Investing in China: Find the Future “Cristiano Ronaldo’s” of Industry

Lawrence Tse of Gobi Partners, a venture capital firm based in Shanghai, addressed the CFA Institute Asia Pacific Investment Conference on Wednesday, where he recounted some key lessons learned from his experience working in China’s VC market. Tse, whose firm focuses on early stage Series A investments, provided an overview of the market and highlighted, in particular, the importance of investing in companies with good management.

Venture capital in China is without a doubt a growth story. The number of active venture capital and private equity firms — an increasingly blurred distinction — has grown from approximately 10 to 4,100. Five years ago, Tse said, it was rare to find a management team that was complete and hiring qualified people was difficult. Today there is a massive industry with a deep pool of talent in China. In a good sign for the industry, the average age and experience level of executives at early-stage firms have increased.

In addition, deal volume has skyrocketed, up seven-fold over the last ten years, to more than 1,500 deals in 2011, and the amount invested has increased 25 times, Tse said, to more than US$13 billion last year. Such growth is due in large part to the influx of renminbi (RMB) denominated capital and means that China now has as much VC funding as Europe and nearly as much as the United States. In fact, venture capital in China is now seen as a key asset class in a proven market, one that is likely to return cash to limited partners.

In yet another example of the growth of the VC sector, Tse believes that over the next 10 years investors will shift from a focus on Chinese firms that use U.S. business models to firms that are taking business models proven in China and exporting them to Malaysia, Indonesia, and other Asian markets. He says entrepreneurs are now asking, “After you become the top company in China in an industry — or in the top three — can you go global?”

Of course, some aspects of venture capital investing remain constant regardless of country. Along these lines Tse gave several examples of the importance of working with top-notch management, both when sourcing deals and when monitoring existing portfolio companies. Specifically, Tse said that the top three attributes for a manager are commitment and desire; leadership and charisma to attract and retain talent; and high ethical standards.

For these reasons, Tse believes that paying a premium for top talent is reasonable. Investors must try to find the “Cristiano Ronaldo‘s” of the industry, he said, in reference to the soccer superstar, even though it’s not always obvious when you’ve identified them. Tse recounted one missed investment opportunity from 2005, when his firm met with a successful entrepreneur who wanted a lot of cash but didn’t have a clear explanation of how he would use the funding. Gobi Partners passed on the deal. That entrepreneur was Victor Koo, who is now chairman and CEO of, Inc., the number one web video provider in China. Tse said that Koo wasn’t the first entrant to the market he now dominates and was in fact two quarters late to the game — long in Internet time. But Koo knew enough about business to overcome his slow start.

In VC, Tse added, once you are in a deal “you are stuck for a long time,” so succession planning is important and management changes can be very challenging. In China, founders remain in charge at most top VC-backed companies, so these transitions are still to come and should be watched carefully by investors.

One key factor in the investment decision-making process is how a CEO treats cash, Tse said, which is particularly important during the early stages of a company. Tse relayed the story of a CEO he was considering investing with who wouldn’t split a dinner bill with him. The entrepreneur said that Tse had chosen the restaurant, and that it was too expensive. Tse said he found this a bit awkward, paid the bill, and went home slightly out of sorts. But after reflecting on the episode, he realized that the CEO’s preference for cheap restaurants reflected fiscal discipline that would serve him well in business, so Tse invested.

Ultimately, Tse said, VC firms should think in terms of how best to partner with management, and they should avoid any perception of scrutinizing. He has found three ways to be particularly helpful to portfolio companies in this regard:

  • Help the CEO recognize blind spots. Tse gave the example of a firm that had grown but was still controlled by the old lieutenants, who no longer had the skills to run the business. The CEO was too close personally to this group to recognize that a change was needed, so Tse was able to step in to do the difficult cost-cutting.
  • Help entrepreneurs prioritize. Entrepreneurs often become successful because they have so many good ideas. But not everything can be done at once, so a VC investor who knows the business well can help a good leader focus his efforts.
  • Serve as a sounding board. When expansion decisions need to be made, a VC partner can be part of the dialogue. “Make them want to share ideas with you,” said Tse, who has helped negotiate important contracts for his portfolio companies because they trust him and have thus been willing to share key documents. Regular reporting by management can also improve information sharing and help avoid potential corporate governance challenges, Tse said.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Rebecca Fender, CFA

Rebecca Fender, CFA, is chief of staff for Research, Advocacy, and Standards at CFA Institute. Previously she lead the Future of Finance initiative, which is the thought leadership platform for CFA Institute. The group publishes studies to help investment professionals build their careers and serve their clients more effectively. Their paper Investment Professional of the Future was recently awarded Best Investment Industry Paper of 2019 by Savvy Investor. Fender has testified before the US House Financial Services Committee AI Task Force on the impact of artificial intelligence on investment roles. She speaks regularly at industry events and has been quoted in the Financial Times, Bloomberg, and the New York Times, among others. Prior to joining CFA Institute, Fender was a vice president at BlackRock working with pension funds and endowments, and she also worked at Cambridge Associates, where she published research about manager selection. She earned her undergraduate degree in economics from Princeton University and holds an MBA from the Darden School at the University of Virginia.

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