One of the key challenges faced by start-up firms is raising sufficient capital to get their business off the ground. In times where the availability of credit and bank loans are restricted, early stage private equity funds offer start-ups an alternate and reliable source of capital, as well as much-needed guidance and expertise from fund managers to grow their businesses.
Preqin’s data shows that Asian and Australasian fund managers raised an aggregate $33.7bn for all types of venture funds from 2006 to date. Some 16% of this pool – or $5.4bn – was raised by regional early stage specialists in the same period, of which China-based fund managers accounted for $2.9bn of the aggregate capital garnered from investors. In contrast, Japanese and Australian fund managers raised approximately $800mn each via early stage funds in the same period. Interestingly, China is also home to the managers of the three largest early stage vehicles raised by private equity firms based in the Asia-Pacific region this year.
The largest Asia-Pacific-based early stage fund raised in 2011 to date is managed by Northern Light Venture Capital. Established in 2006, the firm successfully finalized its third vehicle, Northern Light Venture Fund III, and reached final close on $400mn in September. Northern Light Venture Capital also closed a CNY-denominated fund, He Yuan Northern Light Venture Capital Partnership, at CNY 600mn in the same month. Both vehicles focus on Chinese early stage firms across a wide spectrum of industries. Northern Light Venture Capital’s early vehicles, the 2006 vintage Northern Light Venture Fund I and the 2007 vintage Northern Light Venture Fund II, raised $121mn and $354mn respectively.
The second largest early stage fund raised this year so far is GSR Ventures IV, which closed on $350mn in July. More than 80% of the capital in the fund was raised from returning LPs, including Horsley Bridge Partners, signalling continued interest from investors in Chinese start-ups. GSR Ventures, which has offices in China and the US, typically invests as an initial-round investor and targets IT-related sectors in China. The firm has collectively raised $658mn via its previous three vehicles.
First-time fund manager, Innovation Works, managed to close the third largest early stage fund in 2011. Spearheaded by former head of Google China Dr Kai Fu Lee, the early stage venture firm’s Innovation Works Development Fund secured $180mn from a mix of international and domestic investors. The vehicle attempts to tap into opportunities arising from the evolving information technology scene in China, and will target internet-related businesses such as e-commerce and cloud computing. Innovation Works Development Fund is co-managed with China-based venture capital firm WI Harper Group.