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Neil Shen, founder of Sequoia Capital's China unit   © Reuters
Business

Sequoia China chief is Asia's 'king of alpha'

Venture capitalist Neil Shen wins big with mainland investment strategies

Hong Kong -- It is just before the Christmas holidays and Neil Shen, founder of the renowned U.S. venture capital firm Sequoia Capital's China unit, has just arrived in what was once the industrial heartland of Kowloon, across the harbor from Hong Kong island.

The relatively low rent district is being transformed into a trendier area, housing everything from a big new office building for Citigroup to struggling dotcoms.

Among the new tenants in one of the nondescript industrial buildings is Hong Kong X-Tech Startup Platform, which Shen created in 2016 in an attempt to kick-start innovation in the city, partnering with a group of Hong Kong-based professors and the heads of the territory's three leading universities. Shen also has donated 300 million Hong Kong dollars ($38.6 million) as seed money for the best projects.

The professors will serve as mentors for students in robotics, artificial intelligence, big data, pharmaceuticals, medical devices, electronics and financial technology. Shen is one of the first residents of the city to try to do something about the fact that Hong Kong no longer has much of an industrial base and cannot rely on financial services alone to secure its future.

Shen is widely considered the most successful early-stage investor in China. "He is the king of alpha," said one of his main competitors, referring to increases in company values that reflect factors specific to the companies rather than general market movements.

Shen has been so successful in his 11 years as the founding partner of Sequoia in China that his status within the firm is equal to that of the managing partners at Sequoia's head office in California's Silicon Valley. He was, for example, the first investor in China's DJI, which now accounts for more than 50% of the global market for drones.

Indeed, he has been known to invest in companies on the day they are established if he has faith in their founders. It is, says one admirer (and competitor, using the term loosely), like investing in the star basketball player Yao Ming when he was five years old.

Shen, who describes his mission as "giving small and fast fish money so they can compete successfully with bigger, slower fish," remains widely known in mainland China as a mathematical and computer programming genius, having first come to public attention as a result of competitions in which he participated while still a teenager.

A half generation younger than compatriots who went abroad after the turmoil of China's cultural revolution, Shen studied at Jiao Tong University in Shanghai, and then at Yale University's School of Management, famous for producing some of China's best investors. He says he really only flourished when he returned to China.

Nowadays, he says, he tries to lead a balanced life with his wife, a former investment banker, and his children, but remains driven; constantly on the phone with entrepreneurs, even when at his beach house at Sanya, in China's southern island province of Hainan.

Famously cool

Shen's influence on China's entrepreneurial culture has been huge. Sequoia China's 10th anniversary celebration outside Beijing in 2015 was attended by some of the most famous business leaders in China, all of whom had received money from Shen, generally early in their careers.

The roll-call included such stellar names as Wang Xing, chairman of Meituan-Dianping, China's biggest online seller of movie tickets and restaurant bookings, Richard Liu, founder of the e-commerce giant JD.com, and Li Zhifei, founder of Mobvoi Inc., a fast-growing voice interaction technology developer.

Li is typical of those who win Shen's backing. After studying in China, he went to Johns Hopkins University in the U.S., where he obtained a doctorate in language processing, and then spent two years working for Google in its California head office.

When he returned to China and set up his company, he received money from Sequoia on day one to finance the development of voice recognition software for smart phones and watches. A few weeks after the festivities in Beijing, Google took a big minority stake in Mobvoi, a vindication of Shen's prescience.

When Shen sits down with entrepreneurs, he speaks their language. "It is because I was an entrepreneur that I can relate to them," he said. Shen was one of the three founders of Ctrip.com, the most popular travel website in China.

Shen is also famously cool. When the Chinese stock markets were in meltdown last year, he counselled panicky investors to wait. Now, he thinks China's economic slowdown and Beijing's efforts to tighten controls over capital flows will be good for Sequoia.

"My competition may fade away," he said, noting that since he has both dollar funds offshore and yuan funds onshore, he has a degree of investment flexibility that many rivals lack.

As 2016 draws to a close, Shen is focusing on next year's targets. "Artificial intelligence and big data will be important, I am looking at applications of AI in many different areas," he said. "Everything from education and enterprises to financial services."

Another big initiative is in healthcare. Shen has already made a return of 10 times his investment in one pharma company, in which Lilly Ventures, the venture capital arm of Eli Lilly, a U.S. pharmaceutical company, has taken a stake, and says he has high hopes for another drug firm in his stable, Betta Pharmaceuticals.

Moreover, BGI, another medical technology company in the Sequoia family, will make an initial public offering of shares in China early in 2017 at a valuation that will likely give Sequoia investors a return of at least three times their money.

BGI is the world's largest genomics sequencing organization, according to Sequoia, and works in close collaboration with the Bill & Melinda Gates Foundation, one of the world's largest philanthropic organizations, in developing everything from diagnostic kits to helping to identify early markers for cancer.

BGI also provides lots of evidence for Shen's long-held view that China is on its way to becoming a leading edge participant on a host of business fronts, including medical technology.

To be sure, BGI has not developed in isolation. While it has reduced its dependence on the U.S. for the sequencing machines it uses, its acquisition of California-based Complete Genomics was a vital step in its development. But it is by no means a typical Chinese company.

Although it was founded under the aegis of the Chinese Academy of Sciences in 1999, it moved to Shenzhen in 2007 to be far from Beijing's sometimes poisonous politics. Unlike the average mainland enterprise, it provides a congenial atmosphere for clever and innovative misfits and drop-outs.

Many of its staff find mainland education uninspiring, with its cross between a Confucian emphasis on rote learning and the Chinese Communist Party's requirement for loyalty to the official ideology. Today the company's researchers contribute to international journals and apply for patents.

BGI has many strengths. For one thing, the more data, the better the results, and China's 1.3 billion people naturally give rise to more data. While the company was originally dismissed by pundits as a mere service provider in the field of DNA analysis, it is attracting increasing respect, in part because of the quality of its work, and in part because of the enthusiasm of the Gates Foundation.

Competitive landscape

Another of Shen's goals is to take his companies offshore to places such as Southeast Asia, where the competitive landscape is less intense than in China. One of his most promising candidates is a daily news site, Toutiao (or headline) which is valued at $10 billion. Toutiao creates customized content based on individual users' reading habits, and is expanding its video content.

"I think it can have a big international audience," said Shen. Sequoia China is also backing the China launches of some of Silicon Valley's most iconic companies, including Airbnb, the online homestay network, and LinkedIn, the business-oriented social media site.

One of the reasons why Shen is widely respected is that he remains disciplined. When one of the founders of BGI left to start another company, Shen refused to invest in the founder's new company because he thought the valuation was too high.

Sequoia Capital China has less than $10 billion under management. While Shen could easily raise more if he chose, he prefers to keep the fund's size relatively small to avoid being forced to compromise on investment standards to put all the money to work.

This approach is in stark contrast to some VC rivals, who prefer to have more assets under management and concentrate on collecting fees from investors in their funds, rather than focusing on making money from rises in the values of the companies in which their funds invest.

While Shen remains ruthlessly focused, he has increasingly lent his vision to larger projects. In addition to trying to spark an economic renaissance in Hong Kong, he has cemented closer links in the past year between Jiao Tong University and Yale.

The Mandarin- and English-speaking Shen says he is also trying to improve his command of Cantonese, the language of Hong Kong, so that when he next visits Hong Kong X-Tech, "I will speak to everybody in Cantonese."

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