New China Focus for Kleiner Perkins

The Silicon Valley investment firm chose the mainland for its first overseas office. Managing partner Tina Ju talks about the investment landscape

Kleiner Perkins Caulfield and Byers is best known for an investment track record that includes Google, Electronic Arts and Amazon. Last April the Silicon Valley firm picked China as the site of its first overseas office. The China office was essentially run by the three founders of TDF Capital, a homegrown venture firm that has backed Alibaba, Baidu and Focus Media. But it’s kept a low profile since then. Tina Ju, a managing partner at Kleiner in China, spoke to CHINA ECONOMIC REVIEW about Kleiner’s China strategy, the sectors they’re watching, and the country’s investment landscape.

Q: Where’s the line between private equity (PE) and venture capital (VC) funds in China?

A: I think the line is blurry. It was very clear in the beginning and it has blurred over the course of the last three years. It’s driven by a few things: One is increasing capital and  record [amounts of] capital flowing into China. The second thing is VCs’ ability to expand beyond just TMT (technology, media and telecoms) investments. Once you start moving into traditional businesses, whether it’s consumer, healthcare or cleantech, you start dealing with companies at a later stage, so venture capitalists are becoming PE investors, growth capital investors. I think at the end of the day, as more capital comes from the buyout funds, the venture funds, the PE funds, the hedge funds, most of the venture firms will look at our strategies and ask ourselves are we [going to] continue being hybrid, VC-plus-growth-capital investors, or do we focus and become venture capitalists again? I think that’s going to apply to not just the stage [of the investment], but also the sector.

Q: Are VCs in China lazy because they are in later-stage deals?

A: I wouldn’t say they are lazy. The way I look at it, growth capital gives investors high ROI (return on investment), with much more certainty. So [growth capital investments] are considered, in our view, to be the low-hanging fruit. It’s easier to have “quick” success, but I think true venture capitalists pride themselves on discovering the company early, having significant ownership and being a partner from zero all the way to IPO. The fact that a lot of venture capitalists do invest in growth capital is a reflection of the fact that growth-stage companies offer great opportunities.

Q: PE funds in China tend to invest in growth capital too. Is there more competition for VCs as a result?

A: We get invited to do a lot of private equity investments. [But] we are more valuation sensitive, we like entrepreneurs who are disciplined, who take on the right amount of capital, and not just take on a lot of capital for its own sake. So our belief and the private equity belief are sometimes different. They want to deploy capital; so if a company needs US$10 million, they are more than happy to give them US$30 million. We’re not [like that], so we end up being less competitive in that regard.

Q: How do you classify Kleiner in China?

A: As our fund size increases, we continue to see ourselves as venture capitalists. We continue to like to bet on early-stage companies with big innovation, either with technology risk or business-model risk, which we tend to take more often in China. We like companies that have a huge, creative business model, but at the same time we understand that there are going to be a lot of great companies that you don’t discover when they are just founded. So we would love to be associated with great industry leaders – even if it’s at a later stage – because we think it helps our strategic positioning to better understand the industry.

Q: VCs in China are moving away from traditional tech plays. You invested in a company that sells diamonds online. Can you tell us more?

A: is actually a hybrid model, a combination of online and offline. We were actually an investor in [online jeweler] Blue Nile in the US, which turned out to be a success. I think in the long run, 9Diamond is trying to become the Blue Nile of China. The business model is slightly different, because in China you do need to combine both your online and offline businesses.

Q: What’s the macro trend that you’re tapping into with investments like 9Diamond?

A: The macro trend is consumer spending. All the PE investors are capturing that. [The] restaurant business – how many people went into that? Educational services – we actually recently made an investment in that sector. We think that the consumer is becoming more sophisticated and diamonds are a reflection of that – it’s a high-end product.

Q: What else are you looking at?

A: I think we will probably make a couple more investments in the consumer space. We have also been very aggressive in the cleantech area. Between TDF and KPCB, in the last year-and-a-half we have made six investments in the cleantech area. Healthcare is another area. We want to leverage our US partners’ expertise because we’re one of the strongest VCs in healthcare in the US. I would say we will continue to be very strong in TMT, that it will continue to be our core business. We still love companies with innovation.

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