How One China-Based VC, Backed By The Government, Invests At Home And Abroad

Shenzhen Capital Group (SCGC), one of China’s most prominent venture capital firms, is a government-backed group that has invested in over 150 companies.

According to Crunchbase data the firm, founded in 1999, ranks seventh of 776 in terms of number of known investments when compared to other China-based VCs. It has invested in a known total of 171 companies, including 14 lead investments in the last four years.

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Despite its activity, its overall investment strategy is difficult to pin down. Aside from a focus on striking early-stage deals, SCGC appears to have little preference regarding sector focus, with deals being made in education, biotech, big data, e-commerce, and consulting startups.

The Chinese government prided itself on its continued growth and maintained strength during and after the 2008 financial crisis which it combated with a huge stimulus package and state-wide promotion of domestic investment. SCGC is a prime example of this state-sponsored move.

So just how far has the state gotten them, and what can we learn from SCGC’s investing patterns?

Behind The Rounds

According to Crunchbase data on the SCGC portfolio, the group initiated a huge jump in investment in 2008 and 2009, accounting for 33 percent of the firm’s total known investments from January 2008, year to date.

Of its known investments, the vast majority of the companies are based in China, including over 40 in Guangdong province where SCGC is headquartered. All of the group’s 14 latest-known lead investments and 162 were also headquartered in China (including Hong Kong).

SCGC has participated primarily in early-stage funding rounds, with Series A and B investments making up 70 percent of known investments.

As noted before, SCGC’s past investment cadence was mostly agnostic in terms of sector. But pouring over recent investment trends points to slivers of focus in line with state-sponsored initiatives.

Technological Education As A Potential New Focus?

According to China Money Network, SCGC is looking to focus it’s investment strategy on educational technology, stating “supportive government policies and a strong market demand.”

While its 2017 investments still include biotech companies, ecommerce consulting firms, and more, Crunchbase data supports this refined focus.

In December 2015, SCGC led an early stage funding round for Afanti, a Beijing-based company which developed a mobile app for real-time tutoring for middle schoolers. According to Crunchbase, the round brought in a total of $60 million.

Similarly, in December 2017, SCGC, along with Hua Partners and Baili Capital, made a seed round investment in Wuhan-based tech-education company Qimengtingting (启蒙听听). This mobile platform uses audio recording and sharing technology to bring the sound of mothers voices to a parent’s phone, and it is a source for both Chinese and English language learning and childcare advice.

China’s Startups Go Global Despite SCGC

SCGC’s investment in QiMengTingTing and Afanti are indicative of its apparent desire to promote China-based startups that exclusively aim to serve China-based customers. This focus on the local market, however, runs against the current trend for Chinese VC firms. According to the Economist, more Chinese startups are looking abroad to maximize success and are bringing Chinese VC firms with them. SCGC is showing signs of being dragged in that direction.

The group was a lead investor during a February 2017 Series B funding round for Makeblock, a Beijing-based robotics-education startup. The round brought in a total of $30 million. Makeblock promotes STEM education by selling DIY robot building kits for kids. Unlike Qimengtingting and Afanti, it is a globally facing company with customers in a 140 different countries.

There are also a couple of notable exceptions to the SCGC’s China-located investment focus over the past year. In December 2017, SCGC participated in an Series A investment round for the Japanese robotics company, GROOVE X, Inc. The company designed a robot that was programmed to respond to human emotion. The round raised a total reaching almost $658 million.

Additionally, the firm participated in a late stage round for the U.S.-based 3D printing company, Desktop Metal. As its name implies, the company has reportedly developed technology to print in 3D with metal. This Series D round raised a total of $115 million for the company.

Cross-Border VC Hiccups

But like many VC firms, not every investment that the group has made has gone well. One notable SCGC investment failure is LeEco. Shenzhen Capital Group led a Series A funding round in August 2013 which raised a total of $32.5 million for the company.

For those unfamiliar with the LeEco controversy (read: horrifying avalanche), here’s a timeline. In short, LeEco was founded by Yueting Jia and Hank Liu in Shenzhen, starting off as a Chinese video streaming company. In 2016 the company expanded its reach to the U.S. It announced in February of 2016 a joint venture with Faraday Future, a U.S.-based electric car company. All the while, LeEco had already carried out a Series A funding round for its own futuristic electric vehicle, creatively called “LeSEE,” which garnered a total of $1.08 billion in investment.

But the massive funding amounts haven’t tamped down a wrought of negative coverage of LeEco and Faraday Future. Meanwhile, Yueting Jia, the CEO and Founder of LeEco, was blacklisted in China earlier this month for having an outstanding debt payment of $72 million, according to the New York Times.

Making China Great Again

Whether these failures will indicate a continued focus for SCGC is not something we can determine at this time. However, it seems likely that the government-backed group will continue to promote China’s government’s interests by targeting promising startups at home. For now, China-based entrepreneurs will continue to have a deep-pocketed fund in their corner.

iStockPhoto / RoboLab


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