China Fund Raises $500 Million to Snap Up Cheaper AI Startups

(Bloomberg) -- Google’s former Chinese chief just raised $500 million to invest in the country’s artificial intelligence startups. But first, he needs their valuations to come back down to earth.

Lee Kai-Fu’s Sinovation Ventures is one of the biggest players prospecting for promising Chinese AI startups: a gold rush fomented by corporate touting and Chinese government backing that’s raised the cost of buying into the industry over the past year. About half of his new Fund IV has already been earmarked for investments in fields such as machine learning. But with many domestic startups offering little more than a concept, he’s counting on a crash in investor confidence to serve up cut-priced opportunities.

“We’re going to see a number of AI companies deliver nothing and go out of business and that will cause some degree of sentiment shift,” he told Bloomberg News in an interview. “That’s why we thought we should raise a large fund now and deploy it when we expect to see opportunities, when the prices hopefully come down to a more rational level towards the end of the year.”

Lee’s belief underscores the uncertainty around Chinese tech valuations after an unprecedented surge fueled by easy money in past years. Five of the world’s 10 largest privately-backed startups are now Chinese. Mobike, the consistently loss-making bike-sharing outfit, was said to sell for an eye-popping $3 billion just this month. The buyer, food delivery and group-discount startup Meituan, is said to be valued at $30 billion. And a fashion app -- Meilishuo -- is said to be angling to go public at $4 billion.

Lee’s own outfit hasn’t been idle. The latest round gives him a total of $1.7 billion to manage and he’s targeting another yuan-denominated fundraising to score an extra 2.5 billion yuan ($397 million).

The overall value of private equity funds focused on China’s tech sector plummeted 48 percent to $9.7 billion in 2017 from $18.5 billion in 2015, according to data compiled by Bloomberg. Much of that was driven by concerns over the country’s slowing growth and a deceleration in Chinese tech listings -- the exits investors need to cash out their profits.

But just four months into 2018, $5.7 billion worth of China tech-focused private equity funding has already been raised -- more than half 2017’s total. On Tuesday, Eight Roads Ventures, the proprietary investment arm of Fidelity International Ltd., announced the launch of a $275 million technology fund for the country. It’s a surge fueled by a spate of public listings of startups from Ping An Good Doctor to iQiyi Inc.-- likely to be followed soon by giants from Xiaomi Corp. to Tencent Holdings Ltd.’s music arm and Jack Ma’s Ant Financial.

“If you get a stretch where the number of exits or exit opportunities seems a little drier in the past then it makes it a harder story to sell,” said Mark Natkin, managing director of Beijing-based Marbridge Consulting. “The number of Chinese tech IPOs has definitely picked up in a major way and that of course will stimulate fundraising.”

Beyond short-term trends, Lee’s banking on a new generation of tech startups that blend the smarts of real AI and data with businesses like retail and online education. These will soak up the rest of his fund, he said.

“The consumption upgrade coupled with mobile payments is going to be the world’s fastest engine for creating hugely profitable companies,” he said.

--With assistance from Alex Terol (Bloomberg Global Data).

To contact Bloomberg News staff for this story: David Ramli in Beijing at dramli1@bloomberg.net.

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

©2018 Bloomberg L.P.

With assistance from David Ramli