Venture capital market

Chinese hedge fund’s venture capital bets on start-ups yields returns of more than US$1.3b

Investments that paid off handsomely for venture capital funds started by ChinaRock Capital Management include tech start-ups Musical.ly and Youku

PUBLISHED : Monday, 07 May, 2018, 11:24am
UPDATED : Monday, 07 May, 2018, 10:18pm

ChinaRock Capital Management has rewarded investors in its five-year-old venture capital fund with 27 times their initial outlays by scoring huge returns from financing start-ups involved in everything from artificial intelligence to ride sharing.

The US$37.5 million CRCM Opportunity Fund has distributed more than US$1 billion since it was set up in 2013, Toby Zhang, a venture capital partner of ChinaRock, said by telephone from San Francisco. An earlier venture capital fund returned more than US$300 million.

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Years of central bank easing has crimped the volatility that helped drive hedge fund returns and contributed to years of underperformance that prompted many hedge funds to seek alternative strategies. ChinaRock has been ahead of the curve, opening its first venture capital fund in 2005 with investments in fledgling companies that scored large returns when they eventually got sold or went public.

“We are looking for opportunities where today in the market it’s very nascent, but in the next three to five years, we think, will drive the next wave of innovations in technology,” Zhang said.

ChinaRock founder Ding Chun, who once managed money for Farallon Capital Management, set up the Genisis Fund in 2005, initially raising US$32 million to invest in early-stage internet and technology companies. ChinaRock now has US$158 million in four funds that focus on young tech companies in the US and China, Zhang said.

ChinaRock also manages a traditional hedge fund.

ChinaRock’s strategy is to get in on the ground floor and then cash in big when companies are eventually sold or launch hotly contested public offerings.

When ChinaRock’s second venture capital fund invested in video-sharing application Musical.ly, the Shanghai-based start-up had a staff of two. It went on to top the most popular application charts for both Android and iOS, and was downloaded by hundreds of millions of teenagers across the globe. Musical.ly was bought by Chinese media company Toutiao for nearly US$1 billion last year, Zhang said.

We are looking for opportunities where today in the market it’s very nascent, but in the next three to five years, we think, will drive the next wave of innovations in technology
Toby Zhang, venture capital partner, ChinaRock Capital Management

Among the second fund’s other profitable investments are shuttle bus company Chariot, now part of Ford Motor, and Orbeus, the San Francisco-based artificial intelligence and image recognition company acquired by Amazon.com.

The CRCM Opportunity Fund also took part in late 2014 in a round of private financing for Ripple Labs, the company behind the cryptocurrency. It still holds that stake.

Some of Ding’s bets have helped produce new ChinaRock investors. Ding’s first fund backed a one-person video-streaming start-up called Youku. The company was bought by e-commerce giant Alibaba Group Holding in 2015, in a deal that valued Youku at US$4.8 billion. Alibaba owns the South China Morning Post.

Youku is now an investor in ChinaRock’s fourth venture capital fund that finished raising US$56 million in the first quarter, said Zhang.

The two newest funds have yet to return cash to investors. One focuses on enterprise information technology, consumer, health care and bio- and financial technology, while the newest fund, Frontier Technology, will dabble in AI, augmented and virtual reality, robotics, drones, self-driving vehicles and blockchain, Zhang said.

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That fund invested in Cargo, which provides vending machines to ride-sharing companies, allowing drivers to sell consumer items such as mobile phone chargers and snacks to riders. New York-based Cargo also boasts the backing of consumer goods giant Kellogg. Frontier Technology also provided financing to the Drone Racing League, which runs competitions in which racers use virtual reality glasses to pilot drones.

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