April 20 2016
Gary Rieschel’s career in venture capital began in the US before the dotcom bubble burst. Now the co-founder of China-based Qiming Venture Partners advocates a cautious investment strategy.
When Masayoshi Son, founder of SoftBank Corp, tapped Gary Rieschel to set up a US venture capital business in late 1995, the original internet portals - such as Yahoo and Excite - were still fledglings. Google was three years away from being founded, while Facebook wouldn't emerge for nearly a decade.
SoftBank Venture Capital moved quickly and aggressively. The four funds it raised between 1996 and 1998 completed 26 IPOs and made 15 M&A exits, with the likes of Puma Technology going public on NASDAQ, while Geo-Cities and Art Technology Group were acquired by Yahoo and Oracle, respectively.
As the dotcom boom gathered pace, the firm became even bolder and the 1999 vintage Fund IV was deployed within six months. A year later the portfolio was in rude health, marked up 3x on paper, but after boom turned to bust the fund failed to achieve 1x. SoftBank Venture Capital, which was rebranded Mobius Venture Capital in late 2001, is no longer making new investments.
If you asked our LPs why they trust Qiming, they would say that we have quite a few senior people who understand that prices don't just go up and up. They can go down very, very quickly
Rieschel, who departed the firm in 2004, acknowledges that allowing capital to be invested so quickly was an error. The lessons learned at SoftBank Venture Capital continue to influence his decision-making at Qiming Venture Partners, the firm he set up in Shanghai in 2005. With China now experiencing an internet boom of its own, characterized by billion-dollar unicorns and investors losing their heads, Rieschel advocates moderation.
"It's a great example of what I worry about now with all the unicorns," he says. "I lived through the experience of watching a fund that was at 3x fail to return capital when the market collapsed. If you asked our LPs why they trust Qiming, they would say that we have quite a few senior people who understand that prices don't just go up and up. They can go down very, very quickly. Qiming is a little more conservative than some of the other venture funds."
SAIF and sound
Like many in the industry, Rieschel has a technology background. After graduating from Reed College in Portland, he landed a position as a manager for Intel Corporation, testing integrated circuits. In 1984, he joined a US-based commercial data-processing start-up - Sequent Computer - and five years after that was sent to Japan to run the company's joint venture with Panasonic. During this period, he struck up a friendship with SoftBank's Son.
Rieschel returned to the US in the mid-1990s to run Cisco Systems' global sales division. He convinced the company to set up a joint venture in Japan and SoftBank became the largest backer of this initiative, committing $12 million for a 12% stake. In 2000, by which point Rieschel had already joined SoftBank Venture Capital, SoftBank sold its interest to Cisco for $650 million in cash, $500 million in equipment and $500 million in financing to set up the SoftBank Asia Infrastructure Fund - which later became SAIF Partners.
Rieschel oversaw SAIF Partners' investments for the first year and then hired Andrew Yan to run the firm, a role the latter retains to this day. Prior to the creation of SAIF, Rieschel also worked with Chauncey Shey, who launched SoftBank China Venture Capital - now known as SBCVC - in 1999. In addition to helping build SoftBank's network, he created his own, making personal investments in China-based Ceyuan Ventures and its US counterpart Ignition Partners.
After leaving SoftBank Venture Capital, Rieschel spent more than six months traveling in China and Europe with his Hong Kong-born wife and their children. This coincided with the nascent stages of Chinese venture capital and the development of the so-called "institutional venture market." Several US-based VC firms came to China in search of opportunities and Sequoia Capital's local affiliate opened in 2005. There were few truly local franchises, but Rieschel felt confident he could establish one.
"You went and met entrepreneurs, and you had some ideas where the future trends were going. You knew that VC in China was going to be big," he explains. "The question was simply how large and how fast China the venture capital community and internet business would develop. Obviously it has developed very quickly over the years."
In 2005, he started talking with Duane Kuang about creating the firm that would become Qiming. The two knew each other from Cisco and stayed in touch when Kuang set up Intel Capital China in 2001. They had the option of being fully independent or running a co-branded business alongside Ignition Partners. In the end they opted for a partnership, with John Zagula, a managing partner at Ignition, relocating to China as a member of Qiming's founding team. Ignition did not invest in the GP or its funds.
"It has been such a fantastic experience launching Qiming and watching it become successful. We decided early on that we didn't want to be Ignition China. We felt that we could create own brand, and that was a really a big decision. I am actually very happy that we opted to have our own firm and identity, rather than using US brands to create practices in China," Rieschel says.
Qiming closed its debut fund in early 2006 at $200 million, with the Princeton University endowment among the LPs. Nisa Leung, who had previously worked with Rieschel in SoftBank Venture Capital, joined the firm soon after to lead healthcare investments. While most China-focused venture capital firms have focused on technology, media and telecom (TMT), Qiming has also introduced healthcare and cleantech practices.
"I think we were the first VC firm in China to organize ourselves around sectors. We have kept our sector focus and invested in companies at pretty much the same stage since we launched," Rieschel says. "We have also steadily deployed capital. We change when we have to but we don't come up with a new strategy every year. We believe that it's better to invest in a strategy over a long period of time, because it takes a long time to understand whether an investment is going to work or not."
An evolving market
Over the last decade, Qiming's assets under management have increased to $2.5 billion across US dollar and renminbi-denominated vehicles. Fund V closed earlier this year at $648 billion. Princeton remains an LP alongside the likes of the Massachusetts Institute of Technology (MIT), the Robert Wood Johnson Foundation and the Mayo Foundation.
The firm's five managing partners - Rieschel, Kuang, Leung, J.P. Gan and William Hu - have meetings at least once a week to discuss the different things they are working on. Each deal approval must come after at least two formal discussions. When addressing technical issues specific to one of the three sectors, such as new drugs or emerging technology, every managing partner must participate, asking questions about sourcing and development strategy. Rieschel sees this as a team-building process.
"That's something we have spent a lot of time on. It comes down to a very important word that's hard to find in China - ‘trust,'" he says. "We Are an unusual VC firm in that the senior level compensation is pretty much the same, which means we all have the same financial incentives. So there is no benefit to someone trying to do more deals or pushing up a bad deal. At the end of the day, you need to trust that your partners are doing the best job to the benefit of the fund, not to any individuals."
For all its consistency in team and approach, Qiming recognizes the need to evolve in step with the Chinese market. In the early days, the firm's US connections made it easier to understand the forces that would see internet technology touch every part of China's economy, bringing substantial change in certain many areas. Rieschel believes the market has now reached a level of maturity where the US angle is interesting but no longer a necessity.
The companies in Qiming's pipeline must increasingly address global demand from an early stage, whether they originate from China or the US. With this in mind, the venture capital firm is going cross-border and setting up healthcare-focused team in the US and plans to raise a dedicated healthcare fund of $100-$150 million. The local team will invest in US-based companies and help them expand into China, or vice versa.
"Cross-border is more something that a company does. We don't believe that we can have partners living California and then invest in the China. We think people should invest where they live because the context of venture capital is so important," says Rieschel.
This does not, however, mean that Qiming will also set up funds specific to its other verticals. Rieschel observes that the TMT space in the US is already crowded enough, with many well-established firms chasing deals, but cross-border healthcare is an area in which Qiming can genuinely differentiate itself from other US-based players. Needless to say, the investment strategy will remain cautious. Rieschel is still mindful of his experiences at SoftBank Venture Capital and warns that history could repeat itself in the US and China.
"Capital is being deployed so quickly, especially when you consider that the exit market has been poorly managed by the Chinese regulators," he says. "I think there is no question that many of these companies will have difficulty raising money, so in that sense, you're going to have some kind of bursting of a bubble. It might not look exactly the same as it did in 2000-2001, but something will happen in the US and China, simply because the velocity of capital has been so high."