China's Venture Capitalist

Gary Rieschel is seeding China's start-up scene with the same sensibility that he learned in Silicon Valley, and cleaning up in the process. His Qiming Venture Partners has become one of China's hottest moneymakers, but he's also intent of nurturing a new generation of Chinese entrepreneurs.

By Ron Gluckman/Beijing, China

WHEN GARY RIESCHEL MOVED TO CHINA IN 2005, he was looking to take a break. He had spent two decades bouncing between Silicon Valley and Asia, most recently managing technology investments in the aftermath of the dot-com bust.

But China proved irresistible to Mr. Rieschel, a longtime venture capitalist. The country had a nascent Internet sector, a growing middle class and plenty of potential. Within months of relocating, he co-founded Qiming Venture Partners, at the time one of the few investment firms focused on start-ups.

“I’m a bit of an adrenaline junkie,” said Mr. Rieschel, 55. “If you like change and ambiguity, it doesn’t get better than in China.”

His pioneering spirit has been rewarded. Qiming, which now oversees over $1 billion, is one of the largest venture firms in the region, focused on information technology, clean technology and health care companies. Its client list includes top American institutions like thePrinceton University Investment Company, the Robert Wood Johnson Foundation, theHarvard Management Company and Commonfund.

“I like to invest in things that Qiming has seeded,” said Rob McCormack, the founder of Mustang Ventures, a China-focused rival. “They know their stuff.”

Mr. Rieschel finds the Chinese start-up scene just as exhilarating now. Last year, 138 venture-backed Chinese companies went public on mainland or foreign exchanges, raising an estimated $21 billion, according to VentureSource. While offerings have slowed this year, China remains one of the world’s hottest markets. When Qiming raised its third and largest fund, for $450 million, this year, it closed within weeks.

Still, the environment remains treacherous. The country lacks a strong regulatory framework, market data is limited, and financials can be unreliable. For example, companies often mask their ownership in a maze of family relationships. Qiming has regularly walked away from seemingly attractive deals when the structure is cloudy or the payroll includes groups of relatives.

Mr. Rieschel credits Qiming’s success with relentless research. Starting in 2007, his team spent months studying a potential investment in Ehi Auto Services, a Chinese rental car company. Qiming staff members rented cars from various Ehi outlets, submitting feedback, then checking to make sure that information was actually used. The lead partner on the deal personally visited most of the company’s locations, interviewing each manager.

Qiming spent almost a year surveying the Chinese social network scene before buying a stake in Kaixin, which was in fierce competition with Renren to become the Facebook of China.

Accounting is a top concern in China, where “audits can’t be trusted,” Mr. Rieschel said. As his team assessed one Beijing customer services company, they used cash receipts to rebuild the financials. They wanted to understand “whether the cash flow they were presenting was real” and to determine the “cost of customer acquisitions.” In the end, Qiming decided to invest in the company, which he declined to identify.

As an added layer of protection, Qiming tends to focus on start-ups with a No. 1 or No. 2 position in their particular niche, given that they are the most likely to prove profitable. In recent years, the firm has taken stakes in information technology leaders like ChinaCache, a content delivery network; Jiayuan, an online dating site; andDianping.com, a dining and lifestyle site. Another portfolio company, Desano, is a supplier to Western pharmaceuticals focused on generic AIDS drugs.

“The diligence here is an entirely different animal than in the United States,” Mr. Rieschel said. “In the U.S., you can talk to an attorney, other venture capitalists, analysts, and get a lot of information. Here, diligence has a different intensity.”

Once Qiming decides to invest in a company, the team works closely with management. Mr. Rieschel will often help recruit executives and broker relationships with top government officials, crucial to navigating the country’s bureaucracy. He sits on the boards of six companies in Qiming’s portfolio: Alltech, Touch Media, Tigermed, LP Amina, Lanzatech and Appconomy.

“They really help with everything: strategy, recruiting, finance,” Mr. McCormack of Mustang Ventures said. “It’s the classic Silicon Valley model.”

The similarities are by design. Mr. Rieschel and the other two founders, Duane Kuang and J.P. Gan, all honed their investment skills in the United States.

After graduating from Reed College in Portland, Ore., Mr. Rieschel, who had worked nights at a grocery store, landed a position as a manager for Intel, testing integrated circuits on a graveyard shift. In 1984, he joined a start-up, Sequent Computer, and moved to Japan in 1989 to be managing director of the Sequent-Panasonic joint venture and general manager of Sequent in Asia.

Four years later, he returned to the United States as a deal maker forCisco Systems. In that role, he helped Cisco Japan sell 25 percent of its operations to a consortium of a dozen partners and investors, including Softbank, which took about 12 percent, or nearly half of the venture. Softbank invested $12 million in the deal, exiting in 2000 and netting $550 million in cash, $450 million in equipment and $650 million in financing for its Softbank Asia Infrastructure Fund.

In 1995, Softbank’s mercurial founder, Masayoshi Son, tapped Mr. Rieschel to run aventure capital fund focused on Internet start-ups in the United States. It was the early days of the dot-com boom, and he bought stakes in scores of firms, likeYahoo andBuy.com. Over the next three years, Softbank funds posted annual gains of 125 to 200 percent.

But the crash was equally spectacular. Softbank’s funds lost 75 percent of their value in 2000, while the Softbank Corporation’s stock dropped 80 percent over a two-month period; Mr. Son lost an estimated $47 billion in personal wealth.

“I felt devastated,” Mr. Rieschel said of this time. “I had to make hard decisions.”

From more than a hundred companies, he had to choose which to let go. More painful was giving pink slips to partners, who had been close friends. “It was real triage, emotional triage.”

The Chinese start-up scene, Mr. Rieschel said, has a frenetic feel similar to those early dot-com boom days. “I’ve worked in Tokyo and in Silicon Valley during the dot-com bubble, and that was intense,” he said. “But it’s not even close.”

“I tell people, it’s like a football game,” he added. “You sit in the sidelines and think, whoa, those players are big. Then you get in the game, and see not only are they big, but moving really fast. In China, it’s the combination of speed and size.”

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