VCs may not know how to trade stocks, but they don’t have to understand.
Editor’s note: This article is from the micro-channel public number “Dongsishitiao capital” (ID: DsstCapital), Author: Zheng Xuan.
Some time ago, the B station was listed for the second time, and the fact that VC could not hold the stock was ridiculed by the group again.
The market value of Station B when it went public in the United States in 2018 was US$3.1 billion, and it has risen to US$43 billion three years later, and it has risen 7 times since 2020. However, IDG, CMC, Qiming Venture Capital, Legend Capital, H Capital and other early VCs that entered the market have sold most of their stocks before 2020 and hardly received this wave of dividends.
This is not the first time such a discussion has occurred. After JD.com went public in 2014, DST and Capital Today both withdrew in about 2015. In the following years, JD.com’s share price has risen by more than 3-4 times. If these two institutions earn at least $5 billion now.
There is also Golden Eagle Commerce, which gave the Bubble Mart a helping hand in 2014. In 2019, it sold 10% of its equity for 150 million yuan. One year later, Bubble Mart went public in Hong Kong, and its market value exceeded 100 billion Hong Kong dollars at one time. After waiting for a year, Golden Eagle Commerce made a small profit of 9 billion.
Can’t help but make people curious: Why are big men who believe in value investing and long-termism so uncomfortable and unable to hold the stocks of these big cases?
Is it all caused by the duration?
Talking about the problem that domestic VCs cannot hold stocks, the first answers given by many investors all point to the duration of the fund.
The most common duration of domestic private equity funds is 5+2. my country’s “Funds Law” stipulates that the duration of closed-end funds shall not be less than 5 years. It can be extended for 2 years if the conditions are met, so most domestic The duration of private equity funds is 7 years.
GP will generally finish investing in the project within 3 months to 1 year after the fundraising is completed, which means that after VC has invested in a project, it will take 6-7 years to complete the exit of the project.
JD.com received three rounds of venture capital investment in 2007, 2009, and 2011. When JD.com went public in 2014, foreign media reported that the promoters behind it were some investors who wanted to exit. Years later, today’s capital, DST and other shareholders’ substantial reductions in their holdings also confirmed the rumors from the side.
Considering that Amazon has just risen in 2014, the US capital market is far less tolerant of losses than it is today. At that time, JD.com, which had not yet made a profit, chose to go public at that time, which may not be the best time.
In contrast, some overseas investors with longer durations and smaller restrictions have received more returns after their investment projects are listed.
A few days ago, South African newspaper group Naspers reduced its holdings of Tencent by 2%Naspers has cashed in about US$15 billion in cash, plus US$10 billion in cash from a 2% reduction in its holdings three years ago. Naspers has cashed in US$25 billion. At present, Naspers still has about 28% of Tencent’s stock, plus the cashed part, Naspers’s US$32 million investment in 2001 has a total return of more than US$240 billion, which is nearly 8,000 times more profitable.
Tencent went public in 2004. At that time, Naspers’s Tencent stock was worth approximately US$2.7 billion. If Naspers immediately reduced its holdings after the listing, the return would not be as small as today.
The same example is Softbank’s investment in Alibaba and Tiger’s investment in JD. However, there are not no domestic institutions that have made a lot of money by holding stocks. The most typical ones are the investment in Pinduoduo Gaorong and Sequoia.
Since 2015, Gao Rong participated in Pinduoduo’s Series A, B, B+ and C rounds of financing, holding 10.1% of the shares before listing; Sequoia participated in Pinduoduo’s C and D rounds of financing before listing Holds 7.4% of shares. Calculated according to the stock price at the time of listing in 2018, Gao Rong and Sequoia’s book earnings were US$2.1 billion and US$1.6 billion, respectively.
After listing, Gao Rong and Sequoia reduced their shareholdings in Pinduoduo a small amount. So far, Gao Rong holds 7.17% of Pinduoduo’s shares, and Sequoia holds 6.67% of Pinduoduo’s shares. Calculated based on the stock price on April 8. Valued at 12.6 billion U.S. dollars and 11.7 billion U.S. dollars respectively, three years of holdings made the two funds an additional 10 billion U.S. dollars.
In fact, many US dollar funds have a longer duration. For example, Gao Xiang of Gaorong Capital said in an interview with the media that the duration of the first phase of Gaorong’s US dollar fund is more than 10 years. From this point of view, duration is not necessarily the only factor that VCs can’t hold on to stocks. The big venture capitalists will not trade in stocks, which may not be a joke.
Not capable, or unnecessary?
The target of venture capital (Venture Capital) is early-stage start-ups. Compared with listed companies, start-ups have opaque information, unclear business, and complex investment models. From this perspective, the threshold for venture capital is lower than Stocks in the secondary market are much higher.
Some people think that it is a dimensionality reduction blow for a powerful man in the primary market to invest in stocks in the secondary market, and it should be done by hand, but this is not the case.
Xu Wei (a pseudonym), a senior investor with many years of experience in the industry, told China Investment Network that in his opinion, VC investing in start-ups is essentially different from investing in stocks in the secondary market.
VC’s core competence is the ability to judge the “growth” of an enterprise. Observe a company for several quarters to see if its growth has fulfilled its previous expectations, so as to determine whether the company is worthy of follow-up.
The core of investment in the secondary market is the ability to judge “price”.In addition to the company’s business development, the basis for judgment is more importantly the market’s sentiment. There are both macro factors (such as monetary policy) and micro factors (operations, public opinion) of enterprises. Therefore, investment institutions in the secondary market have formed a variety of schools, including band operations, quantification, and bridges. Such an all-weather strategy.
The investment philosophy of the two markets is quite different. Xu Wei believes that this determines that it is difficult for an investment team to possess both abilities at the same time. In fact, at present, the operation of domestic VCs when they exit is often rougher than when they are investing.
A friend from a RMB fund told me that I know a good VC partner who has invested in multiple IPO projects, but he didn’t pay much attention to it when he quit selling stocks. Several colleagues stared at the computer and watched today’s stock price. If it’s not bad, just find a high point and sell it; in addition, there are also investment institutions that divide the stocks in their hands into several shares after the lock-up period ends, and sell a part of them every month, which is equivalent to taking an average value, which is also an account for the LP .
There are also domestic VCs who will hand over the stock to the secondary market department for trading after the company is listed, but the number is very small. On the one hand, a VC may not have several projects listed in the past few years. It is not wise to spend a lot of money to set up an investment research team in order to retreat better; on the other hand, the distribution of the team’s interests is also a problem, and the stock trading team can only sell it. Buying, selling more and selling less are difficult to measure whether you have made a profit or lost.
What’s more, there are certain regulatory risks involved. Many of the VCs that led the rounds of investment in Series A and Series B are major shareholders holding more than 5% of the company’s shares, and they often have a lot of insider information about the invested companies. High selling can easily fall into the trouble of insider trading.
For example, last year Ruixing made a fake storm. According to the Wall Street Journal, Dazheng Capital, which sold Ruixing’s stock two times before the storm, was targeted by the SEC. This is why some large private equity funds that set up both a venture capital department and a secondary market trading department will set up strict information barriers.
In addition, Xu Wei believes that another important reason is that for LPs, making more money through the secondary market is not in itself what they want. “LP itself does not have strong expectations for the secondary market department of GP. The spread between the primary and secondary markets is already very high, and the rest is just fate. And for LP, returns and liquidity It’s not easy to say which sex is more important.”