Brain drain hits mainland venture capitalism

Some of the oldest brands in venture capitalism, including Intel Capital and the 3i Group, have seen their mainland turnover shrink in recent years as key personnel traipse out the door.

21 January 2008
Published by South China Morning Post

“We have seen huge turnover of talent in this industry which is supposed to have much longer tenures than investment banking and other fee-income businesses,” said Vincent Chan, who headed the North Asia division of Jafco for seven years. Japan-based Jafco is a venture capital investor active on the mainland.
 
Mr Chan said that in the mainland market, most venture capital specialists left after two or three years with a firm. Few stay with the same company for 10 years.

“That is extremely unhealthy,” he said.

High turnover of key staff has resulted in the loss of good investment opportunities for some major venture capital firms. One industry source said Goldman Sachs did not invest in the third round of Alibaba Group due to the departure of a manager responsible for the project and instead sold its stake cheaply. Apparently, the manager’s replacement did not feel comfortable handling Alibaba. Another venture capital source said: “It could have easily made more than 50 times [the money it invested] if it had kept its stake.”

As key people leave, even corporate venture capital firms backed by major industrial or financial groups - such as Intel Capital of chipmaker Intel - have problems raising funds.

EPlanet Ventures, a Silicon Valley-based venture capital firm had problems raising funds after investors realised all its key employees, including two in charge of its mainland operations, had left.

EPlanet raised US$650 million in 1999. It invested in some of the best deals in the technology sector, including Skype, Baidu and Focus Media. Its 1999 fund had grown to US$3 billion as of March last year. It has an annual rate of return of 35 to 39 per cent and is one of the best performers in the industry. Still, the company could not raise US$100 million in funding, the source said.

Some of the most talented investment managers have set up their own funds in recent years, allowing them to make much more money.

“If you set up your own fund, you can take the ‘carry’, which is about 20 per cent of the profit of the fund. If you stay with a corporate, such as Intel Capital or 3i, the company takes the carry and you are only paid a bonus,” the source said.

Besides the monetary rewards, establishing their own fund also gives investment managers the freedom to pursue their own strategies, rather than sticking to a company’s rules, he said.

Setting up your own shop is not difficult. Armed with a track record of reasonable returns, experienced investment managers “don’t need recognised brand names to raise new funds”, he said.

Former Jafco employee Mr Chan is a case in point, having just set up Spring Capital Asia. So far, he has raised US$100 million and plans to raise a further US$200 million in the first quarter of this year.

But can the new venture offer better investment returns to investors? Mr Chan believes so, arguing that those who manage their own fund tend to work harder to bring in more returns.

Moreover, the advantage of major corporate venture capital firms providing regional coverage is disappearing. Most venture capital firms will have to be located in the country they are investing in as “local knowledge is key to getting a better deal”, Mr Chan said.