(Note Updates below) BEIJING, CHINA– Starbucks is a franchise in China that worked. The company opened locations at the bottom of all the major tourist hotels and downtown areas where returning Chinese, expats and business people traveling to China would pop in for some familiarity and to hold meetings, much like they do in the U.S. For people hoping to mix with that crowd, Starbucks became something of an aspirational brand in China. Tea was what your parents drank; a latte was something exotic and western.
No one thought Starbucks would work in China, but it did. Sequoia Capital, however, is not Starbucks.
There are a few ways to set up venture activity in China. One is to become a limited partner for a local firm. Another is to relocate an existing partner to build an office. The most common is to hire well-known, connected investors already in China, and Intel Capital, which has been investing in China longer than almost anyone, is one of a few farm systems for that. Typically this is known as the “franchise model.” The hired China partners operate under the Kleiner Perkins or Sequoia brand name and typically share the same limited partners, but the funds themselves are separate. In exchange for that name and fund raising advantage, the Valley firms take a healthy chunk of the carry.
It seemed like the best of all strategies a few years ago. These firms want experts but don’t necessarily want to slow down or meddle in their deal making. But the cachet of the top Valley brands only goes so far over here. In 2008 Kleiner Perkins’ China partnership exploded, with two of its four partners quitting in a dispute that was far more contentious than a lot of Valley media reported at the time. In a week of touring China’s start-up scene, I’ve barely heard the KPCB brand mentioned at all. Now, it seems it’s Sequoia’s turn in the spotlight.
It’s no secret Mike Mortiz has been traveling back-and-forth to China a great deal, and he’s fond of telling reporters that’s because of all the opportunity. I asked him at Kenshoo’s recent US launch party about the unique challenges of investing in China versus the US, Europe or Israel. He said he wasn’t trying to stonewall on the answer, but that all venture investing was just hard, no one place more than another.
Really? Several sources in China and Silicon Valley have confirmed Moritz has been in China this week addressing Sequoia’s so-called “China Problem.” In February, one of Sequoia China’s founding partners, Zhang Fan, resigned due to “personal reasons.” People are fond of pointing out that Zhang’s biggest hit was Asia Media Company, which later had to de-list from the Tokyo Stock Exchange under a scandal. Whether it’s true or not, the situation certainly didn’t do Sequoia’s brand any favors here.
That left the other founding managing director at the helm, the highly respected Neil Shen, who founded Ctrip.com, the so-called “Expedia of China,” and Home Inns & Hotels Management. I’ve talked to several VCs and entrepreneurs in China who say Shen is a prickly guy but his deal judgment is unparalleled in the country. Indeed sequoia has had two other IPOs (Renhe and VanceInfo) and a stake in the hot social networking name 51.com. Another investment, Peak Performance, has filed for its IPO. Shen is even a bit of a hero to some entrepreneurs. But unfortunately, Shen too is in hot water. U.S. firm Carlyle Group is suing Shen for more than $200 million in damages for allegedly blocking a Carlyle deal in a Chinese medical research firm.
Even the widespread speculation could be a big blow for Sequoia, which at one point seemed to be one of the better-adapted Valley names here. It still employs two other managing directors and several more vice presidents and associates in China, but for many Chinese entrepreneurs Shen represents the brand as much as Moritz does in the U.S. There are few China investors with solid operating experience, particularly in the Internet.
And it can’t be good news for Sequoia’s limited partners who haven’t taken too kindly to Sequoia’s pressure to make them invest in not only China, but in other unproven Sequoia funds aimed at India and later stage U.S. companies, according to very wide-spread reports and my own reporting.
Player hating is part of human nature, so it’s no surprise that other Valley investors have whispered with glee that the once-dominant Sequoia seems distracted by all this. The competition’s biggest fear: Moritz solves the problems and Sequoia starts to focus on what it does well again.
(Sequoia did not respond to a detailed request for comment or clairification of this story and has a long-standing policy of not commenting on the firm’s internal matters.)
Update: I’ve updated this story based on conversations with additional sources.
JMA Update: The earlier version of this post included rumors suggesting ethical issues around former Sequoia Capital partner Fan Zhang. Upon reflection we removed all language referring to those rumors as the charges were serious and could not be verified. In fact, we could find no underlying evidence of any inappropriate or illegal behavior by Fan Zhang. If anything, we determined that Fan Zhang has made significant contributions to the entrepreneurial community in China. Also, we have determined that Sequoia Capital firmly supports Neil Shen’s leadership of the China operation. We regret and apologize for any embarrassment this may have caused Fan Zhang, Neil Shen and Sequoia Capital.
….great article sister!
I am going to Beijing too – on the hope that Arrington reconsiders and hires me as a TC Senior Editor…
Anjali Sen
From India (in Singapore now)
I wouldn’t call it great, but congradulations on finally writing a post where you didn’t go on and on about yourself. You’re now almost qualified to apply to journalism school.
They also did not had any major hot in China. Or did they had any ? The biggest Chines hit that comes to mind is Alibaba
China? They’re closing down the SF office they just leased not too long ago I heard.
Not really surprising, China is a very different ball game, very different rules, and much harder to conquer in some business arenas.
“And it can’t be good news for Sequoia’s limited partners who haven’t taken to kindly to Sequoia’s pressure to make them invest in not only China, but in other unproven Sequoia funds aimed at India and later stage U.S. companies, according to very wide-spread reports and my own reporting.”
I’ve heard that as well. At the end of the day, LPs’ opinions are the only ones that matter. I learned that the hard way lol.
Nice stuff Laci Michael needs to force you to write more posts.
yep.
“Player hating?” Did Sequoia get “served?”
Hey, post something that will get you arrested.
Did you mean “cachet?”
Ugh.
Nice post Sarah,
Yeah China and India are no doubt very different.
I think that big companies shouldn’t focus too much on China and India just because there are over 2 billion people living there.
There are big countries in Eastern – Europe like Ukraine, Russia and Poland they could put more focus into because the culture is pretty much the same. And they could give it a try in Indonesia also. 260 million people speaks for itself.
Sarah,
If you want to know about China, like I said, come to Hong Kong!
(That goes for Moritz too).
Nedders
Sarah,
By the way, we have lots of Starbucks too but, just like Beijing, you won’t meet the right people there!
Nedders
surprised by the comments about zhang fan. i had always been under the impression that zhang fan was the clean one. curious if this is true or a smear campaign by neil shen and his “people” in china.
It is surprise to know that even Sequoia China is lacking integrity.
Moving forward, China’s big problem is lacking of trust everywhere, huge obstacle for innovation and productivity.
what americans don’t get; is asia is hard core; and they have the money; why would they want to give it back to the white people when they can keep it in their country?
do any of you think creating twitters is that hard?
plus you’ve outsourced everything to india, china, argentina, philippines. i know start ups now in india outsourcing americans lawyers.
the only thing americans can do, is bullshit.
look at twitter, it’s nothing but a spam feast with no business model;
i speak and read japanese and chinese, and lived in both countries for a number of years.
ROFL.
VC biz is a PROFESSIONAL BS and kickbacks and bribery. People made it their PROFESSION, what do you want from them after that?
investing in businesses with real models; i get the BS, and i know asians, they don’t BS; and they’re not stupid.
Well, at least they did well in Israel. I heard the Sequoia Israel has returns at the high end of any VC worldwide. Can anyone confirm?
“And it can’t be good news for Sequoia’s limited partners who haven’t taken to kindly to Sequoia’s pressure to make them invest in not only China, but in other unproven Sequoia funds aimed at India and later stage U.S. companies, according to very wide-spread reports and my own reporting.”
Hey guys I can understand the aversion in investing in unproven places like India and China. But I don’t understand how investing in Later Stage companies is a bad thing.
Is it because the returns on later stage investments are low? Thanks guys
Sara, this is a terrific post, because Sequoia, like many other companies who go global, has overlooked the cultural differences. Chinese society has anger and lack of trust that is generations deep, from when people ratted on their friends during the “cultural revolution” and it makes people live in the back brain, in survival mode. Not the way we do business, and not something we easily comprehend. But we are going to have to understand the Chinese cuture better if we are going to play in it, and respect their traditions as well as our own.
You are not invited ‘to play in it’, instead THEY will be playing in your 19-th century (which is equivalent to ‘obsolete’) culture. They are doing that already if you didn’t notice.
China is on the verge of collapse. How do you grow the GDP of an export dependent nation at 8% while exports have shrunk by 22%?
Answer: Catastrophic misallocation of capital.
If that’s not the case, then they are falsifying numbers big time. Their stimulus is still not a factor as it hasn’t hit the economy yet (and it’s not big enough to make up the difference anyway).
China’s in big trouble dudes.
That is very true. The only reason why central planning exists is: it allows the centralized falsification of EVERYTHiNG, including the economic data.
You can go to China looking for the analogy to the Web 2.0 Valley. Meeting at the starbucks or bookworm and people will expertly feed you that story. They’ll dazzle you with huge traffic growth (falsified data) and localized twists on social behavior with the occasional “look how bizarre” China is anecdote thrown in.
You miss the real story:
The innovation of underground social networks instantly translating movies, of advanced P2P networks for streaming video long before joost, of working around a fragmented network system or creating marketing websites that work; and the immense innovation in combining offline and online marketing and events. That’s just the start.
Take ctrip.com, the travel site mentioned above. Online travel? Sure…except it does most of its business through a call center, most of its advertising through pamphlets at train stations and its “CDN” are a bunch of people on bicycles. The internet makes it work, but not like in the U.S…
Similarly, one can scoff at the corruption or graft; but that again misses the point. The innovation is in working in a different set of rules and constraints.
The process of innovation is the same. The parameters are fundamentally different. That’s what the failed foreign ventures miss.
I’ve been lucky enough to spend three years living in Beijing working with a fantastic team creating innovative online products. Everyone is devoted to using new technologies to make the world a better place. Most importantly, everyone has the patience to really understand the underlying cultural differences that make this world an interesting place.
I know that journalism works well with “analogies” or “gotcha’s”…but this is exactly what is causing such misunderstandings and hindrance to progress in the first place. With thousands of years of a different history there isn’t analogies between China and the West. There is, however, the shared human emotions and reasonings enacted through a different vantage point.
That’s the story.
Well said, JP.
…except for the fact that you are NOT talking to journalists… these are just… BLOGGERS, all of them here.
actually, sarah lacy makes it very clear that she is a journalist. she should have higher standards. see her bio here: http://sarahlac...lacy/about.html
“Sarah Lacy is an award winning journalist and author of the upcoming book, “Once You’re Lucky, Twice You’re Good: The Rebirth of Silicon Valley and the Rise of Web 2.0″ (Gotham Books, May 2008). Lacy has been a reporter in Silicon Valley for nearly a decade, covering everything from the tiniest startups to the largest public companies. She writes a biweekly column for BusinessWeek.com called “Valley Girl” and is co-host of Yahoo! Finance’s Tech Ticker. She lives in San Francisco.”
strangely, the story was deleted from the home page overnight on saturday (while other stories stayed). Is techcrunch in conflict of interest in publishing the story too openly? happy to see they covered KPCB as well, and highlighted the corruption issue with VCs in china. FINALLY!
I happened to read the earlier version of this post that contained the comments regarding Sequoia China’s former partner Zhang Fan. I had several meeting with Zhang. In my mind, he is straight forward , honest man who has acute perspectives on internet business and yet is very encouraging when speaking with entrepreneurs. He is nothing like what the original post described based on my personal experience. I highly doubted Sarah’s sources on this one. BTW He didn’t invested my company, but I have to agree with his decision looking back.
The original story wasn’t pulled because Techcrunch was protecting Sequoia, it was pulled because there was a statement about Zhang Fan that began “I’ve now talked to close to twenty sources in the venture scene in Beijing and Shanghai who say…”
What followed was gossip at best, slander at worst. This re-post removed the language but should begin with an apology to Zhang Fan and Techcrunch readers for failing to uphold a better standard.
This was bad for all parties involved (and professional bloggers in general) and I can understand not wanting to draw attention to it immediately since it would only further hurt the the subjects of the story. Very soon, however, Techcrunch needs to address this – and do better than rewrite stories without explanation.
And an appropriate next assignment for Sarah might be the importance of face and guangxi in China.
I’d suggest Sarah look into the white boys’ adventure in China, which should be far more shocking! (Bruno, I am not talking about you.)
For example, at a 100+ Mil fund affiliated with a well known fortune100 company, there are three white GP who collectively did only one deal in the past three years, but cheated their LP/Chinese partners millions of dollars in fees and future earning by charging multimillion dollars per year “housing-car-hardship allowances”, “professional service fees”, and five star VIP travel accommodations all over the world! These are the audited financial facts. When you get into personal level, that’s where the adventure starts! – We will leave that to the tabloid journalists.
I know the firm/guys you are talking about:-) My partner was invited to his xmas house warming party at a mansion on the peak worth 20 mil USD! Leased and fully staffed by the management company, for $2 mil/year! Now you are talking about the white boy’s high rolling life in Asia
Hi, I’m new to this blog. Could you give me a couple of more clues about this 100+ mil fund?
Thanks!
i am reposting here a comment i have now made 3 times on techcrunch in regards to this article. it has been deleted 3 times, and expect it will be deleted again once they realize it is there. techcrunch has also deleted several others, including one by a journalism professor, that were critical of the reporting.
i live in beijing. i find it sadly ironic that techcrunch publishes sensitive content, then removes that sensitive content and reposts it without acknowledging the changes, and then tries to stifle any discussion of the changes.
my oft-deleted comment from techcrunch:
I find it disturbing that this article has been reposted almost 48 hours after disappearing from TechCrunch within hours of its original publication. The only change appears to be the deletion of a sentence repeating libelous innuendo about a former Sequoia China partner. There is no mention of that specific change, just an “Update: I’ve updated this story based on conversations with additional sources.” If your lawyers are limiting you to saying only this then find a clever way to tell your readers. Don’t just hope no one notices.
There is no shortage of dirty doings in the investment business in China, but TechCrunch, as a publication with a massive audience, tremendous market power and aspirations to reputability, should know that you do not print allegations of criminal behavior based on rumors and hearsay. And you especially do not write those things without at least trying to contact the person about whom you are making these allegations.
Yes, you read that correctly. The author, an established reporter, never bothered to contact the former Sequoia partner in question before she wrote that he was dirty. He is very easy to find and at a dinner in Beijing last week at least three of the attendees have his number in our mobiles and could have given Ms. Lacy his phone number. But she wasn’t even trying to contact him. Again, that is not how credible journalists practice their craft.
In a tweet over the weekend @sarahcuda wrote “pretty surprised people who were *silent* in room when ppl said things about sequoia china are publicly calling me out for being unfair. ok.” http://twitter....uses/1819511453
As Ms. Lacy knows, I was one of the 8-9 people at the dinner in Beijing on Thursday night. She is the one who mentioned that Michael Moritz was in Beijing and that big changes were coming to Sequoia China. That comment spurred a discussion about Sequoia China among the party. Neither I nor any of the attendees with whom I have spoken remember any specific discussions about the partner in question, and especially nothing negative. In fact, she was told of Neil Shen’s reputation for being smart but very difficult to deal with, and of a BBS posting that circulated on the Chinese web a couple of years alleging all sorts of sketchy dealings between Shen and former Yahoo China head Zhou Hongyi.
We also discussed that the Sequoia China portfolio appears to have some companies in trouble, and the fact that their only public exit to date has been Asia Media, a company recently delisted in Tokyo for financial irregularities. Curiously, she addressed no questions about the partner in question to the dinner party. This group included several VCs, entrepreneurs and other people who have some knowledge about the topic of her article. After publication several of us were surprised that these allegations seemingly came out of left field.
So I don’t who she is calling silent or otherwise in her snarky way is inferring is a hypocrite. I didn’t follow the party to the Chocolate Club, so perhaps there were further conversations or moments of “silence” on this topic of which I am not aware.
TechCrunch should be better than this. Ms Lacy seems like a perfectly nice person, but this article is so poorly reported and unprofessionally written, and about such a serious issue (accusing a respected investor of being a criminal), that readers should wonder what kind of editorial standards are in place.
Full disclosure: I am acquainted with the former Sequoia partner but would not consider him a friend; he is good friends with a very good friend. More importantly, I don’t like bad journalism and believe very strongly that influential media organizations especially should not abuse their power and trust with sloppy work.
One more nitpick, I believe your fact checkers got the date of the Sequoia China partner’s departure wrong. My understanding is that he left at the end of 2008, not in February 2009.
that hurts
Journalists in the print world print anonymous accusations. They just do. What makes a journalist useful is second-sourcing and a critical attitude. What makes him professional is the delicate phrasing which avoids lawsuits. What makes blogs different is the ability to “unsay” something online when your opinion changes. What makes a popular blog different is that the interest exists, as well as the ability, to retrieve caches for comparison, and see what you unsaid.
Well said David. I too suggest Sarah/Rebecca look into the misconduct of the white VC GP’s conduct or misconduct in China, in both business and personal side. I bet you’d find more shocking stories than you want to report.
I have interviewed 10 venture capital sources in Beijing in 2 days. Not one of them has ever heard of the wrongdoing that Sarah mentions in her tales of former Sequoia partner Fan Zhang.
Must be a case of mistaken identity.
Is it a case of mistaken identity? The answer is NO.
Rebecca and all the people who care about this isse, If you probe into investment and commercial competitive relations between Sequoia capital (Mr. Fan Zhang whom Sara censured in her original post), google, Yahoo ( Yahoo China’s CEO Mr. Jack Ma, co-hosts Tech Ticker on Yahoo! Finance Ms. Sarah Lacy), Qihoo ( chairman of Chinese search engine company Zhou Hongyi) and if you learned about some personal longstanding drudge between Jack Ma and Zhou Hongyi, it’s not difficult for you to realize ultimately that Sara Lacy is a blinded-by-greed and inglorious rumormonger and her original censure on Mr. Fan Zhang is complete blasphemy to journalist’s code of ethics.
Sarah, I have to say your original post is really a shame.