Neil Shen’s HongShan Is Slow to Deploy Its $9 Billion Capital, Looks for Deals Outside China
The Takeaway
• HongShan has invested only a quarter of its $8.8 billion warchest
• The slow investment pace reflects weak Chinese economy and trade tensions
• The firm set up offices in Singapore, Tokyo and London over the last two years
When venture capital giant Sequoia decided to carve off Sequoia China two years ago in response to growing tensions between the U.S. and China, the newly independent China firm was expected to continue pouring its huge funds into Chinese startups.
Renamed HongShan (Mandarin for Sequoia), the firm had only a year earlier raised what was then a record $8.8 billion to fund new tech investments. Three years later, things haven’t turned out as expected. HongShan has invested only a quarter of its giant war chest, according to two people with direct knowledge of the matter. The unusually slow pace underscores the reality that the yearslong challenges confronting Chinese VC firms—including a moribund Chinese economy and U.S.-China trade tensions—have not eased, as even the best of them struggle to find enough good deals to invest in.
To pick up the pace, HongShan has been increasingly looking beyond China. It has branched into buyout deals in Europe, while also backing startups around the world in diverse sectors.
What makes HongShan’s investing status noteworthy is its commander in chief, Neil Shen, whose name has become synonymous with VC in China. He set up Sequoia Capital’s China arm in 2005, and in the ensuing decade and a half, he established himself as one of the most successful and celebrated venture investors both in China and around the world. He spotted early on the potential of companies such as ByteDance, Meituan and PDD Holdings, each of which went on to become a giant. Sequoia China’s gains from Meituan’s 2018 initial public offering were comparable to Sequoia Capital’s gains from Google’s 2004 IPO, The Information reported in 2018.
For three years in a row from 2018 to 2020, Shen was ranked No. 1 on the Forbes Midas List of the world’s top 100 venture capitalists, above American heavyweights such as Benchmark’s Bill Gurley and Sequoia Capital’s Roelof Botha.
But HongShan is now caught up in the tensions between the U.S. and China. Just last week, after New York–based Eight Sleep announced that HongShan had participated in a $100 million funding round, the firm’s participation sparked an online squabble between Founders Fund partner Delian Asparouhov, whose firm is an Eight Sleep investor, and Benchmark partner Chetan Puttagunta. To avoid scrutiny from the U.S. government, HongShan made sure its stake is not big enough to warrant a board seat, according to an existing investor in Eight Sleep. Eight Sleep’s sensor-equipped mattress tracks user data like heart rates, breathing patterns, and sleep and wake time.
Some of HongShan’s biggest investments in the past year were in Europe. In January, the firm announced that it had taken a controlling stake at Stockholm-based audio equipment maker Marshall Group. The transaction valued Marshall at 1.1 billion euros ($1.3 billion). HongShan’s stake is around 80%, according to one of the people with knowledge of HongShan’s fund deployment details. Last year, HongShan participated in a $430 million funding round for the U.K.’s largest digital bank, Monzo, at a valuation of $5 billion.
HongShan recently invested in Turkish fintech startup Midas and Genesis AI, a Paris-based developer of artificial intelligence for robots co-founded by a former Mistral AI employee. Earlier this year, HongShan backed ELMI Power, a German developer of electric vehicle charging systems.
A person close to HongShan said the firm’s “edge in overseas opportunities lie at those with a China angle, such as Chinese founders, or a company with its supply chain or target market in China, or investment opportunities in sectors where the firm has an expertise and insight that’s gained through 20 years of investing in China.”
Meanwhile, in China, major late-stage startup deal opportunities have become scarcer. Last year, for instance, HongShan helped fund the purchase of shares from existing shareholders in social media giant Xiaohongshu. The deal valued Xiaohongshu—which was briefly crowded by TikTok refugees earlier this year—at $17 billion.
Shen has been backing startups outside China since his Sequoia days, with moves such as his 2018 investment in Australian graphic design software Canva. But independence from Sequoia offers HongShan a much bigger runway. The firm set up offices in Singapore, Tokyo and London over the last two years. However, the U.S. remains largely off-limits due to U.S. government scrutiny of inbound investments from China.
The $8.8 billion capital HongShan raised in 2022 consisted of four funds—seed, venture, growth and expansion—for backing startups at different stages of development. So far, the firm has deployed just 27% of the growth fund and 15% of the expansion fund. HongShan only started deploying the capital from those two late-stage funds around the beginning of 2024—in part because the firm, in 2023, still had money left from its previous growth fund raised in 2020, according to a person with knowledge of the matter.
HongShan “has consistently delivered outstanding returns through a focused approach to capital deployment across China, Southeast Asia, Europe and Japan,” the firm said in an emailed statement. “We continue to leverage our Asian roots, expertise, and networks to be a leading global alternative asset platform.”
Global Branding
HongShan invested in those recent international deals under the moniker HSG, a brand name the firm has adopted. HSG is a sort of acronym for the firm’s full name, HongShan Capital Group.
Some non–Chinese speaking entrepreneurs and investors considered the name HongShan too difficult to pronounce, making it less suitable for a firm looking to increase its presence in overseas markets.
That wasn’t the case just two years ago, though, when Shen, then the head of Sequoia Capital China, decided that HongShan’s track record in China would ensure the firm’s continued success. Not only did the firm keep its Chinese name unchanged—it decided to use HongShan as its English name. (By comparison, Sequoia Capital’s South and Southeast Asia arm rebranded itself to Peak XV, a name British surveyors gave Mount Everest in the 1850s.)
The roughly $9 billion Shen raised in the summer of 2022 looked like a crowning success. The fundraising, multiple times larger than what he had raised in the past as the China head of Sequoia, was 50% oversubscribed. That feat was all the more impressive given that it took place in the aftermath of Beijing’s brutal crackdown on big tech platforms and in the midst of Covid-19 lockdowns.
But things didn’t go according to plan. China’s economy didn’t stage a post-pandemic rebound as many had hoped. That, as well as a high interest rate environment that also hurt stock prices elsewhere, suppressed the valuation of Chinese tech companies overall.
Furthermore, in early 2023, China’s securities regulator promulgated new regulations that tightened the approval process for Chinese companies or those with significant operations in China to go public overseas, an attempt to plug the regulatory loophole exploited by ride-hailing giant Didi Global. The new rules have since curbed the pace of startups floating their shares in popular listing destinations such as Hong Kong and New York, stifling the exits, and therefore the returns, for many of the country’s VC firms.
For example, Lala Tech—a Hong Kong–based operator of on-demand delivery and logistics services with sizable operations in China, which is a portfolio company of HongShan—has been waiting since spring 2023 for the Chinese regulator to sign off its IPO plan in Hong Kong.
Without the certainty of realizing gains through an IPO, and alarmed by geopolitical tensions, many U.S. institutional investors, such as pension funds, university endowments and charitable foundations, have stopped making new investments in Chinese VC and private equity funds.
Fundraising Struggles
When Shen ran Sequoia China, he typically traveled the fundraising circuit every two years. Today, three years after its last fundraising, HongShan is yet to start fundraising talks for another round. Two of HongShan’s limited partners, who declined to be named, said the firm should consider returning some of the capital, given that it’s been slow to put those funds to use.
HongShan has no obligation to return the capital limited partners have already committed, but doing so would build a lot of goodwill should it want to come back for another check in the future, they said.
Another HongShan limited partner, however, said they aren’t concerned about the firm’s current pace of investment because they have faith in Shen’s ability to find the best deals in the long run, as his track record has shown.
“Some U.S. dollar–backed Chinese funds have significant dry powder but appear reluctant to deploy. It’s difficult to tell whether that slow deployment is because the opportunity set is simply not compelling or because the [general partners] are fearful of running out of capital and being forced into a very difficult fundraising,” said Edward J. Grefenstette, CEO of Pittsburgh-based The Dietrich Foundation, who is not a HongShan limited partner but has backed some other prominent Chinese VC firms.
To be sure, compared to some of its smaller peers, HongShan is still in a good situation. It has raised enough money to stretch throughout the doldrums, while others are scrambling to raise the next fund.
And while HongShan isn’t raising new funds, several other Chinese VC firms have tapped the fundraising circuit, including Qiming Venture Partners, Lightspeed China Partners, Source Code Capital and Ince Capital. All have had to settle for a smaller target than they set out to raise, according to multiple people with knowledge of the matter.
For example, Qiming, another well-respected Chinese VC firm, has to reduce its funding target to $600 million from $800 million, according to two people with knowledge of the matter. Source Code Capital, founded by former Sequoia China manager Cao Yi, had to halve its target to $150 million, with about one-third of the first close of $90 million footed by Cao himself, according to two different people with knowledge of the matter. Qiming and Ince declined to comment. Lightspeed China and Source Code didn’t respond to a request for comment.
“For U.S. [limited partners] looking at China VC right now, the underwiring challenge is both assessing geopolitical risks and evaluating the current VC ecosystem. The former is especially hard, because the half-life of any analysis is about 72 hours, it seems. The latter is not easy either, as there’s lots of noise around the supply and demand of VC capital,” Grefenstette said.
“China remains full of incredibly talented founders working tirelessly toward their vision. Yet China VC remains the least crowded trade in the world right now—it seems strange not to find that alluring and worthy of deep inspection,” he added.
