Winning in China by Lele Sang and Karl Ulrich

Author:Lele Sang and Karl Ulrich
Language: eng
Format: epub
Publisher: Wharton School Press

Sequoia with Chinese Characteristics

Though Sequoia China was rooted in Sequoia’s US business, it wasn’t controlled by its parent in the traditional way, with big decisions made in California and orders emanating from there. Leone insisted Shen and his team make their own decisions. That was a lesson he’d learned in Israel. When Sequoia and Cisco set up an Israeli investment fund in 1999, their approach was to let the Israelis vet potential deals but have the US office make the decisions. That arrangement proved sluggish. In China, Leone wanted decentralization. Shen was expected to create his own distinctive plan.

Shen’s departures from Sequoia’s US investment strategy started early. Initially, he and his team financed Qihoo360, an internet security company, and Dianping, a restaurant review site—choices consistent with the focus of Sequoia US. But then they bet on Noah, a wealth management company with no particular enabling technology, investing about $5 million for roughly a 20% stake. Three years later, in 2010, Noah went public on the New York Stock Exchange and raised $100 million. Today it’s the largest independent wealth management company in China and valued at $2.6 billion. As the only institutional investor, Sequoia China earned a good return. “You would never have done that without a localized strategy,” Shen said. Though Sequoia US had invested in the financial sector, it focused mainly on financial technologies, so-called fintech. But Shen knew his home market well enough to bet not just on IT and health care but also on a broader spectrum of industries, as China was—and still is—in many categories “an open space,” he said.

As the market evolved, Sequoia China’s strategy diverged further from its parent’s. Chinese entrepreneurs, after years of learning from Western peers and being called copycats, had started to develop their own products and business models that didn’t have a model in the United States. These companies could baffle even sophisticated investors from Silicon Valley, including Leone himself. For the first 10 years he visited China, while Chinese entrepreneurs were playing catch-up, Leone would point to a Chinese company and say: “I know it—I saw this in the US.” Yet over the years, his déjà vu began to fade.

Take Meituan-Dianping as an example of how China is creating new categories of companies. It’s hard to define what Meituan-Dianping is. It’s a group-buying and review site. It handles food delivery, hotel bookings, movie ticketing, ride hailing, and other services. In 2018, it acquired Mobike. It rolls the services of Groupon, Yelp, Grubhub, Kayak, and Uber into a single enterprise. When Sequoia China first encountered Meituan-Dianping, it was two separate companies: Groupon-like Meituan and Yelp-like Dianping. (Dianping was founded in 2003, a year before Yelp.)

Sequoia China was the only investor in both companies’ earliest financing rounds. With the evolution of both—Meituan added food delivery, Dianping started offering group deals—a fight for market share erupted. Both firms burned through cash. Sequoia China facilitated a truce and a merger, which created a company with over 300 million Chinese users. During the company’s fund-raising, one leading investor dropped out after its letter of intent was signed.

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