Sequoia Capital’s former China unit raises new $2.5bn start-up fund

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Sequoia Capital’s former China unit has raised an Rmb18bn ($2.5bn) fund, defying a fundraising freeze that has hit rivals and building its war chest to invest in technology start-ups in the country.

HongShan, the Beijing-based group that split off last year from one of the world’s largest venture capital firms over geopolitical issues, successfully closed the renminbi fund in March, according to two people with knowledge of the matter.

It is the largest fundraising by a privately owned VC firm in China in the past year, marking the ongoing influence commanded by its founder Neil Shen, widely considered the country’s most powerful tech investor.

The new fund is backed by the Hangzhou city government and a number of private and state-owned insurance companies, the people said. However, it is smaller than HongShan’s $9bn US dollar fund raised in 2022, which it has so far struggled to deploy.

Start-ups in China have been hit by an economic and property crisis, as well as the lasting effects of a regulatory crackdown on tech groups that sent valuations tumbling and crushed plans of stock market listings.

Last year, Silicon Valley-based Sequoia separated from its China unit amid pressure from Washington and Beijing over foreign investment flows.

In June, President Joe Biden proposed rules that would stop US investment in Chinese technology with military uses, such as artificial intelligence, quantum computing and semiconductors.

Several global financial institutions that had previously backed Sequoia China remain investors in HongShan’s US dollar fund. These include the California state pension fund Calpers and the Canada Pension Plan.

Shen has been behind some of the most lucrative Chinese tech investments, including TikTok parent ByteDance, drone maker DJI and ecommerce groups Meituan, Alibaba and Pinduoduo.

This year, HongShan has invested in Zhipu and Moonshot, two of the leading domestic start-ups racing to become China’s answer to OpenAI. In April, it also acquired a stake in Biren, an AI chip start-up trying to develop graphics processing units to rival those of Nvidia, whose most cutting-edge technology is banned in China, according to PitchBook.

A person with knowledge of the fund’s operations said the new renminbi fund could present a challenge for HongShan’s US limited partners, the financial institutions that invest in VC groups.

HongShan’s dollar and renminbi funds are managed by overlapping teams, but the renminbi one can more easily invest in sensitive technologies.

“The RMB fund and USD fund are very different animals under the same leadership, with more constraints on the US limited partners than before,” the person said. “By nature the USD fund will be tapped into fewer deals and more cautious about investing in sensitive industries. The question is: where does HongShan focus its energy and efforts?”

HongShan’s seventh renminbi fund is smaller than a more recent Rmb28bn one raised in 2021 during the peak of investor appetite for Chinese tech companies. But it leaves HongShan in a strong position to negotiate preferential terms from cash-strapped founders, said one rival VC firm.

“Everyone is struggling to raise capital,” they said. “There aren’t many players in the field writing big cheques.”

HongShan declined to comment.