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In 2018, Yuan Yaguang, a partner of Yida Capital who was originally from the advanced manufacturing team, led the team to Wuxi for development. This was due to the establishment of a 3 billion yuan fund in cooperation with Jiangyin High-tech Zone under Wuxi that year.

In recent years, there have been many market-oriented investment institutions like Yida Capital that have come to Wuxi for development. Gu Wei, then director of the Wuxi Local Financial Supervision and Administration Bureau, introduced in 2023 that in the past two years, they have met with the top 30 funds on the Qingke (Investment) list, and have reached cooperation with half of the institutions. In addition to market-oriented institutions, central enterprises, local state-owned enterprises in cities such as Shanghai and Shenzhen, and local state-owned enterprises constitute the complete echelon of equity investment institutions in Wuxi. But Gu Wei also said: "No matter how many funds there are and what the results are, they will ultimately be reflected in the good of the industry."

In June this year, Wuxi just launched three funds, which are commonly referred to as "new funds" by the local industry, hoping to leverage more social capital. For an industrial city like Wuxi, the purpose of attracting funds is naturally to hope that they can promote more industries to land in Wuxi.

"Fund investment promotion" is something that is being done all over the country. However, unlike the "Hefei model" that has been popular in recent years, Wuxi's style from the beginning has been to use government investment to support more early-stage projects.

A corner of Wuxi city. Photo/Visual China

Wuxi "make-up lesson" parent fund

The three new funds that have landed in Wuxi this time are Jiangsu Integrated Circuit (Wuxi) Industry Special Fund, Jiangsu Biomedicine (Wuxi) Industry Special Fund and Wuxi Future Industry Angel Fund, with a total scale of 10 billion yuan, all of which operate in the form of "sub-fund + direct investment".

The Jiangsu Provincial Strategic New Fund has established a mother fund in cooperation with seven cities in Jiangsu Province. The provincial mother fund contributed 25% and the cities contributed 75%. Regarding how to ensure the source of funds, Wang Zhixing, president of Wuxi Innovation Investment Group Co., Ltd. (hereinafter referred to as "Wuxi Innovation Investment"), told China News Weekly that Wuxi City is actively raising local funds and will start fund investment operations in 2024 as required.

Wuxi is working hard to implement these three mother funds. According to the data in 2023, Wuxi's GDP ranked 14th among cities in China with a volume of 1.55 trillion yuan. The only prefecture-level city before Wuxi is Suzhou. However, according to the statistics of Zero2IPO Research Center, as of 2023, Wuxi has established a total of 19 government-guided funds, ranking only sixth in the province, which does not seem to match the economic size of Wuxi.

"In recent years, it is rare to see government-guided funds with a scale of tens of billions established at the Wuxi municipal level." A Wuxi equity investment person admitted to reporters that in the early years, many mother funds were operated at the Wuxi municipal level. At that time, there were many market-oriented institutions willing to develop in Wuxi and apply for investment from the Wuxi mother fund. However, in 2021, Wuxi used the whole city's strength to support the National Development Fund Phase II led by China Chengtong, contributing 30%. The current paid-in amount has reached 10 to 20 billion yuan. It is hoped that the National Development Fund Phase II will allocate more resources to Wuxi to support the development of local sub-funds. "However, the expected effect was not achieved in the end, and almost no Wuxi sub-funds were able to apply for investment from the National Development Fund Phase II."

"We have started recruiting GPs, and the selection criteria mainly focus on their industrial resources, especially in the fields of biomedicine, integrated circuits, etc." Wang Zhixing said that the three new funds are all managed by Xi Venture Capital, two of which are industry-specific mother funds targeting biomedicine and integrated circuits, and the ratio of direct investment to investment in sub-funds is 3:7.

The two industry-specific mother funds launched in Wuxi this time are more inclined towards the sub-fund model rather than the direct investment model. Regarding the much-debated issue of whether state-owned assets should only be LPs, Wang Zhixing frankly said that it is unlikely that government investment funds that simply choose the sub-fund model will be found, and all will choose the "direct investment + sub-fund" model.

However, direct investment is still the main form of funds managed by Xi Venture Capital. Wang Zhixing told reporters: "We will act as LPs appropriately, but we attach more importance to building a professional investment team."

He introduced that after the reorganization and establishment of Xi Venture Capital in 2020, global recruitment began to be planned. "At present, the market-oriented team is recruited according to tracks or investment stages such as biomedicine, integrated circuits, dual-carbon energy conservation, advanced manufacturing, capital markets, and angel investment. The recruited personnel either have rich industry backgrounds or have certain work experience in leading institutions. The current investment team has more than 100 people."

In addition to the personnel selection mechanism, the incentive mechanism is another important factor.

Wang Zhixing described the incentive mechanism of Xi Venture Capital as "carrot and stick", with two mechanisms: mandatory follow-up investment and voluntary follow-up investment. The follow-up investment can be up to 5% of the project investment amount, and the mandatory follow-up investment ratio is an average of 1% of the project investment amount, to ensure that the team and the investment project advance and retreat together.

At that time, Xi Venture Capital asked McKinsey to design an incentive and constraint mechanism in conjunction with domestic and foreign investment institutions. "Everyone in the project team and relevant decision-makers must invest in the invested projects, share risks, and also share profits, which can also prevent risks." He said that he is confident in the performance of the projects selected under this reverse pressure mechanism.

On May 27, 2021, at the 3rd Yangtze River Delta Integrated Development High-level Forum held in Wuxi, Jiangsu, the Yangtze River Delta integrated circuit, biomedicine, new energy vehicles, and artificial intelligence four major industrial chain alliances were unveiled, and a number of major cooperation projects were signed. Photo/Reporter Yang Bo

How do state-owned assets invest in angel rounds?

In fact, Wuxi Fund of Funds started relatively early and began by investing in early-stage projects.

In 2008, the former Wuxi Municipal People's Government Financial Office was established. The following year, Zhang Hongjun, the current deputy director of the Wuxi Municipal Party Committee Financial Office, participated in the drafting of "Several Opinions on Accelerating the Development of Venture Capital in Wuxi City", proposing a pilot venture capital guidance development special fund. The government then invested 1 billion yuan to establish a mother fund and cooperated with market-oriented institutions to establish a sub-fund.

"Two or three years later, we attracted about 50 market-oriented institutions to set up about 30 billion yuan of funds in Wuxi." Zhang Hongjun told China Newsweek that the background of the establishment of this mother fund can be traced back to Wuxi's early experience in venture capital.

In August 2000, Wuxi Venture Capital Co., Ltd. (hereinafter referred to as "Wuxi Venture Capital Company", now Wuxi Venture Capital) was established with a registered capital of 100 million yuan. It mainly uses equity investment as a means to invest in talent projects. At the same time, the city and district levels work together to invest in and hold shares in early-stage technology entrepreneurial projects. A more representative example is Lixun Micro, a local power management chip design company that was listed on the Science and Technology Innovation Board in 2021. Lixun Micro was established in 2002. Wuxi Venture Capital Company invested 3 million yuan to support the launch of the project. Since then, it has undergone several capital increases and has always been the second largest shareholder of Lixun Micro. Zhang Hongjun said that unlike Hefei, which was famous for investing in mature projects such as BOE in the early days, Wuxi Government Investment Fund is more inclined to support early-stage projects. "This is one point that the Wuxi model is different from the Hefei model."

Among the three Wuxi municipal mother funds released this time, one is a future industry angel fund with a duration of 15 years. It mainly invests in cutting-edge future industries such as synthetic biology, general artificial intelligence, and quantum technology.

Xi Venture Capital has set up a separate angel investment team and is also actively promoting angel investment by various teams. "As a state-owned investment institution, we should show our responsibility and invest early, in small companies, and in hard technology," said Wang Zhixing.

Tong Hua, managing director of the angel investment team of Xi Venture Capital, told China News Weekly that market-oriented institutions are more profit-oriented and are unwilling to make angel investments. For example, state-owned LPs that previously targeted angel investments would require that half of the sub-funds invest in angel round projects. "I have asked some market-oriented GPs, and they are not very interested in applying to become sub-funds of angel funds. The main reason is that angel mother funds have requirements for investing in early-stage projects."

Previously, Wuxi Venture Capital has had two angel funds, which were launched in 2016 and 2021 respectively. The first angel fund invested in 94 projects in total. The profitable projects basically covered the loss-making projects. The valuation of some projects increased by dozens of times. Bioda and Yiwen Technology are two star projects, belonging to Wuxi's two landmark industries of biomedicine and integrated circuits.

The second phase of the angel fund was established in 2021 with a scale of 1.126 billion yuan, 60% of which was used for direct investment and 40% for sub-funds. However, due to the limited enthusiasm of first-tier institutions to participate, Tonghua told reporters that Xi Venture Capital did not even issue a recruitment announcement, and this angel fund is still mainly for direct investment.

This fund has invested in 70 projects with a total investment of more than 300 million yuan. It is generally invested in hard technology companies that have been established for less than 5 years, and the single investment amount cannot exceed 5 million yuan. Most of the 70 projects are invested in integrated circuits and advanced manufacturing companies represented by aerospace, accounting for nearly half of the total. Due to the short time, there are relatively few projects with valuations that have doubled several times, but there are already four or five projects whose valuations have doubled.

As the number of investment projects increases, Tonghua has felt the pressure of management increase. "From the government's perspective, we hope that angel funds can cast a wide net, even with a single investment of only one or two million yuan, but this is difficult to implement, which is actually different from the usual logic of investors who are used to doing 'fine work'."

However, Tonghua told China Newsweek that there are also cases where angel investment projects in some cities have been "annihilated". The high-risk characteristics of early-stage projects and the risk-averse characteristics of state-owned assets are considered to be naturally contradictory. How to evaluate the investment team and the invested enterprises is considered by the outside world to be the key.

In September 2021, the "Wuxi Angel Investment Guidance Fund Management Interim Measures" was introduced, increasing the overall loss tolerance rate of angel funds to 40%.

"Early stage projects are indeed more risky, but it is not difficult to judge the quality of the team through experience. What is more important is to invest in the direction of industrial development." Tonghua told reporters that the terms signed with the company when investing are relatively loose, and there is basically no gambling on operating income and profits, but milestone nodes will be set for the company after two to three years, and the conditions for achieving them are relatively loose, such as assessing the company's R&D investment and the number of patents obtained. "On this basis, a fault tolerance mechanism is added to form a relatively loose environment. If the gambling agreement with the company is too strict, or there is a lack of a fault tolerance mechanism, investors may be constrained."

The duration of Wuxi Angel Investment Guidance Fund is 9 years, while the duration of the recently launched Wuxi Future Industry Angel Fund is 15 years, which is considered by Tonghua to be more suitable for the duration of angel investment funds. "Some projects have long R&D cycles and customer trial cycles, and the conventional duration is basically not enough and needs to be extended, but it can generally only be extended once or twice. Soon the second phase of the Angel Fund will also be extended to 15 years."

Angel funds are evaluated mainly on the number and amount of investments, rather than the rate of return. Therefore, it is more important for Xi Venture Capital Angel Investment to find enough high-quality assets and maintain a certain investment intensity.

Wuxi Government Investment Fund has already set its sights on overseas. "This year we have set up two angel funds overseas. One is in cooperation with the National University of Singapore to incubate projects around Nobel Prize winners' laboratories. The other is deeply involved in Hong Kong's 'Industry-University-Research 1+ Program', sowing seeds overseas in the early stages of the project, waiting for it to gradually grow and then 'transplanting' it to Wuxi. The purpose is to avoid 'involution' as much as possible," said Wang Zhixing.

On August 9, 2023, in Wuxi, Jiangsu, during the 15th China Integrated Circuit Packaging and Testing Industry Chain Innovation and Development Summit Forum, visitors consulted and exchanged products with exhibitors. Photo/Visual China

How to achieve “fund attraction”?

“Fund investment promotion” is obviously a topic that Wuxi government investment funds cannot avoid.

"Government investment funds should complement market-oriented institutional funds. For the parts where the market fails, direct state-owned capital is needed. On the one hand, it is for early projects like angel rounds. On the other hand, it is necessary to 'fill in the gaps' according to the characteristics of Wuxi's industrial chain, and invest in what is lacking." Zhang Hongjun said, "The finance Wuxi needs is industrial finance. The primary purpose of establishing a fund is not to make a profit, but to support industrial development. Wuxi is accustomed to calling it 'fund attraction'."

The three new funds released this time cover two landmark industries in Wuxi, namely integrated circuits and biomedicine. As one of the main birthplaces of the domestic integrated circuit industry, Wuxi has formed a full-chain industrial cluster covering design, manufacturing, packaging and testing, equipment materials and other fields. The total scale of the special mother fund is 5 billion yuan, mainly invested in semiconductor equipment, materials and components, third-generation semiconductor materials, production entities and equipment, chip design and other fields.

A person familiar with the issuance of the new funds told the reporter that the investment targets will not be particularly rigid, for example, the mother fund for semiconductors will also include the next generation of electronic information industry. A person from the Wuxi government told China News Weekly that this is a "testing the waters" and that mother funds may be set up for Wuxi's landmark industries in the future.

When looking for investment targets for angel investment funds, Tonghua requires that the company must be registered in Wuxi, or have important operating entities such as subsidiaries and R&D centers located in Wuxi. "Otherwise, the audit will not pass. For some foreign companies, we will also pay attention to their possibility of landing in Wuxi in the future. For example, a company may have established subsidiaries in Suzhou and Changzhou, and the chance of landing in Wuxi in the future is relatively small. We will not invest in such companies."

"Last week, I negotiated with two companies that make humanoid robots, but they ultimately chose not to settle in Wuxi. Companies value comprehensive factors and will ultimately choose the soil that best suits their development. Just like a football player's transfer, even if the Saudi League offers Messi a sky-high contract, Messi is unwilling to go." Tonghua told reporters, "Some projects will indeed be attracted by higher valuations and better landing policies, but more advantageous industrial projects like Wuxi will choose to land locally."

In his view, support from government investment funds is ultimately just one of many factors that determine whether a business is successful.

In 2020, Zhiyuan Pharmaceutical, which planned to go public, conducted its first round of external financing. "At that time, we did not expect to get much financing, nor did we do too many public roadshows. We just found some market-oriented institutions that were familiar with each other for financing. In the end, that round of financing was 66 million yuan, and the government investment fund invested more than 30 million yuan. Although the government investment fund invested the highest amount in that round, it was closer to a follow-up investment, and the decision was made entirely based on the due diligence results of the market-oriented institution Jinyu Maowu." Xie Hongwei, president of Zhiyuan Pharmaceutical, told China News Weekly.

In 2020, Zhiyuan Pharmaceutical only had a profit of more than 30 million yuan, and the government investment fund's decision to invest at that time also required considerable courage. Since then, Wuxi Government Investment Fund has invested another 21 million yuan, holding less than 5% of Zhiyuan Pharmaceutical's equity through different platforms.

"When raising funds, we want it to be 'faster' and we don't want to spend too much energy on it. The advantage of the government investment fund is that it knows enough about local companies like us to make quick decisions. Ultimately, companies still have to rely on their own real operations rather than on one or several financings," said Xie Hongwei.

As an investor in Zhiyuan Pharmaceutical, Wang Dong, vice president of Jinyumaowu, admitted that one of the benefits brought to the company after the intervention of the government investment fund is that it can help the company open up other financing channels.

"Once the government's investment enters the enterprise, banks will be more willing to provide indirect financing to the enterprise, realizing the linkage between investment and loans, and the enterprise can obtain dual support from direct and indirect financing." Zhang Hongjun told reporters.

However, in Xie Hongwei's opinion, between industrial planning and fund support, the former may be more significant. "Wuxi City has made biopharmaceuticals a landmark industry, and has selected eight 'chain leader' companies to focus on eight sub-tracks to avoid the general development of the biopharmaceutical industry. Zhiyuan Pharmaceutical is one of the eight chain leader companies, mainly focusing on skin health. This track is very well chosen. It is one of the few tracks in the biopharmaceutical field that is not affected by medical insurance and centralized procurement, and it is purely oriented to the C-end and has the ability to continue to grow."

Wang Dong said that biomedicine and integrated circuit companies can almost "seamlessly" relocate from other places to Wuxi, and if they relocate from first-tier cities to Wuxi, they can also achieve cost reduction. "For local advantageous industries such as integrated circuits, Wuxi's semiconductor industry ranks among the top three in the country. Compared with Shanghai, which focuses more on R&D and design, Wuxi focuses more on manufacturing, which can differentiate its competition."

It can be seen that "fund attraction" must ultimately be combined with local advantageous industries.

The founder of Yanwei Semiconductor told China News Weekly that Shanghai does have its own advantages, especially in terms of preferential policies for talents, and the other party has tried to "poach" several times. However, as a semiconductor equipment startup, it will still polish its products in Wuxi at this stage. The close distance between R&D and production also helps to reduce costs at this stage.

"After graduating with a Ph.D., I have worked in the semiconductor equipment industry for 20 years. I can clearly feel the difference between this industry at home and abroad. Foreign companies are used to slowly polishing, but domestic companies have a faster pace. Our team is also adjusting its own pace. It took less than two years to produce eight products in five series." The founder told reporters, "Despite this, the semiconductor equipment industry is still an industry with a relatively long cycle."

In the angel round, Yanwei Semiconductor received a 10 million yuan investment from the state-owned assets of Wuxi Economic Development Zone, and then received several rounds of follow-up investment from other state-owned platforms. "The management of Wuxi government investment funds is more market-oriented, and they are fully prepared for the long cycle. The assessment in the first three years is more focused on R&D investment, the number of patent applications, etc., and sales indicators will be assessed starting from the third year." For the semiconductor equipment industry, it is particularly important for state-owned assets to be patient.

Published in the 1153th issue of China Newsweek magazine on August 19, 2024

Magazine title: Wuxi Fund of Funds, how to “roll up”

Reporter: Chen Weishan