Li Feng, co-founder and partner of FreeS Fund, is trying to bring the disruption of the Internet to the Chinese venture capital business.
FreeS Fund has attracted a huge amount of attention in the industry by performing a number of impressive feats. FreeS managed to raise RMB 920 million (USD 146 million) in only 60 days, it participated in Uber Global’s new round of financing in September and it invested RMB 30 million in Three Squirrels, China’s largest snack food-oriented e-commerce platform.
But what provokes more disputes is Li’s new Chinglish joke “Who can who up, no profit no carry”. This line is a reference to a Chinese saying about how only capable people deserve a say in matters, while losers need turn away. Li used this line at a press conference for a new fund to explain what he described as a “disruption of the venture business”.
FreeS Fund is disruptive in several ways.
I. FreeS introduces a valuation adjustment mechanism for their business — if they fail to make a triple return on investment, there will be no commission for FreeS; but if FreeS makes more than triple the investment, they will raise the percentage of their commission accordingly. That’s what Li means by “no profit no carry”.
FreeS Fund sets a new mechanism for their commission.
Photo from FreeS Fund.
II. FreeS intends to let people contribute more to earn more. FreeS allocates 5% to 8% of profit as a deal sourcing bonus and 2% to 5% for execution. This means that even a junior partner can potentially earn up to 10% from a project, provided they are responsible for both deal sourcing and execution. This is a higher than average return when compared with partners in conventional investment institutes.
People contribute more will earn more.
Photo from FreeS Fund.
III. FreeS uses the slogan that “anyone can be a limited partner” with bottom line investment as low as RMB one million or USD 200,000. Normally the bottom line for a limited partner is USD six million in the U.S. or RMB six million (almost USD one million) in China. FreeS has lowered the amount six fold.
Though Li has seen fame as a venture capitalist, he started his career as an English teacher for New Oriental Group, after gaining a masters degree in chemistry from the University of Rochester in 1998.
Li’s experience at New Oriental, China’s largest provider for private education, prepared him for his future entrepreneurial adventures. There he made it into the administration board and founded a few popular projects. It was also at New Oriental that he built up his extraordinary presentation skills, winning the adoration of his students for his humor and admiration from his colleagues for his capacity as a leader.
But he never forget his real ambition to found his own company. After leaving New Oriental in 2007, Li established Miaozhen Systems, a data marketing company which now has yearly revenue of USD 30 million and hundreds of employees. Before too long, Li resigned from his post as CEO at Miaozhen in order to chase his bigger goal of being a venture capitalist.
Li spent the next seven years at the respectable IDG Accel Partners, one of the largest venture capital firms in China dedicated to the startup industry. Li rose from being an asset manager to one of IDG’s youngest general partners. However, he also provoked a lot of controversy.
At IDG, Li led investment for early stage start-ups. Last August, Li helped IDG found a “post-1990s generation special fund” supporting entrepreneurs aged under 25. In the past year, Li has invested in eight “post-90’s” generation entrepreneurs. The most legendary story includes Li spending only a matter of minutes before making the decision to invest RMB 20 million upon meeting a young entrepreneur for the first time.
“Millennials understand young people’s ideas and demands much better than we do. If they can sort things out and know what to do, then they will get our investment,” Li once explained about his fast decision.
It was proof of Li’s decisive manner but also a reason for people to be suspicious of his expertise. From crowdfunding platform Dreamore to cartoon selfie maker MYOTee or Face Q, Li has invested in many projects arriving at the same problem — it seems that none of them have a profitable business model.
“The book value of his investments far exceed their actual returns,” commented an investor on review site Uppers.
“Because of this outspokenness, his reputation outside the company is far better than the relationships he has with his colleagues inside the company.”
This might partly explain why Li eventually left IDG Accel Partners to found his own venture fund FreeS Fund.
Li intends to be the heretic of the venture capital industry by bringing disruption to the old regime, but doubts still remain for the future of his FreeS fund.
Bao Fan, CEO and founder of boutique investment bank China Renaissance – who recently ranked 22nd in a recent Bloomberg ‘Top Market Influencer’ list – said, “The Internet has disrupted many industries, and it is pretty amazing that investment banking remains the last man standing.”
Li Feng may agree with Bao in the case of venture capital. Will he be able to knock down this standing giant? We may not need to wait another seven years for the answer in this vibrant Internet age.
(Top image from Baidu Image)