Hong Kong-headquartered VC firm Mindworks Capital expected its fourth fund, like many 2021 vintages, to be an easy close. But coming toward the tail end of the exuberance of that year – the official launch was at the end of the third quarter of 2021 – that didn’t happen.

A final close of USD 220m came this month including a parallel fund and co-investment vehicle. This followed two extensions and an increase in the hard cap to USD 250m. The initial target was USD 200m.

Joe Chan, a managing partner at MindWorks, described the fundraising as a “super tough” process. He cited factors including China’s tightened regulations on tech companies, increased data scrutiny, challenges with IPOs, difficulties in exits, interest rate hikes, devaluations, and Sino-US tensions.

“In general, Asian investors have a strong understanding of the Chinese supply chain, which has made them more optimistic about the region’s growth potential,” Chan said, adding that LPs generally understand the challenges in Asia and that fund extensions have become the norm.

“In the venture capital market, we’ve seen a notable increase in Asian investors deploying capital to funds in the region over the past few years.”

Around 70% of LPs are from Asia, with the balance representing Europe. This marks an increase in the proportion of Asian LPs versus prior vintages. The original plan was to market to US LPs as well, but they do not feature.

Broken down by type, LPs include sovereign wealth funds, a university endowment, asset managers, family offices, and new economy entrepreneurs. The Hong Kong government’s Innovation and Technology Venture Fund (ITVF) came in as a co-investment partner in August 2021.

Following Chinese founders

MindWorks Fund IV is likely the largest Hong Kong VC fund to complete a final close year-to-date. Only USD 532m has been raised through final closings by three local managers – MindWorks, Mirana Ventures, and ORI Capital – according to AVCJ Research. MindWorks is the only one with a strong appetite for China.

In addition to an encouraging track record in terms of performance, the fundraising process benefited from an emphasis on cross-border investment and being headquartered in Hong Kong, Chan observed.

Mindworks was established in the territory in 2013 by Chan and David Chang, who helped set up Betatron, a local start-up accelerator serving the broader region, three years later. The firm now has offices in Beijing, Shanghai, and Jakarta. Total assets under management are around USD 1.4bn.

The mandate is pan-Asian with a focus on Greater China and Southeast Asia. Historically, cheques have ranged from USD 5m to USD 15m in Series A and Series B, with scope for participation in larger follow-on rounds up to Series D. This remains the case for the new fund.

In a sense, Fund IV reflects a theme of China-focused GPs repositioning themselves as regional or global investors able to capture ex-China opportunities.

While MindWorks claimed it is not pursuing allocation adjustments in specific geographies, it is interested in supporting businesses founded by Chinese entrepreneurs in areas such as cross-border logistics, cross-border finance, smart manufacturing, and artificial intelligence.

The firm has backed 44 companies to date. Standouts include Singapore financial technology platform Finture, Hong Kong supply chain compliance business ICW, Taiwan travel and activities marketplace KKday, and China cross-border payments specialist Xtransfer.

“Opportunities arise when a strong founder and their team decide to address a specific market. We believe that founders, being at the forefront, are best positioned to identify and solve problems. Our role is to evaluate whether their solutions align with large, addressable markets and offer the potential for growth.” Chan said.

“We are particularly drawn to battle-tested Chinese founders, who have demonstrated ambition and developed exceptional skills over the past decade.”.

Hong Kong VC ecosystem 

MindWorks is renowned as an early investor in Lalamove, a logistics transaction platform that launched in Hong Kong and subsequently expanded into Southeast Asia, China, and South America. It has been a continuous presence since the Series A in 2014, mobilising each of its first three funds.

The VC firm has now channelled approximately USD 100m into Lalamove, including LP co-investment, across seven rounds. It is the second-largest institutional investor, holding an 8.34% stake in the company, which is pursuing a Hong Kong IPO.

Fund I exited Lalamove through a USD 300m Series D in 2019, generating a 19.3x return. According to Chan, distributions to paid-in (DPI) for that vehicle now exceed 15x, while the gross multiple was 10x as of 2023. Amidst a challenging IPO market, exits have come mostly from trade sales and sponsor-to-sponsor deals as part of growth-stage rounds.

“Maintaining close relationships with major tech companies and other GPs is essential. While being headquartered in Beijing once offered significant advantages for deal sourcing, the market has evolved. Now, deal sourcing in Hong Kong, especially for exits, is increasingly favourable,” Chan said.

“Many founders are relocating to the Greater Bay Area to build more internationally focused businesses.”

Much of the MindWorks thesis is predicated on a perceived evolution of Hong Kong in recent years – from being primarily a capital market for corporations and individuals toward a hub for exporting Chinese technology. This is viewed as a return to the territory’s longer historical role as a trading centre for exporting products manufactured in China.

The VC ecosystem in Hong Kong is less vibrant than those of China and Singapore, but Chan believes it has improved due to the efforts of the local government. He observed that many of these efforts came during a period of fiscal deficit, signalling the agenda is a significant priority.

“The Hong Kong government has made significant strides in recent years, showing a commitment to long-term, patient investment. Initiatives like Cyberport and HKSTP [Hong Kong Science & Technology Parks Corporation] are driving the advancement of science and technology,” he said.

“With the establishment of the Hong Kong Investment Corporation [HKIC], there’s a concerted effort to attract businesses to Hong Kong and strengthen the local ecosystem, providing critical support during economic downturns.”