Entrepreneurial Finance and Private Equity

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BUFN 755: Entrepreneurial Finance and Private Equity

Case Report

Case 1

Gobi Partners: Raising Fund II

DC51

Group Members:

Jingyueyi Li 113700989

Ruqiu Yang 113705243

Mengting Li 113683152

Poting Lee 113861727

Executive summary:

Gobi Partners, founded in 2001, is considering opening a second fund. The GPs, known across the industry for their due diligence, presents the idea to the advisory committee for guidance. Although the committee does not approve or deny Fund II, they seem to support a second fund under certain conditions. The GPs are faced with difficult circumstances and personal to global financial conditions; all of which could lead to fund failure. Gobi targets Chinese based, digital media, early stage investments. Although the journey will not be easy for Gobi, they should move forward with the creation of fund II.  

1.What are the pros and cons of Gobi’s strategy in a young venture capital market?

Gobi’s strategy is clear and straightforward: concentrating on early-stage Chinese digital media companies. This specific strategy provides advantages from China’s young venture capital market and, as well as, its digital media industry.

• Opportunity from growing economy. China’s significant progress in economic reforms creates a booming business environment for Gobi’s investment. This active and energetic economy sees opportunities from all aspects. The establishment and consummate of financial system offers possibility to venture capital market. The growing economy requires dedicated manufacturing efforts, which gives the starters space to grow and expand.
• Demand within digital media industry. Demographics, rising incomes, and relaxation of government control creates huge demand for information technology, which China is in lack of.
• Early relationship with entrepreneurs. Since China is fresh at both VC and digital media, Gobi not only faces a relatively low competition but also establishes important relationships with the first generation of Chinese technology entrepreneurs. This so called “guanxi” is crucial in business networks and keeps Gobi on the track of the industry. In addition, Gobi can act like a bridge for western LPs to invest in Chinese companies.

The downside of a young market, however, cannot be ignored.

• Deficient standards. Embryonic legal institutions, developing banking institutions and regulatory challenges cause difficulties to both Gobi and digital media companies. Also, education fail to keep up with the market needs that it is hard for companies to find and retain management.
• Immature financial market. The struggled domestic exchanges, coupled with the listing requirements, limit the exit avenues for Gobi.
• Concerns about the overheating sector. The rapid capital increase may be frothiness.

2.  If you were a Gobi partner, what would your planning horizon and the fund size target be?  When would you expect to close; which potential LPs would you approach, what are the keys to raising the second fund, and how large should it be?