Hongshan Seed Deploys Another $480 Million, Early-Stage Investing Is About to Get Even More Crowded

By | Muxin Xu

On February 28, Hongshan announced the strategic deployment of capital for its seed fund: $480 million.

The term "strategic deployment" is used because this seed fund is actually part of the $9 billion that Hongshan raised last year. The fund has now officially entered its investment period.

Since its launch in June 2018, this marks Hongshan's third USD-denominated seed fund (Sequoia China Seed Fund III). To date, the seed investment portfolio under this investment giant's management has reached 15 billion RMB, making it one of the largest early-stage funds in China.

Unlike in 2018, when Hongshan Seed was first established as a standalone entity, the past year has seen seed and early-stage investing become undoubtedly the most competitive phase in China's primary market. Hongshan's bet on early-stage continues to intensify: they shared data with us showing that early-stage (seed + venture) companies already account for 80% of Hongshan's investments, and its seed fund — targeting seed through Series A — has invested in over 300 companies to date.

Among these 300-plus startups, Hongshan served as the first institutional investor in 70% of cases, with average check sizes around $2 million (or RMB equivalent). Seventy percent of these portfolio companies have successfully raised subsequent rounds, with some advancing into Hongshan's venture stage.

The roster includes some familiar names: AgileX Robotics (思灵机器人), Lanhu (蓝湖), Opay, Taichi Graphics (太极图形), JiTai Pharma (剂泰医药), MicroConstruct Works (微构工场), ShuDu Technology (数牍科技), NeoX Biotech (星亢原), Zhonghe Energy Storage (中和储能), DeepLang Technology (深言科技), Cheese Doctor (奶酪博士), Unitree (宇树科技), and others.

In 2023, hard tech emerged as the supercycle following the internet era, bringing frontier innovation but also driving up early-stage valuations and the barriers for institutional competition. In an age of depleted low-hanging fruit, how will Hongshan Seed carry out its new historical mission?

Surrounded by Rivals, How Does Hongshan Seed Stay Ahead?

Since the founding of ZhenFund and Sinovation Ventures, angel (seed) investing has developed in China for over a decade. But the real entry of large funds into early-stage came with the birth of Hongshan Seed.

In 2018, Hongshan announced it would go all-in on angel investing and created "Hongshan Seed Fund" as a standalone investment vertical. The significance was perhaps best captured by Neil Shen, global managing partner of Sequoia Capital: "Early-stage is in Sequoia's DNA. This allows us to often become the earliest and most important investor in high-growth companies."

The context for early-stage investing has shifted dramatically in the past year. Last June, Source Code Capital formally launched "Source Code Yisu," focused on seed-stage investing. Hillhouse Capital followed months later with its Aseed+ seed investment program. Even smaller angel funds are accelerating — just days ago, Inno Angel Fund announced the first close of its new fund, expressing determination to hit record investment and exit volumes this year.

One could say that over the past year, Chinese funds — especially VC funds — have adopted a posture of "no early-stage, no fund." Data from Tianyancha also shows that over the past year, primary market financing transactions have concentrated in early-stage projects, with seed, angel, Series A, and Series B rounds collectively exceeding 80% of total deal volume.

So how does Hongshan Seed maintain its position amid increasing crowding?

In materials provided to us, Hongshan repeatedly mentioned a startup accelerator called "YUE." Launched last August and led by Hongshan partners, this incubation and acceleration program targets extremely early-stage entrepreneurs (including pre-angel).

Hongshan Seed told us that YUE is now accepting applications for its second cohort. Accepted entrepreneurs receive $1 million (or RMB equivalent) in investment, and upon graduation gain access to Hongsha's incubator spaces across Chinese cities. But perhaps more importantly, as founders of nascent companies, they can directly join the community of Hongshan portfolio company founders.

The emergence of "YUE" represents a critical inflection point in the transformation of angel investing. In earlier years, people were accustomed to describing it with the "sprinkling pepper" strategy. But as entrepreneurship has migrated from the internet toward technology and industry, pure financial early-stage investment strategies have begun to fail. Especially as phenomena like "scientist entrepreneurs" have gone mainstream, "incubation-style investing" and classical "early-stage investing" have become increasingly intertwined.

"In the future, post-investment value-add will account for more than 50% of an early-stage institution's strength," one investor told us.

The competition may already be happening before the starting line. Large funds are effectively conducting dimensional reduction strikes against angel "natives" — they not only have deeper pockets and more comprehensive post-investment support, but are also front-loading that support. That is, they're moving from early-stage to even-earlier-stage, attempting to determine outcomes at the "pre-investment" phase.

One formulation Hongshan Seed provided: exerting force at the "-1" stage. Specifically, this includes co-hosting the Ostrich Society with ZhenFund, internal Scout programs (individual angel investors), and partnerships with universities and science and technology innovation funds. For instance, Hongshan Seed invested in Taichi Graphics when Yuanming Hu was still a PhD student — a classic example of intervention from the "-1" stage, and arguably a case of "targeted incubation" by the seed fund.

Regardless of how comprehensive pre-investment support services become, the core objective of seed investing remains finding people: how to locate the next Yuanming Hu.

In Hongshan Seed's profile, such founders might be cross-domain resource integrators without rigid mental models, or providers of "marginalized innovation" solutions outside mainstream sight. Moreover, going earlier means finding "would-be founders who haven't yet founded." Hongshan Seed told Waves: "We hope their first step toward entrepreneurship begins with the YUE accelerator."

A New Cycle, Renewed Confidence

At Hongshan's recently concluded annual RMB fund LP summit, partners again emphasized the strategic significance of the seed fund: "As Hongshan's outpost, Hongshan Seed can also help us discover the most cutting-edge directions."

This strategic significance also functions internally. Hongshan Seed told Waves that among Hongshan's nearly 100 investment professionals, more than half are paying attention to early-stage opportunities. Additionally, three partners — Colin Guo, Zheng Qingsheng, and Zhang Han — are fully dedicated to managing the seed fund's investments and operations, along with over 10 full-time early-stage investors.

In Zhang Han's view, the process of evaluating seed projects may help Hongshan's investors understand portfolio companies' industries earlier, which also greatly aids subsequent venture and growth-stage investing — a corresponding knowledge reserve.

The YUE accelerator has also given Hongshan's investors "new homework." Hongshan Seed told Waves that in preparing curricula for YUE, many partners had to reorganize experience accumulated over more than a decade to produce materials of several dozen pages. This is no easy task, but it holds greater meaning for organizing internal tribal knowledge.

In 2018, when Hongshan Seed Fund was first established, it identified three major investment directions: TMT, consumer/services, and healthcare. But when Hongshan discussed the seed fund's investment targets with us now, these had been updated to: new energy and "dual carbon," EV supply chain, innovative medical technology, synthetic biology, fintech, SaaS software, robotics, design and content platforms, productivity tools, and new consumer. The difference in wording reveals both the seed fund's insight into "hot topics" and the self-evolution of a fund branded with hunger and ceaselessness.

Hongshan Seed told Waves that they are currently paying close attention to and deploying in early-stage AIGC-related companies. The mysterious Module X in YUE's second cohort curriculum has been confirmed as AIGC.

Of course, for Hongshan — with over 300 billion RMB under management — understanding the seed fund purely through the lens of "investment" may be too narrow.

Colin Guo, one of the heads of Hongshan Seed Fund, told Waves that Hongshan Seed will persist in practicing its semi-public welfare philosophy, helping cultivate entrepreneurial talent in technology and improving early-stage startup success rates.

The term "semi-public welfare" also came from Neil Shen. At the seed fund's third anniversary, Shen expressed that this was one expectation for high-risk, high-input seed investing, and a belief in "satisfying results in both public welfare and commerce."

In the first YUE cohort, "retired" Dada founder Philip Kuai served as partner and resident mentor. 2023 is a year of warming for China's primary market. Whether it's "retired" figures returning or the seed fund kicking off a new investment cycle, both are signals of flowing confidence.

Image source | Hongshan

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