Is Huawei a Top-Tier VC?

Huawei started a little-known corporate VC division in 2019 called Habo Investment. Since then, it has made 22 investments and five of them have either IPO’ed or are in the process of doing so on the Shanghai STAR market.

Although these IPO’s are not huge by market cap standards, from an investment-to-liquidity perspective, 5 out of 22 within two years is an incredibly high ratio. It would make Habo one of the best-performing VCs.

Habo’s very existence breaks Huawei’s own tradition. Its founder and CEO, Ren Zhengfei, has made it a rule to never do corporate venture investments, especially in current or potential partners, in order to maintain objectivity in choosing the best companies to work with.

So what has changed that gave birth to Habo and led to its success so far as an investment firm?

IPO Bonanza

The pace of Habo’s investments has been aggressive, and its fund size has ballooned quickly as well. It began as a 700 million RMB (~104 million USD) fund in April 2019, which increased to 1.4 billion RMB (~200 million USD) in January 2020, and increased again to 2.7 billion RMB (~400 million USD) in October 2020. Basically, its size almost quadrupled in less than two years.

All things considered, Habo’s fund size is still a drop in the bucket for Huawei, whose cash and cash equivalents at the end of 2019 is a whopping 171 billion RMB (~25 billion USD). Here’s a table that lists Habo's current portfolio, plus where they are in the STAR Market’s IPO review process.

(For my non-Chinese readers, the 3rd column denotes the fund’s ownership percentage. The last column notes the stage where some of the companies are currently in to prepare for their Shanghai STAR market IPOs. The bolded companies are all in the IPO pipeline, except for the last one, which canceled its application.)

One notable Habo investment we’ve discussed before in “300 Years: Huawei's Open Source Strategy” and “Can You ‘Nationalize’ Open Source?” is OSChina, an open-source tech community organization and the parent organization of Gitee, China’s GitHub alternative.

There are two ingredients that make Habo-invested companies primed for public listings:

• A Habo investment and a stack of Huawei purchase orders typically come together
• Habo’s investment areas are strategically important sectors that are encouraged by the government to go public and grow

From Investor to Customer

There have already been a few examples where a Habo investment plus Huawei purchases revived companies that were struggling to survive.

One is C&Q (灿勤科技), a manufacturer of antenna filters -- a key component of 5G base stations. The company was founded in 2004 and its business was struggling until 2019, when its revenue increased 11-fold, almost all of which are from Huawei. C&Q has now finished its IPO review process and is poised to trade on the STAR market.

Another one is 3Peak (思瑞浦), which makes signal chain simulation chips -- another key component of 5G base stations. This company was on life support until its revenue grew 167% from 2018 to 2019 on the back of orders from Huawei and investment from Habo. It’s now listed on the STAR market; its share price has doubled since the IPO.

Thus, a Habo investment is a trifecta of:

• Fresh new capital
• Huawei’s business and vote of confidence
• Positive signal for more investment from both public and private markets

The last bullet point on “positive signal” deserves some explanation. Because Habo is a corporate venture division of a company that has plenty of cash, it does not need to make a quick return on capital and will hold shares for a long time. Thus, private market investors like VCs, who do need liquidity and look to bet on reliably growing businesses, like to ride Habo’s coattail. One recent example is VisionICs (芯视界微电子), which received an investment from Habo in September 2020 and was soon followed by another one from Sequoia China in December.

This “positive signal” carries over into the public market if the invested companies IPO, because Habo is a long-term shareholder and only invests in sectors that Huawei needs, which by extension are what China needs. Thus, the “Habo team” tends to align well with China’s overall development and planning objectives, making them good bets in the Chinese stock market, even though some of them effectively become single-customer companies, like C&Q.

With that in mind, let’s look at which areas Habo has been investing in.

Investment Areas

As the chart below provided by Qcc.com indicates, Habo’s five sectors of focus so far are advanced manufacturing, smart hardware, enterprise technology, artificial intelligence, and traditional industries, listed from left to right. It’s worth clarifying that the “traditional industries” category includes companies that do integrated-circuit design and semiconductor materials R&D, while “smart hardware” includes companies that actually develop, produce, and test semiconductors.

The blue bars indicate Habo’s investments. The green bars indicate the industry average number of investments in the same sector. (I assume the averaging is done per investment funds, but it’s not totally clear.)

What’s evident from this chart is that Habo doesn’t invest in necessarily the hottest areas in the market. (It would be unthinkable, even comical, for Habo to try betting on the next Pinduoduo, Kuaishou, or community group buying service.) Habo invests in what Huawei needs, which ends up being more hardcore tech that requires a longer time horizon to mature. The only sector where industry outpaces Habo is “enterprise technology”, because B2B SaaS is becoming trendy in China’s VC circle.

Breaking Tradition

So why did Huawei give birth to Habo against the principle laid out by its founder? It was a way to adapt to sanctions and geopolitical realities.

Ren Zhengfei’s “no partnership favoritism” rule worked well in a no-sanction world. Huawei sourced the best-of-class technology and suppliers from around the globe and gave no special treatment to domestic partners -- until it couldn’t anymore.

Habo is a way to find and invest in the best companies in China who can be suppliers and partners, and groom them to be world-class quality. That's why Huawei gives them its business -- there’s no better training than serving a real (and big) customer. Huawei would even send engineering teams to be embedded in some of these companies to help them “level up.”

In many ways, Habo’s investment performance as a fund is beside the point. Its purpose is another, less discussed way to speed up the journey to achieving technological self-reliance.

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