The torrent of innovation and entrepreneurship sweeping China has become a new engine fueling China's economic growth, and in this process capital has played an indispensable role. Beijing Review recently held an exclusive interview with Albert Wang, a partner with SAIF Partners, a leading Asian private equity firm, on how venture capital has been supporting domestic innovation and entrepreneurship. Edited excerpts of the interview follow:
Beijing Review: As we can see, industrial leaders already exist in many Internet-related segments. Which areas, from your point of view, will create new leaders, and therefore, should investors pay the most attention to? What kinds of business start-ups are you most interested in?
Albert Wang: There are indeed industrial leaders in almost every visible segment. But when it comes to the new economy, newcomers always stand a chance of defeating those first arrivals. From my point of view, opportunities exist in the following three areas.
First, there are plenty of opportunities in a niche market. For instance, JD.com is a leading general e-commerce website, and there are many other e-commerce platforms focused on selling one particular type of product such as cosmetics or baby products.
Second, opportunities exist along the industrial chain of e-commerce. Taking Amazon for example, it's a business-to-customer (B2C) website where third-party sellers are invited to open stores. Solving cross-border logistics problems for Amazon sellers could be a huge business. In 2013, SAIF invested in BFE (also named ChukouI), a cross-border e-commerce logistics service provider headquartered in Guangzhou, south China's Guangdong Province. Many of the products sold on Amazon and eBay are made in China, while sellers promise next-day delivery on those e-commerce platforms. It's extremely difficult for those sellers to deliver the products within one day, as it concerns lots of issues, such as customs, storage, logistics and supply chains. BFE helps those sellers by establishing a chain of warehouses for the most frequently sold goods where DHL is available whenever a deal is sealed online. This way, customers can receive their products very quickly. Since it solves practical efficiency problems facing online sellers, the company is growing rapidly with its revenue having almost doubled over the past few years.
Third, with the advent of the mobile Internet era, new location-based and social-based opportunities will pop up. For example, taxi-hailing apps Uber, Didi Dache and Kuaidi Dache are areas that Internet giants once overlooked or failed to cover.
Investment opportunities on TMT (telecommunication, media and technology) area will exist in at least the above-mentioned three areas. New areas such as big data and cloud computing will churn out plenty of opportunities as well. These are all investment directions for us, with unlimited room for development.
Personally, I favor three types of business start-ups—those with a hi-tech barrier, those with an innovative business model and those with established skills in a certain segment.
The first and third types are easy to understand, but the second one could be a little tricky. Basically, a company has to create a completely new model to enter a potentially huge market. I would be really interested in this kind of business start-ups.
When a revenue model is absent at the early stage, how can you tell whether a company is worth investing in?
A sound and good revenue model is an essential issue in the investment world but is often a paradox.
When we invest in a company, we hope it has a clear revenue model, or even better, that it has already started to generate cash flows.
However, we have found a paradox in both Chinese and U.S. markets. Many Internet giants either didn't have one clear revenue model at the early stage, or they had one but changed to a different model as it grew. This paradox is especially prominent with Internet-related businesses.
By virtue of this paradox, we should never rule out a project arbitrarily when its revenue model is absent or unclear. This is a must-have quality in the investment world. As a matter of fact, the team matters a lot at the early stage. I believe an excellent team has a strong ability to cash in what it has to offer.
Whether we should invest in a company when it doesn't have a clear revenue model is the difficult part for a venture capitalist, but is also the most attractive part in this job. That's what sorts outstanding professional venture capitalists from lame ones.
In a nutshell, we hope the investee company has a clear revenue model or has such potentials. If not, the project is potentially valuable if it has an excellent team and a promising direction that, according to our judgment, could eventually lead to a tremendous number of subscribers or users in the future.
Some people think there are bubbles in the technology industry in China, and that the bubbles may soon burst. What's your viewpoint on this?
Personally, I think technological innovation will continue and bubbles in this area are quite obvious.
It's obvious in that the valuation of some tech firms is way too high. Meanwhile, whenever a new concept appears within a sector, it will become very crowded, intensifying competition or even resulting in cutthroat competition. Finally, both investors and entrepreneurs have as a result become more anxious, especially during 2014. The market, according to my observation, has restored some of its rationality since 2015.
Overheating does exist in the venture capital market. It's mostly because there's too much money available in the market, but not so many investment channels. Traditional investment destinations, such as real estate and the real economy, are not as attractive as they once were. Several years ago, few people knew about venture capital. Now when you talk about venture capital, everyone knows it, at least it seems like that. On the other side of the equation, entrepreneurship has become a constant social phenomenon, with more and more business start-ups.
I think passion and heat, to a certain extent, is healthy for the market. Since the Silicon Valley started to produce semiconductors in the 1970s, the growth momentum in the United States has mainly come from technological innovation. When it comes to innovation, the more people are involved, the better. It's also a good thing for the Chinese nation, as it on the one hand adds vitality to the economy, and creates jobs on the other. Therefore, a heated market is a good thing, but not to the extent of being overheated.
Can you share with us the most impressive investment cases by SAIF and you?
SAIF current manages four dollar funds worth $3.5 billion in capital and a renminbi fund worth tens of billions of yuan in capital. SAIF is one of the earliest, largest and best-performing venture capital funds in China.
Since its inception in 2001, SAIF has invested in roughly 200 companies, over 20 of which are listed, and a bunch of them are preparing for an initial public offering. SAIF makes privately negotiated equity or equity-linked investments across several growth sectors, in particular TMT, healthcare and consumption-related sectors.
For me, every case is special and has something to teach me.
During the second half of 2014, SAIF invested several million dollars in Beijing Dnurse Technology Ltd., which offers hardware and software solutions for users to manage a chronic disease—diabetes. With the Dnurse app, a patient can check the data uploaded from a smartphone-based Dnurse glucose meter, consult the doctors and share their experiences with other patients. It's the first company to have proposed the idea of self-management of chronic diseases. Right now, the company is expanding quickly in China and exploring the global market on a trial basis.
In 2011, SAIF invested over $10 million in Appotronics, a hi-tech firm based in Shenzhen, south China's Guangdong Province. The company is ranked No.1 globally in high-brightness laser projection lighting. When SAIF made the investment four years ago, the company had nothing but a concept. Now, it has a rich product portfolio ranging from stage lamps to projection lamps in movie theaters and laser televisions. In the second half of this year, the company will launch some mini projectors and engineering projectors. Boasting hundreds of patents for inventions, the company has a strong competitive edge in the market. We believe any single product by the company has the ability to make it a listed company.
This is an indigenous company with world-leading technology and market ability. This type of company is much favored by us investors. It remains to be seen how far the company can go, how big it can be in the future and whether it can make big bucks for us. But I think it's really meaningful investment as it has supported domestic technological innovation.
In 2012, SAIF also invested over $3 million in Norel Systems Ltd., a fabless semiconductor company headquartered in north China's Tianjin which specializes in the design and development of complex chips requiring high-speed mixed-signal expertise. Norel was founded in 2009 by Silicon Valley semiconductor veterans and represents China's technology ability in this regard. Currently, their products are mainly focused on USB 3.0 but are also expanding toward security and engineering areas.
Being an investor, I feel proud that we can fund a company to let it develop its own strength from the ground up, so that China doesn't have to be subject to overseas suppliers in some areas. This is what makes my job meaningful and attractive.
China's Venture Capital Market
A total of 1,917 investment cases took place last year. Total investment in the 1,712 cases that disclosed transaction value amounted to $16.88 billion, surging 155.8 percent from 2013. In the first five months of this year, the venture capital market saw 795 investment cases, with investment in those that disclosed transaction value reaching $15.98 billion.
Copyedited by Kylee McIntyre
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