Yuan Liu is a managing director at ZhenFund, one of China’s top seed funds founded by Xu Xiaoping (Bob Xu) and Wang Qiang (Victor Wang), cofounders at NYSE listed New Oriental Education, along with Sequoia Capital China. While at ZhenFund, Yuan has invested in some of their top deals, including autonomous driving unicorn Momenta, Yi23, Castbox, 12 Sigma, and more. With Yuan, we’ll learn more about ZhenFund’s investment focus, fund strategy, and how it differentiates against other funds. We’ll explore best practices when it comes to deal sourcing and portfolio management. Yuan also shares with us what trends he’s looking at in China, and some of the advantages and disadvantages of Chinese teams building start-ups tackling global markets.
Edited by Jeff Kuai;
Link to SoundCloud (here), also available via Apple Podcasts, Google Play, etc.
[Editor's note: this interview has been edited and condensed for clarity. The opinions expressed in this article are Yuan's own and do not reflect the views of ZhenFund]
Yuan, thanks for joining us today. Could you share a bit about your background and experiences leading to ZhenFund?
Yuan: Sure thing Adam. I was born in Wuhan, which is a large city in Central Eastern China. I went to the US when I was 18, studied at Washington and Lee, a small liberal arts college in Virginia. After college, I spent a few years at Greenspring Associates (VC + Fund of Fund), which is how I initially got into the venture world. At Greenspring, I was responsible for numerous sectors, and since I was the only Asian, naturally I took on all the Asian fund relationship management work as well. At the time, ZhenFund was only just beginning to take on external LPs in addition to money from Sequoia Capital, so that’s how I got in touch with them. It was good timing. I decided to move back to China in 2014 and joined ZhenFund, and have been there ever since.
Tell us a bit more about ZhenFund and how it is organized.
Sure, when I joined in 2014 there were around 10 people. Now we're about 70 people with offices in the US, Beijing, Shanghai, and Shenzhen. Our investment team is quite large at ~30 people. If you look at our deal funnel, we have about 200 emails come into our email inbox every day, and we respond to every email within 5 business days, so every email and request is actually heard and responded to. And we sit down with about 20,000 opportunities with founders every year, and we make about 100 investments per year. We’ve been a pioneer and advocate for entrepreneurship itself, which helps us achieve a dominant position in angel with corresponding more deal flow.
In terms of the portfolio service team, I think it's actually more common in China now than in the states. Many VCs start to have in house agency models, more specifically their own finance, legal, PR, GR, all sorts of specialists, just to help out the company, we as well have a large portfolio service team just to help us out, so that's why we are so big.
What Makes ZhenFund Tick
For early stage funds, there's a number of key success key factors. Sourcing is one large part of it, and there’s also deals evaluation, winning a deal, and portfolio management. I’d like to step through those, because again, ZhenFund has done massively well over the past number of years and is quite unique. Sourcing for early stage funds is a bit different from later stage funds, which we talked a bit about last time, where in later stage funds you can work with FAs (financial advisors) or with other VCs that push their portfolio companies to you. For early stage funds like ZhenFund you mentioned you have a lot of inbound referrals, so I just wanted to get a sense if you rely on that, do you have your own sourcing tactics, how do you maximize and optimize this sourcing piece.
Yuan: in terms of sourcing, we have inbound and outbound just like other firms. So for angel, inbound is perhaps more important than outbound, because that’s usually the first time the company has raised money. We offer a light tower in the dark, we don't know who in the dark will come out, so actually inbound is more important, that is why we do so many PR events, and we innovate with different programs and features. For example the room that we are in right now is used for a special program called the Ostrich Club over the weekends, which attracts experienced executives of leading companies who are thinking about doing a startup but have or have not made up their mind. Ostrich Club is jointly lauched by Sequoia Capital China and ZhenFund, it has three principles: totally free, no equity required, and membership privacy. They get together on the weekends for fireside chats with preeminent founders about start-ups. This is an example of a program we’ve designed to attract specific groups of people in our inbound sourcing regime, we do tons of these programs a year.
Another example, for returnee Chinese (海归), who comprise one of the major components of the first wave of the mobile internet start-up founders, we would go to their schools and do lectures in places like MIT, Harvard, Stanford, and we would do those regularly, as well as large corporations like Google, LinkedIn, and Facebook. Basically every time we go there and speak, there's a pretty large audience, not just people in the school or working at the companies but also Chinese in nearby neighborhoods who just want to meet ZhenFund. Sometimes we’ll invite them back to China for a start-up camp, introduce them to local founders, with each batch lasting about a week. Lastly, we also leverage our CEO network, where we have about 700 portfolio CEOs who can also refer us deals.
As for outbound, we do things similar to other firms, we monitor the media and try to stay up to date with prolific executives leaving their job posts and we check out what they're doing. We’ll check with FAs, the intermediaries for what new deals are coming out in the market. But I think that's what everyone does, but we just try to do so more diligently.
(Ostrich Club Room)
Deals Sourcing Tactics
I heard that some early stage funds work really closely with later stage funds, but a reason why they talk to later stage funds is because later stage funds would have gone very deep in a particular sector, so at that point they would probably know all the key players and they might know a founder that comes out of there but perhaps the later stage fund is a bit too big to invest in that individual founder so they may refer that founder to an earlier stage fund. What do you think about that?
Yuan: actually that's something that I was doing when I first joined ZhenFund. When you talk to later stage funds, some deals may be too early for them, and these are risks that those investors are not willing to take, but thought might be a good fit for us at ZhenFund, so they’ll make the intro. Historically, some of the best deals at ZhenFund are those introduced to us from other venture capital firms, who did not do the deal but instead referred them to us, for example Mei Cai at the seed stage, and also Yitu. That was a feasible idea back then but I think now it's getting harder, because everyone is going in so early, even the mega funds would have their own seed funds. GGV, Qiming Venture Partners, etc. are all testing the idea of doing some seed investing. Increasingly more funds are willing to embrace product risk, they don’t care if there isn’t a product yet necessarily, but as long as there is a great team, they would be happy to invest. So I think that sourcing way is getting way harder than before.
What about the concept of scouts? For example in the US, there's the Dorm Room Fund, and several other campus focused efforts. Sequoia also has a scout program in the US with more of a focus on executives and portfolio founders helping them source deals. Do you guys do that at all in the US or China?
Yuan: we have a program called Zhen Reps, and it’s basically an ambassador program, in which we select students that are still active in school to be our ambassadors, to be our sourcing agents on the ground, and we’ll welcome these representatives to join us in discussion and learn our methodology of investing. With their help, we can stay up to date in each of the schools about students with start-ups, or what's new in the emerging communities. But out of schools, when you mention the scout programs, I think many of these programs are within large tech corporations, involving senior executives in that world. So we don't really have anything like a scout in internet/tech firms yet, and that's something we’re thinking about and working on. In terms of say, what type of power do we delegate and what kind of access do we give them as external experts or advisors, so we’re still brainstorming as of now on the idea of a more robust advisor and venture partner network, but that's something we don't have a viable product on yet.
Creating Value For Portfolio Companies
Can you tell us about some of the programs you work on in terms of portfolio management?
Yuan: we actually divide our portfolio management into 3 layers, the first being more individualistic, so basically our cofounders Bob and Victor who personally devote time to portfolio performance. Victor doesn't look at new deals, but devotes his time to our existing portfolio companies basically talking to founders about their inflection points. And he’d take the ZhenResidence candidates to visit the portfolio companies and have a communication session with the founder. Bob spends lots of time talking to portfolios as well, helping on key decision making based on his experience dealing with corporations and founders and investors.
On the second level, it’s deal management. Every deal manager is responsible for keeping a regular key contact point with the founder just to help and stay in contact with a company, and we feel that with a strong and competent founder, it‘s usually more of a learning session for us to learn from the founder to try to stay up to date and see how we can help, and usually it’s with introductions to other potential hires or to other VCs for future fundraising etc.
As for the 3rd layer, we have the functional staff, like finance, legal, PR, to help with different aspects of the company. We will host programs such as overseas trips, for example where we take a few portfolio teams to overseas study tour. And then we have office hours for legal, finance, sort of consultations for helping portfolio companies on a performance basis. And then we have ZhenBreakfast, which is a breakfast session with Bob, and each time we would have say 8 founders for a breakfast, and they would come together, usually from similar sectors, meaning they are likely facing similar problems, so it's kind of like consultation with Bob. And then we have ZhenMasters, which is a program exclusively open to our portfolio CEOs, where we invite the so called big shots, like renowed founders of companies or super investors to share insights to our portfolio CEOs, so those are all examples of portfolio programs.
What do you think is the biggest value driver for your portfolio companies? So for example is it to help fundraise or hire quality people or just the expertise you guys share? Where is the biggest bang for the buck?
Yuan: although many venture capitalist firms would share stories about discussing firm strategies with founders, I think usually it'll be very rare that the investor will be even more knowledgeable than the founder in that domain, so although we also discuss firm strategies with the founders, we do it just to offer complementary perspective from an investors angle because our advantage is that we’ve met so many founders across different sectors, so we probably have a better macro sense in the startup ecosystem than a founder in one specific sector. Other than that though, I think the founder would be the one that has the wheel, so we try not to be so presumptuous to assume that our ideas for the future strategy to be superior to theirs, so I think the key impact for us is still fundraising and hiring. In terms of fundraising, that's something we are very familiar with, we have 700+ companies, each company has gone through different fundraising cycles, some may be in the billions now.
Do you guys have a kind of internal CRM or a tool to collect all the names and efficiently match them?
Yuan: we do not, but that is something we are working on. So, it's actually not so difficult devising a CRM, but we meet so many people and are so active that we get lazy and don't have an incentive to really log everything in, and so we don't even track every deal considering that would be around 20,000 deals, and writing a summary and memo for every single one would be too much work. But that is actually a good idea, and that's something we should look into.
One more question about portfolio management providing advisory to portfolio companies, as a company gets bigger and more investors come in, how does your role change as a board member or an investor, and secondly, what kind of value added services do later stage funds offer as well.
Yuan: I think one of the main positives of going into a company early is that you are the most trusted investor supporting an entrepreneur in his most fragile times at the start of his journey, where one has very few friends and guidance. So being the most trusted advisor is a big perk, and that's also in a time that the founder is least experienced about fundraising, which is a topic investors have lots of experience in. So, typically before a company gets to series A, we meet them more frequently. We may talk to the founder on a weekly basis over wechat or over lunch on a monthly basis, and then after series A or series B, the new investors come in with smaller portfolios than us, and have put more money into the company and worry more than we do, and because they manage less companies, they will be more devoted to hiring and key operatives than we will. So I think our support to founders is a lot of times spiritual, as we are with the company in his lonely times, and we help them through difficult times to get to the next round of financing. So in result, I’d say the role is very different.
Spotlight on CastBox
Can you perhaps pick one or two investments you’ve made and share your experience with them?
Yuan: sure, Castbox is an example of our investment philosophy. ZhenFund differentiates from other firms in the sense that we are very founder centric. I think many firms claim this philosophy too, but in reality, people tend to choose the company with more visibility and certainty which is better data. We try to find the next generation of founders but we never try to predict the next big thing, we believe the best founders are visionaries, and to be the ones creating trends. If we as angel investors try to dive into hot trends, it'll be too late for us. Castbox is an example, I would say audio, while not the hottest trend, is something that many venture firms are after as of now. You see reports saying that audio is more passive than video, and that video is crowded, so you spend more time, but it's less crowded, which is why there's more value there. We invested in Castbox in 2016, when audio is considered a very niche or complementary segment, and we didn't know if audio was big enough at the time. But when the founder came to us, she had 4 years of experience in sales at Google and was a psychology major before that while self teaching coding and took up projects to make money. She also self-funded her startup, and when she came to us she had one product, which was quite crappy, but was an audio aggregator that already supported about 12 languages and was pure recording technology in a primitive stage. There were few early users and some traction around less than 10,000 people. At first glance, it doesn't seem like a product that you would invest in, given how rudimentary and primitive it was. However, she was so confident about the future of podcasts and was so devoted to entrepreneurship itself. With her experience in Google and mobile products, we could see that she was definitely an expert in mobile product, and in addition to her team that has known her for a while, it was the perfect story that we were after, in which we had an all in founder with a team of long time acquaintances going into a direction that the founder had true authenticity in. We ended up signing the term sheet on the first meeting, which was one of the fastest deals we struck at the time, and the company now has around 20-30 million total users in total, and also millions of daily active users, so it's safe to say they've came a long way from 10,000 to millions.
How is Castbox different from popular platforms like Apple podcasts or Google?
Yuan: most people use the Apple podcast service, but on Android, its more fragmented and less developed, and even on Apple, many of the features like in text searching is rather difficult. Additionally, interactive features on the creator side is also not great, so Castbox tried to capitalize on these weaknesses. In regular podcast systems like iOS, If an audience member leaves a comment, a poster cannot directly interact with their fans. It's always good for the content poster to get feedback, so interaction is something that's really important.
(Castbox CEO Renee Wang)
Opportunities in the China Market
What are some of the opportunities and trends that you've seen in Chinese Markets?
Yuan: what I’ve noticed in the market is that the low hanging fruit opportunities are gone, there are now more capex heavy deals… which is contrary to the traditional venture capital beliefs that we should be investing in asset-light, stable, and low cost things, which is still ideal to this date but is getting less popular due to the fact that the penetration for mobile is already very high. Moreover, the fight for user engagement time is intensified to the point where it's almost too difficult for startups to compete against companies like Tencent, so a pure online mobile product is actually harder to create and become viral in our opinion, and recently we are seeing more and more models with heavy offline components such as fresh grocery delivery, which is a hot trend we’re seeing in China. And this enables community legion leaders, like stay-at-home moms being the dispatch center for grocery goods on a daily basis, providing logistics to her community circle, and feeding logistics on a door to door basis.
We’ve also been seeing a lot more AI products in different sectors like healthcare. For example yesterday we met a deal in which AI was trying to be used to better design chips. The chip design process is very lengthy, mechanical, and dependent on the designer’s experience. This company we met was trying to automate the process with AI. We’re also seeing a lot of RPA (Robotics Processing Automation) in the market now. And RPA was already a hot trend in the US, but more companies are employing robots, not just hardware robots but process automation too. OA (Office Automation) has always been very mature, but cognitive robotics has not been yet applied to such automations yet, so this is also something in the market we’re looking at. And this is an irreversible trend, since more automation means smarter AI, so we’re less likely to see this go backwards, so this is what we see in the power of AI, and we have done a variety of deals involving AI, drug discovery, image analysis and diagnosis, so we see more technology in previously startup-isolated sectors. Also we are seeing Chinese companies going overseas trying to export the experiences after all the fierce competition between mobile and offline products in China. I think under an umbrella, there are smaller products under going to different places.
What are the advantages / disadvantages of a Chinese team building a global start-up?
Yuan: the advantages are very obvious in the sense that the competition is so fierce to where it's almost like a veteran team where people have survived wars, and end up going overseas. So, mobile products have always been a strong aspect in start-ups, it started with gaming about a decade ago, along with tools like battery management, but became heavier. Say when Musical.ly was created, or when Tik Tok went overseas, there is a more cultural element in the product. Games and tools are more universal, and we are seeing these types of products getting better traction overseas which wasn't feasible when Chinese teams had little knowledge of foreign markets. So Chinese entrepreneurs are taking on more difficult tasks. Moreover, I think the challenges are very obvious as well, as you have to know the domestic culture, to hire the best talent locally, so that is something the founders are typically unexperienced with despite the fierce battles faced in Chinese markets.
Thanks for your time Yuan!
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