Zac (Xiang) Pan is Associate Partner at Lightspeed China Partners (LCP), one of China’s top early stage VCs managing $2 billion USD. Zac joined LCP in January 2013, after having worked at Steamboat Ventures (Disney corporate VC) and China Renaissance. Since then, Zac has invested in some of Lightspeed’s top deals, including QingCloud, Spark Education, Full Truck Alliance (Manbang), IfChange, PeerSafe and more. With Zac, we explore LCP’s investment strategy, team structure, and how it collaborates with its sister funds around the world. We also touch on consumer, enterprise, deep tech, and macro trends as Zac shares what he’s looking at and what he finds interesting in the China market.
Edited by Henry Gao;
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 Zac's own and do not reflect the views of Lightspeed China Partners]
Adam: Before we get into your experience at Lightspeed, I’d love to learn more about your story. Could you share a bit more with us?
Zac: I can give a very brief self-introduction. I graduated from Shanghai Jiaotong University with a Bachelor’s degree in Electrical Engineering. And right after my graduation, I joined China Renaissance Partners, which is a top boutique investment bank in China. They just got listed on Hong Kong stock market in 2018. After my nearly 2 years of work in China Renaissance, I joined Steamboat Ventures, which is the venture capital investment arm of Walt Disney. So I started my career as a venture capitalist in Steamboat Ventures. And after that, I joined Lightspeed on January 2013. Now I have been working for Lightspeed for more than 7 years.
Adam: So you’ve seen a lot of the development at China venture capital and start-up market. You mentioned that beyond your experiences in venture capital, you also worked on a few startup-y things or have a few other side businesses. Can you share a little bit more about that?
Zac: For me, I think venture capital is a kind of lifestyle. It’s essentially your everyday job to talk to different people and acquire knowledge with those industry veterans. For me, I really want to experience more in life. I want to learn some new skills or different experiences every year so I actually opened a BBQ restaurant in Shanghai in 2015 (like the street carts in NYC). It’s a BBQ cart on the street and people can order and buy barbeque for a snack. Also, I have my own band and I had three music videos.
Lightspeed China Partners
Adam: Getting back to your experiences in the VC realm in China, it’s been quite a while, having spent 10+ years in this area. So Lightspeed has been there for 7 years and I think most of our listeners would have heard of Lightspeed, one of the top VCs in the world, led deals in companies including Snapchat and Stitch Fix in the US; in China, certainly PinDuoDuo in China is a very big one over the past period. Could you share a bit more about Lightspeed, what Lightspeed China Partners is like and about your experiences there?
Zac: Sure. Lightspeed was founded in late 1990s in Silicon Valley. When we say Lightspeed Venture Partners we also call it Lightspeed US. We opened our China office, Lightspeed China, in 2006. From 2006 to 2010, we operated as the branch office of Lightspeed US. That means the fund-raising part and the investment committee decisions were made by the US. We invested in some of the famous companies during that time such as Dianping, which is merged with Meituan and called Meituan-Dianping now. We also invested in one of the largest online advertising company called MediaV, which got acquired by Qihoo 360. We also had a company that was listed on Chinese stock market called 联络互动 (Lianluo SZSE: 002280). After 2010, Lightspeed China Partners raised our own China fund. The fund-raising part and the IC process were all completed in China. Right now, we have five US dollar funds and one RMB fund. The total fund size is around $2billion for LCP (Lightspeed China Partners).
We have three focus industries. One is consumer internet, where we’ve invested in companies such as Paipaidai (拍拍贷), which got listed in the US as PPD (NYSE). Another company is called Jianpu Technology (简普科技 NYSE: JP). It’s a spin-off of Rong 360. Some other companies such as edaili (e代理). It’s not a listed company but it’s also very big.
The second industry we focus on is called Enterprise. We can talk about it later. Lightspeed US invested a lot in this sector. In China, we invest in some famous companies such as QingCloud (青云), which is an IaaS companies just like AWS. [We also invested in] some companies such as HESAI (禾赛科技), which is a LiDAR company for autonomous driving.
The third industry we focus on is called Internet+, which is a large industry. Basically, excluding the Fintech and Enterprise sectors, all the other sectors are in this Internet+ [category]. For example, for e-commerce, we have Pinduoduo (拼多多 Nasdaq: PDD), which is a very famous company. For logistics, we have YunManMan (运满满) which is [also called] Manbang, or Full Truck Alliance (满帮). It might be the largest private company in the logistic industry, which just got a one billion USD investment from Softbank Vision Fund in 2018. In real estate sector, we have Fangduoduo (房多多 Nasdaq: DUO), which also got listed in 2019. In other sectors like education we have Spark Education (火花思维) and in travel and hospitality space we have Tujia (途家) which is a unicorn company.
Basically, Lightspeed China Partners is a typical early-stage venture capital [firm] in China. We mainly focus on Chinese startups. We have US dollar fund and RMB fund. Right now, we have raised our fourth fund – Lightspeed China Partners IV, so we can also invest in some late-stage deals. For example, some of our portfolios are raising Series B or Series C, and we may pro-rata. So we can also do some late-stage investments, typical check size is around 20 million to 30 million or even above.
Adam: Got it. That’s quite helpful. Clearly Lightspeed China Partners has invested in some really incredible companies. So you guys invest typically early-stage. What’s the typical check size and which stages? Everything before Series B?
Zac: Typical check size is below 10 million US dollars. For the first round of investment, we typically invest from 2 million to 7 or 8 million. But since we do the pro-rata in the following rounds, the total check size of one deal could be around 10 million or 15 million USD. That depends on the deal. Our focus is in Series A, but we also do some angel deals and sometimes Series B. In short, we are generally a typical early-stage VC in China.
Adam: Got it. And in terms of the Series A versus earlier or some of the growth co-investments that you mentioned, are those types of investments split by teams? Are there folks who are focusing on earlier versus later stage? And generally speaking, can you share a little bit more about the team setup and how things are structured at Lightspeed China?
Zac: OK. Actually we are a small team. Right now we only have around a dozen investment professionals, so we don’t have a very rigid or very serious team separation. But we do have some general teams, for example consumer team which includes e-commerce and social deals and the travel space. For the tech team, we have someone who has deep dive into SaaS and deep tech which [includes] the IC (integrated circuit) industry. We have two general partners in China and six associate partners with two VPs for the investment team. Also, we have some portfolio management teams such as HR, PR and finance team.
Adam: OK understood. So that’s the investment team setup. I’ve visited your office is in Shanghai, so that’s presumably the headquarters. What about other coverage/office locations in China?
Zac: In China we have two offices, one is in Shanghai and one is in Beijing. We only have two offices, but we travel a lot, just like other VCs.
Adam: Yup I can imagine. So with the understanding of the team structure and the types of deals that you invest in, what is the investment process like? Or if we take a step back, can you talk us through how you guys source and evaluate [deals], what the investment process might look like and beyond?
Zac: I think one of the differentiations of Lightspeed among other VCs in China is the amount of effort made towards people prospecting. When I first joined Lightspeed back in 2013, I was astonished that VC firm needs to do people prospecting. For me, during my work experience in Steamboat, we only do deal prospecting. For the deal process part in Lightspeed, we do pay attention to people prospecting. Every week, we need to network and know many people, people with good track record. They might be the potential founders or candidates for our portfolios. So every week during the team meeting, we talk about deals and we also talk about people. We do focus on the people side. And for the deal prospecting part, I think almost all the VCs in China do quite the same.
Adam: Yup. Assuming that you, the investors at Lightspeed, sources some interesting deals, what does the deal evaluation, the investment committee process look like?
Zac: We have a weekly deal meeting on Monday. And if there are some urgent deals, we can talk on daily/hourly basis. Let’s talk about the weekly deal meetings. We will pop up some interesting deals or priority deals from each investment professional, and we talk about it. We talk about some highlights and basic introductions of the deal, the deal structure, etc. And we will discuss if we need to meet the founders for a team presentation. After the team presentation, we may or may not issue a term sheet. If we issue the term sheet, we will ask the founder to sign it, and we then we do the due diligence process. After that, we just close the deal. Typically, the whole process will take two months or even one month.
Adam: Got it. Is this process done completely separate from Lightspeed US? What is the collaboration, if any, with Lightspeed China versus the US side?
Zac: We are all under the Lightspeed family, but we operate differently. We have our own fund-raising process, we have our own IC decision process. Basically, Lightspeed China Partners focus on Chinese market, while Lightspeed US focus on the US market. And also, we have Lightspeed India, which is now also separate from Lightspeed US. They have their own IC member and their own fund-raising stuff. They will focus on India market. And we also have Lightspeed Israel. So there are four teams under the big Lightspeed family: Lightspeed US, Lightspeed Israel, Lightspeed India and Lightspeed China.
We may share some of the market information. For example, we talked a lot with the US team on the enterprise market, e.g. SaaS market. And the India team will have some routine call with China team on some deals like e-commerce or social sector to seek our advice. And also, we may exchange some of the key matrix while we’re doing due diligence on some deals. We may also talk about the valuation method for different deals with the US team or India team to share the knowledge.
Online Education Space
Adam: OK got it. It’s certainly beneficial to have these investors and experts in different areas around the world. Must be quite helpful. But coming back to Lightspeed China Partners, you mentioned some of the companies that you and team have invested in. Are there any portfolio companies you’d like to highlight or share a little bit more about in terms of how they’re doing and you understanding of them?
Zac: I think I can share with you a company called Spark Education (火花思维). It is the No.1 online math lesson for kids with age from 3 to 8. It is a very competitive market in China for those K-12 education companies since there are so many conglomerates such as 好未来 (TAL Education) and 新东方 (New Oriental) and also private companies such as VIPKid and 猿辅导 (Yuanfudao). They all have different business lines that compete with Spark Education. However, having said that, Spark Education is still No.1 this sector. We invested in this company in Series A and I’m the board member of this company. Right now, the company has closed Series D and will kick off the new round of financing soon.
The founder of the company is called Luo Jian 罗剑, who is the co-founder and CTO of Ganji (赶集). Ganji was merged with 58.com. It’s the Craigslist in China. The founder and CEO of Ganji, after the merge, founded a company called Guazi (瓜子), which also got Softbank Vision Fund investment. The CTO Luo Jian founded the company called Spark Education. I knew him through people prospecting. I knew him when he was CTO of Ganji and I kept tracking him and talked to him frequently. Once he had some idea about starting a new company, I talked to him. But before Spark Education, his idea was about toy sharing. There is a company in the US called Pley, which is also a toy sharing company. He wanted to build a company in China, the China’s Pley. But the idea didn’t work out and the company pivot to Spark Education, the online math teaching [company]. Right now, the existing investors include Sequoia China, IDG, Lightspeed, Northern Light, KKR, GGV, etc. So a lot of reputable investors are backing the company.
The business model is very simple but also very unique. When I say simple, [I mean] it’s just like other online education companies, teaching kids math online. There’s a company in China called 好未来, which is the largest online education company according to the market cap. They also do math teaching, but their students are older. Typically, the students of 好未来 is around 12 or even older, and the class is a mass class, so maybe around 500 [students] or even bigger. A lot of students will have those big class online. But for Spark Education, I’m talking about the unique part, they have small class. Four or six students will have the online math lessons simultaneously. The teachers are fixed, the time slots are fixed, and the classmates are also fixed. The three fixed parts are the unique point of this business model. For the other online education companies such as VIPKid, they do one-on-one, so the time slots are not fixed, the teachers are not fixed, and they don’t have classmates. Spark Education is the first online education company that do those Three-Fix model. In this model, students tend to be more focused and they have link with teachers, so that will generate a healthy and unique economic model and a good retention rate.
Adam: Got it. Sounds like the company is doing pretty well. Just trying to understand it and break it down a little further, you mentioned that this is a company that teaches math online and it’s a one-on-many type model?What kind of math is taught in these classes?
Zac: Some kind of very easy math lessons, because the students are very young and sometimes they don’t even know some basic math thinking methodologies, so the teacher wants to teach them online some basic math lessons. For example, how to count, the sequence [of numbers], what is a circle, what is a triangle, what is a rectangle, etc. The parents want their children to have this kind of lesson to lay a solid foundation before they go to elementary school, or if [their children] need to pass some exam when they want to go to some good elementary schools in China. So the parents are eager to have their children become good test-takers in those exams, that’s why they want their children to have this kind of lessons.
Adam: Yup. It sounds like education is going earlier and earlier. Let’s say before Spark Education, assuming this company did not exist, what did younger kids do before? Was it primarily offline? Was it mostly logic games? Why is this such a new thing?
Zac: Good question. Before Spark Education, parents will send their children to those offline centers. There’s a company called 摩比思维 (Mobby Thinking), which is also a branch company of 好未来. It is a purely offline business. The parents will send their children to the offline center to learn some math lessons. But for the offline part, parents need to spend more time in traffic, and the lessons are only once a week. For Spark Education, you can have two or three lessons per week, and parents don’t need to spend time on traffic, and also the content taught on Spark Education is very interactive. Children will find it a lot of fun when they are having online lessons. And one of the most important thing is that when you have offline lessons, there may be 20, 30 or 40 students in one class, while on Spark Education there are only 4 or 6 students, so parents tend to pay more money for the online lessons.
Adam: Right. Just to understand, you mentioned that these are fixed slots with the same teacher and the same students in the class. Is this an after-school type program? Is it a weekend class? Or is it supposed to replace other stuff that’s done during the day?
Zac: Typically, the students of Spark Education are kids in kindergarten, so they will have lessons after their kindergarten course, when they are at home. If they choose to have two lessons per week, one lesson will be in the weekend and another lesson will be during the weekdays. It’s a kind of after-school tutoring.
Adam: Got it. To your point, I think education in China is very interesting and we’ve had a couple education founders come up before, including the co-founder of Liulishuo, which is an AI English teacher in your pocket, and also 17zuoye another edtech unicorn. So there’s a lot of money in this area, but also seems to be quite a lot of competition. To your point earlier, there’s the big giants such as TAL (好未来) and 新东方 (New Oriental) or Yuanfudao, 17zuoye, there’s a bunch of these guys. Many of them are following a similar model where they have a teacher teach you by the app or via a PC, and then paying either by hour or subscription. At the same time the cost of acquiring new users or new students is super high. I’m just wondering, for this company Spark Education, how does it get about this challenge? How does it manage the cost of acquiring users? And how is it able to differentiate against so many of the other existing education companies?
Zac: Well Adam you asked a very good question. Since I’ve been looking into education space for nearly two years, as far as I know, if an education company wants to acquire a new lead, they will spend almost 50% of the total revenue for the new users in CAC (customer acquiring cost). But for Spark Education, they only spend less than 20% in CAC. The company kicked off the business by inviting some very small parts of the parents and they invite their children to have the lessons. If they feel good, they can invite their friends via parental referral through the WeChat group. Nearly 70% of the leads are through referral, and that makes the unique model of Spark Education very beautiful. All in all, the customer acquiring cost is quite low comparing to other online education companies.
Adam: Got it. I like it a lot. Feels like a very clever innovation when it comes to the business process. It kind of reminds me of other types of social behaviors, all social group buying and community based models. So yeah, really interesting company. You know, we don’t have too much time during this session, I figured we could talk a little bit more about what else you’re seeing in China in terms of the overall market, in the categories that you cover. I think one thing that a lot of folks in the US or around the world is starting to understand about China is that the mobile consumer internet opportunity, that was a really big one over the past decade. There’s a lot to talk about. Enterprise these days, there’s some talk about deep tech, about semi-conductors and all of that. In terms of where you sit at Lightspeed China Partners, what are you seeing in the market? What do you find very interesting?
Zac: For me, I think there’s no low hanging fruit in the VC market right now. People are pivoting their attention from consumer sector to the enterprise sector. For me, I was focusing on the consumer sector, such as social deals and education deals, but now I’m more focused on the enterprise sector. Actually, we have some kind of a debate among our investment team. There’s one thing that we found very interesting. Actually, there are three kinds of businesses that can be very big. One is called “business model innovation”, such as sharing economy conglomerates, for example Uber and Didi in China. Those companies are the typical examples of business model innovation. The second one is called “technological breakthrough”, such as Tesla. By the way Tesla’s performance on the stock market is very beautiful these days. The third category is called “consumer-oriented”, for example Apple. Apple’s technology is not the first one [on the market], its business model is also not the first one, but the product wins the consumers’ heart. People like it. It has built a flywheel effect. The product got viral among users.
In China, you can find two very big companies. The first one is called ByteDance (字节跳动), the second one is PinDuoDuo. Those companies have the same pattern which I call “following the big conglomerate but finding a new space”. For example, before PinDuoDuo, there is a business line in Taobao called JuHuaSuan (聚划算), but since Alibaba is a listed company, they had some pressure for the healthy financial performance, so they shut down the JuHuaSuan business line. And then PinDuoDuo found this opportunity and became a very big e-commerce company. For ByteDance’s case it’s also the same. Before ByteDance, Baidu is the overwhelming giant in Chinese search market, but the business model requires Baidu to take advertising revenue from companies. But ByteDance found out that they can focus on the user part and do some customized content according to different users. This kind of approach created a new space for ByteDance. What I’m talking about is that some matured mass markets, such as search and e-commerce, there are those dinosaurs in the space already, but new comers can still find a space that was left over by the conglomerates, due to either financial [concerns] or business model [concerns]. You can find those opportunities in many other industries. I think this kind of opportunities will be the next big thing.
Adam: If that’s the case, how does your team at Lightspeed China go about looking for such opportunities? And might you be able to share one or two things you are looking at right now?
Zac: Actually, as I said before, there’re less and less low hanging fruit in Chinese VC industry, especially in consumer sector, so I can say most of the VCs are pivoting to the enterprise sector. For us, we discussed about this internally. We also focus some attention on the enterprise sector, but for the consumer sector we are not giving up. We are still in search for some breakthrough in social, in e-commerce, which are also very big sectors. But for those sectors that are too crowded, we may not give too much effort.
For the enterprise part, we focus a lot on the IC (integrated circuit) sector due to the Sino-US trade tension. [We also look at] some technological breakthrough in the enterprise sector, such as LiDAR or [other] high-tech. For example, we invested in a company called 小鱼 (XY Link), which is targeting to be China’s Zoom.
Adam: OK got it. You brought up an interesting point around the US-China relationship and the need for China to invest more in IC’s and semiconductors. I’d like to hear more about how Lightspeed approaches semi’s and some of the deep-tech/hardware component type opportunities?
Zac: James Mi is our founding partner in Lightspeed China. He holds 14 US patents in the IC industry. I would say he might be the one of the most experience veteran in VC with IC background. For him, he paid a lot of attention on the IC deals and some high-tech deals. He knows a lot of hot people in this industry, and he has a technology background, so he understands this industry very well. The network also helps him do some deal sourcing and his profound knowledge in IC industry helped him make some judgement.
Adam: So at Lightspeed, does James do all the deep-tech hardware/semiconductor deals? Or are there other members on the team that also focus on that area?
Zac: James is the lead in high-tech, but other can also be part of the deal team.
Adam: Interesting. I’ve heard that some of the typical blue chip funds including Sequoia, Lightspeed and others are beefing up their deep-tech teams these days. It’s an area where there’s a lot of corporate funds, so a lot of RMB funds, a lot of 产业基金 (industrial and corporate funds), basically a lot of tech companies that might have a team that invest in that area. So like the Xiaomi’s, the Huawei’s and all of those guys definitely game in that area, but I find it very fascinating that a lot more financially driven VCs are also investing more in this area. In Lightspeed, James Mi certainly stands out for having that type of background, even before all of the financially driven type deals like PinDuoDuo.
Zac: Yes. We are also beefing up the team in high-tech part. We just recruited a very experience guy from other VC who has been looking into these industries for almost 8 years.
Adam: OK cool. We talked a little bit about the broad investment categories from consumer to enterprise, deep-tech. If we take a further step back, I was wondering what you thought about some of the impact of the macro factors? There’s always the US-China [relationship], and these days in particular the Coronavirus. We’re having a Zoom call right now partially because folks can’t really leave their homes. What do you think that impact will have on Chinese startups and venture capital?
Zac: For me, the Coronavirus definitely impacted the fund-raising process for the startup companies. I would say that there are two major effects on the companies. First of all is the cash flow issue. Many startup companies may not be able to survive in maybe three or six months without any cash inflow while they also need to pay the checks, pay the rent and other things. The second issue is that, for the fund-raising part of the startups, they might not be able to do the fund-raising in two or three months, because people are not very active in meeting people. As far as I know, a lot of VCs and startup companies are working from home. We need to have Zoom calls or video calls at home, while if there’s no Coronavirus, we can meet in person and the process will be more effective.
For the Sino-US tension, I think it’s kind of a crisis and opportunities. In Chinese we call it “危机”, so crisis (危) and opportunities (机). For the opportunity part, I think it’s good for the Chinese semiconductor industry, for the IC industry. There are a lot of opportunities for the Chinese companies to have some big checks from investors and from customers. The crisis part is that the whole process may take some time and if the tension goes on, I don’t know how it will affect the Chinese GDP and the whole fund-raising [process].
Adam: Yeah. In terms of Chinese funds being able to invest in the US, that’s been declining for quite a while. In terms of China flows to Israel, that still seems fairly open, when it comes to learning more about the deep tech players out there. At least thus far, the US capital from LP’s flowing into China seems to be okay and if anything, the LP’s that I talked to who are based there seems to be allocating even more so to China, so at least that’s still open for now. But I very much hope that the Coronavirus situation improves after a while. When I talk to a lot of my friend and colleges and folks who are in China, whether in Shanghai or Beijing, it’s really pretty tough. I feel like folks based in the US or abroad really don’t have a sense of what it’s like living through that. Everyone was going kind of crazy being stuck at home.
Zac: And facial masks have kind of become a currency in China. You can buy stuff using facial masks.
Adam: Yeah I know, totally! So if folks can contribute more to either donating masks or to certain types of campaigns or relief programs, then please do! It’s quite an unfortunate situation. Alright, Zac, thanks for your time! It’s a helpful conversation, learned a lot about Lightspeed China Partners, some of the deals you’ve been looking at and some of your other views. Thanks again for your time.