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Sequoia's Xing Liu and Qiming's JP Gan Dialogue: 2016 Is Not Chinese Venture Capital's Winter

· Founders and VCs,ICEO
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Host: What are your views on the capital market’s “winter” in 2016? Is the market really getting warmer this year?

Xing Liu: First of all, I wouldn’t characterize last year as a capital market winter. Everything is relative. Second, if a good investment institution can maintain a good performance for a long time, its investment criteria and investment pace should be consistent and disciplined. Of course, the investment industry has its own cycles, and it is inevitable that it may make a large movement when at a high point. Last year it was certainly not the high point. 2016 is a year when everything returned to a reasonable range, or back to normal, and 2017 should be a relatively normal year.

JP Gan: I don't think there will be a winter. How did we come to have the concept of a cold winter? In retrospect, it came from the managing partner of a fund who wrote a long article warning that the cold winter came and everyone quickly stocked up on “food and grass”, and so on. When I was asked to comment during previous interview, I felt no winter, just local adjustment, but everyone said it was a cold winter and my opinion was ignored.

When we look back at the scale and action of VC investment in the past three or four years, the first half of 2015 was indeed a peak. If you still remember when O2O was hot, many companies raised a lot of money. In June 2015, the A-share market had a very big adjustment – the index dropped from more than 4000 points to 2000 points. In the second half of 2015, compared with the first half, a lot of RMB funds indeed made many adjustments, and many companies that did not to raise enough money dropped out of the start-up world.

In the second half of last year, A-share market IPOs clearly accelerated, and investment activity has accelerated in recent months. Since we focus on long-term investment in China, what we prefer is a relatively stable pace of raising investment. Only by doing this can we even out our overall average valuations over time. This is what we are supposed to do as institutional investors.


China’s Bike Sharing Phenomenon

Host: a harsh winter may create another impression that since the second half of 2015, the number of new business models and overnight successes have decreased. The high hopes for AR/VR did not yield much and neither did O2O, which was once hugely popular. Last year could have been indeed another off year were it not for bike sharing. Sharing bikes may not seem very sexy, but because of the lack of opportunities, a lot of money poured into those.

How do you two feel about bike-sharing?

Xing Liu: We hope there will be a lot of exciting hot spots every year. As long-term investors, we certainly hope to invest in great enterprises, but it takes a long time for start ups to evolve into great enterprises. Bike-sharing was a hot spot this year.

We invested in one of the shared bicycle companies, and its later performance went beyond our expectation at the initial stage of investment discussion. It not only may replace and optimize the needs of the people who used to ride, it also was later discovered to have stimulated the needs for people who did not ride, creating new demand.

Host: But do the bike-sharing industry’s pace of growth, the influx of funds, and the significant social impact achieved exceed your expectations?

Xing Liu: Definitely yes. The performance of any good investment project will go beyond expectations.

JP Gan: We are also the shareholders of Mobike. When I evaluated the Mobike opportunity at that time, I was indeed pleasantly surprised. I personally think that it is one of the few innovative projects entirely created from scratch by Chinese entrepreneurs. It is an innovative product that no one has ever seen before, and it solves the pain points and demands in the last mile of the city.

There is a GPS lock on Mobike, which can be unlocked by scanning a QR code. It is relatively heavy and not easily damaged, and it can be parked in any corner of the city. The company can locate the bikes by GPS, and users can use that also to find them. This is a product that can create a very strong network effect in a single city. Indeed, I thought that it was a very innovative product. And further as we consider its business model, from deposits to expenses, it was also relatively straightforward to calculate the cash flow. So we invested in them.

But unexpected circumstances can occur. You [the host] mentioned that the brave one always wins in a military battle, but we would rather see the one with both intelligence and courage that achieves victory. We really don't want to see bad money driving out good money in bike-sharing, companies fighting with each other, and finally the government making policies that stop further cash investment. That’s the last thing that we want.


Offline Entrepreneurship is Full of Opportunities

Host: Do you agree that pure internet companies are declining, and instead the “+ Internet” start ups, where the internet is used as an enabler, will be the next trend? Ma Yun proposed new retail, and Ma Huateng also thinks the category should be "+ Internet" not "Internet +.” What do you think?

Xing Liu: From "Internet +" to "+ Internet" is a very rational view, because the purely Internet-based world is full of giants (Baidu, Alibaba, Tencent, JD, etc.) with the best talent. The giants already adapted most business models within our imagination, and the market concentration is already very high.

In the offline world, almost no industry has an obvious leader that occupies a large portion of the market share. For entrepreneurs, they found that the offline world is full of opportunities for creativity and room for startups, so the difficulty of creating value can be lower than online, and the talented people and money are pouring into the offline world. What Ma Huateng described as "+ Internet" and Ma Yun as new retail are essentially the same concept.

I am personally very optimistic about "+ Internet", which will be the next driving force of China's economic growth in five to ten years. The application of technology to all walks of life is full of entrepreneurial opportunities. Traditional industries need to be more efficient, come up with new ideas, and be able to improve their operations. These methods are more reliable than coming up with ideas to compete with the giants online.

JP Gan: If the future businesses want to succeed, they have to embrace the Internet, they have to be information and software based. They need to introduce big data, cloud computing, and artificial intelligence to help enterprises improve efficiency, interact with the customers to improve products, and help them make tactical decisions.

There are already 800 million Internet users in China. Except for the elderly, children and the extremely poor people, the majority are online. Any business must embrace the internet closely. If they think they don't need to embrace the Internet, I believe these companies will soon disappear. So everyone has to embrace the Internet.

Host: Will the Internet be the infrastructure for all manufacturing and retailing industries in the future? Will the projects that are based on the Internet itself no longer be sexy?

Xing Liu: That's possible. Internet technology grows much faster than traditional industries. For example, although AR/VR did not produce any results when it was popular, we have to be patient because many technologies still need time to develop. It is still too early to predict whether there will be more sparks that catalyze the industry in the future. There may be better entrepreneurs, and purely internet-based start-ups need those who are even more outstanding to innovate.

JP Gan: Our last wave of investment is based on the mobile internet and on the popularity of mobile phones. Whether there will be bigger investment opportunities in the next wave depends on the revolution of new hardware, and AR / VR might be one of them. It may also depend on the evolution of human-computer interaction methods. The revolution goes from the mouse in the PC age to the mobile phone in the internet age. As for the future I don't know either. Maybe it is related to the language or the vision of robots. If future entrepreneurs can figure this out, he/she would be the Bill Gates of that new era.

This article was originally shared by Leisheng Wang via ICEO's Wechat public account on April 23, 2017. Translated by Shuyu Song.