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Venture capital is an industry that eats cyclical dividends.
The subtext of this sentence is: in the downward cycle, it is natural that VC will not have enough to eat.
We often praise some of the most experienced investors as "cyclical navigators" and assume that they must have a lot of practical experience in how to navigate the cycle. As everyone knows, their experience may be one word - "lay".
Those who are good at defending the city, good at restraint, and "survive" the downward cycle through the retreat strategy of not making a move or making fewer shots, can not be said to be "passing through the cycle", which is to escape the cycle.
Of course, they are not unintelligent, and can even be said to be quite "wise", because they have chosen the least risky way to cross. However, the venture capital circle has always been an industry with a very high saturation of "wise people", and in this industry, the remaining handful of "stupid people" who insist on "tossing" are particularly precious.
So what is a crossing cycle?
"Crossing the cycle" means that no matter how the cycle goes up or down, no matter how the rules of play change in the cycle, no matter how the players iterate in the cycle, the "cycle crosser" always stands on the front line of the industry, continues to maximize the dividends of the current cycle, and ranks among the top of the industry list under each cycle, so that it can be called a "cycle crosser".
What does VC rely on to cross the cycle?
We recently chatted with some investors, and the most common answers we've received are: "deep to the center of the earth" industry insight and resource accumulation, "accurate to outrageous" market prediction and human nature recognition.
These are the unified "sales skills" of the head VCs who have received rich returns in each cycle, and they are the core competitiveness that they want to prove in every VC interview. Therefore, it is reasonable to assume that the underlying capabilities of VC through the cycle are precisely these two points.
Some sober people replied: Aren't these two sentences useful nonsense?—— to what kind of situation can industrial resources and insights be "deep" in order to really distance themselves from other institutions? What is the probability of "accurate" prediction of people and the market in order to truly form core competitiveness? In addition, in addition to the VC's own exit performance, what else can really prove the existence of these two illusory capabilities? And how to prove that the exit performance is really related to these capabilities?
China's venture capital has been in the past 30 years, the Internet has flourished in only 10 years, consumption has been upgraded in only 5 years, AI has even experienced several rounds of short-cycle fluctuations, and there are short-lived hot tracks such as social networking, e-commerce, sharing economy, blockchain, ARVR, metaverse, innovative drugs, and new energy. Only by retaining the resources of which industry and improving the cognition of which industry can we ensure that VC will have a place in the next cycle? Relying on the profound understanding and resources of the subdivided industry to go through the cycle is just a good hope.
Of course, this is not to say that industry knowledge and resources are not important, but they are not the decisive factors in crossing the cycle.
In the current cycle, the overwhelming industry reports and news reports all express an indisputable fact: state-owned LPs have become the largest type of LP in the domestic venture capital market.
In other words, in the current cycle, state-owned LPs are the most wealthy and willing to contribute. On the other hand, the demands of state-owned LPs for GPs have also undergone corresponding changes, from the simple pursuit of financial exit to the pursuit of local investment promotion performance demands or industrial chain mergers and acquisitions. This new set of rules has subverted the core game of market-oriented VCs pursuing IPO exit in the past 30 years, especially for US dollar VCs, which is a seismic change.
The subversion of the rules of the game is destined to be accompanied by complaints. In the past six months, all kinds of jokes about reinvestment, investment promotion, and egg hunting have come and gone, and the words are full of disdain for the new rules of the game and ridicule of new social methods.
I thought that these voices were just brothers and sisters from the front line of the venture capital circle, who had suffered from the surge in workload and the change in working methods brought about by the change of rules, but they never thought that some of the investment bigwigs who had stood at the top of the industry in the last cycle also "sneered" at government LPs, state-owned LPs, and even the industries that such LPs focus on.
Shouldn't they be the first to smell the changes in the direction of the times, the first to perceive the nature of the changes in the rules, and the ones who have the best opportunity to go through the cycle?
Why are they hesitant to move forward in their own institutional operation strategy? Is it really so difficult for these bigwigs to take the initiative to embrace the cycle, to cater to the changes in the industry, and to get out of their comfort zone?
Yes, it's much harder than you think.
Recently, I talked to a young investor about the concept that risk comes from inertia.
The so-called "inertia" refers to the internal rules and capabilities of continuous construction on which the achievements of investment institutions in the past depended, and the larger the size of the institution, the higher the peak it has reached, and the greater the inertia.
A market-oriented institution will face many problems if it wants to transform. For example, the commitment and responsibility to the old LP, the source channel of the project established after many years of operation, the market-oriented investment team that has been cultivated for many years, the risk control system that has been repeatedly polished for many years, and the smooth exit path that has been laid out after many years of operation. The accumulation of these "market-oriented institutions" as treasures is not fully applicable in the face of the new cycle.
Knowing that the role of this system is weakening, how easy is it to replace them and build a new system, let alone who can guarantee the expected benefits of replacing the old system?
The more perfect the huge system, the more difficult it is to deal with flexibly in the face of the wheels of the cycle. It's not that the bigwigs are reluctant to actively adapt to the cycle, but the process is inevitably slow.
So our first point is that the ability to resist inertia is the first ability of VCs to traverse cycles.
Another fact that should be accepted calmly is that management fees are the most stable income for GPs and the survival line of VCs. "At our company's annual meeting, we have been very straightforward to regard management fees as KPIs, and IR has become the position that earns the most money for the company, and the exit return is all false. A first-line investor of a leading RMB institution said stupidly.
There is nothing to be ashamed of, management fees are the basis for the survival of investment institutions, and today when LP demands and exit paths have changed, management fees are even more important. Correspondingly, the ability to raise funds continuously and stably has become the most precious and scarce ability in the industry, which is also the second ability that VCs rely on to go through the cycle.
The fundraising ability is divided into hard power and soft power, the hard power is easy to understand, the institution's excellent historical investment return data, good historical LP reputation, stable and mature project exploration system, investment decision-making system and exit system, efficient LP development ability, good communication and clerical ability, plus the ability to attract investment.
The renewal of the LP is an uncertain event, and even if there is a full score of hard power, the LP may choose not to invest in the next phase due to various reasons. Therefore, hard power is only the basis for raising money, and fundraising must be done outside of fundraising.
Venture capital institutions are essentially no different from entrepreneurs, except that the purpose of raising funds is different. We can often see a group of entrepreneurs who have always been at the forefront of the tide, such as Lu Zhenyao, Luo Yonghao, Dai Wei, who appear in the tuyere of the times again and again, regardless of the final success or failure, they can rise again in the next outlet. There is a group of investors behind them, who seem to have no decision-making costs, and are fanatically investing in their every big gamble like a "fan circle".
It is true that the people just mentioned are entrepreneurs who have had Dacheng experience, and their odds are indeed hundreds or thousands of times higher than those in betting. But at the same time, they are also "bad entrepreneurs" who have failed miserably, and even tear up decency with many former investors. Why do they continue to start a business, and still receive so much capital without hesitation to bet on it? I believe that many GP partners must be very depressed: why haven't I met an LP who is so determined to invest in me continuously?
There is a big brother in the circle who is like a fish in water in high-net-worth fundraising. His way of socializing is very "egg-breaking", but his fundraising strategy is very "depo", finding the fish on the table and making him feel that the odds are right. As a result, the glorious record of this big brother's fundraising made us realize the limitations of our perception of the world: it turns out that leeks are really inexhaustible. More likely, he cut and cut, and then entered the next cycle.
We are not advocating for this big brother's fundraising strategy, even if he has a good chance of going through the cycle. What we should see more is: trust over professionalism. The strong trust built in the previous cycle is the bargaining chip for the next cycle, whether it comes from historical LPs, IPO investee founders, or other relationships. What can truly be called a continuous and stable fundraising ability is trust, and trust is the greatest wealth of VCs.
Finally, the venture capitalists of Titanium Media want to say: What does VC rely on to go through the cycle? We don't talk about professionalism, vision, or skills, we talk about attitude, attitude towards rule changes, attitude towards inertia risk, attitude towards all LPs, and attitude towards this profession.
Welcome to share your own thoughts on the views of the "Venture Capitalists Say" column, and the editorial department of Titanium Media Venture Capitalists looks forward to colliding with your thinking~