In recent years, the venture capital industry has undergone significant changes. With the end of the dividend period of an era, the new era has put forward new requirements for venture capitalists to "intensively cultivate".
In the view of Xiao Bing, the managing partner and chief investment officer of Dachen Caizhi, a 20-year venture capital veteran, the most difficult thing to invest in today is outside of "investment".
In the 13th class of Whampoa, Tutor Xiao Bing shared his thoughts and answers with us:
In the past few years, I have a profound understanding that the core competitiveness of an institution is not only reflected in the investment ability, but also in the comprehensive strength of all aspects of fundraising, investment, management and withdrawal.
On the investment side, the certainty is stronger
From zero to one, from small to large, we have paid more attention to investment for a long time, and the core KPI set for the team is how much money must be invested each year. In recent years, we have started to change gradually and increase the weight of other work. In the past, we were primarily looking for investment-related talent, but now we have an increasing percentage of our team working outside of investment, with less than half of the total number of investment team members.
Behind this transformation is a change in the whole era. I've been in the industry since 2002, which happened to be the beginning of China's rapid economic growth: China joined the WTO in 2002, and the Chinese economy really started to take off.
For a long time, we have been accustomed to the inertial thinking of moving forward with the trend of the era of rapid growth. But now, that era is over – we have entered a new era.
What we need to do is to adjust and adapt to this change in time. In the new environment, we feel that there are challenges in all aspects, but the most difficult part is not the investment part, because in the current environment, investment certainty has become stronger:
In the past, due to the rapid growth of the economy, there were investment opportunities in all walks of life, and the difficulty at that time was that there were too many opportunities, and the top three in each industry were worth investing;
This situation has forced us to narrow our investment direction and focus on the areas where we have the most accumulation and deep cultivation, and although the scope of investment options has been narrowed compared to the previous investment strategy of "blossoming everywhere", this has simplified the decision-making process and made it less difficult. It is also worth noting that the rapid development of AI and the emergence of new technologies have brought new opportunities and challenges to investment.
When making investment layouts, we mainly focus on areas that we are good at and have accumulated experience for many years, and have relatively high certainty. Focusing on "national security", we focus on investing in areas such as industrial chain security, national defense security and information security, with a special focus on projects that contribute to the realization of independent controllability and import substitution, as well as "bottleneck" technologies. This is not only because national security is a top priority right now, but also because investing in projects related to national security enhancement has both real market demand and easier IPO listing.
Many projects under the theme of domestic substitution, independent and controllable, originally everyone felt that they were not sexy enough, but we actually invested a lot, and in the previous environment, many times we sat on the "cold bench". However, we have always believed that based on China's huge internal market, there are abundant investment opportunities in the process of building a completely independent and internally circulating industrial chain, which is our priority investment direction and is also an area in which we are relatively good at.
I don't think it's hard to invest at the moment, and while there is still competition in the market, the intensity of the competition is weakening. For investment, the key is to further raise the investment standard in the current environment, and to grasp the investment rhythm more precisely, so as to ensure that it can still achieve profitability despite relatively limited exit opportunities, so as to bring returns to the fund. This may be the main investment challenge we face, but it is easier to deal with than other challenges.
Tutor Xiao Bing in the Dune class
Fundraising: The hardest thing at the moment
What's the hardest thing at the moment?
Fundraising.
In the past, fundraising was relatively simple for us, with a fundraising team of only two or three people, but each fundraising was quick and over-funded. However, now that LPs have gradually shifted from high-net-worth individuals to institutionalization, they are generally relatively conservative at a time when downward pressure on the economy still exists.
Fortunately, Dachen did not encounter much problems in fundraising, and the biggest challenge we faced was the complexity of the fundraising process and the extension of the cycle, which required our IR team to be more professional, systematic and large-scale.
Post-investment management: a "new team" in front of the stage
Post-investment management is becoming more and more important to Dachen. On the one hand, as an established institution, we have invested in close to 800 projects, successfully exited nearly 300, and continue to invest in new projects. On the other hand, the financial statements and operating conditions of the investment companies we collect every quarter are a barometer of the micro market, and we conduct regular reviews, which significantly increase our pressure when the economy is in a downturn.
One is the pressure from corporate performance. While we may invest in the best companies in the market, the economic downturn will have a much greater impact on them than in the past.
On the other hand, the project failure rate is on the rise. Many projects will encounter the problem of broken capital chains, and then we are faced with a difficult decision: do you want to save it? I will get a call in the middle of the night, and the entrepreneur will say that he will not be able to pay his salary. As an investment institution, do you want to pay to save the company? If you don't, the project may fail, and the previous investment will be wasted. This puts a lot of pressure on our portfolio.
At the same time, competition among companies is intensifying. In recent years, "volume" has become a popular word, mainly because the market has entered the stage of stock competition. Under the "involution", almost all markets have become red ocean markets, and even the emerging blue ocean markets will quickly be filled by competitors and transformed into red oceans.
In this case, how to ensure that the companies we invest in can stand out in the fierce competition? This requires investment institutions to change their traditional concepts, attach importance to and increase investment in post-investment management and value-added service teams, and provide value-added services including but not limited to technology, market, management, etc., to help enterprises build and consolidate competitive advantages.
In the past, Dachen did relatively little about post-investment management and value-added services, but when we started to do these things, we found that we actually had a lot of resources sleeping there, and we needed to wake up and integrate them into resources to serve the invested companies.
Therefore, post-investment management is no longer a marginal and neglected department, but an important combat force that can help enterprises "come back from the dead". We are now enriching some elite teams into the post-investment department, establishing a reasonable assessment and incentive mechanism, and making the post-investment management more professional, systematic, large-scale, and fine-grained from the beginning of project supervision, so as to integrate the ecological resources and industrial chain of the project.
This is something that does not work at the time, but will create great value in the long run, so as to improve the success rate of the invested company, and can also bring great value to the institution, which requires perseverance and investment day after day.
Tutor Xiao Bing in the Dune class
Exit: The most ideal exit channel is still the IPO
Quitting is also one of the biggest tests right now.
IPOs are getting more and more difficult, the exit pressure is increasing, and the DPI of the fund is not performing well, which will make LPs more cautious, and the capital cycle will not be able to turn around.
The most desirable exit channel at the moment is still an IPO. M&A deals continue to be difficult, effort-intensive and uncertain. But we are still actively adapting and adapting, and exploring how to move forward with M&A. This means finding the right talent, driving the process from within, working with intermediaries, looking for M&A targets and potential takeovers – this is a new challenge for us.
In the economic downturn, in the face of increasing restrictions, large changes in exit policies, and huge pressure from LPs, how to find a way to maximize returns is a question that venture capital institutions must answer.
Question: Through mergers and acquisitions, there is still a certain gap between the overall valuation space and the market, what do you think about this issue now?
Xiao Bing: Every new investment made by Dachen now is only for companies that have the potential to IPO on the A-share market. This requires us to deeply analyze and understand the underlying logic of the projects approved by the review committee, explore the common characteristics of past projects, and maintain regular in-depth exchanges with the CSRC and the stock exchange to understand and grasp the policy direction. Some people say that IPO is a metaphysics, but in fact, if you dig deeper into the analysis, you can find patterns.
This decision-making logic makes our investment decisions relatively simple and clear after we unify our thinking internally. Every new investment decision we make is based on the fact that the company meets a set of A-share listing conditions, and if it is clear that a project cannot be listed on the A-share market, we will not invest in it, even if the project is good and profitable. If the investment project does not end up in an IPO, we consider mergers and acquisitions as a suboptimal exit strategy.
Q: Most projects in the hard technology sector take a considerable amount of time to become profitable, will such projects receive extra points due to their characteristics during the A-share listing review process, and to what extent?
Xiao Bing: This kind of project needs to meet multiple requirements for listing on the A-share market: it needs to meet the national strategy and security requirements, and it also needs to have a good business model and be able to make a profit.
Although hard technology projects are very important to the country, if they lose money for a long time and the market size of the project is limited, it is difficult to pass the listing review no matter how high the technical value is.
It is a very challenging task for investors to choose the intersection and look for projects with high technical content, good business models and obvious profit potential in the future. Through internal research and analysis, we have identified a number of sub-sectors that are worth investing in.
In addition, although some projects can successfully pass the listing review, they may not be favored by the capital market and have low valuations. For example, if you invest in a "small but beautiful" company with a limited market size but which is extremely important to the country? In the face of such a situation, although the valuation is not high, as long as we can calculate the return on investment, we will still choose to invest.
Through careful analysis and market understanding, you can gradually clearly understand the multiple dimensions that must be considered when making investment decisions, so as to position your investment direction more accurately.
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