This article was originally written by Xinmang Daybreak, a Chinese WeChat public account. Translated and adapted by Ellen Tay.
Wu Shichun, the founding partner of Plum Ventures, is a serial entrepreneur. After a brief stint at Huawei and Baidu, respectively. Wu started his own company at 25 years old. Undeterred by a series of failures, Wu finally found success with kuxun.cn, a travel search engine he developed together with Chen Hua, the founder of Changba, China’s leading mobile karaoke app. Zhang Yiming, the founder of ByteDance, was the first engineer onboard. Wu was eventually managed out of kuxun.cn by its investors after the 2009 financial crisis. It was a major turning point in Wu’s career and a catalyst that prompted him into an angel investor role.
Since founding Plum Ventures in 2014, Wu has found success as a prolific investor. Plum Venture’s notable investment includes EV maker Lixiang (NASDAQ:LI), smart electric scooter maker Niu Technologies (NASDAQ:NIU), online credit platform Qudian (NASDAQ:QD), mobile internet company NewBorn Town (HKEX:9911), and China private capital market intelligence service Zero2IPO Group (HKEX:1945).
01 Technology is the key direction for entrepreneurs
Xinmang Daybreak (XD): Since the beginning of 2020, you have been emphasizing to founders the term “luck the fortune of the country”. This is an abstract concept, how does it play out in reality?
Wu Shichun (WS): China is an enormous singular market with the ideal conditions to create an innovative, collaborative, and sophisticated supply chain system. The basic infrastructure is set in place for starting a business. Also, as the acceptance and recognition for Chinese brands grow overseas, companies can charge a premium. These are all manifestations of the “fortune of the country.” Understanding and believing in the destiny of the country should form part of an entrepreneur’s faith.
When choosing to implement a strategy, it is important to follow the country’s focus sector trend. For example, deep tech is a key sector currently receiving a lot of support from the state. The launch of STAR Market, China’s answer to Nasdaq, and implementation of the registration-based IPO mechanism were meant to drive the development of deep hard tech within the country. Technology is the key direction for entrepreneurs today.
XD: What is your firm’s strategy for investing in the deep tech sector?
WS: We believe that machines and software can replace humans. Our firm focuses on general-purpose robots, such as industrial robots, consumer robots, security robots, and specialized robots, which are substitutes for manual labor. For software, we look at chip and Software-as-a-Service, which can be great tools to take away mundane processing work from humans to free their productivity. We believe that unleashing human productivity is the most valuable part (of investment).
XD: Many large companies are also investing heavily in deep tech. How can startups compete in the same sector?
WS: Often, large companies have shown themselves to be inflexible in adapting to changes. When an industry reaches an inflection point, large companies usually take longer to react. It is hard to balance funding profit-making but older technologies that pay dividends and investing in new technologies. Startups have the advantage of being more agile and can react quickly to changes in market conditions.
Historically, innovation has come primarily from startups. When an industry reaches maturity, large companies play a leading role; when an industry is in its initial stage or undergoing a transition, startups are the major driving force for innovation. For example in the electronic vehicle industry, most of the patents and innovation originates from companies like Tesla instead of General Motors or Toyota.
XD: What is your firm’s methodology when it comes to investing in companies that are “riding the trend”?
WS: When we invest, we are investing in the founding team. At the very worst, a top-notch founding team can still build an average product or company in an underperforming sector. However, an abysmal founding team in a performing sector can never build a satisfactory product or company even when given the best available resources.
90% of a company’s value depends on the founding team, while 80% of the founding team’s value depends on the founder. The founder plays a crucial role in a company. Resilience, knowledge, attitude, and aptitude determine the quality of the founder. Combining this logic with thorough due diligence will minimize the probability of making a bad judgment call on your investment.
02 Anyone could be the winner
XD: 2020 is the year of consumerism. We have seen many of the portfolio companies under Hillhouse Capital and Sequoia Capital filed for IPO. Tencent is starting to invest into verticals and niches in this sector. BA Capital, a venture firm that exclusively invests in consumer brands and products, has achieved good results in the past year. What is Plum Venture’s investment strategy in this sector?
WS: When presented with an investment opportunity in the consumer products space, the quality of the founding team is the key factor we are evaluating. We are interested in hearing from the founding team their predictions on how the industry will shape out in the coming years and their vision for the product.
XD: Consumer products usually require some time to find their footing in the mass market. When investing in an early-stage company, how do you make the right judgment call?
WS: We invested in SharkFit as it fits into our investment thesis that there is a growing trend amongst health-conscious young consumers who prefer food lower in calories and fat and have zero sugar. The team at SharkFit had a good Go-To-Market strategy. It was a smart move to use chicken breast as the entry point to break into the market.
XD: Even though consumer trends can be unpredictable, companies that have made the right bets typically see a meteoric rise in their growth. With a healthy cash flow, these companies can then afford to be fussy about investors, making it harder for investors to make a deal, what do you make of that?
WS: There are five requirements to be an early-stage investor – have an opinion of the industry’s future, have a good understanding of the market conditions, negotiate your way into the financing rounds, add value to your portfolio companies, have a successful exit. Among them, having a strong conviction of the industry’s future and being able to secure a place in financing rounds are the most important.
It is truly a test of a venture firm’s capabilities to secure good investment opportunities. You will need to build your brand with the entrepreneurs. A good brand reputation within the industry makes it easier to get referrals for better investment opportunities. For example, we have co-invested with Sequoia Capital in functional food product company Buffx, and with Hillhouse Capital in colored contacts company, Moody.
XD: When Plum Ventures invested in Springs & Mountains, Genki Forest had already achieved considerable success in the market. Even though the consumer product market is not a winner-takes-all, what is your firm’s rationale for investing in the smaller followers of a more successful brand?
WS: Many of our previous investments started as the industry’s smaller players, but they managed to catch up eventually. For example, when we invested in a drone company MMC UAV, it was ranked outside the top 100 in the drone industry, but it is now the second-largest player in the industry. The same goes for our investment in EV maker LiXiang, which entered the market three years later than Nio. Now, LiXiang is among the top three domestic EV makers. As long as the die is not cast, anyone could be the winner.
As an investor, if you believe that the current valuation of a company is reasonable and it will bring you 100x or even 200x returns, you should invest. For me, I believe that Springs & Mountains has the potential to be a beverage giant valued at hundreds of billions.
03 The more afraid you are of taking risks, the more you attract risks
XD: Which aspect of venture capital — fundraising, deal sourcing and investing, portfolio management, exiting, does Plum Venture excel in?
WS: I think it’s portfolio management. We manage our portfolios, as in helping and supporting them, that’s why we are being called the Plum Mafia. We also leverage our network to add value to our portfolio companies. For example, we have assisted Moody with their factory plans and helped SharkFit source for reliable suppliers.
For our signature networking event, we invite ten executives from our portfolio companies over for dinner. At the dinner, each executive will share with the others one of their trade secrets. The exchange of ideas creates meaning and adds value to such events.
XD: Why is no one commodifying such networking events?
WS: It won’t make sense. There are some training programs on the market, offering more form than substance. The problems that companies face are often unique and time-specific. For example, the previous year’s buzzword might be WeChat mini-program, but this year’s focus is on acquiring customers on Douyin. It is pointless to commoditize the contents unless they are constantly updated to remain helpful to companies.
XD: This will be very exhausting for you as entrepreneurs prefer to have direct conversations with the partners.
WS: For this reason, we usually categorize our portfolio companies into A, B, C, and D based on their growth trajectory and the probability of them achieving unicorn status. Companies in category A can become industry leaders and have more than 80% chance of becoming a unicorn.
Category A companies have most of my attention and support, while companies in category B receive less of my support. My associates support category C companies, however, it is hard to allocate any resources to companies in category D.
XD: Plum Ventures invests in early-stage companies. There is a saying that early-stage investors are considered a dying breed as most venture capital firms now prefer to invest in later-stage companies that the market has validated. Do you agree with this?
WS: In venture capital, the more afraid you are of taking risks, the more you attract risks. By choosing not to invest in early-stage companies because it is riskier, an investor loses the opportunity to hone his skills to manage risk.
If you do not have your skin in the game at an early stage, it is even more challenging for you to participate in the later rounds. A later-stage company that the market has validated will have access to top-tier venture firms such as Sequoia Capital and Hillhouse Capital. A lack of early-stage investment strategy will lead to a lack of opportunities to take part in later-stage rounds.