Sky9’s Ron Cao Shares His Experiences From Over 18 Years in Venture Capital
“China has a vast amount of local capital, and talent in the region is world-class. Entrepreneurial ideas in China are among the world’s most advanced , so the growth opportunities are huge.” According to Ron Cao, Founder of Sky9 Capital, a great environment and eco-system has emerged for venture capital in China. China’s VC industry is set to experience a powerful growth phase, and Chinese projects “going global” will become a mega-trend.
Ron has been a venture capital investor for more than 18 years, having worked in both Silicon Valley and China, and at both startup companies and big tech companies like Intel. After returning to China in 2003, Ron foresaw the vast potential of the investment sector in China. He brought Lightspeed Venture Partners to China and founded Lightspeed China Partners. Over the last decade, he has invested in many industry leaders, including Tujia, PPDai, QingCloud, and Fangduoduo.
Ron founded Sky9 Capital in 2016. Once again, he is challenging himself to take his career to new heights. He explained, “Currently, the entrepreneurship and investment environment in China is still just warming up. Although a lot of people have started their own businesses, this just means that we are realizing that entrepreneurship is worth trying. Only when we really begin to act on it can we truly understand and appreciate that there is still a great deal of potential compared to a more mature market like the United States.”
The Trend of the Technology-driven Model
Ron explained to Securities Times that Sky9 Capital will mainly focus on the sectors of consumer-oriented internet, enterprise IT, and deep technology.
He points out that judging from the current situation in China, consumer-oriented internet represents the biggest opportunity, with social networking, e-commerce, fintech, and many more business models all included under this umbrella. In this sector, investors need to pay particular attention to founders from the younger generation and focus on their entrepreneurial experience. “Having a good business model is critical for consumer-oriented internet companies; the business model itself will determine whether the company can scale into a successful platform. After the start-up reaches critical mass, then the real test of the CEO’s capabilities and his or her potential will begin.”
He believes that consumption upgrading is already becoming a dominant trend. From a funding perspective, he prefers technology-driven business models because they can have long-term barriers to entry and viral network effects. As a result, traditional retail stores may not be a good fit for Sky9. He points out that although this model represents a very large market opportunity, its potential for explosive growth is rather limited and the model is fairly asset-heavy. “Therefore, we believe that if we have a consumption upgrading team focused on internet DNA, we can combine both online and offline playbooks to build brands, set up channels, and win consumers’ trust, so as to scale more quickly.”
Ron believes that there’s nothing inherently wrong with the currently trending topic of next-generation offline customer acquisition. Since online customer acquisition has gotten so expensive, people need new playbooks for finding customers. However, from the perspective of early-stage TMT investment, he would like to see more tech innovation, since startup companies need to create long-term core value if they are going to be able to compete with BAT and other such giants in the future.
In Ron’s opinion, enterprise IT is underdeveloped in China right now, with a huge gap between China and the United States. From what he understands, enterprise IT requires founders who are more mature and have a deeper understanding of their industry. Enterprise IT business models are relatively straightforward, typically selling products via channels and providing services via the cloud. Since this sector is technology-driven, more attention and emphasis should be given to the technology itself. This is also a field that he pays a lot of attention to. “In fact, internationally, enterprise IT companies create much more value and generate greater returns than consumer-oriented internet. However, this sector has only just gotten started in China.”
In terms of deep technology, Ron believes that these technologies are being applied to many different sectors and industries, and their overall potential is huge. However, he also contends that technologies like deep learning and blockchain will need some time to evolve.
The Cycle of “Next Big Things” Is Around Six-Twelve Months
Ron also shared his opinions about other technologies like VR and AI. Ron thinks that VR is an industry whose breakout moment is something the whole world is anticipating. The reason why it is cooling down at the moment is that both its hardware and products are not yet mature enough and so the user experience remains at an early- or medium-term stage. In his opinion, VR is sure to be a trend but is still a long way from having a mature hardware platform where mature applications can be developed.
He believes that AI will be a massive trend, leveraging big data technologies and that its applications will be used very broadly. In the future, maybe all businesses and industries will benefit from using AI to make them more effective and efficient. As a result, in his early-stage investments, Ron also takes into consideration how AI may influence or be applicable to the company.
He has also noticed that domestic investors and entrepreneurs seem to like “chasing trends”– pursuing what they consider to be the next big thing. When they establish and select companies, they often like to be involved with whatever trend is ‘hot’at that moment, resulting in the phenomenon where people “swarm” to invest in these popular themes. However, when the popularity of this theme cools down, “the tide of death” quickly appears. “Actually, entrepreneurs and capital in China closely resemble those in other countries. Most entrepreneurs have no clear idea what they would like to do, while capital itself likes some concepts more than others. Companies ultimately have to rely on their core teams. And ultimately, investing in a company is also about investing in people. Generally speaking, trend cycles usually last six months to a year.”
Ron summarized the biggest lessons he’d learned over his more than 18 years of VC experience: if an investor finds the right partner, then he or she is already halfway to success. Most of the other half is divided into control over technology, risk, and business model, and the remaining portion is in the hands of destiny. “How great a return you can generate will take some luck and depends on numerous uncertain factors. Among these factors, people are the most difficult to judge and the most difficult to change. In my opinion, the ultimate bottleneck of a company is that of its CEO’s growth. In terms of funding, we should not only consider how to cultivate our own team but also take into account how to help our CEOs grow,” said Ron.
Therefore, how to spend time building a team has become a task that Ron has spent the most time on during the past year. In his view, an ideal team can use a systematic process to face and solve problems, and details, lessons learned, and methods of this process can be systematized. “Sky9 Capital is not about any one specific person. It has a set of systems and a culture of its own. It has a set of processes to make complicated decisions. Therefore, we need to cultivate the spirit to take risks and take responsibility.”
We Need a Foundation of Localization While Accelerating Internationalization
“Personally, I pay more attention to what opportunities China’s venture capital will have in the next five years, as well as how we should adjust ourselves.” Ron believes that VC is a team sport with its foundations in a company culture and corresponding systems that the whole team follows. “No one can be 100% sure as to which companies will grow up to be unicorns. What we can do is to create an environment so that when a unicorn shows up, we can catch it.”
In his view, when China’s start-up companies wish to expand internationally, they have several advantages. First, most of China’s start-up companies are pure internet plays, and China’s internet industry is practically the most developed in the world. Therefore, these companies should have an advantage when expanding to countries and regions that have environments similar to China’s. However, he does not advise companies to go overseas blindly, since going overseas means that they need to understand local cultures. Considering this factor, Chinese start-up companies may lose their advantage. He believes that companies that have real core technologies can use better technology to replace outdated products in other countries. “Although not many companies have real core technologies, the number who do will keep increasing, which is an inevitable trend.”
From 2005 to 2008, the first batch of US funds landed in China, and they recruited local Chinese teams to make investments. Since 2013, we can see that a group of core teams from USD funds has started establishing their own businesses, building new brands, and creating new funds, which shows a trend of “localization of investment brands.” Finally, local teams can raise funds locally, make decisions locally, invest at home and abroad, and have exits at home and abroad. One view is that this is because the capital markets have gradually become mature in China, that exit channels exist where they didn’t before, and that the percentage of qualified or relatively qualified LPs has been increasing, that the development of mobile internet in China has changed from “copy to China” to “copy from China,” and that American GP partners and LPs cannot understand China anymore.
Regarding this phenomenon, Ron believes that the localization of the venture capital market is another inevitable trend. In terms of the industry itself, it needs to continuously understand the local industry ecosystems and entrepreneurship culture. On the other hand, when localization develops to a certain degree, it will need internationalization again. That is after local venture capital explores how to develop the powerful ability to take root locally, it also needs to explore how to get geared to international standards, broaden its investment horizon to the whole world, and discover Chinese enterprises that can succeed in overseas markets.