Special Interview with Ron Cao of Sky9 Capital: VC Doesn’t Have to Be Dog-Eat-Dog
In June 2016, Ron Cao, the founder of Lightspeed China, published an open letter establishing a new fund – Sky9 Capital. Since then, Sky9 has established a USD fund of 200 million dollars as well as an RMB fund; established a 15-person team of veterans spread across Beijing, Shanghai, Shenzhen, and the US; and invested in six projects, including www.51zhaoyou.com, www.edaili.com, and www.enmonster.com.
Recently, Ron Cao agreed to a special interview with a reporter from www.36kr.com, in which he shared his thoughts over the past year as an entrepreneur, answering the following questions:
— Why does Fintech– which is frequently regarded as an underdog– still have a lot of room to grow?
— How can an “intensive cultivation” strategy be used effectively in a “fallow” period [with fewer projects]?
— What characteristics determine whether a projects is worthy of investment?
—-What points should we pay attention to when evaluating people?
Since establishing Sky9 Capital last year, I have paid a great deal of attention to the fields of Fintech (finance or financial technology), enterprise services, and deep technology. Whether we call it “Internet Finance”– a buzzword which was at one point on everybody’s lips in China– or “Fintech”, which has now become the more popular term for it, start-up companies in this field have encountered bigger and bigger difficulties.
One reason is that, over the past few years, most relatively clear start-up opportunities have already been seized; another is that domestic internet tycoons have, through their investments and business, become relatively established in the finance sector, leaving fewer opportunities for those coming in later.
However, I think the present state of affairs still presents opportunities for Fintech. When looked at from a macro-environment perspective, the negative news about a batch of P2P online loan platforms here in the past has made domestic users more cautious about P2P loans and even internet financing and investment. However, this period of “chaos” at the very beginning is now long past, and the situation has become relatively stable. Currently, domestic users’ understanding of internet financial services is more rational than before. Through the rise of these large finance players, people have come to know more about finance and risk. For entrepreneurs, the environment is clearer: there are a series of rules that should be followed, and there are bigger possibilities for people to succeed in the relevant start-up white spaces.
Looking back to www.ppdai.com and www.rong360.com, which I have invested in previously, I believe that they used the most fundamental business models we could follow at that time. Unlike the relatively perfect financial and credit reporting systems of the USA, the domestic loans, financing, and investment services in China are still at an early stage of development. For example, www.ppdai.com gives credit ratings via data, leveraging financing through an online platform to meet the financial service needs of some users who cannot obtain bank loans. However, when a greater number of enterprises begin to operate this model, we will be able to better judge its positives and negatives, and how it could be innovated upon. Entrepreneurs in this field should clearly recognize that Fintech will become a basic part of the infrastructure of internet-enabled society, and it will be integrated into a wide range of business models, just like computer technology and the internet itself were in the past, and artificial intelligence is set to be in the future.
Therefore, Fintech has a very big potential market. Through various channels, including the internet, Fintech will enable financial technology companies to solve the demands of those not yet involved in the “traditional” financial industry, as well as help enterprises optimize financial services, improve customers’ experiences, and promote innovation efficiency, pricing, and risk management, establishing a mutually beneficial and trust-based relationship with customers.
The Three Standards Behind “Investing in Quality Over Quantity”
I have always believed in “investing in quality over quantity”. As I have said many times before, “China has around 15 start-ups worth investing in every year”, meaning that we do not need to focus on quantity in investment. After founding Sky9, our team still firmly believes in this. Over the past year, our team met with nearly 600 start-ups, but we ultimately invested in just six projects, so our investment ratio was almost one out of 100.
Why do we continue to persist with such “precision plowing”? Ultimately, every investor’s goal is financial returns. Among the companies that have received VC investment over the past decade, around 70 companies have been able to reach the proverbial “unicorn” status, or are in the process of becoming unicorns. Breaking that down further, that means that less than 10 companies each year will eventually become unicorns. As an early-stage investor managing over $100 million, our returns mainly depend on these big deals. Therefore, we should simply not invest rather than make investments just to chase a trend or feel some sense of participation.
Following this principle, knowing how to guarantee precision in our investments becomes a critical factor. I don’t worry about whether I can find enough good projects; I worry about whether my judgment of them will be correct. These days, finding a large number of projects isn’t a challenge, but judging projects correctly is very difficult indeed, especially at the early stages of the company’s development.
To help overcome this challenge, most Sky9 team members have between 7 and 8 years of investment experience. During that time, each member of the team has found which fields they have a knack for. So now is the “harvest” period for them, in which they reap the benefits of this knowledge and experience that they’ve built up, where they have the ability to analyze entrepreneurs and projects more accurately. Currently, Sky9 is primarily focused on “to C” business models with a platform effect, such as new models of consumption via the internet, social networking, e-commerce, Fintech, O2O, etc. With our sights firmly set within these sectors, Sky9 has formed a common understanding internally, which is that the companies we invest in must have at least one of the following three features:
Firstly, an excellent CEO. Whether a CEO has entrepreneurship experience, strong leadership, personal charisma, sensitivity to his industry, and good industry connections will determine whether he can succeed or not.
Many investors believe that it’s necessary to evaluate people, but what exactly does this mean? In my experience, the criteria for evaluating an entrepreneur should include whether this entrepreneur is able to endure pressure, whether they have an big enough vision, whether they have the strength and comprehension to take the right risks, and what exactly is the relationship between the founder and the enterprise itself. As an investor, I am accustomed to evaluating an entrepreneur through long one-on-one discussions, through which I make sure that they are doing something they have confidence and desire that emanates from deep within their heart, and not just chasing some currently popular trend.
Secondly, an innovative business model. More precisely, the main factors we survey are whether they are able to iterate quickly, scale rapidly, and become a platform in a relatively short period of time.
As for the sectors that Sky9 focuses on, platform-type “to C’ businesses with the largest market opportunities are able to magnify their market strength as they get bigger. For early-stage investors, it is necessary to form a judgment about the platform potential of a start-up early in the company’s lifecycle, and this is exactly what Sky9 Capital’s team excels at.
Thirdly, new technology and new sectors. Our belief is that the creation of new sectors or even entire industries is driven by the development of new technologies. So, currently we also pay attention to start-ups in the fields of autonomous driving, artificial intelligence, deep learning, etc.
When considering new technologies, we must ask ourselves whether they have the potential to drive an entire market or industry in the future. For example, artificial intelligence is a mega-trend, and also a hot spot that we are monitoring. I would monitor whether artificial intelligence could become involved in every aspect of our lives, and so what specific industries or fields would best demonstrate artificial intelligence’s strengths, which industries would AI disrupt, and how would this disruption play out.
Artificial intelligence has great prospects, but still, it will take some time to mature into practical applications, and it cannot be achieved by relying on simple business model innovation. For now, investing in artificial intelligence is still investing in the concept stage. Early entrants certainly have advantages, but they may also become martyrs.
VC is not a “you win and I lose” industry
It has been more than a year since the founding of Sky9. To some degree, I feel like I myself am an entrepreneur. The feeling of owning my own brand is just like the sense of achievement after graduating from university and finding a job. You are not just a school’s student or somebody’s son anymore, but you are your own person.
As can be seen from looking at my career over the past decades, I previously focused on how to find and invest in the right start-ups. Now, I must also consider how to operate Sky9 as best as possible, and the core of my work is done by surrounding myself with the right people, including establishing my team and thinking about the core culture we want to have at Sky9.
We want to be a VC that knows how to share. Entrepreneurship is too hard. If we have very good stories, experiences, and thoughts, and have come to some insightful conclusions, we will share these with others through our public WeChat account. Additionally, Sky9 plans to produce some short videos to help communicate our ideas.
I firmly believe that the best VC should have good judgment, excellent teamwork skills, and the capacity to positively affect others. The last point in particular is one of the main reasons why I pay attention to sharing. It is somewhat like the concept of a “coach”, as opposed to a trainer who has a more hierarchical relationship with their trainees. I want to truly become an equal partner of entrepreneurs, and to be a kind person. In this aspect, I was much affected by my grandfather.
I was raised by my grandfather between the ages of 4 and 10. My grandfather had been a business owner before China’s liberation, and he had washed toilets after China’s liberation right until the end. But still, he had his own pride. He was worthy of his place on both heaven and earth. My grandfather instilled in me two lessons: The first is to be number one in everything, and compare myself only to myself, instead of to others; and the second is to make sure that I am a good person who is kind to others.
Some people think that being kind clashes with the “wolf principle” many investors in China believe in, because they think this industry is purely “dog-eat-dog”. In my opinion, while kindness certainly conflicts with the wolf principle, it does not conflict with aspiring for excellence. Kindness is a mental state in which we treat others as we would want to be treated, and it reflects our own relationship with the world—being willing to help and believe in others.
Over my career, I have met many investors who firmly adhere to the wolf principle. They compete and fight for more shares and equity, but ultimately to what end? Rather than shares, I pay more attention to “health”. Having more shares should not be our one goal to the exclusion of all else. Instead, we should consider how to create win-win and multi-win scenarios, and help the CEO go further.
Venture capital is not a zero-sum-game industry, but an industry where you and I could create higher value together. This is the difference of VC from PE. PE focusing on later stages is like sharing a pie, while VC is creating that pie. Actually, all people engaging in VC adhere to wolf principle to some degree, but it is not enough to have this wolf principle; we should also strive to be “kind people” as well, and consider further whether our judgment as investors is aiming for what is best for the health of entrepreneurs as a whole.
Sky9 Capital (www.sky9capital.com) is an early-stage venture capital firm focused on the Chinese market, with a focus on consumer internet, enterprise services, and deep technology.