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Anxious risk investor

Text | Yin Ming (Blue Lake Capital Partners)

“What can I vote for in addition to charging treasures and artificial intelligence?” This is the question that I have been asked most by my peers in the past six months. This is probably the most anxious period in the history of China's TMT venture capital. After the bubble period of 2014-2015, many newcomers who have not completely experienced the “investment”, “management” and “retreat” cycles have been created from the first-line funds. At the same time, the scale of some of the first-line funds has also expanded rapidly. Even some funds have already exceeded the amount of the original US dollar funds.

Two weeks ago, a veteran mother fund partner shared a set of data for me. The results of the data are simple and straightforward. In the venture capital fund portfolio they have invested in for more than a decade, the size, investment speed and rate of return of the fund are presented. There is a strong negative correlation, especially for funds with a single-phase fund of more than $400 million and a investment period of less than two years. Then the problem is coming again. We have all heard the story of hedge fund managers voluntarily repaying LPs and reducing the size of funds in the secondary market. Why does the venture capital industry seem to have only one option to continuously expand asset size?

When I first entered the venture capital industry in 2008, Y Combinator founder Paul Graham wrote a blog that warned young investors to keep in mind the four criteria for early investment: markets, barriers, teams, and capital efficiency. Now that nine years have passed, the current market environment has really told me what it means to be "easy to do." A shared bicycle project can be used to get four rounds in a year, but the management may not know where the company's cars are going, what the failure rate is, and how many times a day is riding, as a product with such a strong asset attribute. From free deposits to free rides, no one will consider asset returns and network effects. After all, increasing order volume for continued financing is the most important.

My investment experience tells me that every two or three years, the investment industry will always have such a trough, the new driving force does not appear, and the investment theme is not answered. At this time, patience and restraint are particularly scarce and important. Today, I want to share two stories. These two stories are also my own reflections on my colleagues after continuous reflection and I hope to give some inspiration to the risky investors.

Story one - fast? slow?

When Blue Lake was first established in 2014, IT-driven supply chain efficiency improvement was an area where we invested a lot of energy.

At a weekly meeting, a colleague recommended a project called the Hotel Alliance. At that time, this was just an e-commerce company that sent agricultural products from small to medium-sized restaurants. The colleague who recommended this project believed that the US benchmarking company Sysco (Note: North America's largest Food service sales companies provide food for restaurants, restaurants, schools, hospitals, etc.) The market value has reached tens of billions of dollars, and the hotel alliance is growing at a monthly rate, we should quickly miss the investment opportunity. I still remember today that the suggestion was to give the company a one-time investment of 10 million US dollars.

When asked about my attitude, I asked the project team a few questions:
1. China is different from the United States. There are already mature wholesale market distribution models offline. Why does the hotel alliance model represent higher efficiency? If so, then why has this happened so far, and what external drivers have changed?

2. As a supply chain business, Sysco's growth process has experienced multiple rounds of financing and mergers and acquisitions. Is the return on investment efficiency of VCs suitable for VC funds? An acre field (Note: a domestic agricultural product integrity trading platform.) Is this light model more reasonable?

3. Is the DNA of the founding team capable of managing a fast-growing sales and supply chain team? If not, can investors change?
At that week's meeting, the project team was unable to answer these questions, so we endured the hotel alliance project with the anxiety of losing investment opportunities. In the next two or three weeks, the two partners led the team to do Sysco's case study and domestic industry research. Fortunately, these studies gave us a very strong confidence in this track, in the process Thanks to the Grace of Grace Fund, I introduced the dish to Liu Chuanjun, the founder of the predecessor. I thank the project team for choosing the military after interviewing several competing products, and thanking Mr. Zhang Lei of Gaochun Capital. The company introduced the former CEO of Wal-Mart China as a consultant, and later helped the company form a very strong supply chain management team. After three years of development, today's American cuisine is an industry leader with an annual income of nearly 10 billion and a stable entry into the profit cycle.

It's a bit like making an early investment and starting a business. To understand the core driving factors and factors behind the business, just like the cheaper battery pack for Tesla, the simpler and more friendly interactive experience for Apple. In the case of American cuisine, if we don't want to understand the above problems, then we can't have enough confidence to pull the trigger even if we spend a week in the warehouse of the delicious food, let alone stick to the capital market with the founding team. Low valley, cooperation for ten years or even longer.

Today, many venture capitalists simply think that there are so many uncertainties in early investment. It is too meaningless to consider too much. Some people even simplify the problem as long as they vote for the team. Anyway, how can the team always make a transformation. I think this idea is very wrong. According to Cambridge Associates' statistics, 70% of early investment errors occur in the misjudgment of product market fit. I also tried to reinstate more than 20 investments I have made in the past, and nine of the companies with a valuation of more than $500 million have continued the original business model from beginning to end, without exception.

What I want to say is that there are bound to be many risk factors for the early investment to pull the trigger, but as a qualified investor, you should think about whether the risk of putting down should be borne or confident to help the management team. solved.

Many times, slow is fast.

Story 2 - Something is wrong

In 2015, a mobile live app was hot in the capital market. A colleague from Blue Lake brought this project to the investment committee in the A round. His view is that the live show is a proven money-making model. The mobile show products are just getting started. The company has 100,000. DAU, traffic and revenue grew rapidly, and many investment institutions gave term sheets, and Blue Lake should quickly participate in this competition.

At that investment committee, I also asked the project team several questions:
1. What is the upgrade point of the vertical screen show live compared to the traditional live broadcast product? Can it continue to constitute differences and barriers?

2. The company's growth is rapid, but the monthly retention rate lasts only 10%. What is the reason? Can it be improved in the long run?

3. The founder seems to be sensitive to the needs of the show mode, but it is not what we think of the product manager of the A class. Is it the founder of the ten years we are willing to cooperate?
The feedback from the project team is that because the competition is too late to do research, some of the answers can't be solved at the moment, but we don't make a contract with others now. So that time we gave up this investment opportunity. Later, after the live app got financing, it experienced a very rapid growth. It ranked first in the free list in the app store for a long time. Blue Lake recommended this project's colleague WeChat to ask if I regret it. I only returned seven. The word "does something different."

The truth of my answer is actually very simple. As the manager of the fund, I need to create a highly consistent investment standard within the fund, rather than let the team fall into momentum driven. (Note: from the concept of the stock market, that is, when the stock returns Or the stock investment and trading volume meet the filtering criteria of the investment strategy of buying and selling stocks. Maybe the live app can be a good money-making company, even in the short-term A-share listing to get 100 times the price-earnings ratio, but a company can not understand the long-term competition barriers, even if the number is more attractive, Blue Lake should not open Guns, because the growth traps and lessons we have experienced in the past are too many.

Later stories should be very clear to everyone, the big traffic, Momo, Betta, and Qihoo quickly cut into this product form. According to the monitoring of the Blue Lake, the live app was unable to form a control on the supply end of the head anchor, and the traffic also showed a significant decline. The Baidu index plunged 70%.

I often remind myself and my colleagues in Blue Lake that early investment is by no means a simple game that relies on coverage and probability to win. There must be a firm value system to not be disturbed by the various vents on the market. Young investors always tend to have higher risk appetite. They think that investing more than a dozen projects a year can increase the hit rate of the unicorn, without considering the huge pressure of post-investment management and the failure rate. The high accumulation is hard to return. We should be responsible for every decision we make, recognizing that this is a long process of personal credit accumulation. Those who make early investments are not destined to become scale-driven asset managers, but can still rely on IRRs that are much higher than the average market return. To win the respect of long-term investors.

About Blue Lake Capital:
Blue Lake Capital is a new generation of research-driven venture capital funds that invest primarily in Internet companies in the early stages of entrepreneurship. It manages a US dollar fund and a RMB fund, totaling approximately US$300 million. The star projects of investment include Mei, Doummi part-time, mobile phone loan, 5miles, Huilianyi, Moment, Zhongrui Tianxia, ​​Xinzhiyuan and so on. Among them, Doummi part-time, Mei Cai, 5miles have been selected for the IT Orange Maxima Club.