Kathy XU rarely appears in public. She gives speeches once in a while, but rarely does interviews. However, stories about her abound.
She is one of China’s first-generation VC investors. In 1995, Kathy XU invested in Wahaha, betting that the Chinese would develop a liking to the then “faddy” bottled drinks as foreigners did. She was then working at Peregrine, a private bank in Hong Kong. That might have been the first consumption upgrade China’s VC investors ever betted on. Kathy XU won. Wahaha, which was worth 300 million yuan back then, is now valued at more than 100 billion.
She was the first to invest in NetEase in 1999. Then in the year 2000, the internet bubble burst. It began a “hell-like” period for Kathy XU and Ding Lei, founder of NetEase. At its worst, NetEase was rated as a junk stock. All the investors on the board insisted selling NetEase at a low price. Kathy XU was the only one who opposed it. Her reason was simple: We already hit rock bottom, and from now on, things will become a little better with every step we take.
The stories that followed are more widely known. In 2007, after being turned down by dozens of investors, Richard LIU met Kathy XU, who, on that very night, signed a letter of intent that involved a $10 million investment in JD.com. Intuition told her that Richard LIU was a dark horse, whom she could not afford let him meet other investors.
Also in Kathy XU’s investment portfolio are Tudou, Dianping, Ctrip, Ganji (赶集), Vipshop, Three Squirrels, Xiaozhu, Meituan, Zhihu, and Guazi. In late 2016, bullish on the growth prospects of new retail, Kathy XU invested in Yonghui Life, a chain of community-based fresh produce stores under Yonghui Superstores, although the chain had only 20 outlets then and an average daily sales value of less than 4,000 yuan. A year later, Yonghui Life grew to more than 200 outlets with sales rising ten-fold and then went on to raise funds from Tencent.
This following is Part 2 of a 3-part interview with Kathy XU done by 36Kr, our parent company. Read Part 1 and Part 3 here.
On choosing people
- A good founder always makes a good son-in-law.
- Entrepreneurs must be pushy, while investors must know when to yield.
- If it had been just Haoyong and I, Ganji would not have been merged with 58.com, and we would have continued the cash burning race.
Q: You said that you are interested in investing in the top five players in a market but not the No.1.
A: Yes. We don’t just look at players’ current performance. We are more interested in predicting who will emerge as the No.1 player eventually. Opportunities lie in markets where the room for growth is big and a small pool of existing playes. You have to find founders who can tap into the growth potential of such markets.
Back in 2008, we were looking to invest in a pharmacy chain. Interestingly, although I met the founder of the No. 1 at that time, I eventually invested in the 16th-ranking company, which was Yifeng Pharmacy. My colleagues were shocked. But today, it’s growing the fastest with the highest profit margins in the industry. It took me 10 years to prove that I was right.
Q: What’s so special about Yifeng Pharmacy?
A: It was just a regional brand in Changde, Hunan then. Their people were surprised that we invested in them too and asked us if they had anything special that they didn’t see themselves.
As a matter of fact, what impressed me first was a piece of paper, a report on the performance of regional managers formulated by the company’s chairman GAO Yi. Besides gross margins and customer satisfaction, the report included in the KPIs employee turnover rates. I felt pleasantly surprised because lower employee turnover rates suggest higher year-on-year growth for its old stores. I thought it amazing that someone who lives in a remote and small city should have such insights into retail business.
Q: Was the investment in the No. 16 player a quick decision too?
A: I have a personal method that helps me make decisions: to see whether a founder can make a good “son-in-law”. If the answer is yes, it means he is practical, reliable and trustworthy, which are important elements of a good entrepreneur. GAO Yi is a perfect candidate to be my “son-in-law”, ha-ha.
Q: Few investors rely on sensibility like you do.
A: In fact, the final judgment is built on the experience I have gathered before. I have read many biographies of people in the retail business. Although each founder is different, I have summarized three characteristics they share: They all pay great attention to detail; they are all stingy; but very nice to their employees.
After I met GAO Yi, I found he had all these characteristics. He pays great attention to details: He visits the company’s stores each time he comes to Shanghai, and he knows every detail about the stores. He is stingy: I paid every meal we had together all these years. He never bought me dinner! He went so far as to count posters himself for fear that people might print more than necessary. But he is very kind to his employees. We often have to urge companies in traditional industries to issue stock options, but GAO Yi had done so before we investigated their project. Plus, his senior executives are all people who have fought together with him for many years.
Q: Investors and founders are on the same side most of the time, but they may occasionally disagree with each other. Are you the pushy type when conflicts occur?
A: It was indeed very tough arguing with GAO Yi at that time. As I said earlier, he is a stingy person. That made him unwilling to give way on issues regarding prices. We were so divided on the problem that our talk was fruitless.
We then took the elevator down to the lobby of Jinmao Tower. When he was about to leave from one of the gates, I thought to myself: he had come all the way from Changde and if I let him go this time, we may never have a second chance to reach an agreement, so I stopped him. I said to him: How about this, Mr. Gao? We divide the investment into two stages. We keep the prices low in the first stage and raise them in the second.
We stood in the Jinmao Hall and talked again for a long time before finally going back upstairs to sign the term sheet.
Q: Are you the one who was willing to compromise?
A: Yes, I have compromised many times. I managed to invest in several great companies because I was willing to compromise, or they would not have come through.
Q: Does Richard LIU know that he passed your ” son-in-law” test?
A: I knew LIU was a trustworthy person and “a dark horse whom I must not let go” the moment I saw him. We talked from 10: 00 to 2:00 in the morning and I wanted him to fly to Shanghai to sign the term sheet the next day.
Before this, a fund company had promised him an investment of 5 million yuan but stopped after investing 1 million yuan. The investor lost faith in his company, which had long been operating in the reds. I asked LIU to show me the terms of the contract he signed with that fund company, but he refused.
I was surprised at his response because his company had already run out of money and their expansion plan was made on the premise that an investment of 5 million yuan would be provided. He was really desperate for money, but held on to his principles. You can see how strong-minded this man is.
Q: Why did he refuse to show you the contract?
A: He said that they had signed a non-disclosure agreement. Again, it was I who gave in in the end. I think true entrepreneurs are always pushy, and it is important for investors to know when to make concessions. You should give him what he really wants.
Q: Has there been a case in which you were really excited about a project at the beginning but later found it to be not as good as you thought?
A: I think I’ve always picked the right people. Sometimes it’s just that their opponents are too strong.
Q: Does YANG Haoyong (founder of Ganji), who was challenged by Michael YAO (founder of 58.com), fall into that category?
A: No. Haoyong has always been awesome. I’m talking about another person, but I can’t tell you who he is. He is very smart. We all felt that we hadn’t met such a brilliant person in a long time, but in the end… If you have to compete with someone like Pony MA, there is little chance you can win. Luck is also important.
Q: You did not invest in shared bikes. Was it because the fight between Ganji and 58.com that year gave you doubts about the practice of competing with each other by intensively burning large amounts of cash?
A: No. I had wanted to continue investing in Ganji to the end of the game. If it had been just Haoyong and I, Ganji would not have merged with 58.com, and we would have continued the cash burning race.
The market had already been divided into different segments then. Ganji was doing well in the segments of second-hand cars and recruitment at that time. Both were huge markets that could foster a powerful company. Many investors give up halfway because they do not have conviction. If they do, they’ll know that spring is right around the corner if they hang on for a little bit more. Haoyong has now founded Guazi.com (瓜子), which is also faring well in the market. We invested in it too.
We did not invest in shared bikes because the business model doesn’t make sense to me. For users, the more bikes, the better, but for bike operators, it is utilization rates that matter. They are contradictory.
Q: How would you comment on the acquisition of Mobike (摩拜) by Meituan?
A: Meituan is a super online service platform. In order to meet the needs of its users, it must ensure that it has its foot in all high-frequency businesses. Food delivery services, online car hailing platforms, and shared bike operators are some of the few platforms generating over 20 million orders a day. The mission of Meituan is to help people eat better and live a better life. Travel has always been one of the core businesses of Meituan, so the acquisition of a shared bike company is rather necessary.
Shared bikes are commodities that people use in daily life at high frequencies, but the average revenue per transaction and proportion of variable costs are low. That means a pure-play bike sharing company may not be very profitable, but for a super platform like Meituan, shared bikes offer a way for it to obtain new customers and retain old customers. With so many Mobikes running on the streets every day, the acquisition is worth it even from the perspective of advertising. Moreover, given the low proportion of variable costs and high daily transaction volumes, they may well offer the bikes for free and earn the money back elsewhere.
Q: What about Meituan’s branching out into ride hailing?
A: I think WANG Xing is an insightful man. The ride hailing market will certainly not be dominated by one player eventually. The market is undersupplied, and as long as there is an undersupply, there will be new players entering the sector. Although Uber is a powerful opponent, Lyft still managed to achieve fast growth and grabbed a 10% market share from Uber last year.
Moreover, branching out into ride hailing is also in line with its mission of helping people eat well and live a better life. A ride hailing platform can generate 20 million orders per day. How many such markets are there in China?
Q: You have summarized three qualities that make a great founder: the intuition of a killer, superior learning ability and lofty aspirations. Which one of the three is WANG Xing best at?
A: WANG Xing is like a deep learning machine. His ability to learn has allowed him to gain deeper insights, take more decisive actions and formulate more forward-looking strategies than others in many fields despite being a late-entrant. He once said that he would rather have a painstaking strategy formulating process to make the execution process less so.
Q: How are the strengths of founders in this era different from those a decade ago when you picked out Richard LIU?
A: I think the key is still in the ability to learn. Entrepreneurs must learn everywhere, every day and be very open. They should have sharp eyes and keen ears. In the past, you could watch how others were doing so before engaging in competition, but now, you must start running after you have learnt 30% to 40% instead of 70% to 80%. You have to adjust yourself while you run to make sure that you are ahead of others and are the forerunner.
People are important too. Haoyong did even better this time than his first startup project, because he has managed to win over all the great people. He would often ask me to talk to people whom he wanted to win over. I once had a chat with WANG Huiwen, Vice President of Meituan. He told me that he did not start his own business because the future WANG Xing painted for him was already great enough, and he would rather fight for that future together with WANG than start a business himself.
In fact, this is what I meant by “lofty aspirations”. What keeps a company together in the end is its mission and values. They are like religions.
On gains and losses
- I missed the chance to invest in Kuaishou and Pinduoduo, but I still think that you should invest in what makes sense to you.
- You don’t know where the next wave will be, but the least you can do is stay in the water.
Q: The well-known projects of Capital Today, such as JD.com, Dianping.com and Yonghui Life, are all associated with mass consumption. Why haven’t you invested in other fields?
A: We are good at investing transaction-related businesses. JD.com has made us a lot of money; we invested in Three Squirrels, probably the most profitable e-commerce brand that has emerged from Taobao; in the field of O2O, we betted on Dianping.com and then Meituan-Dianping after the two merged.
I think that we could have done better in the field of content. We invested in Zhihu (知乎), but we missed the chance to invest in Jinri Toutiao (今日头条) and Kuaishou (快手).
Q: It seems that you are less interested in Kuaishou and Pinduoduo. I guess it’s because you have been targeting China’s consumption upgrade ever since your investment in Wahaha in 1995.
A: I am a follower of Buffett, and I do think that you should invest in what makes sense to you.
Q: Everyone is talking about the huge growth potential of lower-end markets.
A: I know, but they just don’t make sense to me. Maybe I will understand if I spend some time hanging out with young people from third and fourth tier cities. I don’t know. You can’t force me to like something. This is when I rely on sensibility more than I do rationality.
Q: You just said that you have done lots of research to identify a winning pattern, but I don’t think you can work out a model like that of Pinduoduo’s even after studying the top 100 retail projects. It’s different from the existing ones.
A: We looked into the project when it was still called Pinhaohuo, and we thought that there were some problems with its model. We did not follow up after the company transformed itself later, which I must admit was a mistake. HUANG Zheng, the founder, is indeed very smart. The company’s success is not rooted in the fact that its business is built on WeChat, but that it has invested in supply chains.
However, each retail revolution comes down to creating new value. Richer categories bring new value; so does customer satisfaction resulting from home delivery service, but what is the value created by Pinduoduo? Do consumers derive a sense of happiness from shopping together with others? Are they happy that they can spend two yuan less on a 10-yuan product? Do they kill time browsing the endless commodities fed to them by the recommendation system?
Q: Are you anxious about finding the next great deal?
A: WANG Xing once compared doing business in traditional industries to climbing mountains: You know where the peak is; however, operating in the internet sector is like surfing: you never know where the next wave will come from or whether you can ride the wave or not.
I think we are already lucky to have invested in a super platform like Meituan and betted on new retail in the past two years. There may not be big waves every year. You just have to rest and wait. However, it’s important that you’re prepared when the next wave comes. We are continuously investigating projects and meeting people. Even if there are no big deals, we can always get by with small ones.