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 3 of a 3-part interview with Kathy XU done by 36Kr, our parent company. Read Part 1 and Part 2 here.
On why she launched an evergreen fund
- The biggest mistake I have made so far is holding stakes in great companies for too short.
- NetEase is the one and only case that gave me insomnia; the only good thing when you are in hell is that things can’t get worse.
Q: The funding life of Capital Today’s latest fund is 28 years, much longer than the 10-year life of most USD funds. Why?
A: I have been thinking that the biggest mistake I have made so far is holding stakes in great companies for too short.
The first company I invested in was Wahaha, and I learnt a lot from its chairman ZONG Qinghou. Back in 1995, I was still working at the private investment bank Peregrine in Hong Kong. During a trip to Paris, ZONG Qinghou saw people there drink Evian and thought it was interesting. After he returned, he decided that he would sell bottled drinks in China. That was when Chinese people still took canteens with them and no one knew what bottled drinks were, but he dared to take the chance. He spent $30 million to build 3 production lines and advertised extensively. Yet it was not until six months later that the products were rolled out to the market. How good he was at hunger marketing! When the products started selling, the market was like crazy. ZONG then decided to spend 80% of the sales revenue on further advertising. We were stunned.
Q: What is the most important thing you learn from him?
A: Get big fast when opportunities come. The only barriers you can set up against competitors are scale and brand.
Q: Why did you sell it just three years later?
A: Peregrine was on the brink of bankruptcy at that time amid the financial crisis. We had no choice but to sell it.
Q: How much return did you generate from investing in Wahaha?
A: We invested $40 million in the company and sold our stake in 1997 at five times its original value. The company’s revenue was less than $10 billion then, but has now surged to hundreds of billions.
Q: There is NetEase too. If you held stakes till now, you would be rewarded with huge returns.
A: The NetEase case was really a tough one for me. It is the one and only case that gave me insomnia, but I’m very grateful that I had invested in it.
A: I learnt from the case of NetEase that I must be strong and never give up despite difficulties, and that we must have the faith because faith makes the difference.
Q: When NetEase’s stock price fell to the bottom then, many of your colleagues thought that it was wrong to invest in the company. Why did you still believe in it?
A: We invested in NetEase’s first funding round in 1999. Its stock price once surged from 5 yuan per share to 30 yuan, but we did not sell because after the Wahaha case, we decided to make long-term investments. However, when the internet bubble burst, the price plunged to 0.6 yuan and hovered around that level for two years. This turned NetEase into a junk stock and embroiled it in a class action lawsuit.
The boarding meetings we had at that time would last for 4 to 5 hours and all I heard was bad news. I was 32 years old then and yet the oldest at the conference. Other directors were all in their 20s.They wanted to sell the company.
I was strongly against it. It’s not that I was so smart that I could foresee its value afterwards, I just thought that since we were already in hell, things couldn’t be worse and would only become better going forward. So I called every director and told them we could not sell it cheap.
Anyway, the one who supported me was DING Lei. I took him to a seafood restaurant on his 30th birthday. He said to me: Kathy, I have two dreams. The first is to build China’s best game company, and the second is to make sure that you and other shareholders can make money. I was moved that he had shareholders in mind under that kind of circumstance. It made me feel that he was a responsible guy. He was also smart to have targeted the gaming industry. That’s what I call the intuition of a killer.
Then in the following two and a half years, NetEase launched Westward Journey Online I and II. The performance of the first was mediocre, but the second turned out to be a huge success. By 2003, he was already rated the richest Chinese individual by Forbes. At last, due to internal pressure, we sold our shares in the company when its market value reached $1 billion at eight times their original value. Now the market value of NetEase has exceeded $37 billion.
Q: Is that why you didn’t give up when JD.com was at its lows?
A: When JD.com had a tough time and was in need of funds, we provided it with bridge loans. I had already experienced the worst with NetEase. There is no difficulty we can’t overcome. If you actually believe in this person and that things can work out, then you should bet on it. You must have faith being an early investor for there isn’t much else you can rely on.
Q: Why didn’t you sell after JD.com got listed?
A: If you believe in its value, you should cling on to it. There is this 80/20 rule in the investment sector, which means that 20% of the projects contribute to 80% of the total returns generated. So the key is investing in the top 20% projects. Good companies will keep getting stronger. But if your fund has a short funding life, you will be forced to sell when the term expires or you’ll have to explain to your limited partners. That’s why we gave our fund a 28-year life.
Q: Is it difficult explaining to limited partners?
A: I had kept telling them the same thing ever since the establishment of Capital Today. I guess that’s why they said yes finally, ha-ha.
It’s in fact a two-way selection. It would have been okay if they had decided not to invest in my fund. I could just go and look for someone who had faith in me. Besides, I was not asking for a big sum of money. I wanted prove to them that their investment was worth it with the company’s actual performance in the long run. Our final goal was of course helping them make money.
On the happiness and mission of an investor and the temptation she faces
- I like brainstorming and seeking truth with founders a lot.
- I was already one of the haves, so I certainly wanted more than just money.
Q: You have been an investor for 22 years and have experienced several stages of China’s investment sector, from consumer brands in the early days to e-commerce, O2O and new retail. And you have kept betting on successful projects. What I’m most curious about is: What is it that allowed you to keep making successful investments regardless of the stages?
A: I don’t pay much attention to these concepts. I believe more in the nature of humanity. In other words, what I rely on is my consumer insights.
Q: Did you mean that you relish experience?
A: I spent a lot of time doing research to gain an insight into the target consumers of every project I looked at. I make calls myself even today. Some said it’s unnecessary for me to do so much “dirty work” myself, but for me, it’s just the most effective way to understand a project.
Q: Which aspect of yourself do you like most?
A: I think I am an earnest person and sometimes a little inflexible. It makes me happy when I focus on my work. I’m also an inquisitive person.
Q: As an investor, what else makes you happy besides investing in the right projects?
A: I like brainstorming with founders a lot. It’s not that fun discussing with the board of directors, because there are too many of them and all we look at is statistics. I like envisioning the future with founders and finding out things that others haven’t. It’s as if we were classmates, learning and seeking truth together. It’s a lot of fun.
Q: Have you changed a lot from when you were 20?
A: Ha-ha, I still speak very fast.
Q: Do you have an idol?
A: I didn’t when I was little, but as I grew up I have taken Buffet as my idol. I would give people See’s Candies, the chocolate brand he invested in, and tell them that it is my idol, Buffett, who invested in it and that it is the most delicious chocolate in the world.
Q: What is the decision-making mechanism of Capital Today? Do you make the call?
A: Our decision-making mechanism involves heated argument. We encourage debates, because the truth becomes clearer through argument. Everyone needs to voice their own opinions. It is often junior staff who are the loudest. I believe in what Ray Dalio once said – that everyone has blind spots. I think there are always things I can’t see myself.
Q: Do you study other funds? Who is the person in your industry that you are the most curious about?
A: I do. We are a curious company. For example, Sequoia is very successful. It would invest in multiple companies in the same field. But our company is a sniper-type company which only invests in one company. So are many successful VCs in Silicon Valley, such as Benchmark.
I wonder, in the long run, which type of investors have a better chance of succeeding, the ones that bet on a single company or those that invest in multiple companies in the same field?
Q: Have you ever felt the temptation to, say, enlarge the scale of your fund or invest in new hotspots?
A: Of course I have. I thought about launching RMB (funds) and enlarging the existing fund each year, but it was always my mission that got the upper hand in the end.
Q: What is your mission?
A: Capital Today was established in 2005, 12 years ago. I remembered that we held a “Dongshan” conference to determine our mission and values. We had a heated argument. Some said that we should pursue maximum return on investment. I thought otherwise. I was already one of the haves at that time, so money was never my only goal. Our mission should be to build business for China, to which I added “great” afterwards –We should build great businesses for China.
Q: How do you define “great”?
A: First, it must be the top player in its field. Second, it must seek sustainable development, which means that the company should remain active in the long term.
Q: How important are mission and values for a fund company?
A: Very important. I have frequent arguments with my colleagues on whether to invest in a project. Some colleagues would argue that if we don’t, others will. At such times, I would ask them to think about our mission. Can it become the top player or a great company? If the answer is no, then we shouldn’t invest in it.
I often told my colleagues that we should kill the mediocre deals quickly as our time is limited.
I also derive a sense of achievement from having invested in a company when it’s small, helped it grow and been there every step of the way.
Q: But you are a late investor in the EV maker NIO.
A: I was paying 10 million yuan as an admission ticket to the field of electric cars. I am there to learn. Ha-ha!
Q: So when you think about your mission, do you have the answer as to whether or not to expand the fund or invest in an area?
A: Yes, I have the answer. Are there many great companies? No. Do I need a lot of money? No. Should I spread my money around? No. It’s enough that you get these straight. Plus, you must have patience.
The exchange rate for Yuan to USD is 1 CNY =0.156482USD
Written by: HONG Hu
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