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Long-term value comes from profitability, says Vickers Venture Partners’ Dr. Finian Tan

Written by Yin Lin Tan Published on 

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In Venture Matters TV episode 8, Dr. Finian Tan, founder and chairman of Vickers Venture Partners, shared insights on the Chinese market and on what defines long-term value.

Vickers Venture Partners has a clear focus and that is “deep tech.” Founded in 2005, the VC is now aiming to raise USD 500 million with their sixth fund. “We’ve made 14 investments, they’re almost all in very deep tech spaces all across the world,” founder and chairman Dr. Finian Tan told KrASIA in episode 8 of “Venture Matters TV.”

Tan mentioned that his firm has invested in companies like tissue regeneration startup Samumed, which is already valued at USD 12 billion, and Emergex, which is working on a vaccine for COVID-19. With a PhD in Engineering from Cambridge University, he certainly knows what he is investing in. Vickers has become one of the best-performing funds in the world.

“Over the years, we realized that risk can be split into three,” Tan said. “Will the technology work? Are you in the lead for IP? And is the demand there?” The key to maintaining a good return on investment was to avoid taking risks when it comes to IP and demand. The firm is “happy” to take technology risk though, but mitigates it with fund managers who have expertise in areas like engineering, biotechnology, or artificial intelligence.

“Since we [stopped taking IP and demand risks], our failure rate has dropped,” Tan said. Vickers’ failure rate used to be 34%, compared to an industry average of 60%, and now it is 6%.

Investing in China

Tan is perhaps best known for leading Draper Fisher Jurvetson’s (DFJ) early investment into Chinese tech giant Baidu in 2000. When asked about the company, he said that Baidu continues to be the “number one” search engine in China. “I think the biggest question is whether they can move into the next Web 3.0 as effectively as they have controlled Web 1.0 and Web 2.0.”

“The next wave of growth is artificial intelligence,” he pointed out. “They certainly have the data. And if you have the data and the talent, it could lead to much success. So I’m hopeful.” For him, China is already a leader in artificial intelligence. “I think, in the future, China will certainly be a powerhouse,” he said.

Tan also listed three things that are essential when investing in any market: Good deal flow, good filter, and the ability to help the companies grow. He used the Baidu investment as an example—there was good deal flow, as DFJ already had an office in Shanghai, and then later Beijing. The filter was also sufficient. “At that time, we had a crystal ball, and the crystal ball was that what had succeeded in the US would probably replicate in China.”

“Now it’s slightly different,” Tan said. “It’s not exactly the same, but you still take a lot of forward-thinking ideas from the US.” He mentioned that Didi was a consequence of Uber. Having offices in seven locations across North America, Europe, and Asia certainly helps Vickers. “I think being a global fund allows us to keep in touch with everything that’s going on in the world and having a good filter to pick the best,” he said.

Defining long-term value

Long-term value only comes from companies that will ultimately be profitable, Tan explained. “So if a company does not have a clear path to profitability, then that’s not a company we will invest in, and that’s not a company that can ever make money for anyone,” he added.

Although a company might be making losses today, he emphasized the importance of having gross margins improving over time. Tan recognized that it is difficult for early-stage startups to raise funding. “It’s because of the perceived risks.” he said. “Big boys don’t like risk, and so they invest in later-stage companies.”

Capital is ultimately still important for any startup. “But once you start raising capital, it’s a fine balance between wanting to be prudent and growing slowly, or being a bit more aggressive and growing quickly,” he pointed out. “All companies die because of lack of money, so the decision on how to spend the money is probably the single most important decision for a startup.”

The discussion finally turns to 2020, a “very unusual and unique” year. Tan advised that for companies to grow sustainably, to “spend more time raising capital and be very prudent with cash.” Unless there is a clear vision of where the next dollar is going to come from, startups have to slow down.

“It’s okay to wait it out,” he said. “As they say, live to fight another day, but you have to live so that you can fight again.”

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