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Talk with Xu Dalai of Shunwei Capital: Too many people are anxious and too few people do real work
Xu Dalai, currently CEO of Shunwei Capital, was named to the "30 Most Influential Investors in China 2019" list in October 2019.
Today, we share a transcript of a conversation between Gucang Startup Insights and Xu Dalai, Founding Partner and CEO of Shunwei Capital. In reading this interview, you will learn, through Mr. Dalai Xu's decades of experience in the business, that:
- What were the most frightening crisis and the craziest industry bubble he has ever experienced?
- As a senior investor, what kind of judgment does he have on future trends?
- What is his investment methodology? What kind of entrepreneurs does he prefer?
- How should young people invest in their lives?
This interview took place in 2019. The year of 2018 is known as the "cold winter" of the Chinese Internet, but it is the "autumn harvest season" of Shunwei: Xiaomi, Nio, IQIYI, Huami, Yunmi, and other Shunwei companies went public one after another, and in one year, Shunwei Capital completed 8 IPOs.
As a top investor who has experienced the Asian financial crisis and the Internet bubble, Xu Dalai looks at the future this way:
Q: People are talking about the capital cold winter, what do you think?
Xu Dalai: Now, people are a little pessimistic about the short-term future. But at least since I came back to China in 2003, I do not think we have experienced a real economic crisis.
The real crisis is the panic of people.
How terrible is panic? For example, I believe that for most people who buy stocks, if you are not optimistic about the future of the capital market today, may reduce their positions partly or may reduce all, or may hold the expectation of a rebound to continue to hold. But if you are in panic, you do not think so much and will sell the stock at any price.
Q: Where do you get your business sense and insight from? How do investors break through the limitations of the information and see trends that the vast majority of people do not see?
Xu Dalai: Good question. This is also a test for every investment institution, whether they can start investing earlier before a new trend comes up also determines to a large extent the return of a fund.
Over the past 7 years, Shunwei has been fortunate to invest in the mobile internet wave in 2011, smart hardware a few years later, then invest in deep technology, and in the last few years, we discovered the Indian market, all of which are opportunities early in the trend.
How did we do it?
We rely on the fact that we are always on the front line of the industry. All of our investment colleagues are constantly on the front line looking at projects, from which we may find out what is interesting and maybe a major trend in the future.
Take India as an example. The Indian market is very similar to China, with a long history, a population of more than one billion, a high density, an agricultural base, and both developing countries. When we went to India two years ago, India was in the initial stage of switching from feature phones to smartphones, while this stage started in 2010 and has been developing for seven or eight years now.
Therefore, having experienced the mobile Internet trends in China, it is easier for us to identify the opportunities. If we hadn't been in India ourselves two years ago, we might not have captured the momentum as keenly as we did at an early stage.
Q: How has your investment logic changed in the new normal?
Xu Dalai: As an investor, investments in mobile Internet in the past seven or eight years, are called momentum investing. As long as your investment ability is not too bad, basically, there are stable earnings. And at least in the short-term future, we have to return to Warren Buffett's old saying: value investment.
In the past seven or eight years, companies have been valued more expensive and there will always be more expensive prices to take over. In the future, however, we will be more robust.
At the end of 2017, I wrote a year-end email summary to my colleagues, one of the key points is to tell colleagues that I think the market is close to the high point, to encourage our portfolio companies to raise funds and to go public. So in 2018, Shunwei completed 8 IPOs, including Shunwei's own fundraising, raising $1.21 billion.
Before investing in any company, we have to look at its fundamentals and long-term investment value. I always advocate that Shunwei should make investments with a 10-year perspective. I believe that 3 years later, looking back, the year 2019 will still be a bumper year for us.
Q: What opportunities do you see in the next ten years?
Xu Dalai: China is already the second-largest economy in the world. Regarding the trend in the next few years, it is now very clear that the domestic economy needs industrial upgrading after the development of the past decade or two.
Over the past decade or two, with China's rapid economic growth, enterprises followed along with the growth, it does not matter if the efficiency is low. When I first came back to China in the early years, the retail chain just took off. Many brands or suppliers see the market and are willing to subsidize, but in recent years it is not so. Now we have to look at the ping effect and efficiency, to rely more on the refinement of operations.
- Even without the U.S.-China trade war, intelligent manufacturing and high-tech components, are the focus of development for the next 10 or 20 years. In the premise of the trade war between the United States and China, their development will be accelerated. In addition, the domestic demographic dividend has slowly faded which is why I am optimistic about intelligent manufacturing and robotics, because the labor force is less, more companies need to improve efficiency.
- The second is the industrial Internet. For example, Shunwei invested in Meicai, which has improved the efficiency of agricultural products circulation and also improved farmers' income. Achieving cost efficiency through increased efficiency is a hard truth in difficult times.
- The last is to look at the world. This is another dividend. Chinese consumer goods need to be sold abroad, as represented by Xiaomi.
Having invested in and observed numerous projects, Xu Dalai would like to tell entrepreneurs that:
Q: In winter, the first place in the industry usually gets more capital, and the second and third place has fewer opportunities. What should companies that are not at the forefront do?
Xu Dalai: The core of all people is to survive and fight a protracted war.
Entrepreneurs must first be strong inside. In the deep winter, only those who are strong enough inside can collect more resources and bring maximum value to their limited resources. I have always said that entrepreneurship is running a marathon, and those who can run to the finish line must be the group of people who recognize the significance of the finish line and have extremely high faith and perseverance.
Winter is often a period of industry consolidation.
It will remove all the speculative entrepreneurs and remove the weak ones as well. This is good for startups to exercise themselves properly. The team with perseverance, determination, and execution can overcome to the last day. There are fewer competitors, and once the winter is over, those who are left will win the market.
For Shunwei, in the winter environment, in fact, I pay great attention to the operational efficiency of each company, that is, how much revenue you can generate by spending 1 Yuan, or how many users you can attract by spending 1 Yuan. This is one of our current investment criteria, and also an important requirement for our portfolio companies.
Q: When you look at a project, how can you tell if the entrepreneur has a strong heart across the street?
Xu Dalai: In fact, it is quite difficult and subjective. You can use some objective methodological analysis to see what he used to do.
You should also observe the details in the chat. If the market is very hot and the entrepreneur's resume is very glamorous, it is actually not easy to determine; and those who are still brave enough to come out and start a business in today's environment should be entrepreneurs who really have faith and want to do real things.
How to read people is the basic skill necessary to do investment. I remember many years ago, in one of my portfolios, he went to meet the old gentleman, only 10 minutes of conversation and got several tens of millions of dollars.
My thinking is that, of course, he had an investment manager who had done a lot of work first, but I believe that in that short 10 minutes, the investor had understood him. So, I always remember what my predecessor warned me when I started my career: to do investment, you have to practice behind closed doors first, the older you are, the more experience you will accumulate.
Q: When are startups most likely to fail?
Xu Dalai: In the past 10 years, a large number of funds in China did not lack money, but there was a mismatch between the capital side and good projects.
This is actually a special external reason for the "C round death" curse. Once there is a hot project, a lot of money will come in, and there will always be some projects with less solid fundamentals or unproven business models, but the valuation is speculated to be very high, and the C round can be as high as $1 billion or more.
With the hot money chasing, the internal mentality of the startup will be affected, and it is the easiest to fall when the development is the smoothest. The founding team starts to get cocky, inflated, and feel overwhelmed, and that's when failure often happens.
I learned to drive myself. It was hard to get a driving license in Singapore, but I got it in a very short time with almost a perfect score. The first week after that, confidently on the road, and I had a car crash.
When you are very complacent, you often do not see your own shortcomings, and therefore you are most likely to make mistakes then.
Q: The ideal relationship between investors and entrepreneurs?
Xu Dalai: I have told my colleagues that if there is only one indicator to assess whether the post-investment work is in place, it is whether the founder comes to you for consultation when he makes important decisions.
Moreover, I have met great entrepreneurs who come to me not just to tell me the problem, but have already thought of a viable solution and just want me to give advice or see if there are any loopholes in his proposal.
Of course, entrepreneurs are often hard to convince. That's normal because we want to invest in people who have ideas, and good entrepreneurs don't just do whatever you say.
More commonly, we made some suggestions, he did not accept, took a detour, and came back to tell us that we were right.
"Keep a normal mind" Investment, entrepreneurship, and life are all like this:
Q: How do you combat the anti-human torment in the process of making long-term investments?
Xu Dalai: I have not experienced a crisis bigger than the Asian financial crisis, nor have I experienced a period crazier than the Internet bubble in 1998 and 1999. At that time, it can be said that it was a double fire.
In 1997, I was at Deutsche Bank in Singapore during the Asian financial crisis. Although Singapore was not affected much, it was in the middle of the hardest-hit area with Indonesia to the south and Malaysia, Thailand, and the Philippines to the north.
The financial crisis in 2008 led to bankruptcy, while the Asian financial crisis in that year led to social unrest and chaos in people's lives, so it was much deeper.
In 1998 and 1999, I was studying at Stanford at the peak of the Internet bubble. A startup company came to Stanford to recruit students and gave them a Porsche if they joined their company.
At that time, almost all the students around me were saying they were going to change the world, literally. Even if it was a coffee shop, adding ".com" to its name could raise its valuation to $20 million. Then, until now, I haven't experienced such a big bubble, including in China. The only thing that came close to that was Bitcoin some time ago, but Bitcoin's reach was significantly smaller and the vast majority of people weren't directly involved.
It's very much a struggle to make long-term investments and hold them. Warren Buffett has his reasons for doing his investing in a small place rather than a big city. If you turn on CNBC, you will find that they talk fast, which makes you excited and scares you.
So, always keep a normal mind.
Q: How should young people invest in their own lives?
Xu Dalai: I suggest young people choose what they love. Life is not just a career, do what you like to do. Even if you are not good at it, you can find a partner to do it together.
Of course, it's hard to separate work and life when you really find something you like to do, like me.
My first job was actually very good, and the pay was very good. Right after I graduated, I was flying around the world, meeting Fortune 500 executives and discussing strategy with them.
But when I was working, I always felt unrealistic, surrounded by the halo of the platform, and unable to build up my real strengths.
After that, when I was reading The Economist, I learned that there was a profession called VC in Silicon Valley, and this group of people had invested in several great companies in Silicon Valley. At that time, I was very eager: VCs can give money to entrepreneurs, get shares, and get paid, what a perfect thing! So I chose this career from the point of interest.
Q: Some young people think many windows of opportunity have closed and feel anxious.
Xu Dalai: Don't be anxious, the next window will always open!
This article is written by Gucangchanpinjia, translated by Linda Yang.