Shenzhen’s venture capitalists have their day in the sun

Things haven’t always been this easy for Shenzhen’s venture capitalists. Their businesses are built on research and take a long time to turn a profit.

By LIN Teng


“Why would we invest in this if no one really understands it?” During a meeting at Oriental Fortune Capital in 2015, Zhou Shaojun, the director who recommended the project, was dumbfounded by the question.

“I just had a hunch,” he said later, which at the time seemed hardly enough. Less than four years later, the nascent project has morphed into RoboSense, a world leader in autonomous driving LiDAR technology. The company is now valued at hundreds of millions of dollars and Zhou’s buy-in is worth 180 times its original value.

But things haven’t always been this rosy for venture capitalists in Shenzhen. There are two technology investment streams in China: “soft” and “hard.” In the past decade, thanks to the mobile internet’s role in the consumer economy, soft investors, many from Beijing, have achieved explosive returns.  Those who focused on hard technology have had a less stratospheric time. Their businesses are built on research which, by its nature, takes longer to gain traction and turn a profit.

But as the mobile internet, central to the “soft” boom, passes its peak, the market has turned its attention in a much “harder” direction, driven on by financial reform and government incentives to incubate new technology.

With its first venture capital fund established in 1999, Shenzhen is now home to around 200 such firms. These firms are deeply enmeshed in various booming local industries such as consumer electronics, materials technology and AI. Of the 31 “hard” companies on Shanghai’s Sci-Tech Innovation board, 19 are backed by Shenzhen funds.

Some have already reaped the rewards. Yao Haibo of Kinzon Capital told Jiemian that his projects include operations like electric car maker Xiaopeng Motors, which have brought him hundredfold returns.

Zhou Qi of GSR United Capital said that leading funds were jostling to get into hard projects and other investors say the same. As one put it, “Business model innovation has peaked. The future lies in technological innovation.”

A slow business

Zhou Shaojun, tall and gaunt, has been in Shenzhen for 20 years. In the venture capital circle, especially among those who invest in internet businesses, the golden rule is to be “quick and decisive.” Zhou’s style is exactly the opposite, since investing in hard technology is, in his words, “a slow business.”

“For an e-commerce company, for example, due diligence is very straightforward. As long as you know the numbers, you understand the business model,” Zhou explained.

But hard technology requires a completely different methodology. The key is the underlying technology and its viability, which cannot be easily quantified. And all ideas, sooner or later, must be scaled up to industrial production.

Zhou started following RoboSense when it was still at the laboratory stage. Before that, he spent a year learning all he could about AI. He said the artificial intelligence marketplace can be divided into three overlapping sectors: infrastructure (such as computer chips), technology development (such as natural language processing) and applications (such as smart security cameras). Seeing the infrastructure and application markets already crowded, Zhou decided to invest in computer vision technology, which had few players then, and turned his attention to LiDAR.

That was a formidable challenge to due diligence in 2014, when LiDAR, now essential to self-driving cars, was almost unknown. Every step along the value chain had to be thoroughly examined and there was no precedent to compare to.

Looking into production of essential parts, Zhou came across a polarizing filter that could only be made by hand. This meant sensor production was almost impossible to scale up. RoboSense only solved the problem last year.

The founder of the company was also closely scrutinized. “Obviously he understood all the technology, but I needed someone with the business acumen to take it to the market,” said Zhou.

He was intrigued by the fact that the founder of RoboSense came from Chaoshan, a part in Guangdong where people are well known for their shrewdness. Zhou spent a lot of time with him and declared him “a born businessman.”

The customers turned out to be much trickier. A smart LiDAR sensor was a novelty back then, but Zhou guessed it might play a role in self-driving vehicles, which might eventually take off.

Decision making in hard investment can be a long process. “Partly it is understanding the technology, another part is experience. Having seen so many projects and people, sometimes you just have to listen to your gut,” Zhou said.

To light up a flexible plastic screen

Kinzon Capital’s Yao Haibo is known to be quite bold even for a venture capitalist. He has a background in science and is drawn to frontier technology. “It takes a long time for these projects to generate any returns. But if no one invests in them, they never become viable businesses,” he said.

His projects call for passion and commitment, and enormous amounts of capital and human resources. The investment cycle is long - it can take ten years for a project to show any returns. Without passion and commitment, neither founders nor investors would last the course.

Royole, a manufacturer of flexible displays, is today valued at US$ 5 billion. Years ago, when Yao first visited their laboratory, the three employees were “fiddling with a piece of plastic screen.” He was nevertheless intrigued by the idea of a “flexible screen that could light up” and decided to invest.

“Despite the current debate about Royole’s prospects, I’ve made my money back at least fifty times over, so for me, it’s been a success,” he said. “I was with them from the beginning until finally lighting up ‘the plastic screen.’ The whole process was exciting!”

His experience with Xiaopeng Motors was similar. The “prototype” he first saw was made of hardboard sheets. While he understood that car manufacturing was a money pit, he was still intrigued by the idea of an “intelligent electric car.”

Another quality Yao values is the ability to deal with the government. Funding from the capital market is seldom enough to bring an idea to market. Government funding can be crucial to its eventual success.

Business model is king

Zhou Qi at GSR United Capital has worn many hats. He worked in research, sales and investment before running his own company. Now, back in the investment sector, he sees himself as a pragmatist. “Investors should always focus on real market needs,” he said. “They determines whether an idea will make a profit.”

He invests in AI and industrial uses of internet technology. The capital-intensive nature of these ventures, accompanied with a lack of business infrastructure and low market visibility, makes them extremely prone to failure. For him, a viable business model should be a prime concern in decision making.

In 2015, when automobile and internet juggernauts such as Mercedes-Benz and Google started to become interested in driverless cars, Zhou held back. “It was still essentially a traditional car business, even if the cars are made by an internet company. The fundamentals, such as sales, costs, and profits, are pretty much the same, which I don’t think justifies their extremely high valuations,” he said.

Instead, he invested in TAGE Idriver - autonomous mining truck technology. The trucks operate at low speeds in large, empty spaces, which enables the company to avoid many of the difficulties facing driverless consumer cars. The technology would save tremendous labor costs, more importantly, the mining companies would pay for the trucks - expensive to manufacture and maintain - with the tech on board.

“For high-tech businesses, whether they are consumer-facing or business-facing, overcoming technological barriers is just the first step. To succeed, there must be a viable, robust business model,” Zhou said.

Transforming trends

Venture capitalists, whose eventual goal is profit, are reflecting on the balance between business model innovation and technology innovation. Many reckon that technology rather than business models might transform the market structure and scale up profitability.

As Zhou Shaojun puts it, “Shared bikes meant everyone could ride to work. But laser cutting machines, or computer vision, will fundamentally revolutionize industrial production and societal operations.”

As more investors turn to technology, Shenzhen’s venture capitalists have found themselves in an advantageous position, at least geographically. The city has been a fertile ground for hardware giants and technology unicorns such as Huawei and DJI, and newer sectors such as materials science, AI and consumer electronics are blossoming.

Many funds that specialized in mobile internet have already allocated a large proportion of their portfolios to hard technologies and opened offices in Shenzhen.

As China’s startup frenzy cools, venture capitalists have refocused on the fundamentals of investment - viable technology and solid business models. It remains to be seen who the next winners will be.