Entrepreneurship in VC Has Entered the Period of Elimination

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Too Many Entrepreneurs in VC?

During the 4th session of “New Entrepreneurship Class” of Sina Entrepreneurship “Returning to the Substance of Entrepreneurship”, N5Capital partner Will Jiang, N5Capital Investment Directors Junchen Pu and Yudong Liu respectively delivered speeches.

As to the current status of mass entrepreneurship, Will Jiang frankly said that he personally did not like this situation. In his opinion, the success rate of entrepreneurship is forever only one out of ten thousand. “To be honest, I do not like today’s situation that there are too many entrepreneurs. This increases the difficulty of our decision. I’m at a loss about the choice.”

According to Will Jiang, just like the group purchase in 2009, what each investment feast and entrepreneurship feast bring are usually 99% sorrow and 1% joy. “For our investment institutions, our most favorite period is the time when the market is very cool, because only the excellent entrepreneurs will emerge at this time.”

Will Jiang believes that for the outstanding entrepreneurs, the safest time is the time when the market lacks fund, because the fund on the market will selectively invest for the best enterprise.

Materials indicate that N5Capital is an early-stage VC investment institution that is committed to the investment of early-stage projects in the industry of mobile Internet. It focuses on big data, smart life, mobile video, Internet finance, online tourism, education, and other innovative enterprises in the field of mobile Internet.(Xue die Zhou)

The following are the notes of the Will Jiang’s lecture:

First, I’d like to ask you two questions:

Why do you engage in entrepreneurship? What are the goals of your entrepreneurship?

The goals of the entrepreneurs and the investors are different. The goals of the entrepreneurs are to achieve dreams and do something that others cannot do. The goal of the investors is simple. It’s to make money. The reason is plain. Unlike others, we would give money to the entrepreneurs to let them achieve their dreams. Both of us would make profit, and the amount of profit depends on the entrepreneurs’ outlook on layout.

Not like the situation of mass entrepreneurship

When we analyze the substance of entrepreneurship, we need first to think about how significant a thing that people want to do. Today’s China has entered the phase of mass entrepreneurship. Do we like this scenario and situation? To be honest, I do not like it. There are too many entrepreneurs. This increases the difficulty of our choice. I’m at a loss about the choice.

O2O that went viral last year was analogous to group purchase years ago. You are very young. Many of you do not know what the entrepreneurship craze in 1999 and 2000 was like. I can tell you that each entrepreneurship feast usually brings 99% sorrow and 1% joy.

I cautiously tell you that the time with hot spots is not suitable for entrepreneurship. That’s why I think the best entrepreneurship time has passed or has not come.

We all know that there were two very hot topics in the first half of last year. The one is Internet finance and the other is O2O. This year’s hot topic is B2B, that is, enterprise service. However, these entrepreneurship hot spots certainly did not emerge during last year or this year. There are people who already leveraged the real opportunities two years ago. When an entrepreneur meets with an investor, he would say my idea can change this world. My business can become No. 1 in this industry. However, when he makes a horizontal comparison, he is not that eloquent.

Entrepreneurship is not suitable for all people

I consistently believe that entrepreneurship is not suitable for all. Entrepreneurship means devoting one’s lifetime or the best period of one’s life to a thing with very low probability of success. You can achieve success only through dispensing with all the things that entice you. I think such persons are rarities in this world.

Some entrepreneur has worked in well-known an Internet company and has seen the weaknesses of the large companies, believing that he can solve the problems that the large company cannot. However, large companies would not do certain business, because it’s difficult for it to change direction due to its internal limitations. Despite this, if the large company decides to do a business, it will invest more manpower and resources in it than the small company can obtain. Many current entrepreneurs have very confusing definitions of the goals and success of entrepreneurship. Many of them believe successful financing is equal to success. In my opinion, this is very ridiculous. Many other entrepreneurs think that if the market valuation of their companies reaches RMB1B, they are successful. This is also ludicrous. Why?

What is the purpose of our investment? As an early-stage investor, we do not like early entry or an early exit. The cycle of many early-stage investment institutions, especially in China, is usually 4+2 years or 2+2 years. Such institutions would enter today and exit tomorrow. However, in our opinion, a good company should continuously increase investment. Like any other economic cycle, the cycle of entrepreneurship is, in our view, also eight years. This is a conclusion drawn by my partners and I based on our years of investment experience before we establish this fund. Every eight years constitute an economic cycle, and every eight years form an entrepreneurship cycle. That is, every eight years is an investment cycle.

Entrepreneurship has entered the period of elimination

How much does the price of A-shares fall today? Anyone knows please raise your hand. I think the people who care about the fall of the price of A-shares should not engage in entrepreneurship anymore.

For today’s many funds that invest in RMB, the volatility of second-tier market may cause problems in the supply of the fund. However, for the outstanding entrepreneurs, the safest time is the time when the market lacks fund. Why do I say so? This sounds paradoxical because the fund on the market will selectively invest for the best enterprise.

In the past two months, the market witnesses sharp turnaround. We have slowed down our pace of investment since the fourth quarter last year and we feel that the bubble is hard to maintain. Most of the investment institutions become increasingly cautious, especially those Series A round investment institutions. In comparison with last year, the investment institutions have become extremely cautious since the second quarter of this year and the fund for investment is very small. The valuation of the projects has also been dipping.

For our investment institutions, our?favorite period is the time when the market is very cool because only the excellent and confident entrepreneurs will emerge at this time. His company is rationally operated. Now let’s turn to the problem that I just mentioned. Many people think that valuation and financing amount are very important. I’d like to tell you that this is empty talk before an enterprise enters the stage of normal operation. Although you have raised USD70M-USD80M, and the valuation of your company reaches USD1B through IPO and public listing, if you have no capability of sustainable profitability, you are 5 meters or 10 meters away from the cliff and you will forever stand on the verge of the cliff.

In my opinion, the profitability of the giants and China’s most excellent listed companies, including Alibaba, Tencent, Qihoo and NetEase, are very powerful. Of course, they are having an on impact on different parts of the economic system. After all, much of the profit of these companies come from the virtual economy. Therefore, we think that the future growth point of the Internet lies in today’s Internet +, which moves physical industries online in order to reduce cost, improve efficiency and boost gross profit. In this aspect, the Internet should play a greater role.

How to view capital

Perhaps at this time of last year, the subsidy economy made money. But today you can have a try. The subsidy economy is not truly utilizing the scenarios. Rather, it’s burning the money of the investors. I think that it’s not feasible for 90% of the institutions to acquire data on the basis of subsidies, because it’s not possible to develop scenarios.

So what are you most concerned with when you engage in entrepreneurship? Especially for the early-stage entrepreneurship, assume that your direction is correct and your execution ability is strong, what you need to care about is how much money is in your account. No matter the economic situation is good or bad, the cash flow is of the utmost importance. Some entrepreneurs have a poor understanding of this and they are forever infatuated with valuation. He would say today some company announced that it has raised USD5M and tomorrow another company will raise USD10M. Which is better if you have only a fraction of the shares of a company that is worth RMB1B or you holds 99% of the shares of a company that is worth RMB10M? As a matter of fact, how much the equity is diluted does not matter. But the entrepreneur would say I have less control of the company. In fact, I think this depends on your selection of capital. It’s very important to select appropriate investors. I often tell the entrepreneurs that I can only do two things for you. First, I will give you money, and second I will not disturb you. Some investor would tell you that he could provide you with integrated upstream and downstream resources, provide you with all the resources and help you raise funds. If you are not able to do these things, why should I invest for you? It’s meaningless to do so. What I want to invest for are outstanding entrepreneurs.

As a matter of fact, how much the equity is diluted does not matter. But the entrepreneur would say I have less control of the company. In fact, I think this depends on your selection of capital. It’s very important to select appropriate investors. I often tell the entrepreneurs that I can only do two things for you. First, I will give you money, and second I will not disturb you. Some investor would tell you that he could provide you with integrated upstream and downstream resources, provide you with all the resources and help you raise funds. If you are not able to do these things, why should I invest for you? It’s meaningless to do so. What I want to invest for are outstanding entrepreneurs.

I think what the entrepreneurs need most is exchanging money for equity. So in my opinion, no matter how much the entrepreneur’s company is evaluated in the early-stage financing of the entrepreneur, high (valuation?) is not the most important thing that the entrepreneur should consider. The most important thing is the speed of raising money. We call it “efficiency”.

I often tell the entrepreneurs that the investment institution that they select should not necessarily be the one that offers the greatest amount of money. High amount of fund is usually conditional, and the conditions are possibly more demanding. Moreover, his speed of giving money may not be that fast. Also, it’s meaningless to exclude other investors for the sake of high valuation.

I don’t know whether there is anyone who has been affected by the financial crisis in 2008. Most of you even don’t know what 2008 financial crisis is like. At the time, many funds could hardly survive and had no way to invest, because they have no money to give to the entrepreneurs.

During the fourth quarter of this year, the winter will possibly make a comeback, because the cash-burning enthusiasm of all was almost spent.

Finally, I admonish you all that you should stand in awe in front of entrepreneurship. Fifteen years ago, when I just returned to China, I regarded entering a foreign-funded enterprise as an honor. Previously, I might have thought being hired by a state-owned enterprise is a great honor. Later, I wanted to enter an investment bank and entering such high-paid institutions was thought as a label of status. Soon, I announced in my Wechat that I would start my own business. I think this is amusing. So we should fill ourselves with awe for entrepreneurship. I don’t know whether every one of you is suitable for engaging in entrepreneurship. I always believe that the success rate of entrepreneurship is one in ten thousand or it’s even lower. Our approval rate for the last year was 1%. This year, the approval rate is no more than five thousandths. It could be possible that no one project is approved in 1,000 projects. So under such circumstances, it’s not a bad choice if you can find and join an appropriate entrepreneurship team and devote your limited ability to a project jointly implemented with other people of the same mind. It’s better to cooperate with others than to compete with them.

Previously, the investment institutions prefer investing for the No. 1 company. The reason is simple: only the No. 1 company in the market has greater chance of survival. Currently, with the merger of several large companies, such as the merger of 58 and Ganji, even No. 1 and No. 2 company may not long survive.

The opportunities today should appear in the phase of the early-stage entrepreneurship. Working together is better than in competition because there is too much money in the market. When we look at a team, we would not merely focus on the founder. When you lack the experience of company operation or when you have difficulty in entrepreneurship management, I suggest that you join an entrepreneurship team, which may bring better results to you. You may learn more from it. You are still very young. Most of you belong to post-1980 generation or post-1985 generation. It’s never too late to embark on entrepreneurship. So please do not be too eager to achieve success. This is all for my shared experience for you.

For more information about how N5Capital works with early-stage VC investment, contact our team.

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