Qiming's managing partner, JP Gan
The closing months of 2016 have been kind to Qiming Venture Partners. The US$2.7 billion-under-management Chinese venture capital firm saw three of its portfolio companies list in public markets during the past month: in Shanghai, Taiwan and Hong Kong.
Meitu Inc., a phone retouch app and smartphone maker backed by Qiming, IDG Capital and others, was valued at HK$35.9 billion (US$4.6 billion) following its Hong Kong IPO. It was the biggest IPO by a technology company in Hong Kong since Chinese tech giant Tencent Holdings Ltd. went public in 2004.
The IPO marks the latest high point of a "harvest season" Qiming has entered to cash out of investments made over the past decade, says JP Gan, Qiming's managing partner. The firm just celebrated its tenth anniversary with a lavish party in Shanghai's Ritz Carlton featuring U.S. swimmer Michael Phelps and Chinese national volleyball coach Lang Ping.
Now into the second decade, Qiming must identify the industries from which the next great Chinese tech companies will emerge. Not surprisingly, the sectors cited by JP Gan included artificial intelligence (AI), virtual reality, Internet-of-Things (IoT), all of which are the buzzword in today's venture world.
For artificial intelligence, Gan likes mission-specific products that can be commercialized quickly, such as voice recognition, image recognition and driver-less cars.
In terms of VR and AR, he believes the hardware platform will evolve away from head-mounted goggles to something more user friendly. As for big data, he thinks Chinese start-ups in that field face greater challenges than their U.S. peers as the country's technology giants typically like to do things in-house.
Q: Qiming celebrated its tenth anniversary last month in Shanghai. You have backed some of the most notable companies in China's mobile Internet sector. What's your thinking on how to capture the next emerging trend for the ten years ahead?
A: That's definitely something we worry about a lot. The question is: which trend do we bet our house on?
Mobile Internet has been an important investment theme for us and for our fellow venture capitalists in China. Meitu, which just went public in Hong Kong today, is a perfect example of that.
In the next few years, we will continue to look at mobile Internet. We will also be looking at artificial intelligence, virtual reality (VR), augmented reality (AR), big data, and other disruptive technologies.
Q: Since you mentioned Meitu, the company is still loss making. How does the company become profitable?
A: The majority of its revenue comes from its smart phone sales. The company has sold hundreds of thousands of picture-optimized smartphones. It's one of the most popular phones among female users in China. The ladies love it as their second phone or designated selfie phone.
We hope to get our production up to sell more smartphones. With around 446 million monthly active users, advertising is another revenue source. The company hasn't monetized on ads before. Gaming is another potential. Meitu can use its popularity to attract users to play its games as well.
Given its huge user base, we feel like Meitu is in the position where Tencent was ten years ago.
Q: Baidu's chief Robin Li recently said that there won't be any unicorns (start-ups valued at US$1 billion or more) emerging in the mobile Internet sector any more. Can you still find massive opportunities in this industry now?
A: Of course, user growth rate in mobile has stagnated. But in terms of application, there are still lots of potential. Many apps are still growing its user base. New features and functions are still being explored.
Q: You mentioned AR and VR. Recently, U.S. start-up Magic Leap took a fall as it reportedly exaggerated the effects of its technologies. There appears to be growing skepticism of the sector. What's your thinking?
A: I think VR is pretty far away from real commercialization. You need to have a hardware platform that can be easily used in order for applications to be run smoothly.
We are still in the early days of VR. I'm not convinced that the head-mount goggles will be the final form of the VR hardware platform. Maybe there is a genius somewhere who will come up with a completely surprising product that will redefine VR.
A: Over the long term, how important will the VR industry be? Some people say it will remain a marginal form of entertainment for a small portion of the population?
A: The computer technology always evolves around man-machine interface. Thirty years ago, having a mouse was revolutionary. The iPhone touch screen changed the whole mobile Internet industry. The man-machine interface will again change. It could be voice, VR or something else.
Q: Let's move on to artificial intelligence. What's your overview of the Chinese AI start-up scene?
A: I think the AI evolution is still in an early stage. We like mission specific products, such as voice recognition, image recognition and driver-less cars. These can actually be commercialized quickly.
We have invested in a factory automation and automated manufacturing company called Intelligent that we sold to a listed company about a year ago. We invested in Ubtech, a family service robot company, and a smart vacuum cleaner maker. Other areas we have are interested in include business intelligence, medical devices and education devices with AI capabilities built in.
We are not looking at general purpose artificial intelligence and robots, which we believe still have a long way to go.
Q: Are you finding good start-ups in the Internet-of-things (IoT) sector?
A: We have not invested in this area yet, but we are increasingly looking at products connected by sensors. I recently got to see a product, a small device that can be plugged into your computer or smartphone and displays air pollutant levels. This could eventually be connected to air conditioners or air purifier systems at home or office to better control our environment.
Q: Qiming is also an investor in a popular bike sharing start-up called Mobike. How was that investment decision made?
A: In my 16 year venture capital career, Mobike is the first Chinese company that turned an original idea into an absolutely unique product that no one else in the world has done before.
It's essentially a smart bike enabled by a GPS-directed lock, allowing users to locate and unlock the bike, therefore removing the constraints of fixed bike stations. It's really a great invention.
Q: But there are already many copycats in China, backed by venture funding and launching tens of thousands of bikes in big cities.
A: That's very unfortunate. But none of those bikes are innovative. They are just regular bikes with a lock. It's also sad for my fellow venture capitalists to back such start-ups without any innovation, I think.
Q: Do you find co-working space start-ups interesting?
A: I don't know how many co-working start-ups are there in China, but it seems there is a co-working space on every block now. Anyone with any real estate space is turning it into co-working spaces.
I think the key for this type of company is to have the network effect. You really need to have many locations around the country to give users unparalleled benefits.
Q: Would you invest in this sector?
A: Not at this point. We think it's too capital intensive. Also, there is not enough technology and innovation in it.
Q: How are you positioning yourself in the big data field?
A: I think big data is a productivity tool at the end of the day. Many of our mobile, Internet and e-commerce companies have already adopted big data technology in their decision making, from product design, user interface and distribution.
In China, companies like to do things in-house. They would rather hire people to develop their own algorithm and deep learning platform. Baidu, Tencent and Alibaba all employ hundreds of data scientists to develop their own capabilities.
So we believe a lot of innovation will come from these big companies, because they also have massive amount of data. Contrary to the U.S., we think a B2B big data technology providers will face more challenges in China. Therefore, we are very cautious about backing Chinese big data start-ups.
Q: How is your exit pipeline looking like now?
A: We just had a great year in 2016. Hexing Industrial Group, a smart meter company we invested, just completed an initial public offering in the A-share market last month. A week ago, another portfolio company, a Taiwanese clinical research company called Crown Bioscience International, listed in Taiwan. Then Meitu was listed today in Hong Kong. We have also exited via strategic sales as well.
Q: How long was Hexing in the queue for the A-share listing?
A: Three years. The stock price has gone up quite a bit, and we are happy about the after-IPO market performance. We have four companies in the queue for A-share market listing, including Gan & Lee Pharmaceutical. We are also constantly in discussion with strategic buyers about transactions for our portfolio companies.
Q: Do you expect 2017 will be a good year for exits too?
A: Absolutely. I think we are probably in one of the best times in venture capital history. The U.S. market is traditionally a great exit venue, but now we have the domestic stock exchanges, Hong Kong and other potential listing markets. The M&A space is very active, with large corporations, listed companies and many new players participating.
Q: Qiming recently raised a pair of U.S. dollar and RMB parallel funds. It's important to be able to deploy capital in both currencies. But going forward, how will their importance in investing in China shift?
A: Two or three years ago, I will probably have said that RMB funds will become more important. But with the RMB's depreciation and China's continued opening up of its industries, we have found it's increasingly easier to convince companies to accept both RMB and U.S. dollar investments to set up joint ventures as a company structure.
In the future, in non-restricted industries, such as software, medical equipment and pharmaceuticals, RMB and U.S. dollar will be on equal footing.
For start-ups, they will focus on an investor's reputation and if it can add value. They will think less about currency, at least that's what we hope.
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