Kai-Fu Lee: 9 Years of Sinovation Ventures, Parallel Tech Universes, and VC + AI

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This year, Sinovation Ventures will turn nine years old. At a recent press conference, I shared several stories of entrepreneurship over the past nine years. During this time, the world has changed dramatically. The venture capital (VC) industry has become increasingly competitive and the rules of the industry have also changed.

Sinovation Ventures was established in 2009. We just completed our fourth USD fund, Sinovation Fund IV, raising $500 million. At the same time, fundraising for our third RMB fund has started, we are aiming to raise 2.5 billion yuan ($393 million).

Today is May 2nd, and this is not only a review of the past nine years of Sinovation Ventures but also our view on the changes that has happened in the world.

01. The startup story of Sinovation Ventures

When Sinovation Ventures was first established, we positioned it as the investor and incubator of innovation. We only raised $15 million for our first USD fund. At that time, the team huddled in the Tsinghua University Science Park, stayed at budget hotels, and traveled in economy class. It was a difficult period starting out.

Every time we fundraise, I have to fly to many countries and that wasn’t easy. When we were fundraising for our second fund in 2012, I took a small suitcase and flew to 13 European cities to meet with 15 investors on a tight schedule. When I came back, I became very ill.

When it rains, it pours. Due to limited finances, the company could only afford plane tickets for one person and that was me. I didn’t end up raising much funds because Europeans are generally more conservative, and we happen to be a startup fund, on top of the fact that they were also not very confident in the Chinese market at that time. To make things worse, I lost all my luggage including my business plan on the last leg of the trip.

It was a hard time, and I was embarrassed to tell anyone because everyone thought we were doing well. So we had to bear with the hardship.

Fortunately, we successfully raised enough funds despite the poor global financial market situation during fundraising for the third fund when many funds could not raise enough money. While we were also confronted with difficulties, we had the support and trust of friends from many atypical investors such as Foxconn and New Oriental. Thanks to their backing, we managed to complete our fundraising in the midst of adverse market conditions.

There was also laughter in hard times.

In this time around, things were quite different. We held a limited partner (LP) meeting and when the LPs heard we are fundraising for another fund, many of them expressed interest in investing more than before. Thus before officially kicking off the fundraising, we already had existing investors sign up.

We set off on a business trip to the U.S. to raise money. During the first leg of the trip, I met with people from a large pension fund who decided to invest $100 million, of which we only accepted a portion so as to not exceed our plan. During our second stop, I met with people from the Bank of Spain, who also wished to give us $100 million directly. Again, we didn’t take it all.

After the two stops, we have raised far more than original goal, which was about $300 to $400 million. After careful consideration, we decided to stop there lest potential problems occur, and proceeded to cancel the remaining trips.

Although we originally planned to spend one month on fundraising, we met our goal in less than a week. I suggested our CFO Puyu Li to take a holiday in New York, and I spent some time with my family.

After the two LPs completed their due diligences, our entire fundraising process was completed within a month, raising even more than what we had planned.

This smooth financing experience was partly due to the general bullish attitude towards the Chinese market and the positive attitude towards artificial intelligence.

However, it’s also a recognition of our entrepreneurial efforts. After the due diligence, investors realized that Sinovation Ventures is one of the funds with the highest returns, not only in China, but also in the world.

In 2017, Sinovation Ventures was the world’s third largest unicorn investor with a total of six new unicorns (startups valued at more than $1 billion) under our belt.

In addition, some of our new ideas and new methods in this AI era have also been recognized by investors. For example, Sinovation Ventures AI Institute is considered a unique advantage.

In other words, I am very proud that our brand advantages and returns in past nine years have gained recognition.

Funds and representative projects of Sinovation Ventures.

02. Single universe disintegrates and parallel universes take shape.

During this process, we felt the changes in global structure and we’e also done some analysis after looking at our own experiences.

I went to the U.S. in the 1970s and moved to Silicon Valley in the 1990s. I saw the glory and wonder of Silicon Valley and the pride and prejudice brought by success.

The kings of that era were not only kings of Silicon Valley but also of the world. From the Wintel (Windows + Intel) era, to Google, and Facebook, it has always been the case. There’s no place that can be compared with Silicon Valley in terms of innovation.

This is why a Silicon Valley-centric type of thinking is very common in Silicon Valley.

We once went to the office of a very successful U.S. venture capitalist, one of the top three at the time. We told him our plans and investments in China, and he replied that China was too far from here. He was reluctant to consider outside the U.S., or even outside of Silicon Valley, because there were so many projects already within Silicon Valley.

His words were more of polite rhetoric, and the real reason may have been the U.S.-centered or Silicon Valley-centered thinking.

However, over the last decade, the layout of global innovation and technological development have changed dramatically, leading to a “cosmic fission”. The single universe centered on Silicon Valley has become a parallel universe between China and the U.S.

Simply put, China’s potential “super” markets attracted the first batch of powerful VCs who helped entrepreneurs grow and rise. New products and business model arose from intense competition, which in turn attracted more users to form a larger market. A virtuous cycle then formed.

The key factors are also obvious:

  • Without a huge market, there is no foundation.
  • Without big funds or investors, there is no driving force.
  • Without high-performing entrepreneurs, there is no power source.

Moreover, China’s economic reform and opening-up, economic rise, the waves of internet, mobile internet and other technological advancements have led more areas to develop rapidly, including VC. This particular mix of factors is not found in any other country.

Entrepreneurs in China and the U.S. are also different.

The American belief is that starting a business is dependent on having a breakthrough innovation, to do what no one has done. That is why Silicon Valley has produced companies and products like Google, iPhone, Tesla and SpaceX, all with the mission to change the world.

The belief is also to create technology-oriented platforms that avoid both heavy operations and large teams with tens of thousands of employees. These companies are also mission-oriented. For example, Google and Facebook prioritize the integration of global information and connecting the world over profitability.

This American belief and model has evolved into a standardized entrepreneurial logic that brings innovation from time to time and is worthy of our respect.

However, when Silicon Valley and the U.S. continue to see themselves as the “center of the universe,” then they will not likely expect that another model would arise and give birth to a parallel universe.

That is the Chinese entrepreneurial model. Successful companies in China, including Baidu, Alibaba, Tencent, Toutiao, Xiaomi, Didi, and JD.com, were not born through any breakthrough innovations.

Many great Chinese companies were possibly born from imitating and learning from the U.S., and then they learned to localize in the Chinese market, with some imitation and small innovations. During this localization process, they also iterated rapidly, and started sprinting from there, thus creating groups of successful entrepreneurs.

There are essentially two ways that Chinese entrepreneurs learn.

  • One way is to imitate the U.S., but this model is now outdated.
  • The other way is to grow in big markets with large amount of capital and intense competition.

Entrepreneurs in the U.S. don’t experience competition as fierce as those in China, which is perhaps why so few American companies succeed in the Chinese market.

The competition in American is more gentle and with proper rules, even a death battle is more like a pistol duel where each person is allowed to walk 10 steps before turning around to shoot.

The competition in China is more like a fight in the Colosseum with no rules and only one winner. The competition is so intense that even if you have become the market leader, you may still have to think about how to take up the market shares of your next competitor.

So there are reasons to why Chinese tech companies are becoming larger and larger.

For example, Meituan, the food delivery platform, even though it has a large delivery team, if they perfect food delivery and lower delivery costs to a minimum, they essentially formed a high barrier to entry .

However, the Chinese market is so big, and the opportunities so tempting, that it forces entrepreneurs to continously take on new challenges and to grow. That’s why Meituan started to operate in the car-hailing business, and Didi, a car-hailing company, started to work on food delivery.

The competition in China is so fierce that if you are not careful, others may swoop in at anytime. In the winter when WeChat Payments grew rapidly, Jack Ma, CEO and founder of Alibaba, said that Alipay, the payment platform affiliated with Alibaba, suffered a sentimentally “Pearl Harbor” attack.

These are all unimaginable in the U.S. Chinese companies not only rebuilt the models, established barriers, but also formed free or low-cost business models. It is difficult for companies like eBay that charge commission to compete with Taobao and Tmall in China.

On top of that, U.S. high-tech previously essentially colonized the whole world. So when U.S. companies enter other countries, they are thinking about building a large global brand and establish a global platform while localizing.

However, that is potentially lacking empathy from not putting oneself in other’s shoes. Chinese startups do things differently. After Chinese startups have defeated U.S. competitors in the Chinese market, they have carry more empathy when they go to other markets. They invest, help, and boost the growth of local entrepreneurial projects, bring them along on the path to globalization, instead of competing directly.

The globalization process of Didi Chuxing, the Chinese version of Uber, is very interesting. Didi entered India, Brazil and Russia by investing in and allying with local companies, almost like forming a coalition against Uber. In the process, Didi shared their expertise on products and technologies. Now, the native car-hailing softwares in India and Brazil are looking increasingly more like Didi.

Thus in my opinion, the development of global technology companies is likely to be as follows. American companies will still occupy English-speaking countries and western Europe. Chinese companies may have advantages in Southeast Asia, Islamic countries, the Middle East and Africa. American companies and Chinese companies each have their own advantages in South America and eastern Europe, and will likely compete head to head with one and another.

Chinese companies that emerged from Chinese competition will always have strong business models and financing abilities. Their employees are always hard working as well. A startup once said to the talent that they wanted to attract that, “We don’t work that hard hard, only following the 9-9-6 schedule (9 a.m. to 9 p.m., 6 days a week)”, but it will soon have a large IPO in Hong Kong.

The past few years have seen the development of a China-U.S. duopoly. Before, China could only borrow from the American model, now China is creating significant local innovations. Americans are surprised about companies like Toutiao, Kuaishou, Mobike and VIPKID, as well as the user data from these companies.

Finally, convenient mobile payment will also be a competitive edge for Chinese companies in the future, and it will promote the rapid growth of Chinese companies and businesses.

We firmly believe in the value of China’s future high-tech industry. Entrepreneurship and innovation will become better and better. China’s value in terms of potential, market, talent and data are all enormous.

03. The four waves of AI

Closely related to the development of AI, data is another advantage of the Chinese model.

Sinovation Ventures has proposed the concept of Online-Merge-Offline (OMO), the integration of online and offline data, in the past. Previously, data was not well connected but with better sensors now collecting more data, and newer AI is able to use previously unusable data.

We’re going through a huge AI revolution. You may not realize it because the general impression of AI was and is of a few great scientists creating and selling products and technologies with a few of their students.

This, however, is far from the truth. Of course when there are only 100 top AI scientists in the world, they are scarce resources as technology is the core.

The business model of Face++ and SenseTime are still as such, but as more talent enter the field and barriers to entry are lowered by AI technology platforms, more and more people will enter and change the entire landscape.

When AI technology shifts from technology-dominance and expert-dominance to application-dominance, and combines with data advantages, the AI trend and effect will become more obvious.

As I previously mentioned, AI may go through four waves. Some has already happened, some are happening now, and some may happen in the future.

  • The first wave is the changes in the application of AI technology on internet apps, such as Toutiao, Meitu and others.
  • The second wave is the application of AI technology to businesses. For example, banks, insurance companies, and hospitals have applied AI algorithms to collect data for commercial value.
  • The third wave is the application of new data collection and new apps, for example, visual and auditory data, application of smart speakers and smart cameras, and innovation in automated shops, security and other aspects.
  • The fourth wave is not limited to software, but concerns hardware, robots, autonomous driving and other applications to the real world.

These four waves are all equally significant as it is hard to tell which one has a bigger potential. They can all happen at the same time, which is why Sinovation Ventures is betting it all on AI.

04. VC + AI, Tech VC

We embrace AI and change.

Sinovation Ventures is the earliest Chinese institutionalized angel investor. We want to provide help to those who need it the most and become the catalyst that drives early-stage entrepreneurs to succeed. This is why we chose to both incubate and invest in startups.

After mass entrepreneurship and innovation movement, China has gained more institutions and more angel investors. We also believe that it is time to enter the new era.

On one hand, we will still invest in early projects, but no longer as just an angel investor. We will invest in more companies who are in Series A, B, C rounds and other growth stages, because the value of Chinese entrepreneurial projects are higher than before, and we also raised more funds to grab early shares in good cases and make additional investments in subsequent rounds.

On the other hand, we have implemented a “VC+AI” reform. As a VC, we have established an AI institute.

This is due to our consideration of several aspects:

  • First of all, AI may be a decade-long wave, and it will continue to gain value in various fields. Therefore, if we want to invest well, we must push ourselves to understand the technology. We are willing to undertake some public welfare programs, such as promoting the training of AI talent with the industry and the Ministry of Education of China to launch DeeCamp, a summer bootcamp for college students.
  • Second, the AI Institute will create links between Sinovation Ventures investments. There are more than 160 AI engineers and students in the institute. The team can help Sinovation Ventures assess whether a project is solid and feasible.
  • Thirdly, institute members will also recommend entrepreneurial projects, which will help us to invest in good projects earlier.
  • Finally, we will use the AI Institute as a major value-added service when entering new industries. If you’re an education company, you have a lot of data, but you don’t have the AI engineers to help you gather insights from the data, then Sinovation Ventures will provide this service.

Entrepreneurs often have a target for referenc, and so does Sinovation Ventures. We want to be a VC like Benchmark. While not well-known in China, Benchmark is the U.S. VC with the highest returns. It had invested in Uber, Snapchat, Instagram, and Twitter before other investors realized their business potentials.

We are similar to Benchmark in terms of our path and background. Most members in our investment team have science and engineering backgrounds. Our team has 15 science and technology PhDs. We firmly believe that the next era is the era of tech-based VC.

If you are a technology company, you need to find the VC that really knows the technology and that can recognize the difference between you and your competitors.

If you are not pure technology company, but facing the AI era, you may also need a tech-based VC to help you grow. For instance, if you are in the retail or supply chain industry, you may succeed faster by asking for investments from experts in technology, AI, and SaaS.

Finally, I want to share some of our achievements.

AI is the key driver for Sinovation Ventures, but we also have invested heavily in the areas of consumption upgrade, B2B/enterprise upgrade, education, and culture & entertainment with both USD and RMB funds. Many of the companies we’ve invested in are all household names by now.

This article originally appeared in Kai-Fu Lee and was translated by Pandaily.
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