Interview on Angel Investing in China - Toutiao, Sina, and Hexu

One of the perks of working for a startup incubator is that I get to meet a lot of amazing people, and Liu Jun is one of them. He is one of China's top angel investors. Today I am speaking with Mr. Liu Jun on his investment strategies and angel investing trends in China. 

Background Story.

Mr. Liu Jun worked as a top manager for Sina and Hexun, and QiHoo 360 since 2002. He is now an angel investor. After becoming the earliest investor in Toutiao, he has successively invested in star companies such as Bull Stock King and Haodai.

On Investment Strategies.

Liu: I am a novice in investment, but I am very lucky. My first investment was Tencent Music Entertainment Group, now valued at more than 10 billion U.S. dollars. It was originally called China Music Group. It was a merger of Kugou, Kuwo, and Ocean Music, which I helped to make it happen. There are also several other angel investments I made, which are almost at the pre-IPO stage.

I like to invest in some unpopular projects. I don't like to invest in popular things. Large institutions will worry about missing some projects. But as an individual investor, I don't worry about missing them. There is no need for me to follow the trend.

Big funds tend to like deals that can make billions of dollars in one project. Their first reaction to any project is to see if the market is large enough, preferably several trillion, or at least several hundred billion. For the big funds at the top of the food chain, this strategy is of course reasonable. Staking on one project can double the entire fund's money back.

But for a large number of small funds, it is problematic to follow the big fund’s investment strategy. Because there are generally no more than 10 successful investments that can come out of the big market every year. The problem is that thousands of domestic funds are now looking for opportunities, and they are all screening projects according to the criteria of the big funds. When almost everyone in the market is adopting the same investment strategy, can this strategy still work? The reverse operation may be better.

I have analyzed China’s GEM and SME boards and found that most of them emerged from smaller markets or have very low thresholds, such as chickens and cakes. I believe there is a big opportunity in listing these smaller firms with high revenue, which is being overlooked by most people.

Why these “unpopular” small markets?

1) A relatively low price.

2) Companies in small markets are often close to making a lot of money. I have several projects of this type, and they become very profitable after the angel round.

3) The competition in these industries is not fierce, and the company's survival rate is high.

4) There is no need to burn money as the competition is not fierce, so there is no need to raise funds all the time.

5) Less money burns, less financing, less equity dilution, higher ROE, and higher returns on investment.

6) Entrepreneurs who are willing to work in unpopular industries often really love this business. Higher dedication and lower turnover.

7) Such projects often have simple business models. They don't need too much innovation and exploration. They rarely need to be transformed.

In short, this type of project is easier to manage after the investment is made. As an investor, I can sleep at night.

On the "Big market" Projects.

Liu: Right now, the big market has a large number of players, and that will lead to several consequences:

1) There are many speculators among entrepreneurs. A lot of people see the same opportunity and feel that it is good to raise money and come in quickly. So they plunge into it right away. They don't really love this industry or know anything about the products.

2) Popular industries are expensive.

3) The competition is fierce and the money burns quickly. If you stop financing, you won’t survive.

4) The success rate is low, and most of them have already lost their money.

5) When the competition is fierce, everyone tends to get hot heads. 

6) After the fierce competition, Chinese companies are particularly fond of "scheming": digging walls, issuing black drafts, reporting to the government.

7) Even if the firm wins the competition, in the end, it is still scarred -- fast burning, fast dilution, poor ROE, on the surface valuation is quite high, but in fact, the rate of return is not. At the same time, excessive dilution leads to unreasonable equity structure, the founding team can easily lose control. Even if control is retained through the design of A and B shares, a company with a smaller team will have much less moral hazard.

On Investing in the Founding Team vs the Founder.

Liu: I like reverse investment. Most investors like Xu Xiaoping like to work with a few partners. I am just the opposite. The businesses that I have invested in have developed relatively well. Most of them are dominated by a single person. This way, the decision-making efficiency is high and the team is not easy to split.

Of course, the ability of a founder is sometimes not as comprehensive as a partnership of several people, but this can be compensated by recruiting the right people, which is difficult yet not impossible. A partnership of several people will inevitably lead to differences and conflicts, which affect unity and efficiency. 

In some projects, the conflicts can be resolved by some partners withdrawing halfway through. This approach will have some sequelae. Because the people who withdrew can take away a lot of equity. They no longer work but still enjoy the benefits, which causes the remaining people to lose enthusiasm.

On Advice to Entrepreneurs.

Liu: For anyone who is starting a business, I have four pieces of advice.

1) If you have too much ego, it is best to put your ego away. Don’t interpret criticism as a challenge to your abilities.

2) Do not hide the bad news. One of the biggest nightmares of investors is that one day to find out the company is about to die, and there is no time to react. Investors are your partners. Everyone is on the same boat. If you speak up, they will know how to help you.

3) You may not listen to others’ opinions, but you should listen to your investors on matters related to financing. Investors may not understand business as well as you, but in financing matters, 99% of the time, investors are more experienced than you are.

4) Do not stop learning. I think Jobs put it most concisely and clearly: "Stay hungry, stay foolish". Stay hungry and thirsty and treat yourself as a fool.

On Helping Entrepreneurs.

Liu: I am a pure amateur in venture capital. I don't know how to build a financial model, and I don't understand agreements. If there is anything that I do slightly better than my peers is that I consider myself a partner of entrepreneurs and do everything I can to help them. From products, strategies, financing, hiring, even helping their children to attend school, I try to help as much as possible. Entrepreneurship is a very lonely career. If the investors as shareholders do not help, who else can the entrepreneurs rely on?

My "love to help" is my core competitiveness. I have accumulated a very good reputation. I rarely take the initiative to go out to find projects. They are introduced to me by entrepreneurs and friends who I have helped, and the prices are often low.

Of course, now that I have too many projects, it is difficult to be so involved as I used to. But I still help out with the important things, such as strategy and financing. No matter how busy I am, I have to help. Like Toutiao, my shares have been diluted very little, but Yiming (Zhang Yiming) has always wanted me to be his director.