Venture Capitalists – A different point of view

Most of the VC said they want to invest in the next big ideas – the next Google or Amazon.  They are telling the entrepreneurs to think big and focus on game changing strategies.  But, in fact, not all of them are like that.

Recently, I was helping a friend to source funding for his startups.  So, I paid a visit to a VC friend who I have known for a long time.  He is a early backer of Joyo.  He introduced me to Chen Nian, when I wrote my book on China internet.  Chen Nian built Joyo from scratch to the largest online book store in China and later he founded another online retailer of his own, Vancl, which is the largest online clothing store in China.

“What sector are you investing nowadays ?” I asked.   “Mostly the tradictional industries.  No more tech or internet,” he said.   “It is difficult to judge internet startups.  Who knows what business model will work??  And even if you pick the right sector, it is hard to select the eventual winner.  And it is usually a winner take all market.  No place for the second,” he added.

I was surprised because in the past, whenever he analysed an internet company for me, I found it very insightful.   Now, he is saying he quit.  “Who am I to tell what to invest?  Tech trends change so quickly.  Who knows what the company will become in 5 years? ” he said, “On the contrary, companies in tradictional industries are easy to understand.  Their business model do not change much.  Their growth is predictable.   The only thing leave to discuss is price.”

“I don’t like winner-take-all market.  The more fragmented the market the better,” he added.  “Something like a bakery shop,” I casually suggested, just to keep the conversation.  “Yes, in fact, we have invested in a bakery chain,” he said, “No one can dominate the bakery industry.  It will remain fragmented.”

I was totally shocked, as it contradicted most what I’ve learnt.  Just to be sure, I asked, “Is your company thinking along the same line??”  Yes, he said confidently, “That is what we have been doing in the past few years.”

In fact, I should not be surprised, because over the last few years, another VC friend of mine was also telling me he is investing in tradictional industries.  For example, a soya bean curb factory in Shenzhen. (This is another industry that will remain fragmented forever.)  He even got it listed in the A-share market.  And he also mentioned he visited sock factories, etc.  Just at that time, I was not paying attention because I focus on tech and internet alone.

But unlike the developed world,  tech and internet is only thing growing fast in China.  Many tradictional industry (like bakery stores / sock factories) are growing rapidly, too.  Look at the annual 9% GDP growth.  As an investor, if you only care about return, there are many to choose from, besides internet.  And the risk can be lower in the other sector, too.