Meet China's Midas: Li Feng, A Knack For Striking Gold

This is the second post in our series: Meet China’s Midas, where we will talk to a mix of Chinese investors who have made successful investments in China’s growing tech space. Stay tuned over the coming one month as we talk to Chinese investors from Beijing to Shanghai about what it take to be a Midas in China. You can follow our updates at @technodechina for new stories in the series. 

Li Feng, once the youngest partner at IDG-accel, was the talk of the town when he left IDG to start his own firm last August. It was feared then that the daunting “Capital Winter” was not even near the end of the beginning. He’s now the founding partner of FreeS Fund, managing 2 billion RMB ($279 million USD), with special focus on early stage companies in e-commerce, education, fintech and lifestyle businesses.

Li Feng believes that it’s unfair to call the changes underway a “Winter”, rather, it’s rather more like a transitional phase, uncomfortable and upsetting–for different reasons depending on the individual perspective–as it may be, there’s no real shortage of cash. Now a year later, Li Feng has got some big names under his belt, adding to a dazzling portfolio, including:

• Uber Global–no introduction necessary here.
• Three squirrels-one of the best known brands grown from an e-commerce platforms, vendor of nuts and teas.
• Unity -a third party game development software with over 5.5 million users registered and claims to have helped make a third of the world’s most loved games.
• Zhubajie-a platform for freelancers from webpage designers legal consulting to personal tailors. It’s now valued at over one billion USD.
• Creditease– a wealth management company and consumer lending platform. Its subsidiary Yirendai went public on the NYSE in December last year.

We were lucky enough to have him share his insights on some FAQs:

Q:One year ago, you left IDG to found FreeS fund. What has been the most profound change in the climate this past year?

A: People keep moaning over the “capital winter”, but there is really still sufficient cash, if the past is what you’re comparing to. Everyone says it’s winter, but what they are really feeling is just a low tide during transition–we just need to learn to cope with different expectations.

There’ve been some of changes in the climate. One example is that RMB investments are increasingly favored. This means when seeking an exit, companies and VCs need to adjust to the expectations of China’s secondary market, which is more focused on profitability and better financial figures, as opposed to USD centric standard, which attaches higher value to cash flow and potential for growth.

When there was an influx of USD investment, startups were encouraged to burn cash, to attain scale and marketshare, and put profitability temporarily aside. But for RMB, because of listing requirements, companies have to come up with a clear and profitable model early on. So if you accept RMB investment, you need to compromise and adjust your development blueprint.

Q:What is your advice to entrepreneurs, with this backdrop in mind?

A: Each investor is different, even those who invest in the same stage, those from the same firm, each has their individual management style. Try to find someone who visions the future of your company as you do. When you don’t have much of a choice, just try to get cash when you can.

Try to push for a profitable model early on. Traditional models can profit more quickly, and its easier for them to get on the right track without having to find a base of users (burn marketshare) before they can find a way to reap a profit from that user base.

Q: What are the major differences between fund raising in China than say, the Silicon Valley?

A: One marked difference between funding in China and the U.S. is that overseas, VCs and startups have formed echelons, and as a rule, top-league entrepreneurs seek investment from first tier VCs, lesser entrepreneurs get funded by their equivalents, and so on.  This is because both VCs and entrepreneurs are more mature–they’ve had more than two generations of experience to draw from. In China however, there is no such parallel relationship between startups and VCs, which have only been around for ten years give or take.

I can’t say exactly when such a correlation will take shape, but I’d give it at least one VC life cycle. Once we see a generation of mature entrepreneurs who have experience being supported by different types of VCs, word will spread, and like an invisible hand, startups will begin to seek analogous firms that best match their development phase. But that’s not to say that Chinese startups are not picky over who funds them, there’s still a surfeit of capital, and some can afford to pick and chose.

From a larger perspective, the economy is growing at a much slower pace. In China, much of the economic growth is macro, across a range of sectors, whereas in the U.S., progress is usually a redistribution of the clout of two existing industries. Venture capital has been around for 4,5 decades in the U.S., and compared to their fledgling Chinese counterparts, have better defined rules and roles, established through decades of practice. Fluctuations in valuation brought forth by economic cycles and disruptive technology–the mobile internet, IoT and breakthroughs in computing power–also happen in Silicon Valley, but on a narrower scale.

Q: In terms of business model innovation, Chinese companies are in may ways ahead of their counterparts in Silicon Valley. What about in the long run, does China stand to have an advantage in the contest over technological innovation? 

A: The short answer is YES. China has over the years breed a mighty manufacturing industry, and this is what will give China an edge in the next round of technological innovation. Because at the end of the day, manufacturing is where new technologies will be implemented.

Think along the lines of corner overtaking. There are certain things that weren’t China’s stronger limb in the past, like car engine manufacturing. But in an age of electric cars, China’s inferior status in the pecking order of traditional car manufacturing might get bumped up. While China’s no leader, the technological gap in lithium ion batteries and control systems–core tech in electric vehicles–is far smaller, which is why we’ve invested in lithium battery companies. China is now the largest automobile market and largest motor vehicle producing country, and combined, that means in the future, much of the core technology will be coming out of China. After all, China’s where the industry is.

Q: Can foreign startups compete in China?

A: Only if what they are doing is not directly lifestyle and culture related. If what they are doing is farther away from culture specific areas, and more pertaining to technology. The same goes for Chinese setting up businesses overseas. It’s hard to peg up consumer based ideas in a foreign market, because you need a subtle instinct for grasping the local consumers’ needs, and local parters can help only so much.