Gobi Partners’ Michael Zhu: Venture Capital is Not Limited to Profit
25 February, 2019
Gobi Partners was founded in 2002. After 16 years, it has become one of the leading venture capital firms in Asia, and has US$1.1 B in AUM. Thus far, the firm has invested in over 200 companies and has exited a number of them through public listings as well as merger and acquisitions (M&As).
As a Partner at Gobi, Michael has more than 16 years of experience in the venture capital industry. He mainly focuses on the deep learning, Internet of things (IoT), Enterprise software-as-a-service (SaaS) services, Cloud services, and FinTech sectors. Michael has led and/or participated in Gobi’s investments in Airwallex, GoGoVan, WaveOptics, Teambition, Staycloud, PICOOC, and Cloudwise. In 2018, he was selected by Forbes for their “Top 100 Venture Capitalists, China” list.
In this article, he will be sharing with us some of his experiences in and understanding of deep learning and making overseas investments.
Technological thresholds and corresponding markets: A touchstone for vetting startups
“I think that technological threshold is the most important factor. There must also be a large enough corresponding market that requires the technology being offered,” said Michael. “Essentially, the market for this technology needs to be scalable. For example: between a “Smart Trashcan” startup and a “Smart City” startup, the corresponding market for the former will definitely not be as big as the latter’s.”
As Michael mentioned, when looking at a startup, the most basic requirements are whether the technology behind a company has a threshold, and whether it has a scalable market. How then do you determine the threshold of a startup’s technology and whether this technology will solve a certain key problem?
“Over a long period of time, we observe the evolution and development trends that technologies undergo. Technology development is a process that happens gradually over time, it cannot be fully developed in an instant,” he explained. “By referring to our long-term observations and experiences in that particular field, we can quickly deduce whether a startup has reached a certain technology threshold; there are also specific problems in certain areas that have be faced by all startups in any industry.”
This observation from Michael marks one of the most important criteria that reflects on whether an investment company is doing their homework. Take WaveOptics, a British augmented reality (AR) company that Gobi has invested in, as an example: after the wireless Internet boom, everyone began looking out for the next big thing. They undoubtedly have been focusing on AR and virtual reality (VR), as they are the two sectors that are most likely to explode next. However, VR is currently being applied mostly for entertainment purposes, while AR is used more in the industrial, education and medical fields. This means that AR is the technology that adds value to all the industries it reaches, and consequently, the pursuit for high efficiency from AR products and services is endless.
Although the technology development of AR is still in its early stages, it is comparable to the progress of the smartphone industry; display technology is also undoubtedly a vital component for both industries. Additionally, while the regular manufacturing cost of an AR display is quite high globally, WaveOptics actually has the technology and capabilities to produce it at a lower cost.
“As a global investment firm, we no longer limit ourselves to just Chinese technology,” Michael said. “I believe that there should not be any boundaries for technology, and our country (China) is one of the largest markets for consumer technology and for this type of technology too.”
Explore the world. It’s important to have a wider view of it. As Michael said, Gobi is an investment company that has global vision, and its investments are now spread across multiple continents. One reason for this is because of the firm’s long-time experience which has made it into a regional platform. Another reason is that there has been a decrease in domestically-oriented startups in China; domestic Internet companies have also gradually become international and regional in recent years. Many larger international companies such as Alibaba, Tencent, Toutiao, Liebao, and many more are building regional platforms. This development in turn gives more Chinese entrepreneurs the chance to go overseas.
“There are a lot of businesses in China that are leading business in the world,” said Michael. “If a company is able to combine their technological innovation, they can achieve regionalization quickly, after which will come globalization. The domestic mobile phone industry is the best example of this: the bestselling smartphone in India is Xiaomi, and the biggest exporter of mobile phones in Africa is owned by Transsion. China’s high-speed rail system has also been implemented all over the world.”
Based on the above facts, in recent years Gobi has been actively investing in startups overseas. Simultaneously, the firm also uses the resources it has gathered globally to help Chinese companies expand out of the country. This endeavor is not only due to the huge potential present in foreign markets, but also because it is currently easier for Chinese entrepreneurs to “go out” than “walk-in”, in comparison to startups from other countries.
The reason that domestic companies often develop to a certain scale in China is usually because they have accumulated a certain amount of technical expertise, have a foundation in foreign countries, or have chanced upon an opportunity to expand overseas. Foreign e-commerce platforms, payment platforms, and social media platforms have rarely seen success in China, and often domestic companies and models are more competitive. It is now the time for Chinese Internet companies to “export” their business models overseas.
“In the past two decades, thanks to China’s economic reform, more innovative business models have emerged, but fewer technological innovations have appeared. In addition, the recent Sino-US trade war has actually highlighted our lack of technological reserves,” said Michael. “From the progress observed in other countries such as Japan and Germany, we can see the necessity of transforming economically to provide high-quality, value-added services and to encourage domestic demand. As a venture capital firm, we can promote and support technological innovation, not just by injecting capital, but by also helping companies to grow to a stage that is in line with China’s economic development. For this process, the social responsibility of investment companies is very important.”
In Michael’s eyes, venture capitalists have dual responsibilities: on one hand, they have to be responsible for their investors’ funds, to find and invest in suitable startups, to determine the correct timing for entry and exit of an investment, and to maximize profits. These duties embody the professionalism of an investment firm; on the other hand, they must also be socially responsible to a certain degree, to use their funds to invest in companies and emerging markets that can promote the development of industry and society, rather than maximizing profits without taking into account the community’s social well being.
In conclusion, Michael says that Gobi will continue to use their professionalism and international vision to find more quality foreign investments, while also using their resources to help more and more Chinese companies go global.