Exclusive Interview with Adam Li, Founding Partner of Panda Capital

Editor's note: China's venture capital and private equity industry have undergone huge shifts over the past few years, thanks to a sea change in the global and domestic socio-economic climate.

As Chinese businesses struggle to adapt to the new normal, marked by more stringent regulatory oversight against overseas listings, a Covid-battered economy, dwindling household consumption, and stronger headwinds as startups move up the value chain, so will their financial patrons.

How are VC/PE investors faring in these turbulent times? What are the challenges they deem the most intractable and what are their solutions? Conversely, which are the emerging areas of opportunities that can be turned into the next money-spinner with their Midas touch? More generally, how do they expect China's entrepreneurial scene to evolve in the next couple of years? And most importantly, after having their finger on the pulse of the country's innovations, are they still China bulls or have turned perhaps into China bears?

These are defining questions to which no one has the exact answer. But we at EqualOcean believe that one can at least get a glimpse into the future of the Chinese economy by looking at how VC/PE investors are planning and making their moves.

With this in mind, we start a new series called "China VC Interview," in which our analysts will sit down with frontline industry practitioners to hear their opinions about China's VC/PE industry.

The following is the fourth in this series, conducted after interviewing with Adam Li, Founding Partner at Panda Capital.

About 「Panda Capital」 and Adam Li

Panda Capital was founded in 2015 with USD and RMB funds. Panda Capital looked for startups in consumption and AI technological innovation before 2019 and in agricultural science now. Extending from angel round to B-series, Panda Capital has dozens of famous cases in portfolio including Mobike, Meituan Dianping, Caihuasuan, ATzuche, Kaiyun Motors, Robot++, Rivere Tech, Pet’em, and Fermion.

Adam Li has over 10 years of experience in venture capital and a deep understanding of new retail, consumption upgrading, FinTech, and supply chain investment. Previous to working as a professional investor, Adam Li founded his own business that was later purchased by a NASDAQ listed corporate.

Adam Li in the fields.

Part Ⅰ| Analyze the challenges instead of assuming them

In the midst of 2022, the venture capital community in China experienced a shuffle and the consumption sector of all witnessed the biggest turbulence. A lot of firms that formerly weighed on consumption were seeking transformation, with not a few turning to agriculture——the supply side of consumption. Even against this background, Panda Capital’s decision to ‘bet all on’ agriculture seemed to be too audacious.

The following was how Adam Li explained this move to EqualOcean, “Panda Capital started to look into agriculture in 2019. With research going deeper, we feel all the more that great opportunities lie in the sector. For investors, agriculture is like a long and broad runway with less competition. Policies and national resources are leaning towards agriculture to greater extent as the international environment changes. Agriculture constitutes the foundation for China’s development to the next level and it’s also the basic guarantee of country safety and people’s livelihood.”After going through nearly 10 years of Sino-US Trade Agreement, Adam found the biggest gap of all to be agriculture, not chips which appeared to be more popular in social discourse.

After a thorough research of the agriculture development routes of developed countries including the US, Adam believes ‘the time for Chinese agriculture to catch up has come’. The rural laborers who used to till on small patches were offered jobs in cities thanks to the rapidly growing urbanization rate for the past decades. With the industry transforming and city life pressure raising, the enlightened agriculture population could move back to the rural area to take up new agriculture production and management which is supported by advanced level of technology and industrialization. “If they fly UAVs(Unmanned aerial vehicles) or remotely control autopilot tractors, would they still be thought of as farmers? Perhaps ‘agriculture industrial workers’ are more appropriate.” said Adam.

This trend is happening. “We used to deem Chinese agriculture ‘backward’, actually the mechanization has developed to a high level in northeast China and in Xinjiang, even over 70% in some parts. Plenty of younger generations with technical education background choose their way back to the farmland to pursue agriculture careers. Instead of sweating and exhausting themselves like their predecessors, they manage the production flow on their mobile phone.” 

“Rather than ‘assume’ a great deal of unconquerable obstacles, we dug deep and spoke with facts.” For instance, agriculture laymen would assume breeding to be a drudgery on which the time and resources consumed are impossible to predict, so are outcomes. But as Adam puts it, “the breeding of many crops and livestock falls into specific time span under current biotechnological level. Breeding, for one, is certainly not a ‘bet’.”

As an investor, Adam Li spotted, in this trend, a silver lining in overcoming the structural barriers of “no farmers” and “no one really knows about farming”. This paved the way for venture capital to act and matter.

Just like many observers, EqualOcean was concerned about China’s natural conditions for farming as the biggest barrier to agriculture development and investment. Adam had been asked about this question for a lot of times and he had given it a thorough thinking. “The natural environment is not the root cause of Chinese agriculture’s underdevelopment. Natural endowments of a nation breed a matching set of cost structure. For example, the wine industry of the western countries relies heavily on premium grapes while the traditional liquor business of China relies on masters’ brewing technique. The western cost structure has restricted our efforts in trying to figure out Chinese agriculture dilemmas. A more suitable and efficient cost structure could only be built on Chinese natural basis.”

As for the lack of vast ranches in China, Adam shared his side of interpretation. “First of all, there are plenty of vast lands in Xinjiang, the northeast China and the North China as fundamentals of Chinese agriculture. On the other hand, the US media and TV series have implanted some stereotypes in our mind, while in fact the US ranches are backed by 2.2 million family farms. The concentration level on average is not as high as what we assume. At the core of the developed US agriculture system is their high level of socialized division of labor. As for Japan where land structure is more similar to China, a series of land re-planning activities were initiated from the early 1970s which led Japan gradually to high-standard agriculture development pattern. There are references in their experience for China, for we are on our way to agriculture socialization.”

In all, Adam warned of misreading Chinese agriculture development issues with one single model. China is a vast country with all forms of local conditions. “Our agriculture system has a huge potential to become an integration of diversity and greatness.”

Part Ⅱ| Isolation won’t work, integration speaks for the future

In March, the agricultural drone company XAG declared its over RMB 300 million C++ round fundraising led by GL Ventures, which added yet another record to Chinese agricultural technology fundraising amount. In recent years, top VC and CVC such as Sequoia, Softbank Vision, and Baidu have been dotting the agriculture sector with occasional investments.

When the topic turned to venture capital firms’ agriculture investment, Adam thinks Panda Capital to be different from the top-tiers. “They still look into agriculture with a ‘top-down’ model as in hardcore technology, while Panda Capital ‘dig in the agriculture dirt’ for challenges and opportunities peculiar to this area. We are adopting a ‘bottom up’ style. Also they invest in isolated spots, in our words ‘lone islands’.”

Based on his research into industrial development patterns and global experiences, Adam prescribed ‘industrialization’ as the cure for Chinese agriculture predicament. The former division of primary, secondary and tertiary industry is inadequate for current situation. Agriculture needs to be ‘freed’ from the highly fragmented confinement. On production side, stable and high-functional industrialized system and modern operation mechanism needs to be built; on consumption side, the produce would eventually be digitized, commoditized, and branded.

The above prospects have become realities in agriculturally developed countries. Adam provided a data comparison example. In Japan, over 40% of eggs are commoditized whereas in China that figure is 3~5%. Eggs are pre-processed at the place of production and transported directly to terminal markets. Hence, instant hot spring eggs for convenience stores and egg yolk and egg white separately for home cooking and bakery. In China, an egg experiences at least five to six transactions before it reaches the place of selling. Too many intermediaries cause low efficiency, serious amount of wastage and, eventually, nothing resembles commodities.

How do investors follow up with the trend? As Adam sees it, Panda Capital would invest in industry chain. For clarification, Adam has us recall the history of China’s e-commerce. When Ebay arrived at China, there were no credit cards and online payment habits among consumers. Neither was there express delivery. The later success of Taobao was made possible by the emergence of an ecosystem formed by Alipay, logistics&express, operation service companies and others.

Take cattle industry chain as an example. It starts from order-based breeding aiming to suit different raising locations and consumption scenes. For example, M5 wagyu for high-end steak brands and medium cattle for curry beef. Adam put forward an interesting analogy, “those who only know about breeding techniques could be programmers in Internet companies, while those who understand industry chain needs could be raised as product managers.” Furthermore, cattle breeding is still undertaken by mongers in primitive operation pattern without scale and standards.

One cattle consumes about 20 to 25 kilograms of forage per day which calls for specialized forage-producing companies. Produce stalks used to bother rural governments on clean disposal. They turned out to be high quality material as basal feed, making up 85% of coarse fodders which in turn make up 5/6 of cattle forage.

Even cattle manure is a recyclable resource. It used to take up a lot of resources for cattle farms to dispose of the waste. One biological waste disposal company Panda invested in provides waste recycle services for the farms, then processes the waste into organic fertilizer with biological technology.

As cattle rearing companies expand, there will be subsidiary service companies emerging in six to seven divisions. With their technological and collaborative capabilities upgrading, the service companies will become part of the infrastructure of Chinese cattle industry and even the facilitator of the scientific development of graziery. Based on this perception, Panda Capital would invest extensively along the cattle industry chain.

Unlike the stock market of pork, beef promises a trillion-scale incremental market. According to the Five-year Action Plan on Promoting the Development of Cattle and Sheep Production introduced by the Ministry of Agriculture and Rural Affairs of the PRC, during the last 10 years, beef production has been increasing an annual average of 40.92 thousand tons, more than seven times slower than the annual average growth of 353.9 thousand tons of beef consumption. The ministry also set the demanding goal of 85% beef self-sufficient rate and 6.8 million tons of beef production in 2025. As the beef price raises to the level which allows for substantial profits, the traditional free-ranging has lost competitiveness to modern large-scale centralized breeding in either amount or quality.

When we spoke of the recent news that Internet founders had resigned as CEO to rear cattle, Adam predicted that there would be more and more successful entrepreneurs joining in Chinese agriculture with their ‘money, resources and insights”. Adam held high expectation towards them to found top-tier agriculture companies which would mobilize the whole industry chain development and transformation.

Part Ⅲ| Fulfill the dream and make fortunes

When EqualOcean asked of the biggest opportunities in agriculture in foreseeable future, Adam referred to cattle industry which Panda Capital had been investing in extensively and intensively. Other mainstay sectors included high-end pork, recycled water pisciculture, chicken, eggs and cash crops such as blueberries, raspberries and kiwi fruit. The other strategic planning was in technological empowerment, such as gene transportation, modern farm machinery and forage management.

The latter may seem partially coincident with other venture capital’s focuses in agriculture, but Adam’s fundamental emphasis was on ‘closed loop” rather than technicality—from production, rearing, selection, breeding all the way to dining tables.

Though it had been a fruitful conversation on the prospects of Chinese agriculture and investment strategies of Panda Capital, EqualOcean couldn’t resist to ask of more specific anticipations: “How long will it be before a listed company emerges from your portfolio? Have you thought clearly about return cycles and withdrawal mechanism?”

Adam gave an unexpectedly optimistic answer: “Two to three companies would grow to be top-tiers in their divisions within 24 months, three to four companies would submit prospectuses in 48 months, and, eventually, in 3 years, there will probably be successfully listed cases. Agriculture is a vast field where the development pace and publicly listing requirements differ for various divisions. It’s probable that service companies reach IPO standards before cattle rearing companies do.”

Adam considered high standard farmland construction to be the next reservoir of Chinese economy. The population and economy size of China could support as least 100 agriculture companies with over RMB 100 billion of market value. This vision had become quite clear. Panda Capital’s participation in the fundamental industry—agriculture—intended not to scramble for profits with the government. He preferred to view himself as a professional asset manager. By investing in agriculture modernization and technological development, he strove for appreciation in asset value as an outcome of boosted industry.

As for precooked cuisines that have aroused the interests of investors and consumers lately, Adam had already acted accordingly in agriculture investment. “Like I said, industrialization and commoditization,” Adam put it this way, “adapt to the needs of precooked meals from breeding stage, just remember that different menu requires different breeds of produce. Besides, the production origin companies will take charge of refined processing according to the exact needs of the terminals to remove unnecessary intermediary links. For example, the supermarkets would like to purchase shredded potatoes in multiple portions, thickness and tastes. They would get shredded potatoes in multiple SKUs(stock keeping units) with lower costs directly from places of origin. So are the cases for peppers and tomatoes.”

“No matter how beautiful the future, the fieldwork is still very challenging for you, right?” Looking at his bronzed skin, EqualOcean made a joke with Adam. “I do enjoy it. I dipped into not a few territories in 2019, only to fall in love with farming.” Adam graduated from Xiamen University in biology major. This time, he found his way back to the starting point.

“Are your experience in consumption investment transferable?”

“Make friends with time. During the last few years, investment in consumer companies sees quick returns. But the journey to building a good brand is nothing close to easy-peasy. Money alone is not enough. A brand thrives by overcoming multiple tests from distribution, supply chain, brand building, product development and innovation, all of which calls for patience and immersion. Just like what I’m doing now.”

“How does the team fit in?”

“I’m surrounded by a bunch of patient and passionate people with ideals.” Adam is in charge of cattle industry while the team of farm machinery and recycled water pisciculture. “The young colleagues interview with the companies in the fields with no less passion than mine. The team has looked into every project in these two domains. They’ve built industry-leading perceptions. Founders of agriculture businesses are highly educated talent with diverse backgrounds such as agriculture, mechanics and biology. They don’t choose this industry because they have no better choices.”

“There will be plenty of super ranches arising in China, cleaner and more stunning than those in Europe. Besides rearing livestock, they would be set up as camping sites.”

When he made that speech, Adam looked and sounded pure.

EqualOcean would release the ‘Exclusive Interview Series on 100 Global Brands’ in July 2022. By selecting the 100 most representative global brands originating from China and interviewing their principals, EqualOcean intends to deliver industry know-how and boost the global journey of Chinese enterprises. You’re welcome to send emails via lena@equalocean.com or scan the QR code below and get in direct contact with EqualOcean if you’re interested in the aforementioned topic.