A while ago, the debate on LLM between Sheng Fu, CEO of Cheetah Mobile（猎豹移动）, and Allen Zhu, Managing Partner of GSR Ventures（金沙江创投）， went viral from WeChat to the financial and business media. Known as an internet celebrity investor, Allen Zhu seems to have the flair of being caught in the spotlight. Speculations over him often triggered broad attention and discussion in the venture capital circle.
We met Allen Zhu at a cafe in Shanghai on a steamy summer day to discuss consumerism, AIGC, venture capital, and Chinese companies goglobal. Allen Zhu has several distinctive features. First is sobriety: he is not blindly pessimistic about consumption, nor is he blindly optimistic about AIGC. He is rational and invests in the popular direction suitable to himself and openly accepts China's real VC ecosystem. This may be related to his entrepreneurial background.
The second is simplicity. Speaking of consumer or technology, domestic markets or going global, his logic of thinking is always in line with the essence of things, giving the listener the feeling of smoothness.
After ChatGPT came out, many people were astonished to realize that an era has gone. The prosperity of the Internet/Mobile Internet accompanied by the rise of China's economy, provides the most fertile soil for the growth of a batch of entrepreneurs. We, as spectators, have also witnessed the birth and disillusion of new money, new stories, and new dreams over the past decade or two.
In the movie Ready Player One, Spielberg created the world race to find the three keys to the oasis, and that's exactly what's happening in the world right now. We don't know what the keys to a new era look like or where they are hidden, but we are enthusiastic about them. In this game, venture capitalists and entrepreneurs are placing the biggest bets based on what they know.
There is not just a revolution in technology but also lies turbulent undercurrents in business, society, and even the international landscape followed by. We hope this dialogue between EqualOcean and Allen Zhu can shed light on entrepreneurs in the era of revolution.
Staying rooted in certainty during industry downturns
EqualOcean: Which areas are you focusing on now?
Allen Zhu: This year's focus is on consumer and AIGC as there are more opportunities in these two areas now.
EqualOcean: Which rounds are you focusing on now?
Allen Zhu: We always invest in the early stage.
EqualOcean: Is your focus mainly on consumer companies or various industries?
Allen Zhu: We focus on many industries and AIGC is the main focus. The overall proportion of the investment is not high, so the valuation is reasonable.
EqualOcean: Recently quite a lot of investors are concerned about smart hardware going global, what do you think?
Allen Zhu: China is equipped with the strongest hardware capability in the world. Hardware companies tested in the Chinese market have an advantage in going global. Taking warehouse robots as an example, there are about 300 million e-commerce parcels to be processed in China every day, and the warehouse robots developed by this business volume are invincible in the world.
EqualOcean: What is the impact of the general environment on your work pace?
Allen Zhu: It seems like to be back to more than ten years ago when a project could be followed for two to three months and then you made decisions. The era of giving term sheets directly after seeing the projects is gone. For entrepreneurs, money doesn't count until it's paid.
EqualOcean: Countercyclical and non-consensus are the hot topics in the investment circle this year. What is your non-consensus model like?
Allen Zhu: My logic is still to look for certainty. Consumption seems to be a non-consensus track today, but we believe that China's 1.4 billion population market and supply chain are still the biggest determinants. We never follow market hotspots, and it's pointless in early-stage investment.
EqualOcean: Some people said the consumer track itself doesn't need so much capital.
Allen Zhu: I totally agree. The consumer bubble in the past two to three years was a mistake, as many consumer companies try to improve revenues at a loss, which will not be able to survive when the direction changes. A consumer company should be able to make money on its own and maintain positive cash flow.
EqualOcean: Have you been following companies with high market valuations in the past few years?
Allen Zhu: No, we rarely did.
EqualOcean: You are known as an internet celebrity investor. Is this a choice or a coincidence?
Allen Zhu: This is probably because we have invested in many internet platforms which have the attribute of "internet celebrity" and are particularly high-profile. Moreover, we invested in them at an early stage, so our bond with the companies is relatively deep.
EqualOcean: Since the outbreak of the epidemic, a lot of investors have devoted themselves to self-media. Is the personal brand in the VC industry becoming more and more important?
Allen Zhu: The brand value of first-tier funds is still high. Moreover, it is still difficult for investors to work alone and hit good projects consistently, and the partnership system of VC organizations can ensure the overall hit rate.
EqualOcean: Which is the most satisfying project you have invested in?
Allen Zhu: It's always the next one.
EqualOcean: Are there any projects with lessons learned?
Allen Zhu: Actually quite a few. When I first entered the VC industry, I lacked experience and went through a lot of pitfalls. That's why platforms are very important, and there are a lot of lessons to be learned and accumulated.
EqualOcean: This year, some organizations have started to ask investors to be desk jockeys, is the VC industry still suitable for young people to incorporate into their career planning?
Allen Zhu: Early-stage investment is a career that requires a lot of accumulation, and it may take 9 or 10 years to harvest good results, which is really a tough process for many young people. It's not like the early days of the mobile internet, when there was a breakthrough in two or three years, and the explosive effects were very strong.
EqualOcean: What advice do you have for young people who want to enter the investment industry?
Allen Zhu: You must have strategic determination, passion for this industry, and be prepared to work hard without returns for over 10 years.
AIGC Startups with Scalable Revenue and Paying Customers to Watch
EqualOcean: AIGC now receives lots of applause yet can not draw much capital attention. What is your ideal profile on the AIGC project?
Allen Zhu: We are attracted to startups that have revenue and paying customers, and the revenue must be scalable, not sporadic.
EqualOcean: Could you explain more?
Allen Zhu: We have been saying that the development of AIGC technology is very favorable to existing entrepreneurs. Startups with core technologies, cornerstone products, and a customer base are easier to introduce AIGC. For example, it may take two years to develop CRM software from 0 to 1, but it only takes two months for an existing CRM to be overlapped with AIGC technology through upgrades.
At the same time, the original product may only help customers to improve the efficiency by 50%, but after being combined with AIGC, the new product can achieve 100% or even several times the efficiency. This will greatly increase customers' willingness to pay and reduce the difficulty of sales work.
EqualOcean: So there are more companies focusing on enterprise services?
Allen Zhu: With the maturity of AIGC technology, we see the hope of explosive growth in the enterprise service market.
EqualOcean: What about LLM?
Allen Zhu: We are more optimistic about startups that do vertical optimization based on open source models. There are a lot of open source models on the market, but the key is to close the data loop and optimise the model based on feedback.
EqualOcean: OpenAI is no longer open source when it releases GPT-4. Is there some risk in this practice?
Allen Zhu: Open source models at the GPT-4 level will come out one after another, and I don't think it's a problem. Moreover, for most scenarios of most software vendors, the capability of GPT-3.5 is enough.
EqualOcean: LLM evolves too fast, will AIGC products built based on the current level of big models be iterated out quickly?
Allen Zhu: So to be short, direct, and fast, it is not recommended for startups to do a lot of investment in the bottom layer, instead, focusing on grabbing customers and data, which is also more conducive to subsequent rapid iteration.
EqualOcean: Have you paid attention to the recent development of Chinese big models?
Allen Zhu: I think at the end of this year or the first half of next year, there may be several Chinese big models that can be iterated to the level of GPT-3.5. The key is to achieve the level of GPT-4, which involves the balance of input and output. However, for big companies, the big model is a defense strategy, which must be done.
EqualOcean: At present, which scenarios combined with AIGC will develop faster?
Allen Zhu: There are many. Content creation is technically the easiest, effective, and customers are willing to pay for it. The call center is also a scenario with significant efficiency gains.
EqualOcean: Does the efficiency gains from AI exacerbate the already dire employment situation?
Allen Zhu: People worried about these kinds of issues hundreds of years ago during the Industrial Revolution. But I think human society will be getting better.
EqualOcean: How about AIGC-assisted short video production?
Allen Zhu: One of the companies in our portfolio can already get CNY 50 million in subscription revenue this year.
EqualOcean: But this is a big market, and it may not be monopolized by a single company.
Allen Zhu: It's too easy to simply develop an AI-assisted content production tool, so the most important thing in the early days is to take up the market, users, and data. Put the AIGC video on Tmall and Jingdong, get the effect of placement, and make rapid adjustments and iterations according to the feedback. As long as we take the first step to get a closed loop of data, it will be hard for competitors to catch up.
EqualOcean: You mentioned focusing on three types of AIGC startups, one of which is tagging data. Isn't this a periodical track?
Allen Zhu: At the moment, many areas such as autonomous driving and AIGC need tagging, and the tagging track has a chance to see explosive growth in China in the next few years.
EqualOcean: There is another category that already has customers and usage scenarios. Can you give us an example?
Allen Zhu: For example, in the call center, in the past, maybe 80% of outbound calls relied on human employees and 20% were machines. Now with AIGC, you can make 50% of machines, and the result is better than before. With CRM software plus AIGC technology, you can automatically summarise the communication of each salesperson with the customer that day, and report to the manager, completely eliminating the need for manual reporting and statistical links.
Another example is the use of AIGC technology to generate personal business cards for insurance agents, which can automatically answer customers' questions. In the future, to assess the agent's performance, we only need to look at how many business cards were sent out a day, which business cards were sent out and received customer inquiries, and which questions customers asked were more in-depth. The system can automatically summarise the results, which is very effective in assisting sales.
To train a vertical insurance industry model, two months and 10 video cards are enough. The key is whether AIGC can find a scenario to cope with pain points, do a good job of defining the product, quickly launch it to the market and capture users, and realize the closed loop of data.
EqualOcean: Is it easy to fall into a price war again if the technical barriers are not high?
Allen Zhu: The key lies in the closed loop of data, which is the only way. Because the price of the insurance industry is not the most critical, the key is whether the effect is good or not, to help attract customers. There are many other scenarios like this.
EqualOcean: The third category is to be able to attract customers and upgrade from selling products to selling services, please explain this point.
Allen Zhu: Don't sell products. Selling products in China can't hold the barriers, and we will end up in a price war. The ultimate goal of the company is to provide services and meet the real needs of customers. Also, take the call center as an example, don't sell software, but help customers operate call centers. An AI-capable call center can be sold at a lower price and at a higher gross margin.
EqualOcean: Enterprise services that are more suitable for the Chinese market.
Sara Zhu: Yes, it's more suitable for China's national conditions, and it can avoid price wars.
EqualOcean: Have you made any moves in the direction of AIGC?
Allen Zhu: We have been working on it, and we just invested in another project. Our standards are the same: there is a scene, data, and revenue. Basically, we do not need to invest lots of money for growth.
The Consumer Market Favours Extreme Cost-Efficiency
EqualOcean: The overall consumer market is relatively in recession, but when we talked to specific entrepreneurs, we found that the situation is not that simple. What are your ideas?
Allen Zhu: We are confident, and there are a few portfolio companies that have doubled their revenues while still maintaining scaled profits.
EqualOcean: What is an appropriate level of profit?
Allen Zhu: We like to see a profit of tens of millions of dollars while doubling revenue. If I have two projects in front of me, the former is tripling its revenue but losing money, and the latter is doubling its revenue but making a profit, I would definitely choose the latter. This type of company is more hopeful to go through the cycle, and even in this environment, they live more comfortably because there are fewer competitors.
EqualOcean: Are there still opportunities for consumer startups?
Allen Zhu: There are still opportunities to start making profits from Day One. When there was no VC in the past, consumer companies came in the same way, and profitability is the essence.
EqualOcean: There are two key labels for the consumer companies you are looking for: 10 billion single products plus 10,000 chain shops. Can you explain it?
Allen Zhu: It's not a plus, that's too much to ask (laughs). There are a lot of profitable consumer enterprises, but not necessarily all suitable for venture capital. A suitable venture capital must meet one of the above. The core is to do large-scale.
Hit products whose revenues reach 10 billion, plus other smaller volumes of products, will have more substantial overall revenue. In other words, the entire market size should reach at least 500 billion or more, and that would make sense for venture capital into the game
Ten thousand shop chain is also this logic. China's market is too big to achieve the scale of 10,000 shops in order to establish market influence. The reason why Luckin is so hot this year is because the number of shops is more than 10,000.
EqualOcean: Can the methodology of 10 billion single products be replicated?
Allen Zhu: I think it can, provided that the volume of the Chinese market. For example, we invested in a pickled fish brand, which adapt its taste to suit for the six provinces and cities in East China. The price range is also very suitable, about ten yuan. Within three years, it reached a revenue of two billion merely on the TikTok channel. There are many other categories like this that have the potential for tens of billions of single products.
EqualOcean: But Tang Bingsen also said he couldn't make another Chi Forest.
Allen Zhu: The window period has passed. China's window period is very short, just three to five years. Some companies did seize the window very well.
EqualOcean: For a new category, how to judge whether it will become a 10-billion-dollar product or be disproved?
Allen Zhu: It depends on the logic behind it. For example, we have invested in a cosmetic company whose sales of lip clay products reached 2 billion this year. I went to the TV station to record the program and found every make-up artist got one. It's photogenic, long-lasting, and cost-effective. At the same time, the company's new products are iterated very fast.
EqualOcean: What kind of method will you use to find a 10 billion single product?
Allen Zhu: The first thing is to see if the market is big enough, like pre-prepared vegetables, cosmetics and packaged drinks, are all considered large markets. Secondly, it is to see whether the category has explosive power and whether it can be a good product at a good price. For prepared food, CNY 10-20 is the mainstream price range; for beauty, CNY 40-50 is the mainstream price range.
EqualOcean: You mentioned that consumer companies must have their own defensible ecosystem, in what ways is the barrier of a consumer company embodied?
Allen Zhu: The first is the ability to sustain innovation, and the second is the ability to bring the channel to make money together. Whether you go offline or KOC distribution, the channel earns money before it will continue to help you bring goods. As the old saying goes, the most reliable relationship is to make money together.
EqualOcean: Is it necessary to be down-to-earth to do channels?
Allen Zhu: Nowadays, entrepreneurship has to be rooted on the ground, and there are many down-to-earth entrepreneurs in the direction of going global, such as the founder of SHEIN.
EqualOcean: Are you concerned about whether consumer companies can achieve "product excellence" or "price excellence", and how to consider "product excellence"?
Allen Zhu: Take the beauty company I just mentioned as an example, their products are quality and cost-effective, both of which have been achieved. In addition, they also redefined a category, that is, matte lip glaze is defined as lip clay. Redefining this is the best thing to make a distinction.
EqualOcean: So product excellence and price excellence can be both?
Allen Zhu: Today's environment is more in favor of price excellence.
EqualOcean: Are there still many quality consumer investment targets in the market?
Allen Zhu: There are a lot of quality consumer companies. The Chinese market is too big and the potential is too big, but many companies don't need financing. It's not easy to find a quality consumer company that just needs financing, and investors need to convince entrepreneurs to raise money.
EqualOcean: Why don't they need financing?
Allen Zhu: The company itself is very profitable. Some entrepreneurs need liquidity to stock up on goods because their revenue is growing fast, or they need to build their own factories, so they come out to raise some capital.
EqualOcean: In going global, the cross-border e-commerce industry has entered a reshuffle period. A lot of extensive businesses are now transformed into developing brands, what do you think?
Allen Zhu: I think doing branding is a natural process. First of all, we need to have a certain volume and do solid business. Today there are still a lot of new channel dividends in.
EqualOcean: Do you think European and American entrepreneurs are better at making brands?
Allen Zhu: Almost all of the DTC brands that have gone viral in the US in the past few years are backed by big local internet celebrity companies, which is indeed a disadvantage for Chinese entrepreneurs, but there is still a chance to make the product the best it can be.
Many products in China are doing very well now based on my observation. When I was in Southeast Asia, I shopped on Shopee and Lazada, and not only was the quality of the products lagged behind the domestic market, and they were also more than 50% more expensive. Even items like electronic scales, which are less technical and have a more mature supply chain, were the same. That's why I choose to shop on Taobao and ship to Southeast Asia, where the discounted price is still lower than buying locally.
The supply chain for a size-free underwear brand we invested in for the Indonesian market is all in Guangdong. Size-free has been popular in China for several years, but Indonesian consumers find it novel and love it, and will spontaneously post them on Instagram.
We also visited an underwear company in Vietnam, and the problem they encountered was that they couldn't produce highly elastic fabrics locally, and local factories still relied heavily on manual production by workers, resulting in substandard product quality. In contrast, the textile supply chain in China is already highly sophisticated, with highly automated factories where shaping and gluing are done by machines. As it stands now, China's supply chain is hard to replace.
EqualOcean: Do you think China will give birth to world-class brands like Unilever, Nestle and P&G?
Allen Zhu: Definitely there will be, and there are already some brands showing full potential.
The Core of China Plus One is still in China
EqualOcean: Will the current environment have an impact on American limited partners?
Allen Zhu: There are still a lot of limited partners who value Chinese markets because there is no market that can accommodate a large amount of capital except China and the US.
EqualOcean: You mentioned that timing is the most important to become a successful investor. In the current era, what will be your timing?
Allen Zhu: I think there are a few big trends that are certain. First, China's large market of 1.4 billion people is unique. Second, China's supply chain is irreplaceable globally, and it will take at least 10 years for other countries to catch up. Thirdly, the level of hard work and diligence of Chinese people is hard to be surpassed by other countries.
EqualOcean: There is also a wave of capacity transfer out of China.
Allen Zhu: The export of China's supply chain, accompanied by China's industrial talent going global is difficult to rely solely on local workers. China's Apple factory yield rate of more than 90%, and in India even less than 50%. The loss ratio is huge, and the account can not be calculated.
China's supply chain integrity is also second to none in the world. For a consumer electronics product, all of its components can be found in and around Guangdong Province. If you want to build a supply chain system overseas, you also have to take into account the transport of parts, and the overall cost may not be low.
I think in terms of the global layout of the supply chain, it may be a "China plus one" pattern, and the dominant one is still China.
EqualOcean: After you came back from Southeast Asia, in addition to "Long China", what else do you think?
Allen Zhu: Enterprises going global still have the advantage of placing their core supply chain in the Pearl River Delta, and it takes a long time to build the supply chain system in Southeast Asia. From a deeper look, many Vietnamese factories have Chinese labels on their machine tools, supply chain talents have to be hired from China, and components have to be imported from China. Even if the local raw material cost is low, the discounted final cost is not cheap.
EqualOcean: At present, many globalization-oriented investors are very concerned about Global Chinese, a group of people with an international vision but quipped with Chinese capabilities, what do you think?
Allen Zhu: We are more optimistic about entrepreneurs and startups going global with China as their home base. It is more important to build a deeper understanding of the supply chain at home.
EqualOcean: Is the current market environment getting more challenging?
Allen Zhu: It depends on who you talk to. Some of the entrepreneurs we have contacted are still very confident, and they see more opportunities in their eyes, which makes us as early-stage investors more optimistic. In reality, there are a lot of entrepreneurs who did seize the opportunity, and the company can still achieve scale revenue and even scale profits.
EqualOcean: Have you seen companies broken down?
Allen Zhu: There are too many. Just take a look at the turnover rate of shops in shopping malls. The past three years have indeed brought a very severe test to many entrepreneurs.
EqualOcean: What kind of entrepreneur profile are you looking for?
Allen Zhu: More grounded, more user-savvy, and market-savvy. Today, it is hard for entrepreneurs who aim too high to survive, they must focus on the bottom line and cash flow.
EqualOcean: What is the meaning of "aiming too high"?
Allen Zhu: Those who rely on subsidies and take the route of consumption upgrade.
EqualOcean: How can a consumer company get closer to users?
Allen Zhu: Numbers speak for themselves. Are they selling well? Can sales grow? How much? Numbers can tell a lot.
EqualOcean: Are Chinese entrepreneurs good at breaking through from 0 to 1?
Allen Zhu: Compared to going from 1 to 100, going from 0 to 1 is easier. In the process of going from 1 to 100, many entrepreneurs fall behind when their own growth cannot keep up with the speed of the company's development. From 1 to 100 requires continuous product innovation, supply chain, channel maintenance, and the ability to build and manage a complete team, which is difficult.
EqualOcean: What advice would you give to entrepreneurs now?
Allen Zhu: To grow steadily, as I said earlier, do you want to triple your losses or double your profits? At the moment, we still need to grow on the basis of guaranteed profits.
EqualOcean: What else would you like to share about Chinese companies going global?
Allen Zhu: Based on China's supply chain, purse pragmatic development with guaranteed profit.