The ESG concept has become an investment hotspot, with green investments experiencing rapid growth. How can Chinese enterprises successfully navigate the ESG landscape in the midst of the globalization wave?
On the evening of November 2, 2023, at 8:00 PM, EqualOcean's "Globalization Lounge" live streaming event hosted a profound discussion on the theme of "Globalization 3.0 Era: ESG as the Lifeline for Expanding Businesses Globally." This in-depth interview provided numerous viewers with fresh insights into China's outbound business strategies, green investments, and the evolving ESG landscape, sparking new considerations.
The interviewee for this discussion is Wei Zhou, the Founding Manager Partner of CCV. He has 11 years of successful entrepreneurship experience and 16 years of venture investment experience. In 2007, Wei joined KPCB as a founding member of KPCB China. He then served as a Managing Partner of KPCB and led the technology investment team in Greater China. In 2017, Wei founded CCV where he adheres to a visionary investment strategy. CCV focuses on early-stage investments in artificial intelligence, robotics, autonomous driving, and green tech. He has maintained a unicorn rate of 35% in the first ten years of operations and continues to yield at least one unicorn each year.
Presented below is a meticulously edited live conversation transcript, curated with precision by EqualOcean.
Due to space constraints, this article will be presented in two parts. In this section, Mr. Zhou Wei not only shares his insightful observations in the realm of green investments but also imparts his perspective on the standards that companies should uphold during their journey in implementing sustainable practices.
Green Investments: A Long-Term Buildup Preparing for an Explosive Breakthrough
EqualOcean: To begin, Mr. Zhou, please introduce yourself and share some insights into your current endeavors, particularly in the realms of globalization and green technology.
Wei Zhou: My first decade was spent in entrepreneurship and product design, and I was one of the key designers for the software and hardware of China's first-generation POS machines.
For the past 17 years, I've been involved in venture capital. During the first decade of my investment journey, I was based in Silicon Valley and served as a partner at KPCB China for 10 years, which is considered a legendary venture capital fund. I primarily focused on technology investments, including green technology investments in the first three years. In the last six to seven years, I co-founded CCV with my former teammates, and CCV continues to invest in technology and early-stage startups. Given our history in Silicon Valley, the relevant experience, and international network, most of the companies we invest in have expanded internationally, and some are founded by Chinese entrepreneurs directly, including a US-listed company we invested in last year that fits this profile.
The investment in green technology or environmental-focused investments began around 2000, driven by one of the most renowned investors globally, John Doerr from KPCB. Later, former U.S. Vice President Al Gore joined as a full-time partner in 2008, leading the global focus on environmental investments. Although the timing back then was somewhat premature, and the returns from a business perspective were less than ideal, the stage and technological maturity reached today and the achievements were only possible due to the early initiatives and groundwork led by KPCB. So, I've always regarded KPCB as a visionary fund that played a critical role in advancing green technology.
KPCB initiated green technology investments globally since the early 2000s, while the domestic surge in China started in 2007. Consequently, we invested in a multitude of green technology companies between 2007 and 2012, marking a 16-year journey. In August of this year, a company we invested 11 years ago, KJY water (301372:SZ), a wastewater treatment company, went public in China.
EqualOcean: As a veteran player in the green technology sector, how have you observed changes in the market environment and emerging opportunities from the past to the present?
Wei Zhou: The changes have been significant. KPCB was essentially a pioneer in this field. When we started investing in green technology, almost all conditions were primitive. Firstly, public awareness and understanding of green technology investments were limited. Secondly, from a technological perspective, the maturity of the technologies was far from achieving a self-sustaining commercial cycle. For instance, back then, the conversion efficiency of solar panels was less than 10%, and wind turbine blade efficiency hadn't reached a certain level of technological maturity. This meant that without government subsidies, companies couldn't survive solely through commercial operations.
The technological maturity of the products was insufficient for full commercialization, and businesses couldn't generate enough cash flow to sustain themselves. For example, we invested in a company at that time that was one of the most mature players globally in the production of PLC biodegradable plastics. While their technology was excellent, and production capacity was fully realized, the high production costs led to their eventual acquisition. Over the years, China has advanced significantly in various aspects of green technology, including solar panels, wind power, batteries, and more. From that era of immaturity to the present, we've made breakthroughs in various aspects of our technology, such as solar panel conversion rates and battery density, enabling many green technology companies today to thrive without relying on any government subsidies.
Additionally, in that era, making investment decisions was quite challenging. For instance, solar panels had limited conversion efficiency, high production costs, and the production process generated pollution and emitted large quantities of carbon dioxide. Regarding the entire lifecycle, the green effects produced by solar panels might not offset the pollution and emissions from the manufacturing process, resulting in negative green effects. However, Chinese green technology companies today place a strong emphasis on the environmental impact of the production process, whether for solar panels or batteries. The production process and lifecycle now contribute positively to environmental sustainability. In other words, while products in that era were considered green technology, the production process was not environmentally friendly. Today, there's a strong focus on ESG and environmental issues, which has led to this positive cycle we're experiencing.
Overall, even though the consensus on technology, the market, and the global environment wasn't mature at the time, KPCB's investments in green technology could hardly yield substantial returns. Today, particularly in China, the elements required for the eruption of green technology, such as technology, supply chains, markets, and government attention, are all in place. China is bound to become a global leader in this field. With years of accumulation, China has various advantages in different aspects of green technology. Leveraging these systemic advantages, along with the global emphasis on green and ESG issues, we should seize this opportunity and grow and strengthen our businesses.
EqualOcean: Green investments often have longer business value realization cycles. How do you balance short-term returns with longevism?
Wei Zhou: Today, whether it's green technology investments or ESG-related investments, particularly in green technology, the maturity and rapid development of technology have significantly shortened the cycles. Many companies in this field are growing rapidly, so you don't necessarily have to wait a long time.
Furthermore, people may consider green technology investments as capital-intensive, but that's not entirely accurate. For instance, companies that are now involved in intelligent grids, smart factories, efficiency management software, and distributed energy systems specifically tailored for international markets have seen significant revenue growth. If not for the current wave of deglobalization, these companies would likely be among the fastest-growing enterprises.
Of course, as an investment firm, we have to consider our investors and be responsible to them. The experience and lessons from KPCB's first wave of green technology investments were that, while it foresaw the green technology trend with great foresight, the timing was too early, leading to a negative impact on KPCB's industry position due to the cyclical nature of funds. Currently, choosing ESG and green technology investment directions can bring about a return on investment that's entirely realistic.
EqualOcean: For outbound enterprises, if ESG is their guardian angel, the quality, distinctiveness, and technological foundation of their products or services are the fundamentals of their success. When choosing to invest in a company, especially an outbound/global enterprise, what specific qualities do you value the most?
Wei Zhou: First, in the era of ubiquitous intelligence, the ability to define next-generation intelligent products is crucial. Chinese entrepreneurs have honed this ability after over 20 years of intense entrepreneurial experience.
For example, Apple completely redefined the interaction between people and smartphones and the ecosystem of smartphones, meeting the demands of consumers. Tesla did the same by redefining electric cars, focusing on intelligence and human-computer interaction, with electricity being just a critical component. Therefore, intelligence is the key, and Chinese entrepreneurs are strong in this area. For example, the intelligent logistics companies we invest in, which include forklifts, warehousing, and intelligent logistics, are not just modifying existing products but are thinking uniquely about the next generation of intelligent products, human-computer interaction, and product form. They possess the ability to redefine, which is essential to setting industry standards.
Secondly, a company's ability to go global largely depends on the core entrepreneurial team's understanding of different cultures, regions, and their capability to leverage talent from different areas. In a recent offline panel I participated in in Silicon Valley, I mentioned that, at present, all the Chinese entrepreneurial teams in attendance are Chinese. While entering some markets, they may encounter some challenges. For Chinese enterprises today, if they intend to expand globally, they should strive for globalization within their own teams from the outset. This is a critical point. We're also helping businesses go global, and we've established an office in Singapore to assist enterprises in bridging the gap when expanding internationally. We're going through the process ourselves as well. So when seeking for a potential team , we might look for local partners in the future.
EqualOcean: From an investor's perspective, which outbound destination are you most interested in, and why? Would a place like Singapore, as you mentioned, be a key focus for you?
Wei Zhou: This is an interesting topic. For instance, some time ago, we observed that household energy storage and intelligent energy storage product designs were novel, user-friendly, and had a higher level of human-computer interaction. We initially believed that these products might be sold to underdeveloped countries due to their unreliable local power grids. However, we later found that they were experiencing rapid growth in markets in developed countries like the United States, as the infrastructure in Europe and the United States was considerably aged, which brought huge needs hence. At the same time, people had their own solar panels, and if they generated excess electricity, they could sell it back to the grid. The related systems were also well established. Consequently, people were willing to use solar panels in conjunction with energy storage devices, resulting in cost-effectiveness. Therefore, from this perspective, different products have different markets. The focus lies in the selection of the founding team, which is always paramount. This includes their entrepreneurial experience, how well it aligns with the local market, the level of understanding of the local market, and insights into local users.
However, for China right now, the most significant trend is that many companies are establishing factories in Indonesia, targeting Southeast Asia market or in Mexico, which offers an advantage to enter the U.S. market.
Additionally, we're not just focusing on Chinese companies going global; we're also paying attention to local entrepreneurship by Chinese entrepreneurs globally. This is actually a great trend. For example, one of the Chinese companies we invested in is currently among the top three in digital banking and payments in Africa. Another Mexican company in digital banking is experiencing rapid growth.
Currently, Chinese entrepreneurs are making strides worldwide, which is called called "capability overflow". China is not only creating businesses locally and then selling products internationally; people are also flourishing in various places worldwide. Among these corporations, some adopt the China's business model, while others utilize the local model for entrepreneurship. All of these are very worth observing.
Green Practices: Embracing Standards, Sustaining Commitment
EqualOcean: In February of this year, CCV, a founding partner, formally announced its membership in the United Nations-supported Principles for Responsible Investment (UNPRI). UNPRI stands as one of the world's most influential responsible investment organizations, committing to six fundamental principles of responsible investment. How are these six principles realized in investment strategies and practices? How can we ensure that the commitments made are genuinely integrated into every investment project?
Wei Zhou: ESG, comprising environmental, social responsibility, and corporate governance, is at the heart of responsible investment. In terms of governance, professional investment institutions are expected to excel because their primary mission is to help the companies they invest in achieve better corporate governance. Therefore, excellence in governance is a common practice.
However, the environmental and social responsibility aspects require a unique approach. Firstly, our team of three partners and one team member all have roots in KPCB, with over a decade of collective experience. KPCB has been an early advocate for green practices, adhering to its ethical guidelines. For instance, for a time, we banned the use of bottled water in our office due to the environmental impact of plastic bottles. Furthermore, we have never invested in tobacco or alcohol-related companies. When e-cigarettes first emerged, some recommended investing in them, but we immediately declined. These values are ingrained in our DNA.
In summary, the six principles encompass methods such as integration, screening, and thematic approaches into the investment analysis and decision-making process. However, our unique perspective comes from our KPCB green technology heritage. From the very beginning, if we determine that a project lacks green technology characteristics, we do not invest. Second, the companies we invest in are highly focused on these issues. For instance, in the e-commerce sector, we invested in JD.com. At that time, JD.com was the first company to provide full social security benefits, including pensions and insurance, to low-level employees, including logistics workers. Before JD.com went public, the board of directors debated this decision, as it would place the company at a financial disadvantage compared to other major players. However, all shareholders and directors supported the company's choice, deeming it the right one.
Therefore, a responsible and professional investment institution can adhere to most principles. The real challenge lies in the choice between financial interests and adhering to these principles. We aim to invest in companies that have a positive impact on the world and possess enduring potential. This is a very clear principle for us. Hence, according to our principles, we can ensure that most of our investment targets meet the standards.
From another perspective, the two major themes we currently invest in are intelligence and green technology. The next phase is all about intelligence in various forms, including AI, robotics, and autonomous driving technology, replacing simple, repetitive, or hazardous human jobs. We have observed that the majority of the companies we invest in are already utilizing new energy sources in their warehouse logistics and automated forklift processes.
The second significant theme we invest in is green technology, which is now commonly referred to as "new energy" or "dual carbon". However, we have always regarded it as "green technology", which encompasses a wide range of areas, such as energy, environment, or related technologies. We have devoted almost half of our energy to this area.
Thirdly, the companies we invest in generally aspire to expand globally. China currently resembles Japan in the 1970s when most Japanese brands that we see today made their global debut. China has accumulated the capabilities to go global in these areas. When combined with green technology and ESG, the process of going global becomes smoother. Carbon taxes and ESG are expected to become qualifications for businesses to enter new markets in the future, especially in developed countries. Additionally, we provide support and guidance to our portfolio companies post-investment, helping them understand the benefits of practicing responsible investment principles. Because Chinese companies are bound to go global in the next phase, adhering to these principles serves as a valuable talisman and passport for their global journey.