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Qiming Insights | Exclusive interview with Duane Kuang on investment prospects in China, entrepreneurship and Web3.0

11/08/2022 | Qiming Venture Partners

On August 10th, Duane Kuang, founding managing partner of Qiming Venture Partners, spoke with Chen Zhe, founder of ChinaVenture Info, at the 16th ChinaVenture Investment Conference Annual Summit. This article features excerpts from the conversation.

01/ Global investors are still interested in China

ChinaVenture: First I want to congratulate Qiming Venture Partners on closing the latest funds totaling US$3.2 billion. It’s a pleasure to have a conversation with you in Singapore. I would like to hear your opinions on macro situations. Inflation in the US is at a record high in 40 years. The Federal Reserve has started raising interest rates with an aggressive balance sheet reduction. High-growth stocks have fallen, and Chinese concepts stocks have also encountered great challenges in the past one or two years, which affected fundraising and exits of several USD funds. During your fundraising process, what are the changes in USD Limited Partners (LPs)’ allocation of assets in the Chinese market? Any different questions were brought up to Qiming?

Duane Kuang: First of all, I am happy to attend the annual conference of ChinaVenture. This is the first time we meet overseas, which reflects the fact that we have become more international. 

I have several thoughts after communicating with LPs. Firstly, LPs do have different focuses than they did five or six years ago, with more macro questions this year.

Qiming Venture Partners was founded in 2006. During the roadshow presentation for fundraising in the early years, we talked about China's macro environment in the first few slides. Then for five or six years, we mainly talked about China's rapid growth and immense opportunities and no one cares about the macro political environment anymore so we skipped it. Now we talk about the macro situation in China again, since more people are interested. 

Secondly, as China is the second largest world economy, our global investors, regardless they are from the US, Asia, or Europe, continue to look at China and make China a part of their investment portfolio.

In my perspective, LPs are more prudent in uncertain situations. As an investment firm with more than ten years of experience, we have some advantages. When the future is unpredictable, LPs are prone to select a familiar firm to reinvest in. That’s why our reinvestment rate is very high. Meanwhile, we also attracted some new LPs from Asia and Europe.

Therefore, I would like to share a simple message with our peers – do not let excessive pessimism overshadow our confidence, people are still interested in this market. 

02/Going global and Web 3.0

ChinaVenture: We are having this conversation in Singapore, Southeast Asia, which is a very popular market for businesses. There are more than 100 unicorn companies in India, and more and more companies are based in Singapore. We also witness the manufacturing and supply chain shifts from China to Vietnam. What is your opinion regarding these trends?

Duane Kuang: In general, we are still investing in sectors we have focused on and mainly in China. Of course, there are also some new changes. 

More Chinese companies are going global. In the past, we also spent time researching on local investment opportunities in Southeast Asia and India. We will continue to consider these opportunities carefully and may do some investments. 

There’s another key trend. With more of our portfolio companies going global and choosing Southeast Asia as their first stop, Qiming as an active VC investing in Healthcare and Technology and Consumer (T&C) sectors, must pay attention to this region.

This includes the migration of part of the manufacturing supply chain to Southeast Asia. We have invested in a number of automation equipment companies, and they are also talking about the fact that because some factories are moving here, upstream equipment needs to have a local presence and local support, so they are also following their customers to move some of their capabilities.

A new opportunity pops up when they decide to relocate – when moving part of their capacity from China, they can also look for local companies suitable for M&As. Because the entire industry chain is mainly in the Chinese mainland in the past, the space for the growth of local companies in Southeast Asia is not so big. The merging of small and medium-sized enterprises here and large enterprises in China will bring huge opportunities, and there is no need for Chinese enterprises to start from scratch when going global.

Furthermore, our US Dollar Funds have invested in Web3.0 since 2018. As Singapore is becoming a hotspot for Web3.0 with many investors and enterprises, we met many peers and our portfolio companies here. 

ChinaVenture: What do you think of Web3.0?

Duane Kuang: From a technical perspective, I think blockchain can bring something new to the ways in which Internet infrastructure works, and I am 100% on board. I believe people are still at an early stage to figure out how we can integrate this new technology into our daily life and infrastructure gradually.

We must be part of this big technology trend. There are a lot of investment opportunities for infrastructure at the early stage, which is actually the same as the technology opportunities we saw from the Web 2.0 era VCs. We have invested in a dozen of Web3.0 infrastructure companies over the past few years. 

I am still very optimistic about the fundamentals. I hope some down-to-earth entrepreneurs can cultivate good technologies and companies that can contribute to the entire ecosystem in this bear market. 

03/The secret of going through economic cycles

ChinaVenture: You have been in the VC industry in China for more than 20 years, and before that, you had a technical background, joined Intel Capital, and then started Qiming Venture Partners. What do you think is the secret of going through economic cycles?

Duane Kuang: This is an interesting question. I joined the industry in 1999, and it's indeed been more than 20 years. When we founded Qiming Venture Partners, we wanted to make Qiming a 100-year-old business, but it is impossible to have everything going smoothly, and a 100-year bull market does not exist, so there must be cycles.

Since Qiming’s founding in 2006, we experienced the global financial turmoil and slow economic downturn brought by the financial crisis in 2008, and later encountered the A share market crash of 2015, which triggered a long downward cycle in the primary market.

There are many different levels of the cycle. One was due to the subprime mortgages, which caused a big downfall around 2008, but China was not affected too much and instead turned out to be a main driver of the world economy later. Around 2015, China had a relatively large secondary market adjustment, but the rest of the world economy was not particularly difficult.

This time the downside will be a little more challenging for everyone, because it is global, and all the big economies are going down. Last year the US market encountered Covid, but the consumer market was very robust. This year, inflation is very high, and we see signs of consumption being affected. China is also within an economic cycle, and the real estate sector has seen some adjustments since last year, etc.

So, two huge economies are moving downward, and there is no consensus yet on whether it is the bottom with all geopolitical factors. How to pull the world out of the predicament is indeed more challenging than in the past.

There are several reasons why we have managed to get through the past few cycles. First, the volume of China's economy is large enough today to generate new investment opportunities and growth points in almost all circumstances.

For example, we are looking at some global-facing biopharmaceutical R&D companies because they already have enough biological R&D capabilities at a lower cost to serve the whole world, and we are looking at such opportunities. We are also looking at a lot of opportunities including electric vehicles, smart technologies, etc.

The last is our preparation to cross the cycle, including starting earlier preparation of the new fund phase from last year, including the arrangement of the future investment direction and staff. We can't do bullish things when the bull market is in full force, and bearish things in the depth of the bear market, and we need to make prior preparations for future cycle development.

ChinaVenture: Qiming Venture Partners' past investments are mainly in the fields of healthcare, technology and consumer. Where do you expect the new fund to be allocated to? And what will be the recent investment status and cadence?

Duane Kuang: First of all, these are really the areas that we are particularly focused on right now, including innovative drugs, devices, diagnostics, services, etc. in healthcare; smart technology and consumption. I think China is a huge consumer market, and we should never ignore the Chinese consumer.

But they are still cyclical. Technology has a market cycle in addition to the cycle of technology development. Technology requires a period of research, early adopters to experiment, then mass adoption, to replacement as the next step. Sometimes these two cycles are not in locked steps.

Qiming Ventures Partners has been investing in this market for more than ten years, and there will not be too much difference in our approach to investment, regardless of whether the market is hot or not. So I did a calculation in May this year, and although the market is already quite volatile this year, our total amount of investment is basically the same as last year, and even a few percentage points more.

In a more sluggish market, we can be more patient with the due diligence of projects because we don't have to rush so much, and the threshold may be higher, but the overall investment approach will not change much.

In addition, it also depends on how the future exit market evolves. Now the road of Chinese stocks listing in the US looks more difficult, and Hong Kong is also getting more congested, we should think about how to facilitate Chinese technology and healthcare companies to go public - are there any new initiatives to encourage them to do so? I believe there will be, otherwise there will be certain future challenges in terms of exit.

In general, we used to invest in each fund for about two years. Because the scale is getting bigger, we might take three years to finish the investment.

04/Behind investing in China

ChinaVenture: Although the GDP volume of the US and China is large, there might be more fluctuations and uncertainties. Southeast Asia, although its GDP volume smaller, offers better predictability. What do you think?

Duane Kuang: I agree with the predictability point, but one thing I still believe is that China is currently winning in entrepreneurship. I also think that as more and more Chinese entrepreneurs go abroad, they are slowly bringing that spirit to Southeast Asia.

When it comes to the certainty and uncertainty of the Chinese market, one of the most critical aspects that I am focusing on is whether the entrepreneurial spirit in China will continue. Are there any fundamental reasons or factors that will affect our entrepreneurial spirit in China? If China's entrepreneurship is strong and thriving, then I think there are still many opportunities for investment.

Therefore, the reason why we focus on Chinese entrepreneurs going global is that, we are more familiar with Chinese companies, at the same time, these entrepreneurs are very hardworking, and we are optimistic about projects that can make the best use of China's supply chain.

We invested in a cosmetic company based in Indonesia a while ago, where Chinese entrepreneurs are already very experienced. With China's e-commerce industry exporting globally, logistics as a supporting industry chain has emerged - it is not traditional shipping, but logistics companies which exist entirely for global e-commerce.

The second is to follow China's relatively mature business model in a similar market, for example, Indonesia is also a relatively large, populous and young market. How to bring Chinese business models to similar markets is another area we are watching closely.

The third area is that some of our entrepreneurs are going global following their downstream customers. Whether they are doing smart technologies, automation, or Web 3.0, we are paying attention to these areas.

One thing I think we should constantly advocate is "The entrepreneurial spirit in China is precious but don't take it for granted". For decades, entrepreneurs have been very optimistic that tomorrow will be better, so they have been working diligently to make it happen. 

Based on Chinese version