Livecast #6: Boyu Hu: Early Kuaishou Investor; Then vs. Now in China Consumer Tech

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This transcript is edited by our TBC Insider Community Manager, Darren Zeng.


Hey everyone! This conversation was recorded live on February 24th, 2021 at 5:00 PM California Time between myself in San Francisco and Hu Boyu in China. 

The first part of the conversation took place over the Clubhouse app, and the second part over Zoom because we had some connection difficulties. 

So, the audio quality, I have to apologize in advance, is not as good as it typically is or as I’d like. Still, I hope you find the content useful. Thank you so much for tuning in and don’t forget to subscribe!

Rui: Inside Asia is the first club focused on Asia on Clubhouse, and I’m really pleased to be here today to talk to Hu Boyu, who is an early investor in Kuaishou. Before we start the event, let me give a little bit of an introduction about myself. My name is Rui Ma, I run which is a podcast on China Tech, and then also a community for investors and operators who are interested in China Tech. 

So, I myself currently consult funds and companies on anything and everything related to China Tech. Boyu here is an old friend from when I was working in China, and he has graciously agreed to be here today. He’s calling in from Beijing, so we actually have a separate Zoom setup going on just in case he gets disconnected. So anyway, Boyu, I put your bio in the description of this room, but can you introduce yourself a little bit more to those who are just joining us?

Boyu: Yes sure of course, hi everyone, this is Boyu speaking. So first I wanna thank Rui for inviting me to give this talk. Rui has been a long-time friend since the days I was at DCM. That was like seven, eight years ago, so it’s great to be here! 

A quick background on myself. I was an entrepreneur before; I grew up in China, went to college in Shanghai and then co-founded a company in college. It was a software company offering credit risk management software to the banks in China and actually the company is now the largest credit risk management software company in China listed in Shenzhen stock exchange. 

So, I worked there for about ten years. I led the product development of our core product lines and then left the company in 2008. I went to Kellogg for an MBA in 2008, I did the one-year program and then returned to China and became a VC.

So, my job at DCM actually was my third job in the VC industry. I was at DCM from early 2011 to 2014, and then I worked at another VC firm called Blue Lake Capital for two years, and then started XVC. So that’s my quick background.

Rui: Right, XVC is your own fund and you guys have about $600m under management right now, right?

Boyu: Yeah, across US dollar and RMB. Now we’re managing our second US dollar fund.

Rui: Cool! So, my first question for you, Kuaishou for those of you who don’t know is one of the most recent IPOs that’s been wildly successful, it’s I think almost $200 billion right now in market cap but it is a competitor to ByteDance which operates TikTok and Kuaishou is also a short video company. 

So, I want to ask you Boyu to talk about that deal, but specifically could you also just use that story to tell about what VC was like in China almost a decade ago. What were the things going on, who were the big players, and how can we tell from this really exciting deal, the Kuaishou story, about the environment that was China Tech ten years ago?

Boyu: Okay yeah, when I made the investment in Kuaishou it was in 2014, May of 2014. Maybe a little bit of background. The company was still very small, it had about just eight employees including the founders, working in an apartment. Their number of users, well daily active users, were something like 900 thousand, it was growing fast. It had about 30 thousand new users per day, all of them are organic users. At that time about 10% of the daily active users would upload at least one video and about roughly another 10-15% of the people will share at least one video outside of the app. Most of the shares were on WeChat and that drives a lot of new users.

So, we saw the reality there; it was the more users they have, the more new users they have. And also, we have seen a very positive feedback loop in the usage of the app and the activeness of users cause we seen growth in not only users but also retention and time, the amount of time people spent on average per day in the app as the community grows.

At about 15 million in company at the pre-money valuation of 60 million and after dilution for post round ESOP valuation, I think we owned about 17.8%, around that, so that was the back end of the deal. Let me get back to your other question, what was the environment then, in China.

Rui: Cause this was a competitive deal, right?

Boyu: Yes, it was a competitive deal. I think the company had seen at least ten investors and they’ve got multiple offers and when we submitted our term sheet, they already had one offer from another leading firm. 

Yeah, I think now people are talking about the deal in the media, now it’s public information now that that offer was from Sequoia. Valuation was lower than ours and we had signed the term sheet I think on the same day when we offered them the offer. So, it was a very competitive deal. I heard that they had also got some other offers, the most competitive one was Sequoia.

Rui: Got it, so I mainly wanted you to give that background because I want you to contrast it with what it’s like today. Also, Kuaishou at the time, it had pivoted from a different product, right? And the original seeding VC, Morningside, now called 5Y, brought in a new CEO and kind of restructured the company and the new product was what really took off.

I mean this is when you guys invested, so when you think about the dynamics of something like that today, number one, is it more competitive today? And how would you evaluate a similar deal in today’s environment, where the original team had to absorb a whole new founder that they hadn’t worked with before, would get you to want to put in a term sheet right away?

Boyu: Yeah, let me get back to your first question first, how is the competitive environment today, is it even more competitive? The simple answer is yes. There are more funds today, the leading funds have more money. Sequoia today is now like ten times bigger and Hillhouse is doing early-stage investments. Even Morningside is raising like billion dollar early-stage fund. I heard that GGV has $2 billion in one fund. 

So, it’s a different world, people have lots of money and lots of people are joining the game, but I would say early-stage investment is still a place where it’s not a game of just money and being the top brand. I mean if you look at the top deals in the last couple of years, last few years, you still see that these companies when they raise their Series A and Series B, they sign the first term sheet they get. So being fast is important, and being able to see, being able to understand the business, to realize it’s a good company, is still the most important thing, I think.

Rui: Wow! I didn’t realize they sign the first term sheet they get.

Boyu: Yeah, you can say that, even at that time, even you know for a competitive deal like Kuaishou, in its Series B they have multiple offers, the entrepreneur signed the first written term sheet, right. The offer from Sequoia was oral, and it was below their expectation. DCM offered the first written term sheet that was above their expectation, so they signed it and if you look at ByteDance when they raised their Series As, Series Bs, they didn’t have that many offers.

Rui: Yeah. Do you think that has changed today because Kuaishou is, Kuaishou and ByteDance both really, and Pinduoduo of course, rode the rural China wave, right? The less developed parts of China, the users coming on because of the smartphone. This was their first device, and they were being exposed to apps for the first time. Do you think that is still a place where you would invest a lot of money today? How has it changed?

Boyu: Yes, it’s still the place where I would be interested. The organization process is still going on in China and creates a lot of opportunities. We’ve spent a lot of time in third, fourth tier cities. Actually, I just went to a fourth tier city just before the Chinese New Year and studied the retail environment there, looking for new retail type opportunities.

Rui: You went there to do diligence, to see if there were new brands or companies that you weren’t aware of?

Boyu: Yeah.

Rui: Could you talk a little more about that, because I know there are other investors who do this too. Why do you think you have to go there in person to do diligence, what is the disparity that you see right now between how people live in first tier cities and fourth tier cities?

Boyu: Yeah, as an early-stage investor, you have to bet on things that will be very big in ten years, five to ten years. And you have to be closer to the customers, to the market, to really understand it, and a lot of things you get most of your information from documents, from reports drafted by others and your understanding of the world will be very vague. It’s hard for you to picture.

Rui: So how much time do you spend right now thinking about the rise of rural China and the opportunities in these rural cities?

Boyu: Actually, we did a study, a quick calculation of our portfolio companies, I would say about 70% of the portfolio is consumer driven, consumer facing businesses, and 80% of these companies are targeting lower income people. If you draw a line of the average disposable income, 80% of people are below that line, so most of our deals, most of our portfolio companies are targeting that part.

Rui: Wow, so you’re basically saying 80% of 70%, that’s over 50% of your portfolio, are consumer companies targeting lower tier cities and their residents, which is funny because one of the things that, I was talking to Ron Cao, formerly of Lightspeed and he had this great bit about the next China is China and I believe that’s also his strategy.

Boyu: Lower tier cities but just average income people. Beijing residents are below that line.

Rui: Got it, so you’re saying the masses and not the elite. So, there are also people living in Beijing who that would appeal to. Yeah, if you look at Kuaishou for example, I believe like 15% of their users are in first tier cities or something like that, but what it sounds like to me is you’re saying the opportunity is still there so even though Kuaishou was started eight, nine years ago, you guys invested seven years ago, the opportunity is still really the same.

Boyu: I think the growth of disposable income of that part of China is still at 10%.

Rui: It’s still at 10%?

Boyu: Well, the overall, yes. The incoming spending power of that group of people is growing much faster than the average.

Rui: I guess I talk to a lot of VCs and some of them have actually pivoted a lot to enterprise and other, deep tech for example, but you’ve really stuck with consumer for a large part of your portfolio, so what are some of the most interesting opportunities that you’re seeing, maybe some of your recent investments that you’re really excited to talk about?

Boyu: Sure. We are still pretty much focused on consumer I’d say. We also do business service, supply chain, that’s a third of our portfolio, but the majority of our time is still focusing on consumer related businesses. We still see a lot of opportunities, there are lots of, as we’ve seen some, in addition to the demographic change, the growth of disposable income, the urbanization, we have seen that the media consumption behaviour have changed drastically in the last few years. 

For example, people are spending on average, 90 minutes per day on short videos. For example, the ad revenue of Douyin, Kuaishou, is now 2x of all the TV stations in China and we have seen drastic, dramatic change in retail channels as well in third tier, fourth tier cities the offline retail, it has been changing very fast. 

And online retail as well, so I’ll give you an example, so the four new online retail channels are WeChat mini program, Didi, Kuaishou and Douyin. So, these four new retail channels never existed four years ago, the GMV of these channels were almost zero and now, how much is it, I think last year it was over $600 billion, and that’s 2x of Amazon globally. The magnitude of the change is just magnificent. 

So, we’re looking for opportunities that can, companies, start-ups that can benefit from these structural changes. So, I think a wave of suppliers will emerge, new retail channels or consumer brands.

Rui: Got it, so are you betting mostly on new brands that take advantage of these new retail channels?

Boyu: Both new retail channels and brands.

Rui: Could you talk a little bit more about the offline retail channels because that’s something I think I’m recently seeing a lot more of.

Boyu: Well, in China the retail industry is still mostly fragmented; mom and pop shops, multiple layers of distributors, right, in most verticals. So, you can still see very large 批发市场 in China, huge wholesale markets in China, and you don’t see those in the US. So modern trading is quickly penetrating third, fourth, fifth cities. 

And in verticals, you can also see chain retail, like you can see chain food shops. There’s no Home Depot in China, IKEA is huge, supermarket chains are growing really fast. The largest supermarket chain is only one tenth of that in the US. They’re growing fast. 

Rui: Yeah, that was actually a question someone had in our investor community, asking why is the supermarket chain so small (the largest one in China), but I think maybe it is just what you’re saying, it’s still early days for offline retail. 

So, going back to the online retail that you were talking about earlier, these new platforms right, of course it’s affiliated with Tencent, compared to seven, eight, ten years ago, do you think the BAT and specifically I am talking about the old BAT (Baidu, Alibaba, Tencent), do you think they are relatively more powerful or less powerful and also how does that affect the start-ups you’re investing in? Do you believe they should be aligned with one of these, either Tencent or Alibaba, or is it starting to maybe be not as important because you have these other emerging platforms?

Boyu: Yes, you’re right. I think that currently the BAT, these three companies are less powerful than seven years ago because of these new platforms. But as a group these two platforms are more powerful than before. That includes Douyin, Kuaishou, Xiaohongshu, Meituan

Rui: So, you’re saying platform companies as a whole has gotten more powerful but there’s more of them, so each individual platform is maybe not as dominant as before. Does that make you more bullish about the entrepreneurship ecosystem and start-ups? There are all these platforms and it’s much easier to scale up right, building on top of these platforms, especially something like WeChat mini programs. Is that better overall for the ecosystem or you think there are disadvantages?

Boyu: I think it’s still too early to draw a conclusion. What we have seen in the market is that in the last two years we’ve seen less platform type of opportunities. I’ll give you an example, there was a very good company that grew very fast in the last couple of years. I think they started their business in 2018 and by early last year their monthly GMV was over $300 million. So essentially it was a $4 billion business by early 2020. 

And here we got cut off a little bit because of connection problems but the company Boyu is talking about is Xingsheng Youxuan, which is a community group buying company that was started a few years ago and saw a lot of success. Their main business model is to enable online group buying of groceries and other common household items and have the consumer actually pick it up from the group leader, saving thus the last mile delivery costs.

Rui: Okay Boyu’s back, we’ll just do it on Zoom. 

Boyu: So, what happened next was Meituan, PDD, Alibaba, even Didi joined the game and the fact that these companies are so rich, and they’re just pouring money in the market and subsidizing consumers to drive growth. 

I think the environment, when there is something big, all these companies will just go in and they have so much money. I think it never happened before. Ten years ago, seven years ago, they would use their, well sometimes they would copy your product, they have traffic, but the game is different. 

Rui: Is it then more dangerous now because if you do have a hit product and potentially all the big platforms, who are so well capitalized, will come in, or are you saying it’s too early to tell?

Boyu: I do think so, it’s more dangerous now. If you look at the competition between the companies, unlike in the US, these large companies, they can do a lot of things which in the US are unacceptable to society. But in China it’s reasonable, for example, they can just use an excuse to ban, for example today still you cannot share a Douyin link in WeChat. People will never be able to share their links, their content on WeChat.

Rui: Are you not optimistic that with the new anti-trust laws, that this will change for the better?

Boyu: That is still unfolding, we don’t know. We’re gonna have to watch but could be good news for start-ups. 

Rui: Okay, you talked earlier about the investor ecosystem, what about entrepreneurs? Has anything changed in what people are working on compared to a couple years ago? 

Boyu: Compared to a couple years ago, yeah one interesting change is that in Beijing, the salary of engineers has become very high. Mostly because of ByteDance. So I recently have seen some entrepreneurs moving to Shanghai, because the costs in Beijing, are becoming much higher. So that’s one change in the environment, so anyone who wanna come back to China to start a business, maybe you can take that into consideration. Overall, I think the fundraising environment is very good, it’s much easier to raise funds than ten years ago. 

Rui: To raise a fund or raise funding?

Boyu: As a start-up. Lots of venture investors, lots of angel institutions, seed VCs. We usually do most of our investments in Series As and Bs, and we did almost ten seed investments in the last year. 

Rui: So, more early stage. Has the balance of power shifted because there’s so much capital now, is it just a lot of capital chasing after a few quality entrepreneurs?

Boyu: Yeah, I think that is the case, the entrepreneurs are gaining power because the valuations are going up, and good deals are going away faster than before.

Rui: Could you give maybe a number on the amount that you think valuations have gone up?

Boyu: Yeah, ten years ago when I just became a VC, typical Series A [valuation] was like $15 to $20 million, is that still the case in the US?

Rui: It’s also much higher here yeah. But what is it like in China now?

Boyu: Yeah, in China now, a typical Series A would be between…

$30 to $40 million yeah, a little over double maybe?

Yeah, also the time between a Seed and Series A will be like four months, six months, they might raise Series B in another six months. But the fact is companies are growing faster than before.

So, it’s justified.

Rui: Yeah. Okay. James, you had a question.

James (audience): Yeah, thanks for doing this guys! I’m wondering about what the fundraising is like, comparing RMB fundraising and USD fundraising, what the differences are in the last year and maybe right now as well?

Boyu: Well, I think overall, the US dollar investors, institutions in the US and Europe, are still more long-term thinking, and in China, we have seen more and more family offices joining the game, they’re putting money into VC funds. Lots of government money. But they all have their mandates. For example, a capital city in a certain province would have like a ten billion RMB fund but they would require you to invest at least 1.5-2x of whatever they invest in your fund back into that city, to create jobs, to support innovation. But that’s hard. Most of the good start-ups are still in first tier cities.

Rui: Yeah, so that sounds like something that hasn’t changed that much in the last five years since I’ve left. But it’s really interesting to hear you say that more family offices are investing, maybe I can ask a follow-up question, which is are these family offices, is their wealth coming from tech and that’s why they’re interested in venture or are these family offices whose wealth comes from other industries?

Boyu: Yeah, the answer is no because the tech money are US dollar.

Rui: Nancy.

Nancy (audience): Hi Rui, Boyu, thank you so much for doing this. So, I have a question about e-commerce. Boyu, you mentioned earlier that there are four emerging platforms within e-commerce. My question is who do you see as the biggest threat to Alibaba and specifically, to WeChat mini programs, it seems to be a very popular channel as merchants focus on D2C and private domain traffic. How do you see WeChat mini programs evolving into the next three to five years? How big do you think they can get? Thank you.

Rui: Yeah, good question. I want to know too!

Boyu: I think the biggest threat to Alibaba is obviously PDD. Main reason is that PDD has a different philosophy, different algorithm, it’s optimizing its traffic for cheap and good products. Does that make sense to you? I don’t know if I have explained it correct. 

So PDD’s algorithm is optimizing but will let products that are both cheap and good to get more traffic, to get more exposure to its customers. Well on Taobao they would give more traffic to the ones that can pay a higher advertising fee. That’s the key difference. If Taobao doesn’t change that I think it’s gonna lose more users to PDD.

Rui: It’s almost more buyer friendly on PDD. But what about the second part of Nancy’s question, which is on WeChat mini programs. Do you think that poses a significant threat?

Boyu: WeChat mini programs is different, I think it will never become a destination for consumers to search for products. I think WeChat is using its unique position as a communication tool to become the CRM system for service providers, product providers, to manage their customer relationships. The brands are all setting up all sorts of groups to manage their users. 

Audience: Could you shed some light on the deal structures of the VC funds in China? In the United States, each early round is structured as a preferred equity with some liquidation preference and sometimes anti-dilution clauses, so is it similar in these early-stage VC deals in China?

Boyu: Yes, it’s similar, it’s very similar here in China. The terms are more, like seven, eight years ago, from what I’ve seen the terms have been more friendly to entrepreneurs in the US in the last few years.

Rui: Wait, so are you saying the terms are still more entrepreneur friendly in the US than they are in China?

Boyu: In the US, the terms have become more friendly. That’s the change that’s happened in the US. It didn’t happen in China, but it’s slowly happening.

Audience: I want to ask about China’s Clubhouse local apps if I can put it that way, because in the past few weeks we’ve seen a couple companies trying to copy or borrow the elements from Clubhouse to do their version for China, also maybe other markets. Do you personally see any investment opportunity in any of those start-ups doing so, and more broadly I guess, what’s your view of social apps in China?

Boyu: That’s actually a very good question. We’re watching, I know at least three Clubhouse copycats, and we’re closely watching them. I don’t have an answer if your question is how well these copycats will be doing because the environment in China is different. But I do think it’s a very interesting opportunity, and we’re spending time.

Rui: Is social like a hot category right now, do you see a lot of growth left in there or are these by nature more platform companies and therefore not as attractive?

Boyu: So, the simple answer is no, it’s not a hot sector in the investment community right now here in China. XVC is still spending time, so if we see interesting social media ideas, we would still spend time. We will still be very interested. In the last two years, the number of investments and the amounts invested in social apps are much lower, smaller than before.

Rui: Since we have just a few minutes left I wanted to ask if you have anything that you want, any closing remarks?

Boyu: Actually, we invest in both returnees and we also actually can invest in the US. Actually, we do have a portfolio company in the US, which is I think some of you may be a user of that company. It’s called “Weee!”, and it’s been growing really well in the last couple of years. It’s been one of the most successful portfolio companies we have, and I think maybe 20-30% of our portfolio companies are founded by returnees. 

I think the entrepreneurship environment in China is very good, I welcome more people who are entrepreneurial to start business in the US or in China and feel free to contact us! You can add my WeChat, which is the pinyin of my full name, huboyu, and if you see anything interesting also, feel free to send me a message!

Rui: There is a lot of people who believe that returnees cannot do well in China because they aren’t, quote unquote, local enough. Is your statement just now saying that…

Boyu: Yes, actually a lot of good companies are founded by returnees. 

Rui: What about a returnee is most interesting to you?

Boyu: Returnees are, well they’re usually, they know more about technology, for example we have seen a lot of very good enterprise software companies founded by returnees, right, like platform as a service, cloud computing companies. Retail is different, I think retail needs local insights and its very cost sensitive right, so we have, well usually the local retail companies are not founded by returnees. Internet, well consumer internet companies, many of them are founded by returnees, like Xiaohongshu we just talked about, right? 

Rui: Got it, so not offline retail or new retail but e-commerce and social might be fine.

Boyu: Okay, that’s it! Thanks for listening! If you liked this content, please subscribe to our YouTube channel and you’ll get alerts for other interesting conversations we have about China Tech in the future. See you soon!