It is an understatement to say that Covid-19 has had a sizable impact on global society and economy. As such, SVTC is using its platform to host virtual events. Through conversations with thought leaders from different industries, we hope to present to Chinese audiences how Silicon Valley is innovating during the pandemic and the future direction of innovation in the post-pandemic era. These talks take place on Saturdays at 9:30-10:30 am CST (Fridays, 6:30-7:30pm PDT).
Our seventh virtual webinar was moderated by Mr. Ming Lin, Chairman of the Silicon Valley Technology Council (SVTC). Our guest was Mr. Chen Zhao, Managing Partner of Plug and Play China, the world’s leading incubator and accelerator.
PnP China, as the world's leading incubator, is a fundamental partner of Guangdong Zhonghuan Investment Group, the parent company of Guangzhou Grand Tech Park and Onelin Capital. China had the first outbreak of coronavirus and is the first country to recover. In this webinar, Mr. Zhao describes what China’s innovation ecosystem looks like in the wake of the pandemic: how has innovation in China been impacted by the pandemic and what does the future hold? Below is a recap of the highlights from this week’s webinar.
Established in 2015, Plug and Play China has centers in Beijing with other locations in Shanghai, Chongqing, and Shenzhen. Plug and Play and Guangzhou Grand Tech Park are “Global Cornerstone Partners.” PnP operates in five business segments including investment, joint innovation docking, startup incubation and acceleration, global cross-border innovation, and innovation ecosystems to build China's leading innovation platform, both online and offline. Their innovation ecosystem includes connections with universities, governments, venture capital institutions, research institutions, cities, and more.
Based on Mr. Zhao’s insights, we have summarized the current status of PnP’s development:
1. PnP China's investment field focuses on artificial intelligence, smart manufacturing, and the Internet of Things. It has invested in the Level-4 autonomous vehicle company Auto X, Zhen Robotics––China’s first robotics company to solve the last mile problem, mixed reality tech company Archifiction, and more.
2. PnP China partners with large enterprises from many different industries, such as Guangdong Zhonghuan Investment Group and Grand Tech Park. It connects enterprises with startups who are providing the latest technology and solutions, and promotes cooperation between startups and large enterprises in business, investment, and M&As.
3. PnP China promotes innovation and collaboration between large enterprises and startups in different vertical industries. For example, PnP Chinafacilitated Daimler’s partnership with SenseTime and PowerShare. Now, the Fortune 500 companies more actively collaborate with startups, with some of them undergoing strategic M&As.
4. For the past 20 years, PnP China has been building an entrepreneur-centered innovation ecosystem, connecting the best tech startups in the industry through a one-stop entrepreneurial solution. By providing an active community space, mentorship system, investment institutions, talent integration and other services for startups, PnP China supports startups in entering and developing in China.
5. There are many differences in innovation and investment in China and the West. In particular, the main difference is it has driven by the government and its unique policy in China. At present, an increasing number of high-tech zones have issued policies with more specific innovation and positioning requirements to support the innovation of large enterprises in their zones. In this way, PnP China has introduced the concept of urban innovation, hoping to attract more companies to the city and region for development.
Mr. Lin summarized Mr. Zhao’s insights using Guangzhou Grand Tech Park’s close partnership experience with PnP China. He explained that Grand Tech Park has worked with PnP for many years and been supported by PnP all this time. At first, they took part in PnP activities to observe and learn. Later, they slowly started exchanges and collaboration. Now Guangzhou Grand Tech Park has become a cornerstone partner of PnP, the world's leading incubator.
Analysis of the Development of Innovation Technology (Macro)
How has the pandemic impacted China's innovation ecosystem?
Mr. Zhao explained that China's investment in science and technology has been increasing in the past few years. Beginning in 2014, there has been a wave of innovation and entrepreneurship. With the help of government policy, entrepreneurship and venture capital have received greater exposure. However, many founders come from schools or from large enterprises such as BAT, and there are not many A-plus founders. A large amount of funds going into the venture capital market come from the secondary market, foreign exchange market and real estate market, resulting in an increase in venture capital. Abundant venture capital funds yielded a significant number of unicorns, but while some unicorns perform well, others are overvalued.
Generally speaking, from 2014 to 2015, more attention has been paid to China's scientific and technological innovation. From 2018, rumors about venture capital encountering a capital winter has been heard, but this is a normal adjustment. Founders considering returning to China to start their own businesses should not worry too much, because leading venture capital institutions are taking advantage of low valuation to actively look for A-plus founders and founding teams. PnP is also looking for better early investment deals.
He concluded that in the first quarter of 2020, transactions in venture capital decreased while the funds have not been significantly impacted. Angel round to Series A round funding accounted for the vast majority of financing. Investors pay more attention to health and education, because they are more accessible when working from home. At present, the listing in China is still slow. Although the STAR Market and the future registration system will alleviate this problem, there are still restrictions on listing, which has led some Pre IPO and PE funds to shift their investment towards earlier Series B startups.
Enterprise/Urban Innovation in the Post-Pandemic Era
1. The Current Situation of Urban Innovation in China
Mr. Lin brought up a popular topic, saying that China, besides being market-driven, has many policy drivers, with urban innovation being especially important. He asked Mr. Zhao to share his insights into how urban innovation is being promoted in China.
Mr. Zhao analyzed this topic from two aspects:
1. In terms of investment assistance, for example, Beijing's municipal finance bureau has started a government fund - the science and technology innovation fund. The funds in Beijing can raise about 40% of the fund from the government funds at the municipal and district levels, which means that government funds can help the GPs to achieve almost half of their fundraising goals . In addition, government funds provide incentives for GPs that can reduce their return distributed to the limited partners after exits.
2. In terms of industrial promotion, PnP China has two projects landed in Nanjing this year, with much thanks to the Nanjing government. One is the mobile travel project, since the Nanjing government issued policies to rapidly develop unmanned driving.The other is a smart farming project. The agricultural science and technology industry is a very large industry with many opportunities for innovation in sub-sectors and across industries. Combining the positioning of different cities, we can see that there are many different opportunities in different cities.
Mr. Lin also agreed, adding that the Chinese government measures will be a large driving force. For example, in the autonomous vehicle industry, government measures in China help road testing and business operations go much faster, while the United States has stricter requirements such as road testing permits. This is the difference between China's innovation ecosystem and that of the United States.
2. What is the impact of the pandemic on the innovation ecosystem of enterprises?
Mr. Zhao believes that due to the pandemic, some short-term changes are occurring in enterprise innovation. Before, many North American, Southeast Asian and Brazilian enterprises contacted PnP China seeking to come to China for collaboration opportunities after the Chinese New Year holiday. At the beginning of the outbreak in China, many enterprises still planned on coming. Later, after the situation stabilized in China, they chose not to come.he reversal of that was due to the impact of the pandemic. China has quickly resumed production through strict disease control measures. China is full of confidence in innovation and industrial recovery, especially in the field of hard science and technology.
3. Predictions for the Future Development in Science and Technology
Mr. Lin mentioned that China needs to boost the economy through investment in infrastructure and hardware technology. He asked Mr. Zhao in which areas will investment increase?
Mr. Zhao responded that there are three areas where investment will increase.
1. The field of robotics will see increased investment. Due to the pandemic, factories and streets now need to use robots to replace human employees, so there will be many opportunities in the robotics field.
2. The field of online software will also receive increased investment, such as online education software and collaborative office software. People will have to continue using online software while working from home due to the pandemic. This software is essentially online tools and services. Changes in people’s behavior caused by the pandemic will lead to many online business opportunities, including in e-commerce.
3. The hardware technology field will also see increased investment, such as chips. Currently, top experts working from home may generate new ideas, and this time is also a good opportunity to invest in A-plus founders.
Mr. Lin fully agrees with Mr. Zhao that this pandemic will not lead to drastic change in the investment circle, and investors should find new needs in every aspect of our lives. For example, to maintain social distancing, robots are needed to solve human problems. Shelter in place has created a variety of online business demands such as telecommuting, home entertainment, e-commerce, etc.
The Impact of the Pandemic on Investment and Funds
1. The Impact of the Pandemic on Investors' Outlook and the Investment Market
Mr. Lin said that the pandemic has put a brake on the upward trend of increasing valuation of the primary market and has now entered an adjustment period. However, in the secondary market, U.S. stocks rebounded sharply and hit a new high after the adjustment period. Are investors still confident?
Mr. Zhao believes that the amount of funding and the number of deals invested by top investment institutions did not decrease significantly in the first quarter of this year. Many of those investments were signed at the end of last year. The real impact of the pandemic can probably be evaluated in the second and third quarters of this year.
However, we can see a large number of online pitch sessions, and we can also see that middling and smaller institutions are relatively short on funds. Now that work has essentially resumed in June, it is necessary to speed up progress to make up for the negative impact of the pandemic in the first half of the year, especially the delay in decision-making caused by the inability to interview. It is expected that funds will rebound significantly at the ends of the second and third quarters. Investment funds with poor performances have already been eliminated. As Churchill once said, “Never waste a good crisis.”
Mr. Lin agrees with this view. During the pandemic, there was a sense of powerlessness when it came to making investments. The reason being that it was difficult to make decisions online, since these decisions require close communication with the founding team. He also very much hopes that the United States can resume work and rebound as soon as possible.
Looking to the Future of Entrepreneurship Innovation after the Pandemic
1. Control Measures for Rapid Changes in Business Environment
Mr. Lin said that China's business environment is developing rapidly and that Chinese people generally have a good business sense. A lot of people have taken advantage of opportunities during this time, from masks to personal protective equipment to market stall businesses. Mr. Lin also asked what advice Mr. Zhao had on the rapid changes in the business environment?
Mr. Zhao explained that he has met with some people who had planned to start their own businesses by the end of this year. Now they have chosen not to do so because of insufficient preparation. Due to the pandemic, more factors are needed to be considered, such as their commitment, project barriers, business obstacles, etc. In the end, they opted to remain at their corporate jobs and receive a stable income, rather than start a business at this time. Therefore, the number of entrepreneurs will be lower, while the average quality will be higher.
At the same time, he mentioned that because Asians work very hard, the pace of entrepreneurship and venture capital in China is very fast and the mindset of not working during weekends is not that prevalent. If someone considers going back to China for their career, they should know that it will be very competitive. Startups and venture capital institutions need to make up for delays in the first half of the year.
Mr. Lin added that with some points, entrepreneurs can rethink some of their radical business ideas. Business moves at a rapid pace and many opportunities are fleeting. Starting a business is not a short term job, but a lifelong career that requires a good deal of time and effort. Therefore, mass entrepreneurship and mass innovation cannot be linked.
The explanations shared by Mr. Zhao were extremely insightful, prompting many questions from attendees. Although we cannot include all the questions here, we will summarize the frequently asked questions below.
01 What should entrepreneurs do to attract investors' attention?
Mr. Zhao said there was no need to do anything in particular. Venture capital funds have basic evaluation systems, and founding teams that have the passion, ability, and experience are best able to attract early VCs. For example, investors will be interested in if you have 2-3 experienced co-founders with disruptive technologies, many potential application use cases, large market scale and potential exits. China has recently focused heavily on insurance, agriculture, and automobile industries, which have seen many opportunities for development. Entrepreneurs should combine their own experience to seek innovation ideas that funds will be interested in.
Mr. Lin added that gold always glitter. Entrepreneurs need to show their strengths.
02 In the United States, where the market is relatively mature, Okta and auth 0 gain growth through their comparative advantages. In contrast, are there any Chinese identity cloud software companies that can compete with giants such as Ali and Tencent? Secondly, what does the competitive situation between them look like? Can this kind of enterprise SaaS be internationalized?
Mr. Zhao said that the exchange of new technologies at the civilian commercial level and the exchange between entrepreneurs and communities will return to previous levels after flights resume. Certain aspects of cross-border cooperation between China and the United States have been put on pause; offline operations can only be completed online, and global cross-border cooperation can only resume at its previous level after the pandemic is brought under control.
Mr. Lin expressed that he hoped to see business exchanges between China and the United States resume as soon as possible.
03 Can Mr. Zhao give some advice on finding suitable co-founders, especially on how to find new partners?
Mr. Zhao said that Onelin Capital has invested in many good companies, and this is his advice for finding a co-founder, which can be no less difficult than finding a spouse. PnP China found in its post-investment management and communication with founders that founding teams can encounter various problems.
The ideal situation is that the founding team already has a foundation of mutual trust before the company is established. Because it will be more difficult to accomplish later. Character, honesty, personality, knowledge of the industry, and how well they complement each other are all very important. Companies with good moral character and integrity will take a long-term approach; otherwise, there will be many problems. The capabilities of the founding team members should complement each other, and there should be honest and open communication among members. If you meet suitable co-founders and core team members, you should quickly formulate effective measures. If the team isn’t working well together, it should dissolve as soon as possible, as long-term pain is worse than short-term pain.
Mr. Lin added that the founders should be able to get along, since they are founding a company together. Whether founders can get along is not a question of tolerance, but one of character––you shouldn’t sacrifice that for entrepreneurship. There are many problems encountered in the process of starting a business, and founding teams that don’t work well together will have difficulty in growing the business.
Conclusion
After an hour of insightful discussion, SVTC once again thanked Mr. Zhao for joining our webinar. He showed us the entrepreneurial character of a global innovation incubator through his professional experiences, explaining to us how PnP China, as a global innovation accelerator, understands innovation and investment strategy during the epidemic. We appreciate PnP's continuous efforts to foster innovation and improve people’s lives during these difficult times.