On 28 November, Zeng Zhije, chairman of Oriza Investment and managing partner of Oriza Rivertown Capital, delivered a keynote speech titled “Stepping up Effort to Create a SecureEcosystem for Venture Capital Investment” at the International Finance and Investment Cooperation Forum of the Asia Youth Leaders Forum 2021.

The full speech is as below.

I want to thank the forum for giving me this opportunity to talk about my thoughts on the venture capital industry. I have been in the industry for over 20 years. So, I am kind of a veteran in this industry. To be honest, along the way, I have been through a lot of ups and downs and experienced mixed feelings.

I got involved in the industry around 2000. At that time, I was a graduate student in Silicon Valley in the United States, and I was about the same age as many young people here today. Back then, the United States was still a very friendly and progressive country. Young students from Asia like me got to know venture capital investment for the first time. I was lucky to have joined Walden International, a venture capital institution in Silicon Valley. Walden International is one of the most well-known institutions for investing in the semiconductor sector in the United States and Asia. I served at Walden International for 8 years. After that, I worked at CITIC Capital for 8 years. In 2017, we established Oriza Rivertown. So, I have been in the industry for over 20 years in total. I want to share with you the history of this industry.

It is actually an industry with longstanding history. It has been around since the Age of Sail. At that time, the whole of Europe was very eager to obtain the silk and spices of the East. And at that time there was already the so-called agent system. UK’s trust system and partnership system are, in fact, evolutions of this centuries-ago prototype. Back then, there were a lot of daring people who did not have the money to sail to and trade in the East. Many people who had the money but were unwilling to take the risk of sailing funded those who had the courage or channels. After coming back, those adventurers could get 20% of the excess earnings. In fact, the 20% excess earnings we study today was already there in that era. There is another version of it that this system dated back to the Venetian era, which is even earlier. However, we now generally believe that it should have originated in the Netherlands. At the time, the Netherlands was the most commercialized country in the world, so the prototype should have been around this age. The practice of investing venture capital in very small companies began in the United States. In the 1940s or 1950s, the United States passed the “Small Business Act”. General Doriot invested in a company in Boston under the “Small Business Investment Act” of the United States. It was the beginning of venture capital investment in the United States. This is why we say the history of venture capital investment is a history of innovation and exploration of uncharted territory, including system innovation. Without a sophisticated system, it's difficult to carry on.

In China, the industry has been around since 1985. There is one company that is worth mentioning. It was called China New Technology Entrepreneurship Investment Company. I don’t know if it still exists. It was the first company in China that engaged in venture capital, and it was the first company established by someone who had studied abroad. To date, more than 20,000 investment firms have registered with the Asset Management Association of China. It is a milestone. China has grown from a country with almost no venture capital firms and a country in which investment completely relies on the state to a country with 20,000 investment institutions. It is spectacular. It is quite an impressive number even in the world.

There are four major stages in our industry: fundraising, investment, management, and exit. Observing the data from 2006 to 2020 on this chart, you can see people are investing every year, but with different focuses. We can clearly see that, for example, in 2020 the investment in the semiconductor sector suddenly increased. What does this mean? In fact, our industry is closely related to the events of the times. The United States imposed sanctions on Huawei in 2019, so the domestic semiconductor industry realized the urgency of rebuilding its own industry chain and building its own secure ecosystem. Starting in 2020, China has suddenly increased its investment in semiconductors. I think the investment will be even greater this year. Take the Internet for another example, the Internet has always been a very important investment sector in China. But we can also see that in the past two years, the proportion of our investment in the Internet has declined. Next, I will share some of our ideas about the industry. First of all, to make venture capital investment, you must have a long-term perspective. You need to be aware of the cycle. The cycle of our industry is very long. The life cycle of each fund is generally 8 to 10 years. In fact, I have been in the industry for 20 years, and I have found that most funds have a cycle of more than 10 years. So, investors need to have great patience. Companies have their own growth pattern. It is very difficult to make a company achieve great success in 3 or 5 years. It is possible for some companies, but 90% of them will have a longer growth cycle. Therefore, this industry needs to face a long cycle. We need to know clearly which stage in the cycle the company we invest in is at. And then we can see through the cycle. The economy has its cycle, and so does the industry and technology. Venture capital investment is an industry that must see through cycles.

I also want to share with you four pieces of advice on the industry. Firstly, investment is a craft that is difficult to institutionalize. You many know that the world's largest investment firm Blackstone Group, or Carlyle Group, or KPR, or Sequoia Capital (United States), has a small number of employees. The Blackstone Group is the world's largest investment management company, with just about 1,000 employees, but it covers a lot of product lines. In fact, venture capital department has very few employees. Sequoia Capital has only 40 to 50 employees. So, this industry is a very small, elite industry.

Secondly, building systematic awareness can effectively avoid cyclical fluctuations. From my experience at Walden, it takes more than 10 years on average for the companies we invest in to return profits. It is precisely because of long-term investment that great success can be achieved.

Thirdly, investing within your cognitive horizons can lead to long-term and stable returns.

Fourthly, excellence in work is through diligence. There is no shortcut. This industry has very high requirements for people's knowledge structure. For example, the semiconductor sector has dozens of technology nodes. If you want to invest in a company, first of all, you must understand these nodes, and then you have to understand the landscape of the industry. You also need to understand the company’s relationship with upstream and downstream companies as well as the power dynamic. So, making an investment is not an easy thing. In addition to basic financial knowledge, comprehensive industry knowledge is more important. Besides, it also requires connections in the industry. Without these, you can hardly be a good investor.

Speaking of investment methods, as a good investor, first of all, it is necessary to have a judgment on the trends and decide what to invest. This is very important. In 2002, if you invested in the Internet, then your judgment was correct. In 2005 and 2006, if you invested in consumer goods companies, that should also be correct. Therefore, it is necessary to have a sound judgment on the general trend. It actually requires a correct judgment on the trend of the country.

The second point is about how to invest. We often talk about undifferentiated investment or targeted investment. Each institution has its own culture. Big institutions tend to adopt the “undifferentiated” method, investing in all the players in the sector, which requires strong financial strength. Institutions like Sequoia and Hillhouse tend to adopt this method, while small and medium-sized institutions like us are more likely to use the “targeted” method. We study these key companies at every node of the industry, and then get our excess earnings by investing in these companies at the key nodes.

Now, let me briefly introduce you to our team. Our members have all been through long cycles. The common characteristic of the partners in our team is that we have all started our own businesses, that we are highly educated, that we have worked together for a long time, and that we have gone through several stages. The investment we manage is close to more than 4 billion yuan.

Now, I'd like to share our views on the investment opportunities for the next 10 years. We think that in the next 10 years, one of the biggest opportunities is still in hard technology. The biggest effect of the China-US friction is the unprecedented unity in the semiconductor industry and the hard technology industry. Large companies that specialize in systems were rarely willing to use domestic products, but now they are active in trying them. We think in the next 10 years, we will have a great opportunity in hard technology. Another opportunity is in the new economy. The new economy is an important track that we have been focusing on. Because the efficiency of China's economy is actually improved through technical means. In fact, the new economy as we defined is an economic form that uses technological means to improve operational efficiency and formats.

In fact, we are focusing more on discovering new growth points and structural opportunities for the Chinese economy in the next 10 years. This is our core strategy for the next 10 years. That is to say, we must follow the trend and seize the golden 10 years of investment in hard technology. China's biggest task now is to build a relatively safe industry chain. From the perspective of the entire industry, it is not necessary or possible for us to be completely independent and develop a closed-circuit chain. But in this case, we must have a relatively safe chain, which also brings a lot of investment opportunities. As we can see, in the past two or three years, many semiconductor companies have been listed on the Science and Technology Innovation Board. Many previously unprofitable semiconductor companies are also listed on the Science and Technology Innovation Board. This is because of China's huge support for the hard-tech semiconductor industry. We believe that in the next 10 years, China will see some results. Now the market value of the largest semiconductor company in China is about 300 billion yuan, and the only one of such valuation, which is Semiconductor Manufacturing International Corporation (SMIC). Except for chip design companies, the highest valuation is probably in the hundreds of billions of yuan. We believe that China will have trillion-yuan semiconductor companies within 10 years. We also hope that in this process, we can make a contribution. During the last two years, we have carefully studied every key node on the semiconductor industry chain. In fact, we have spent a lot of energy on many companies at the key nodes on the semiconductor industry chain.

The second focus is the new economy that I just mentioned. The new economy is not just about improving the operational efficiency from a business perspective. More importantly, companies use technology to transform traditional industries so as to improve operational efficiency. On the other hand, the transformation of traditional industries is also closely related to China's macro policies, such as carbon peak and carbon neutrality. Here are some of our investment strategies: precise investment, continuous empowerment, and ecosystem building.

Our team is different in that we make long-term friends with entrepreneurs. Most of my friends are people whose businesses I have invested in. We make investment based on analysis of the entire industry chain. Especially in the past two years, we have invested a great deal. These are some cases of our past investment in new-economy industries. As we can see, we have invested in all these big Internet companies, including Alibaba, JD.com, and Meituan.

Here is some of our thinking. The past 20 years have witnessed profound growth of venture capital investment in China. In terms of the number and sum of investment, China is now the second largest in the world, after the United States.

Venture capital is one of the most suitable financing methods for startups. It is important to promote economic development with technology and support technological innovation with capital. From the data, we can see that the economic growth – or GDP growth – of the United States after the 1980s was driven by investment in innovation. The most valuable companies in the United States – be it Google, Amazon, or Facebook – were initially funded by venture capital. There is a very important belief that, the traditional economy of the United States after the 1980s did not contribute much to its overall growth; instead it depended largely on these high-tech companies. From the market value of these companies, we can see this clearly. In fact, this trend is also evident in China. In the past 10 or 20 years, the fastest-growing companies are high-tech companies. Of course, China has taken measures to avoid monopoly of high-tech enterprises. There is another data that I would like to share with you. In fact, Asia is home to 50% of the world’s unicorn companies, and the vast majority of this “50%” are based in China. China's innovation momentum is still strong. According to data from the last three years, in terms of the number of unicorns, China is not inferior to the United States at all.

I would like to make a final point on young entrepreneurship. I think it is very worthwhile for young people to start a business. We encourage today's young people to start businesses. I think starting a business – whether it is successful or not –is a very precious experience in life. 

In the end, I’d like to wish all young entrepreneurs here all the best in your business. Thank you.