China Growth Capital Partner Wayne Shiong shares his Dos and Don’ts of investing in Frontier Technologies
The role of a venture capitalist in a startup’s success is often overlooked. VCs not only provide the capital required for a business to thrive, but also bring experience to the table that often helps set entrepreneurs on the path to success.
In fact, at present, the roles of entrepreneurs and VCs are increasingly becoming identical, says Wayne Shiong, Partner at China Growth Capital (CGC).
Like entrepreneurs, VCs are also burdened with the task of raising capital for their funds, and while entrepreneurs lose sleep over their startup’s successes or failures, VCs have to make sure all their portfolio companies are doing well, says Shiong.
Although excited about VC as a career since his college days, Shiong decided to first dip his toes into the pond by working for a startup, and then founding his own venture in 2001. Although the startup ultimately failed, it left him with valuable experiences that helped him when he finally stepped into the investor arena.
A former Partner at Bartelsmann Asia Investments, Shiong now invests in frontier technologies with a focus on China. His portfolio spans across industries with companies focusing on autonomous driving, AI and robotics, medtech, Augmented Reality (AR), and spacetech.
But in a world crowded with unique tech applications, differentiating between deep technologies (deeptech) and frontier technologies can be tricky. According to Shiong, frontier technologies are those that are expected to become ‘the next big thing’ in 10 years.
For example, Shiong says he would not invest in current trends like social apps or mobiles because these technologies are already flourishing, and large, established players are performing better than startups in these areas.
Future technologies are often unimaginable—when people were still using Nokia and Motorola phones in the 1990s, most people never imagined how indispensable a phone would become, or how Internet was going to revolutionize the world. That’s what future technologies are, says Shiong.
“We have to look really long, really far ahead, even though there is a big likelihood that we’re going to fail,” says Shiong. While frontier technologies are almost always captivating, they are also far riskier to bet on than popular technologies.
Dealing with risk
One of the ways to mitigate some of the risks is to have an investment discipline, says Shiong. Being part of an early-stage fund, for example, Shiong says he would never invest over his threshold, no matter how interesting the startup may be.
“Even if you meet somebody who’s super interesting, but is not really in the mandate of your fund, then you should not invest [further],” he says.
He adds that VC funds are almost like products themselves, and the investing of these funds requires a different goal and outlook.
“It’s not like asset management, where you just try to put money into different pockets and to collect returns. It’s more like, how you can build a sustainable kind of track record of good returns in a pretty manageable way,” he explains.
While he says that it is easy to be excited and mesmerized by futuristic technologies, keeping a foot planted on the ground and sticking to an investment thesis can help avoid failures.
Another important way to offset the risk associated with investing in frontier technology is to invest in entrepreneurs that really understand their target audience. Shiong believes that success depends more on their understanding of how technology can solve consumer pain points than their academic qualifications or intellectual abilities.
Keeping an open mind
“Each generation has its own generational entrepreneurs. That’s why the innovations keep coming,” he says.
But key to keeping innovation coming is funding from VCs, who Shiong says need to keep open minds to digest new concepts consider backing them. There are numerous examples of VCs who turned down opportunities to invest in what eventually became multi-billion dollar businesses like Facebook or Tencent.
“The craziest ideas could eventually become a business, but you have to be really open to it,” says Shiong.
And while failures may be a common experience in entrepreneurship and venture capital, the key to success lies in perseverance and persistence, he says. If an individual believes that entrepreneurship is his or her true calling, and has a sense of mission, persisting and enduring the challenges become easier. The success of a startup, after all, is also contingent on market conditions and the timing of the technology.
“Failure is a common element in the progression to success. To keep at it is the most important thing, because eventually, we’re all going to succeed,” he says.
COVID-19 is a wake-up call for businesses worldwide
The COVID-19 pandemic has created unprecedented challenges for businesses worldwide. While many businesses have already shut down, startups with declining runway are resorting to layoffs, furloughs, and hibernation to survive.
Shiong believes that this will lead to consolidation in the market, as technology companies come to the rescue of smaller startups and strengthen their businesses through IP acquisitions and mobilization of resources.
Before the pandemic, a lot of startups and VCs focused on high growth at the cost of revenue and profit, aspiring to reach sky-high valuations. However, he believes the pandemic will lead to a shift in priority from unsustainable growth to revenue generation and endurance in the short term for startups and VCs alike.
“I think COVID-19 is kind of a reminder for not just startups but every business that you have to be paying some attention to your cash flows and also be prepared before anything happens,” he says. “COVID-19 is kind of a wake up call for everyone in the business.”
Referencing the SARS crisis in China and how it popularized ecommerce, Shiong suggests that crisis always triggers innovation. He advises that startups should focus on agility and prepare themselves for the next wave of trends.
While startups and businesses are bearing the brunt of the pandemic’s impact, VC funding and investment deals have declined worldwide. But Shiong believes this is due to a change in the fundraising cycle rather than VCs’ averseness to risk. In fact, VCs are usually more optimistic than public equity investors and other traditional and mainstream investors, he says.
“Even if the skies are falling, VCs will think, ‘Oh, wow, okay, we can sell some stuff to prevent the falling or something else,'” he adds.
Therefore, Shiong believes the funding drought is temporary, and predicts that 2021 will be a big year for fundraising.
“Right now, except for those who have already raised the funds before the pandemic, everybody is going to hit the market right after the damage,” he says. “So I assume 2021 is going to be a super big year for fundraising. With all the capital in place, everything’s going to go back to normal.”
Emerging Frontier Technologies in China
Per Shiong’s predictions, several key industries are pegged to be tomorrow’s money-makers.
In China, many investors are looking at semiconductors that power all electronic devices, a common thread that lies at the base of most emerging innovations. China’s semiconductor market is relatively nascent, compared to the U.S. or Japan, and Shiong says that investors are focusing on building a strong semiconductor supply chain in China.
“We can really borrow from the U.S.’ past experience, because the U.S. has done it really well. And Japan has done it even before U.S. did. So, there’s a lot of experience in the market for us to learn how to build successful semiconductor businesses in China,” he says.
According to Shiong, spacetech is picking up the pace and is expected to grow exponentially in the next three to five years, especially with the global deployment of the Starlink program, a constellation of mass-produced, small, low orbit satellites being developed by SpaceX to enable satellite Internet access.
Global Internet coverage, he predicts, is likely to be a “big wave” that will trigger more innovation in spacetech, he says.
The pandemic which triggered global lockdowns and implementation of social distancing measures has changed consumer behavior. More aId more people are using the internet to work and to keep in touch with closed ones, but Shiong believes the need for social interaction will help AR and VR to gain traction.
“You’ll have your avatar, you’ll have your virtual work environment, […] you can do a lot of things without really commuting to the to the spot. So that’s something could really improve productivity, I think,” he says.
Shiong believes that as work-from-home becomes the new normal, these technologies will be used by companies to create virtual workplaces, boosting employee productivity by catering to their social needs, while increasing profit by eliminating the costs of maintaining physical office spaces.
In the end, investing in frontier technologies involves great risk. Investors not only need an open mind to embrace revolutionary technology, but also need to envision the future. In the long run, it is almost impossible to tell which companies and technologies will become big. Therefore, likelihood of failure is high when considering next-gen technologies.
But as a VC investing in frontier technology, it is Shiong’s job to evaluate which companies and technologies have the potential to grow, while failure is a part of the learning process and perseverance is the key to success.
Header image courtesy of China Growth Capital.