Panlin Insight
2019/09/19
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Li Yuhui of Panlin Capital: Beyond the Comfort Zone—A “Sniper” in Constant Pursuit of Excellence

Invest in B2B startups with SaaS as the fulcrum

Ren Zhong: Over the years, regarding the consumption sector, people were all focusing on investments in B2C companies in the China market, as China benefits from its huge population and internet development. But recently, investors are starting to talk about investing in B2B companies. As an investor who has achieved many successes in the consumption sector, how do you view such a shift? And how do you plan to invest in B2B companies in this sector?

Li Yuhui: Our investment in B2B startups has an emphasis on SaaS. We pay a lot of attention to the application of SaaS in a particular industry. Our first investment in this regard went to Passiontec, a SaaS provider for the catering industry. I personally led this investment project. Passiontec’s SaaS offering could effectively solve some of the pain points and problems confronting businesses, and therefore became widely-used in a short period of time. As the data was migrated to the cloud, the company accumulated big data of businesses.

At this point, we laid out our approach: first, reach out to corporate clients through SaaS offering; next, roll out to more corporate clients rapidly and build up a platform of big data. The accumulated corporate data will generate huge value. Companies like Meituan Dianping already have massive consumer data, but they are in urgent need of corporate data to close the loop of their service and business models. In fact, Passiontec was acquired by Meituan less than 8 months after our investment.

Our success with Passiontec helped us identify our investment logic: invest in startups which solve the problems confronting businesses (the supply side of consumption) through providing B2B service. Such startups may come from many industries, including catering, culture & entertainment, tourism, and traditional manufacturing of consumer goods, so we came up with an umbrella term and define our investment theme as “intelligent transformation of the supply side of consumption”.

Why do we emphasize investing in transforming the supply side of consumption? It has to do with our previous investments in some B2C companies. Back then, we were investing mainly in companies that served consumers born after 1985 or 1990. Those consumers typically have a high demand for customized and high-tech products, so businesses have to come up with such offerings, which means that businesses need to keep up with intelligence and high tech. That’s why some emerging technologies have played a great role in upgrading the supply side of consumption.

Apart from that, the traditional supply side of consumption is under the pressure of reducing cost and increasing efficiency. Companies need to improve their systems of production, R&D, supply chain, logistics and even sales, in order to make their products more competitive and cost-effective. The transformation of such systems is another driving force of upgrading the supply side of consumption.

Ren Zhong: It’s the first time that I’ve heard this professional term “supply side of consumption”. Most people hear a lot about SaaS and how SaaS is applied in different industries. So, what makes you interested in the intelligent transformation of the supply side of consumption?

Li Yuhui: First, we were already investing in new consumption models before this. For example, we invested in Eastern Pioneer, Sun Shine and The Dream Network. In 2011 and 2012, we discovered that emerging technologies could drive the transformation of traditional consumption. They gave birth to Didi among other innovative companies at the supply side. We were always attentive to consumer demand, and most of our service team for our portfolio companies were born in the 1990s. So, after we understood the demand of young consumers, we started to seek for new technologies applied in traditional industries and identify new investment opportunities.

Second, the transformation of traditional manufacturing industry is closely related to my personal background. I majored in engineering and worked in a state-owned manufacturing enterprise as a tech developer for three years after graduation. I understand very well the operations and even production lines of factories. So, when it comes to transforming traditional industries, my team and I are very quick to respond and have deep insights.

In fact, we’ve been talking about B2B investment for many years. But it didn’t draw a lot of attention in the past, while B2C investment was a popular choice, because investors viewed that B2B investment had less potential than its B2C counterpart. In contrast, we consider those B2B startups as data companies which collect industry data through SaaS. Many strategic investors and corporate VCs agree with our thinking and start to favor such enterprise-focused startups, making it easier for the latter to obtain further funding and grow rapidly. And that in turn makes our investment very efficient. As of now, we’ve already invested in over 30 B2B startups, without limiting our investment to particular industries.

Focus on platform technologies in the healthcare sector and stay committed to investing in pipelines

Ren Zhong: We know that healthcare is also a very critical sector for Panlin. This is a sector where US Dollar funds are particularly active, as overseas IPO doesn’t require high sales revenue and even companies with no revenue can also go public overseas. As a result, investors are making earlier investments. In China, as the healthcare reform cuts profits of OTC drugs and healthcare investments have longer paybacks, the capital market’s passion for healthcare is gradually declining. Against this backdrop, how will Panlin succeed in this sector?

Li Yuhui: To be honest, I did not major in medicine, but in engineering instead. In 2013, we transformed from being a PE into a VC, which was achieved through investing in healthcare. It was very hard and costly for a PE to find or invest in late-stage projects, so to some extent, we were compelled to make early-stage investments.

A few thoughts on healthcare investment. First, I have built a strong medical team, a team of seven or eight people who all have backgrounds in medicine or biogenetics etc. They have solid professional knowledge when it comes to healthcare, life science or biotech. When I put together such a team, my leadership capability came in handy, as I had headed investment banking functions before. Backed by such a team, we started early-stage investments in startups developing novel therapeutics. At the beginning, we looked at phase II clinical trials of novel drugs, but now, we can make earlier entries and invest at the time of pre-clinical research or even cell or animal experiments. We have achieved very good returns. So far, we’ve already invested in about 15 or 16 startups at an early stage which develop novel therapeutics.

Second, we have a clear focus when investing in novel therapeutics: “novel drugs targeting critical diseases”. As drugs for critical diseases are urgently or greatly needed in the market, it’s easier to gain support from various parties to speed up R&D and attract more researchers. At the same time, there’s support from the government which can facilitate the approval process. Also, capital is playing a role.

In the recent two or three years, capital has been accumulating in the sector of novel drugs. We think novel drug development in China is at the stage of rapid growth now. Although we still lag behind the U.S. in terms of life science, biotech or essential technologies, I believe China will achieve many successes in biomedicine. In the case of some projects, the relevant technology roadmap is already present in the U.S. or Europe, or the counterpart drugs of the same type have already been manufactured there. As a result, the R&D of such projects in China has lower risks as there are already precedents. After a thorough analysis, we entered this sector as early as the beginning of 2016.

Ren Zhong: It takes a long time for a novel drug to be approved for marketing, while RMB funds generally have a duration of 5+2 or 5+3 years. So the life cycle of RMB funds is shorter than that of novel drug discovery. In this context, if the investment is made early at the stage of animal experiment, how will Panlin bring returns to its investors and make successful exits?

Li Yuhui: As I mentioned, our investment has a clear theme and under that theme we look for platform technologies. Platform technologies are characterized by their capacity to generate a series of drugs. So, while investing in a single drug is indeed risky, investing in platform technologies can effectively diversify the risks and avoid losses.

Speaking of the life cycle of funds versus drug discovery, our investment strategy is pipeline-focused, which enables us to invest at an early stage. A portfolio company’s flagship drugs will enter phase II clinical trials after two or three years of development, as other pipeline drugs will start to go into clinical trials. Then the company’s valuation will go up during follow-on financing rounds, which will give us chances to exit. In this sense, we are not investing that early. Just now I talked about our interest in platform technologies. But platform technologies take time to develop. So, we invest in companies that already have platform technologies in place and are ready to produce drugs. We actually time our entry at the most efficient stage in terms of investment.

Boutique investment

Ren Zhong: As you mentioned just now, Panlin doesn’t limit its investment to certain industries. And we know that Panlin adopts a boutique investment approach. There are some VCs that invest in a wide range of portfolio companies across a whole sector, as at least one portfolio company will succeed if the sector flourishes. But how is boutique investment like?

Li Yuhui: Boutique investment is indeed our approach. First, we have clear investment themes, or two investment themes to be exact. Our first theme has to do with healthcare sector, where we invest in high-end medical equipment makers and startups developing novel therapeutics for tumor, cardiovascular diseases, diabetes or critical metabolic diseases. Our second theme is enterprise services and intelligent equipment that promote the intelligent transformation of consumption supply side. We keep looking for good deals in the two niche sectors. But we don’t simply bet on certain sectors. Instead, we select our targets carefully.

Here are our criteria for target selection. First, as we invest in “technology-driven consumption upgrade”, we focus on how business models are applied in real scenarios. We hope a target company satisfies the rigid demand of its industry. And novel therapeutics for critical diseases are definitely needed for consumption upgrade.

Second, in order to transform the supply side of consumption, two demands need to be addressed: consumers need more customized and high-tech products and services; and suppliers demand cost reduction and efficiency improvement. So, when we look at a deal, we will do a thorough analysis of the industry’s needs, keep communicating with industry practitioners, and do tests over and over again. What we seek for is not innovation in business models, but innovation in technology. We hope a technology can be used to solve real problems. That means that we don’t focus on technologies that are still in the lab or remain a theory on paper. Instead, we are more concerned about how technologies are applied in real life. In a word, we seek for technologies that are both advanced and applicable.

Third, founders. It takes a very good founder to meet the first two criteria. The founder needs to be in the industry for many years, with in-depth understanding of the industry. We prefer founders with technical background, and at the same time, we look for entrepreneurship. We highly appreciate the entrepreneurs who know the great challenges they face but still insist on going forward. With such spirit, they will be able to conquer the difficulties along the path of starting a business. It is something we value a lot.

Ren Zhong: Some say that we have moved from the era of IRR to the era of DPI, meaning that investors are more concerned about cash returns. How does Panlin deliver cash returns to its LPs?

Li Yuhui: It happens to be one of our strengths. We take a boutique investment approach. We have clear themes and select our targets carefully, instead of simply betting on a sector. Plus, we think good deals are hard to come by, whatever the sector is. As a result, we don’t agree with the approach of pouring money into a large number of deals and relying on chance to hit a homerun. What we do is to look at an extensive number of companies in a sector and then carefully select a few good ones to invest in.

Another feature of boutique investment is concentrated investment. It doesn’t mean putting a large portion of money or taking a high percentage of stake in a single portfolio company. Instead, as the portfolio company grows, we keep adding our investments from different funds in follow-on rounds. That’s what differentiates us. As you can see, more than half of our projects receive multiple rounds of follow-on financing.

So far, Panlin has invested in about 50 projects in total, which are not large in number. It’s a reflection of our investment approach. We are the lead investor in over 70% of all those projects, and lead the first round in over 50% of them. As of now, the overall IRR for each of our funds exceeds 30%. And our overall DPI of all funds (as they’re set up at different time) over an average time span of about 4 years surpasses 110%. So, our investors keep adding investments in follow-on financing rounds or funds. Also, that’s an important reason why our new fundraising staring last year has been going well, with recognition from many institutional investors in particular.

A “sniper” in constant pursuit of excellence

Ren Zhong: Previously an investment banker, you’ve turned yourself into a successful VC investor with many deals under your belt. Could you share with us the reasons behind the shift? How did you pull that off?

Li Yuhui: I was an investment banker during 1996 to 2006, initially in the former Junan Securities and later in the post-merger Guotai Junan Securities. I did A-share IPOs and then B-share IPOs, and I’m known as the underwriter for the last two B-share IPOs in China. The IB Division of the former Junan Securities was highly market-driven. My experience there, especially in the later years as an underwriter for B-share IPOs, came in handy as I moved on to PE and VC. My understanding of company fundamentals and post-deal management ability also grew as a result. After I left Guotai Junan, I spent about two years investing in the secondary market, and that gave me more insight into the investment system and asset management.

These two important experiences in my career made it possible for me to hop over to growth equity investment. My first deal was Toread, which was among the first companies to go public in the GEM Board. During the process I completed the transition from investment banking to equity investment.

Panlin Capital was founded in February 2010. Every decision we made has been revolving around the nature of investment and the growth prospect of a company. That’s why we are highly selective in the sector-based investments we pursue (currently focusing on consumption and healthcare). With target sectors in mind and a growth mindset, we made a flurry of investments that resulted in 8 A-share IPOs. However, starting from 2013, A-share IPO activities ground to a halt and remained stagnant for three years. PE deals in consumption and healthcare were expensive and hard to come by, so we had to steer away from PE and get into VC instead. It was a calculated decision the management made in 2013 after a thorough deliberation.

Ren Zhong: Some investors like to make big bets while others prefer to cast their nets wide. So how would you describe your investment style?

Li Yuhui: As an investor I put my sense and sensibility to work. I am quite perceptual and curious by nature. But over the years as I talked earlier about my background, I’ve kept getting myself out of the comfort zone to challenge myself and to embrace new sectors or fields. This is part of my DNA.

At the same time, being an engineer by training, I am a rational person. When I put together my team, I made sure that we have a healthy combination of perceptual and rational team members. For example, of all partners, my risk management partner is the rational one that constantly alerts me to risks. I also took pains to set up our investment system and procedure, because that would make sure whatever deal we close would likely be a high-quality one. But then again, I’ve always told people that we should not follow one traditional framework or use a one-size-fits-all methodology for every deal we make.

In the meantime, I don’t mind taking risks as long as certain conditions are met. I think being willing to take risks is an important quality a venture capitalist should have. I make a substantial investment in what we see as a good deal. This is part of our concentrated and boutique investment strategies, and also one of my personal traits. I hope that the companies we invest in the future will bring good returns, whether they are measured by DPI or IRR, and also grow to become influential players in their respective sectors.

Ren Zhong: I think some investors may tend to cast their nets wide, while you are more of a “sniper” aiming at your target with incredible precision. When a sniper pulls the trigger, he would need to be calm and decisive, and his failure would sabotage the entire process.

Li Yuhui: Exactly. This is what a sniper looks like. A good sniper should have good weapons, gun sights and a perfect vision. A sniper-like investor should be able to make effective judgments. This is a key investment capability. Second, you need to be able to identify trends and seize the prime spot for observation. More often than not there will be noises and distractions when you are hunkering down and watching from your vantage point. They may even look legit, like it’s the next big thing. That’s when you need to hold your breath and stay put until your prey appears. You should have a clear idea of what your prey looks like, so when it does show up, you seize the moment and fire the shot.  

One more thing. Investing is a dynamic process. Just like a sniper who always moves to a fresh spot after taking his shot, an investor does not focus on just one niche sector and stick to it till the very end. The market is constantly evolving, and that means a sniper-like investor would have to get better in order to catch up. Maybe your weaponry can use an upgrade; maybe your gun sights need more dusting, or maybe you need to have a more accurate read on things. So, to answer your comment about the sniper, this is my understanding and also our approach toward VC.

Ren Zhong: If you take a look back at these past investments, which ones are you most satisfied with or most impressed by?

Li Yuhui: The first one is Kangtai Bio. It’s definitely a champion that is widely known in the vaccine industry, as it has a strong product pipeline. We invested in it as we were focused on consumption upgrade in the healthcare sector. At the beginning, the company manufactured only Type I vaccines (vaccines regularly procured by the government). But we invested in it not because of Type I vaccines, but Type II vaccines instead. Later, the company’s pipeline developed just as we expected, and the company grew rapidly. We made multiple investments in it with different funds in follow-on rounds. We led the Series B, and we were the first as well as the largest professional institutional investor that invested in it. I personally took charge of the due diligence of this deal. We knew the technology, products and team of this company quite well. We made three additional investments in total, because we felt very confident about it. The deal turned out to be a great success, bringing huge returns to our LPs. Also, it demonstrates our investment philosophy of targeting consumption upgrade in healthcare sector, selecting targets based on pipelines, and boutique investment.

Another deal is YCloset. Given where it was when we came in, it was more like we were in a typical series A round. If you look at the volume alone, it didn’t really stand out as a great performer, but we believed that its business model showed promise.

Many would say that YCloset was notable for its sharing economy model, but that wasn’t why we invested in the company. We looked at it as a subscription-based E-commerce business and we were bullish on its ever-improving rent-to-own ratio. Its series B funding round got off on a rough start, so we led the B round fundraising. Five months later, Alibaba followed, and then Sequior and Softbank also co-invested. One and a half years later, Alibaba made a strategic investment in the company.

If you’re interested in how this deal came to our attention, one of our team members, a young lady born in the 90s, was using this app. In the summer two years ago, she came in wearing something new every single day, and we noticed. She told us about this app she was using, and I was intrigued. I told her, why don’t you tell us more about it in the meeting next week? She did, and we all thought that it was quite an impressive company that catered to young people born in the 90s. So very quickly we arranged a meeting with its founder. I remember she just got off from the World Internet Conference in Wuzhen at about 6pm, took a cab straight to our office by 9:30pm. After talking with her for an hour, I felt pretty good about the company and thought to myself, I think I’m in.

There were several reasons why I felt optimistic about YCloset. For one thing, the founder used to work in the fashion industry and she had a shrewd understanding of fashion and what post 90s wanted for their wardrobes. This is crucial. Second, I noticed that she put a premium on the Internet. In fact, when we interviewed her team at a later stage, we realized that she had an all-star team. Their IT people were sticklers when it came to user experience. I was impressed by these two observations. So, after talking with her for an hour, I thought, now we probably got ourselves a deal. We were also the lead investor, which was very important because it bought us time for due diligence. And our due diligence was thorough indeed.

Ren Zhong: 36Kr has a large readership consisting of tech founders, young entrepreneurs, and up-and-coming young investors. As an experienced, sniper-style investor, what suggestions do you have for them?

Li Yuhui: I think startup founders need to follow their heart and be bold to act. You can make plans, but first you need to act. You’ll discover new issues along the way, adjust accordingly, and then grow. In the meantime, another suggestion for startup founders is to value technology and fully utilize it.

Speaking of investors, I think what matters the most is to persist with one’s own investment style, although our industry is undergoing changes all the time. There are many investment styles,a lot of which have succeeded indeed. Also, there are many successful cases that we respect a lot. But the key is to choose the style that suits you the most. Never go with the flow. Don’t follow the fad or adapt to it. Instead, try to develop a deep understanding of the niche sector and trend. This is more important than following the craze. And just as the suggestion I gave to entrepreneurs, investors should also be bold to keep doing what they believe in. In the end, persistence will pay off.