Q&A: Hike Capital’s Anna Xu

Q: What prompted you and Mark Yang, your co-founder, to get into venture capital?

A: In 2014, Mark had merged Ganji.com [the online classifieds platform he set up] with 58.com at a valuation of $3.6 billion, so he was thinking about what to do next. He wanted to find a way to share the knowledge and experience he’d gained working on start-ups. At the time, I was leading the mobile internet division at NetEase and had built up the NetEase News app from nothing to 360 million users. A planned IPO didn’t happen, so I was looking for a new start as well. Mark and I knew each other from China Europe International Business School (CEIBS) and we were both interested in technology and business innovation. We were visiting start-ups together before Hike was founded.

Q: Mark went on to establish online car sale platforms Guazi.com and Maodou.com, now under Chehaoduo Group. How do these activities coexist with Hike?

A: I look after the daily operation of Hike, with Mark providing support at a strategic level and in deal-sourcing. He also advises portfolio companies. For example, he interviews about 200 candidates for Chehaoduo every year. One of them, Ying Wang, wanted to start her own business rather than work for Guazi. After interviewing her, he called me up and said she was an excellent candidate – we always talk about these kinds of things. Wang went on to launch Relx Technology, an e-cigarette business that listed in the US earlier this year. We ended up backing the company.

Q: What does being an entrepreneur-led firm mean for fundraising?

A: There is a large GP commitment in all our funds. When we launched in 2016, Mark provided almost the entire Fund I corpus, which was about $100 million across US dollar and renminbi tranches. As of the first quarter of this year, it had achieved a 4x multiple and a DPI [distributions to paid-in] of more than 50%. Fund II was $200 million, and the management team put in 20%. The multiple is currently above 5x.

Q: Do you have a deal-sourcing advantage?

A: We have strong industry networks. For example, when I worked at NetEase, there was a strong entrepreneurial atmosphere. William Ding, NetEase’s founder, once took a group of 16 senior executives on a mountain climbing expedition. Of that group, 15 ended up starting their own businesses. They include the CEOs of Yuanfudao, Snowball Finance, and [healthcare platform] Chunyu Yisheng. Some other start-up founders – from AutoNavi, Dianping, and Meituan – participate in our funds as LPs alongside senior executives from Alibaba and Tencent. They recommend projects to us and share their expertise and insights. We invested in Megatronix Technology, an automotive software provider, after a recommendation from our founder network. Its valuation has increased 10x in two years.

Q: What about post-investment support?

A: First, we have successfully incubated several start-ups, including online insurer Yuanbao Technology. China’s insurance industry is worth RMB4 trillion ($611 billion) a year, but the digitalization rate is only about 5%. We found one good company, but the valuation was too high, so we approached the CEO of NetEase’s e-commerce unit about incubating a new business. It launched at the beginning of last year and is already generating significant revenue. We were also a very early investor in math education platform Huohua Siwei when there were only 50 users. I used to chair NetEase’s product committee, so I shared my experience and helped the company refine its product. As part of these efforts, Huohua CEO Jian Luo would play the teacher and I would play the child. We have participated in five rounds for the company so far.

Q: Do you make growth-stage investments?

A: You have to offer some kind of special value to get access to these rounds. FlashEx [also known as Shansong Express], an intra-city delivery services provider, is backed by a lot of large investors. It took our capital because of Mark’s experience spending large amounts of money on marketing. In the past, he hired TV stars like Chen Yao, Honglei Sun, and Angelababy as brand spokespeople for Maodou and Guazi. There is a specific methodology to improving the efficiency of advertising, but 2C start-up founders often struggle with it.

Q: What other issues often come up where you can offer support?

A: Staff incentives and financing rhythm. For example, a vice president of a start-up might be entitled to a 0.2% post-IPO stake. You can count backwards and calculate how many incentive shares to give him today, but you need a big-picture view on how much money you will raise across how many rounds. Many founders are very anxious, and they are too generous too early on with incentive shares. As result, there may not be enough shares to distribute to key employees who join later on. This is a problem because most start-up teams are upgraded over time as incumbents are replaced by higher-caliber candidates. In terms of financing rhythm or financing security, founders must have a strong grasp of all cash inflows and outflows. We see many companies with good business models and strategic frameworks fail because of a poor sense of capital expenditure. Either they didn’t prepare for worst-case scenarios or they didn’t work out how to spend money in a sustainable fashion.

Q: A recent start-up trend appears to large, multiple-tranche funding rounds that stretch out over several months. What’s your take on this?

A: Entrepreneurs are getting smarter and the current market conditions are very entrepreneur-friendly. There’s nothing wrong on the startup’s side – they just want to have enough money in reserve. But investors must think about it carefully. Say a company raises $100 million at a $1 billion valuation and then closes a $1 billion round at a $2 billion valuation. That's a 10x increase in the size of the round but only a 2x appreciation in value. It's clear the start-up can raise a lot of capital, but investors must ask whether the returns will be sufficient. We do a lot of work on risk controls.

Q: Are you concerned about elevated valuations?

A: The Matthew effect [or accumulated advantage] of leading players is very strong and so they command premium valuations. This overdraws on a lot of the returns in the primary market. If the market opportunity is large enough and the company retains its number one position, in 10 years it could be worth $10 billion or even $100 billion. But as an investor can you wait that long? Excess liquidity has contributed to excessive valuations and then when some companies go public, they trade below the IPO price for a long time.

Q: What is Hike’s investment strategy?

A: We have "2+20" catcher strategy. On average, over the past 10 years, one or two $10 billion companies and 20 $1 billion companies have emerged every year. This shows that good companies are scarce and good founders are even scarcer. We are not a megafund, so we must converse our ammunition. Most years, we review about 2,000 companies and take dozens through to the due diligence stage, but we only end up investing in seven or eight. We have four partners, so each one can fire one or two shots a year. We need companies to meet three criteria – be from a top industry segment, have talented founders, and represent good timing. In addition, we favor transportation, online education, and consumption, because we have backed numerous unicorns in these areas.

Q: Have you considered introducing a secondary market strategy?

A: We will do that in the future. As a long-term investor, we believe companies will grow in value as they move from the primary to the secondary market. The private equity investment window is getting shorter and shorter – maybe a good business lists within three years, whereas before it was 5-8 years. There are many differences in terms of operations and risk controls, so going into the secondary market would be a challenge. It’s not something we would do in a hurry.

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• Topics
• Greater China
• GPs
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• China
• Hike Capital
• TMT