Q&A: Monad Ventures’ Norah Tian

Q: Software-as-a-service (SaaS) has emerged as a popular investment theme in recent years but it isn’t immune to the recent technology sector correction. What’s happening?

A: The entire market has become more cautious. Many generalist funds have abandoned the theme and shifted to carbon-neutrality investments. Those that remain are looking for projects with a relatively higher margin of safety. For example, companies specialising in industrial software and cybersecurity find it relatively easy to secure follow-on funding. Concept-driven companies, on the other hand, are in difficulty. Previously, investors liked Chinese startups with clear benchmarks in the US. Now, those companies are no longer chased because they typically haven’t verified their commercialisation model in the local market. Looking at it another way, projects with high scarcity value, especially infrastructure software, still command high valuations; application-level SaaS is seeing valuation adjustments. In our portfolio, three companies we backed in angel rounds secured Series A funding in the second quarter.

Q: To what extent does valuation attrition extend into the early-stage space?

A: We divide start-up development into several stages. The first stage is all about assembling a high-quality team and maybe generating a product prototype. By the second stage, the market opportunity has been verified, revenue might be around USD 1m, and we can see some high-quality proof-of-concept customers. In the third stage, revenue hits USD 10m, which means the company can efficiently and repeatedly acquire customers, and demand has been fully verified. The change we are seeing is what was a first-stage valuation is now a second-stage valuation, and second-stage valuations are now third-stage valuations.

Q: Could you give an example of that?

A: We know of an application SaaS company that wanted to raise money at a USD 150m valuation this year, but it ended up at only CNY 150m (USD 22m) pre-valuation. Annual revenue is around CNY 30m, which translates into a revenue multiple of 5x. Then there is an industrial software company – operating in a relatively safer market segment – that was targeting a CNY 150m valuation. Several weeks later, the founder adjusted the valuation downwards to CNY 75m, and we closed the deal immediately. In general, valuations are back to 2014-2015 levels, which means it is a great time to make new investments.

Q: Are there examples where you haven’t seen adjustments?

A: High-level executives coming out from Chinese internet giants can get valuations of USD 200m based on the construction of a high-quality team with a rare industry background and their targeting of a large-enough TAM [total addressable market]. Even with the changing market conditions, it can be difficult for investors to access those rounds. Typically, these founders have led business divisions with several hundred staff and products benchmarked against those of top-level US peers. Their management, technical, and sales abilities are entirely proven.

Q: Where do you see the most interesting new opportunities?

A: One theme is matching the right people with the right scenarios. For example, we invested in an audio and video technology start-up launched by a team coming out from DingTalk, Alibaba Group’s enterprise collaboration platform. We believe their technology is a good fit for web3 and metaverse applications. It’s all about bringing a mature technology to a new field. We are also interested in process mining. From our past investments in RPA [robotic process automation] companies, we found that, in overseas markets, process mining is used to “body check” an enterprise, and then RPA is introduced to tackle problems identified during the body check. However, Chinese corporates often skip process mining and go directly to RPA applications. We believe this missing link will be filled in the future. We chased two entrepreneurs with relevant technology, but initially they had no clear idea about use cases. We help them identify the potential market demand and they are now conducting research.

Q: As a sector-focused investor, how do you approach deal sourcing?

A: 2B is different from 2C, where you see fresh graduates founding companies. For 2B, industry experience is important. We follow talent in – and in the alumni networks of – the major technology giants. About 3,000 deals are announced in our field every year, and we look to cover 70%-plus of them through original sources in our network. Partly because of our expertise and accumulation in sourcing, our LP base includes some first-tier VC and PE investors.

Q: How do you track talent in these companies?

A: It works across several dimensions. We track potential people moves to a very detailed level. Executives typically don’t leave one of the tech giants until they have been awarded options and have won key promotions. We trace expiration dates on options and potential promotion dates. We also track specific events such as M&A. For example, when Wandoujia [an Android app store] was acquired by Alibaba in 2016, many executives departed and launched their own businesses. PingCap, a database infrastructure company we backed, was one of them. There was a similar phenomenon after Qiniu Cloud kicked off its IPO preparation and started to spin off business units. Many start-ups were founded at that time.

Q: How do the talent bases of the tech giants differ?

A: The complexity and scale of China’s 2C businesses has helped nurture the service capabilities of a generation of 2B specialists. Talents from the tech giants sometimes inherit the technological and business edges of their parents, and this leads to different competitive advantages. Alibaba Cloud has strong cloud infrastucture product offerings because it has to support Alibaba’s November 11 Single’s Day shopping festival and other tremendous e-commerce campaigns. We have invested in several cloud veterans coming out from Alibaba Cloud. With Weibo, a lot of volatile concurrent traffic is created by Resou – or Hot Searches, and then the company has a relatively limited technology budget. This forced it to become a global leader in algorithm optimisation, and we invested in Galaxy Future, a serverless cloud infrastructure solutions provider, founded by a former tech leader at Resou. Didi’s system operations and maintenance are among the most complicated in the world, so its capability in this area is global leading. We invested in FlashCat, which was founded by an executive from Didi’s operations and maintenance team. As for Huawei, its AI [artificial intelligence] acceleration framework is very competitive. We recently backed a real-time AI optimization framework startup coming out from Huawei Harmony OS [the company’s distributed operating system].

Q: How do you support founders post-investment?

A: Communication and understanding their needs are important, as are customer resources. As a rule, we never invest in two companies in the same sub-sector, so we are never caught between two competitors. Rather, we encourage our portfolio companies to become partners and customers of each other. We also have a community of nearly 100 CEOs who can provide support.

Q: Were you sector-focused from day one?

A: When we set up in 2015, we were a generalist investor. It happens that several of our early portfolio companies became pioneers and leaders in different domains in business services. For example, when we invested in PingCap in 2016, it was the only domestic start-up focused on open-source distributed databases. Other standouts include Deepexi, which captures opportunities arising from ever-increasing data size and analytical demand, and Leyan Technology, an AI customer service SaaS for e-commerce companies. Such pioneers showed us the potential of this field. By supporting them early on and witnessing how each one grew into a unicorn, we’ve gained sufficient industry know-how and thus chose to become a sector investor. More importantly, as a new GP, you exist partly because you are different, so positioning is vital. If you look at the US, once a market reaches a certain level of maturity, sector-focused investors begin to play an important role. We’ve seen US-based peers with fund sizes of no more than USD 300m generating strong returns.

Q: Sometimes sector specialists evolve into generalists as their fund sizes grow…

A: We will stay focused on early-stage investments because the growth stage requires a totally different skillset. We have no interest in being generalist either. There are already top-tier generalist funds in China that have been around for a while, so the landscape has kind of solidified. But we can still develop into a top-tier specialist. We have advantages in that some LPs have dedicated allocations for specialist funds and then CEOs often value the professionalism, networks, and expertise of sector specialists.

Q: Are there additional advantages or challenges that come from being a predominantly female-led GP?

A: We are now a team of 15. Two of the three partners are women and our operation leader is a woman. As a small team, we need people to take on several different roles, and women can be well-suited to that. Women can also use affinity and empathy to build trust with entrepreneurs, while their tenacity and consistency when pursuing deals is very helpful. There may be potential challenges in terms of fundraising under certain circumstances. For example, some GPs are looking to raise more capital out of the Middle East, and we were told by placement agents that it can be difficult for women-led teams there. And then some LPs are concerned that female investors will encounter more challenges in achieving a work-life balance. When we recruit, we look for people who complement what we already have in terms of professional background, age, and gender. We want to combine what are traditionally perceived as female and male characteristics.

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• Topics
• Greater China
• GPs
• Technology
• China
• enterprise software
• Monad Ventures