Fund focus: XVC stresses its idiosyncrasies

XVC doesn’t like making decisions by committee. While most venture capital firms build their organisational structures around investment committees, which sign off on new commitments, XVC delegates responsibility to individuals. Deal leaders can proceed once they have run their thesis past two colleagues and received substantive feedback.

“Investment committee votes can be impacted by irrelevant factors, such as how a project is presented. Sometimes, a partner has the casting vote, but they don’t really know what the start-up in question does,” said Boyu Hu (pictured), founder and partner of XVC.

“We have in-depth discussions and debates, but we don’t do it in front of a group of people. We call it collective independent thinking.”

The firm – which has a relatively small investment team – recently closed its third US dollar-denominated fund with USD 274m in commitments, taking its overall assets under management to USD 1.2bn. LPs include university endowments, foundations, family offices, and sovereign wealth funds. Almost all institutional investors in Funds I and II re-upped.

It is not a bad time to have dry powder. Hu notes that VC investment in China has slowed down this year, with some start-ups cutting their target valuations by half and accepting flat rounds – to ensure they have enough capital to survive. Consumer is the hardest-hit sector.

“The pandemic is the main factor in the consumer sector. The private equity industry’s attitude towards the sector has also undergone a major change. Many large, well-known firms are almost not touching it all,” said Hu.

This has not dissuaded XVC, which claims to be as idiosyncratic in its investment style as it is in decision making. Consumer accounts for half the portfolio. Nevertheless, performance is strong, with XVC’s companies recording aggregate gross merchandise value of more than USD 400m in the first three months of 2022, a double-digit year-on-year increase.

According to Hu, the firm backed a manufacturer of smart home cleaning appliances in the fourth quarter of 2021, a few months after the first product was released. Sales now amount to USD 10m per month. Meanwhile, BaWangChaJi, a tea shop chain that saw significant setbacks with the onset of omicron, is welcoming customers back and opening new stores.

XVC seeks to differentiate itself from other VCs in two ways. First, it only invests in technology-driven start-ups where there is a clear and large application scenario.

For example, having tracked warehouse automation specialist Whale House since 2017, it held off investing until the company released a pick-and-sort solution, tested it with real customers, and could point to gain in terms of space utilisation and efficiency.

Second, XVC focuses on long-term barriers to entry rather than short-term advantages. While scale is known for delivering lower costs, higher levels of efficiency, more robust networks, and brand recognition, it could equally become a disadvantage.

“In high-end Chinese cuisine, good chefs are rare. You can’t replicate the quality of food, but as you scale, the risks to food safety and hygiene increase. Beauty salon chains face a similar problem. We don’t invest in these areas; we want to avoid diseconomies of scale,” said Hu.

Asked what he sees as the next big opportunity, Hu observed that he spent most of the past year researching machines that can replace humans, in software as well as hardware. In 2022 alone, XVC has so far made three investments in the robotics space – two are construction robots and the other is a pool cleaner.

“Artificial intelligence technology is developing rapidly, the entire Chinese supply chain is maturing, and the price of a lithium battery has fallen in recent years. Robot development sits at the nexus of several overriding structural changes.”

XVC closed its debut US-dollar fund in 2017 on USD 115m, while Fund II closed in 2019 on USD 268m. Fund III, like its predecessors, will focus on early and growth-stage investments tied to these structural changes: industry digitalisation, supply chain upgrades, generational change in the consumer base, and retail channel upgrades. Cheque sizes are USD 1-30m.

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• Topics
• Greater China
• Fundraising
• Venture
• Technology
• GPs
• China
• TMT
• XVC
• deep-tech
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