What is it like to invest in a project that returns 5,000 times?
Investing is a practice. There is both the joy of capturing unicorns and the pain of missing out on high-quality projects. Many people are reluctant to talk about what they missed, but this is an issue that cannot be avoided. No investor can grow up without regrets. Therefore, facing oneself sincerely, learning lessons from Anti-Portfolio, and learning from past mistakes are compulsory courses for investors on the road to upgrading.
Recently, Li Lun, the founding partner of Panda Capital, was in pain because he was very close to a project that could bring 5,000 times returns, but still missed it. This project is the recently listed RELX Yueke. It took less than three years from the establishment of the company to the IPO, and the market value was more than 40 billion US dollars at its peak.
Li Lun had talked about this project in depth twice, did detailed due diligence and attended the investment decision meeting, but eventually gave up the investment. He said that the core essence of missing out was still due to insufficient cognition. What went wrong with cognition? What lessons and reflections did the Miss of this project bring him?
It’s painful to miss RELX
RELX recently went public, which attracted a lot of attention from the investment circle. However, it was a very painful thing for us. It was painful why Panda missed it. We were very close to this project. We looked at it twice systematically and attended the meeting, but we missed it in the end.
As for the reason for the miss, some investors said it was due to concerns about morality. I think it was all excuses. Because honestly speaking, although we also pay attention to ESG, we did not decide to pass this matter because of the moral level.
The first time we looked at RELX was when Wang Ying just left Uber in 2018. I first met Wang Ying at an event held by Uber in Hangzhou. I met Mobike founder Davis through Wang Ying. In addition, there are multiple connections that have locked on this person. We were sure from the beginning that he was very strong, but we still had some concerns at the time.
The second time we looked at RELX was when Relx was valued at 200 million US dollars. Around August 2018, RELX was still working in a WeWork in Sanlitun, Beijing. It was a very small team working very lightly. But it had already gained momentum, and the shipment volume was already very large. It can even be said that it brought up the domestic Geek Bar wave.
Of course, we also talked about some other Geek Bar brands one after another, but Wang Ying was the strongest founder among them. However, due to various reasons, we finally went to the meeting, but still passed.
I was very sad to miss two times. On the night of Relxs IPO, I happened to be with a partner of Sequoia. Sequoia was also watching the round of RELXs 200 million valuation, but they did not invest in it. IDG invested. But Sequoia quickly made up for it later. There are also many people around me, in addition to Cao Yi of Source Code Capital, and Yang Haoyong of Shanxing Capital, who invested in it when it was valued at about 700-800 million US dollars. It was real money. They dared to make a move and make up for it, and they all invested in it.
On the night of RELXs IPO, I really couldnt sleep. I reviewed with the team many reasons why we didnt invest at that time. We talked until two or three in the morning. After the conversation, I couldnt sleep even more.
I think that if you see a good project, even if it is expensive, such as when it is valued at 800 million US dollars, even if you can only invest 8 million US dollars and get 1 point, you should make up for it if you have the opportunity. This incident actually taught us a great lesson. In fact, all the reasons for the lack of execution, determination, and thoroughness at that time were due to insufficient cognition.
The reason for the loss is insufficient cognition
Although we did market research and interviews with senior executives when we looked at RELX, there were still two major misunderstandings at the cognitive level.
The first misunderstanding is that we didnt see that Geek Bar is actually a completely new user group, and we are still focusing on a traditional smoking group. We also conducted a market questionnaire survey of 200 people at that time, but basically all the questions were asked to old smokers. Old smokers said that they dont like Geek Bar because they feel that there is no throat hit. And there is no such social ritual, and they feel that it has nothing to do with smoking.
From the perspective of opportunity, we thought that since smoking was banned nationwide, would Geek Bar be an opportunity? In the United States, there was a clear benchmark like NJOY, and we were wondering if it was a substitute for cigarettes. This was the first mistake in cognition. It was not actually a substitute for cigarettes. It was aimed at new people, so we asked old smokers whether they would accept it, which was wrong from the perspective of judgment.
The second misunderstanding was that we overestimated the negative impact of policy supervision on the Geek Bar industry. At that time, we interviewed many senior executives of the Chinese tobacco system. We asked two high-level leaders, and they both believed that everything related to nicotine in China was protected by the Tobacco Monopoly Law, and this matter was actually not very likely.
At that time, we were thinking, is it possible that when its channels and brands are doing well, it will transform into a company specializing in selling cigarette rods and no longer sell cigarette cartridges. But people educated us that it was absolutely impossible, and cigarette rods are also related equipment for smoking, and it is impossible to be related to nicotine.
Then we asked again, assuming that one day in the future its brand is doing well, its channels are doing well, and it has a good reputation among young user groups, would you be willing to acquire it? People also told me why we need mergers and acquisitions? Its too easy for our tobacco system to do this. The road to mergers and acquisitions was completely blocked, which made us feel that Geek Bar really had no chance. At that time, people also cited a negative example. Ruyan was actually invested by the top VC, but it didnt come out in the end.
So we think that Geek Bar has been proven to be unfeasible by history. Even though we thought the founder was very impressive at that time, we still passed it. To put it bluntly, we didnt have enough knowledge, which led to all the executions not being done well.
Reflection: Invest in people firmly & make up for it in time
The first reflection that RELX brought me was that since we think we have to invest in people, we should resolutely execute it. When I had a meeting with the investment team, I drew a four-quadrant:
If the people are certain and the things are certain, we should invest with the largest position;
If the people are uncertain and the things are uncertain, we should avoid it;
If the things are certain and the people are uncertain, we should invest less, or even not invest, because things will eventually depend on people.
We believe that we should invest in projects where the people are certain but the things are uncertain, especially for our early-stage fund.
For example, although the Geek Bar incident was uncertain at the time, Wang Yings top-down height, overall execution ability, and ability to deconstruct things are all very strong, and the people are very certain.
Looking back now, many awesome projects will be controversial and incomprehensible on Day One. But if the things are unclear but the people can be understood, we still have to make a move. From a risk perspective, it is nothing more than not investing too much and controlling it within a certain amount of the fund.
There are many such reflections. Panda was founded in 2015, and since then, many awesome founders have emerged. For example, Ideal Auto was started after 2016, and Yang Haoyong did the same with Guazi. These were all projects where we thought the people were strong but the things were still questionable.
But because the entrepreneur is the one standing in the river, and the investor is standing on the shore, he must see things more clearly than an investor standing on the shore, and know the underwater situation more clearly. In this case, if the founder is someone you are highly sure of, you should bet on him.
For example, my old colleague at New Oriental, Chen Xiangdong, the founder of GSX. When he started his business, no one from New Oriental invested in him. But now looking back, this person is definitely a strong one among todays entrepreneurs. He used to be the president of the entire New Oriental education listed company group, a teacher, and the principal of the Wuhan branch. Before he started his own business, he worked at New Oriental for 15 years and made it bit by bit.
Wang Ying is similar, and they have all made money before, and they are willing to go all in, take a lot of money in, and have determination. In addition to their past experience and ability, they have already generated some insights in the industry that we investors have not seen. In this case, we must be brave enough to take action. The returns brought by these entrepreneurs in the end are very high.
The second inspiration I got from missing RELX is to face human nature and make up for it in time. For projects that have passed, if they have partially proved their feasibility after a period of hard work and cultivation, they should be brave enough to make up for it, instead of being obsessed with the fact that they missed it that year and having many knots in their hearts.
Many times, investors often hope that other projects they missed will be bad, and even a large number of investors will look at them with tinted glasses and magnify other peoples mistakes to prove that it was a correct decision not to invest that year.
And I think the best investors are actually very objective in looking at these things. For example, one of the reasons why Sequoia does well is that Sequoia is very brave to make up for it. If it misses in the first round, it will immediately open a position to make up for it.
Many people think that the ability to make up for it is determined by the size of the fund, but I dont think so. The size of the fund is one aspect, but more importantly, whether there is such a long-term tracking, independent judgment, and the ability to face human nature. Even with a not-so-large fund size, we should make up for projects that we think are good enough.
For example, looking back now, in the past year, a large number of projects, even if they were already very expensive when they were invested, can bring more than 20 times the return as long as the project is large enough in the end. Even if you invested in RELX when it was worth 800 million US dollars and held a small stake, the return is now far more than 20 times.
So later I sent WeChat messages to the founders we talked about in 2020 who I thought were very strong but did not invest at the time, but are now developing well and need to reconsider whether to invest again. I sent WeChat messages to three founders at 5 am that day and asked them to talk later.
Investing in people: What kind of people should you invest in?
The biggest reflection that RELX brought me is that you must resolutely invest in people. So what kind of people should you invest in specifically? We summarized the two most important points from Wang Ying.
The first point is that she has worked in a large company, and Wang Ying is not a screw in a large company, but has independently been responsible for a business, and has strong comprehensive capabilities. At Uber, she was the city general manager of Hangzhou at first, then the general manager of Shanghai, and finally the national general manager. She started an Internet company, saw the rapid development of the Internet, and how to use high-speed Internet means to operate, and she has Internet thinking.
But not everyone who comes out of a big company is necessarily strong. In essence, he needs to have proven his ability on a big platform, done large-scale things, and know what problems will be encountered when a thing reaches a certain size and reaches the end.
There are two types of people who come out of big companies. One type is just in the right time. When the big company is going up, he happened to appear in that position, but in fact, he did not succeed because of the person, but because of the thing. He just used the resources of the big company, and his ability may not match.
Another type of people, in a big company, a certain business is done because of this person. For example, a similar situation may be: the company wants to take path a, he thinks it should take path b, and the company accepts his opinion, and he follows path b to make things go smoothly. This type of person has strong personal ability.
Second, a good founder has a characteristic, he thinks clearly about what he is sure of and what he is not sure of. He knows that there must be uncertain factors in the future, but he must have thought about this uncertain factor. When he doesnt have an answer, he will tell you very frankly: I have thought about this, but I dont have an answer at the moment. You can feel that he has thought about it.
For example, a founder we talked to some time ago was also thinking about the final outcome of the project, because no one in the world had done it and there was no benchmark. Back to RELX, I asked Wang Ying about the regulatory issue at the time, and she thought she had no solution to this problem.
This is unlike some founders who like to brag to others and try to make investors feel that they have answers to every question to prove that they are powerful. This type of founder is not really awesome.
Today RELX has achieved 40 billion US dollars. Is the final outcome 40 billion? If it enters more industries, it may achieve 400 billion US dollars in the future. There will definitely be a lot of unknown situations in the process of entrepreneurship. Therefore, I prefer the founder to be able to say frankly: I have thought about it, but I don’t have an answer yet. Investors are welcome to discuss this issue with me.
In short, founders with the above characteristics can be called natural entrepreneurs. Panda Capital is committed to finding natural entrepreneurs and accompanying them to change the world.