Tuhu's Decade: Liu Erhai's Longest IPO

By Muxin Xu

Edited by Jing Liu

Learning Fast, Learning Slow

On September 26, Tuhu Car Maintenance listed on the Hong Kong Stock Exchange, becoming the "first stock in the independent automotive after-sales service market." Its IPO price was HK$28, giving it a market cap of HK$22.746 billion. The prospectus showed Joy Capital held a 9.11% stake, making it the largest institutional shareholder after Tencent.

Among Liu Erhai's past star projects at Joy Capital, the timelines from investment to IPO have been remarkably short: NIO took three years, Mobike three years, Luckin Coffee 18 months. But Tuhu was the exception: from first check to IPO, Liu Erhai waited a full 10 years, making eight investments totaling over $100 million.

In 2013, in a crude loft office, Tuhu CEO Min Chen was downstairs hauling tires with a group of people.

This was the golden age of mobile internet. Investors preferred high-frequency, low-price projects — not Tuhu's low-frequency, high-ticket tire business. Market attention was fixated on the thousand-group-buying war, with 5,600 group-buying sites locked in fierce battle. So even when investors approached Tuhu, most didn't understand the automotive market; Chen typically had to spend half an hour explaining what "automotive after-sales market" even meant.

The Liu Erhai who appeared before him was different. By then, Liu had already backed star deals like Bitauto and CAR Inc., and was arguably the TMT investor who understood cars best. Liu told Chen that he grasped what Chen was building was "not just O2O." "From day one, Tuhu wasn't just selling tires — it was targeting the automotive after-sales market for car maintenance services," Liu told An Yong Waves. Tire prices were too transparent, with thin margins. But the automotive after-sales market was different — you could do services, build your own brands, even integrate the entire supply chain, open stores, reach consumers directly.

Investing in a company serving massive existing demand beats investing in one that needs to create demand. According to CIC Consulting, China's automotive services market grew at a CAGR of 11.2% from 2017 to 2021, making it one of the fastest-growing automotive services markets globally. By GMV, it reached 1.14 trillion yuan in 2021. This was Liu Erhai's prerequisite for investing.

By 2016, Chen decided to pivot to a heavy-operational offline store model (Tuhu Workshop). Series A investor Liu Erhai supported this decision immediately. Only after opening 100 stores did Chen realize this was a business requiring end-to-end reconstruction — training for service delivery, supply chain for parts. Liu firmly argued at board meetings that this was the right call: "If you can open 3,000 stores, 5,000 stores, this thing absolutely succeeds."

Later events proved this was the hard but right thing to do. Tuhu's breakthrough formula was precisely "chain stores." Today, Tuhu has 5,129 workshops across over 300 cities, plus more than 20,000 partner installation stores. Services have expanded from tires to maintenance, car film, and beyond.

In some ways, the decade-long Tuhu is more representative of Liu Erhai than his faster deals. Because Tuhu simultaneously checks all three of Liu's theories: finding industry potential through "non-consensus," sitting within the automotive and new energy "territory," and being a "dual-sided reconstruction" combining user-side with supply chain/service-side.

Yet every reason that supported VCs betting on Tuhu also doomed the return cycle to be long — behind massive market demand lay extremely fragmented services and inevitably difficult consolidation. The rollout of offline stores made it increasingly asset-heavy. Just integrating the complex automotive after-sales supply chain took years.

Ten years of investment — Tuhu was indeed too long, longer than a single fund's lifespan, longer than the eight years it took Liu Erhai to build Joy Capital into an institution managing eight funds, longer than the several rises and falls experienced by this investor famous for being "fast."

Perhaps this is the original meaning of so-called venture capital.

Learning to Lose, Learning to Win

When it comes to Liu Erhai, Luckin Coffee is an unavoidable topic. Though for a long time, it was something he — and many people made and nearly broken by Luckin — preferred not to discuss.

In 2020, the IPO miracle that was Luckin was exposed for financial fraud, delisted, its commercial reputation in ruins. A letter Joy Capital sent to LPs about the matter was leaked; it candidly admitted: "Not a single share was sold." The cost: on the day of Luckin's implosion, Joy Capital's holdings lost $170 million in value overnight.

Recalling 2020 now, Liu Erhai compares it to a "Ides of March moment." James Anderson, early investor in Amazon, Tesla and others, had delivered 15x returns to shareholders over two decades — yet on the eve of his triumph, the Scottish Mortgage Investment Trust he managed lost 23% in a single quarter, with质疑 and curses pouring in. Later, in an FT interview, asked about this, James responded: "Everyone should always be wary of the Ides of March."

"Beware the Ides of March" was the soothsayer's warning to Caesar about the date of his downfall; Caesar was assassinated on March 15, 44 BC.

But Rome didn't disappear after the Ides of March. After black swan events like financial fraud, beyond accepting reality and minimizing losses, investors can still exercise agency in the remaining space.

When asked about Luckin's epic post-investment management, Liu Erhai cited the example of Salomon Brothers. The storied Wall Street investment bank faced SEC investigation in 1991 for alleged market manipulation, with devastating reputational damage. Warren Buffett, as the company's largest shareholder, stepped in as interim chairman during the crisis. Through various efforts, he finally facilitated Salomon's acquisition. "All shareholders owe Mr. Buffett a thank you," Liu Erhai said.

The Luckin case was similar. Liu told An Yong Waves that three years of post-investment management on Luckin focused on three points: first, cooperating with regulators and accepting investigation; second, selecting the right management team, such as promoting Luckin's pivot to beverage-style coffee; third, conviction in Luckin's business logic.

"Conviction" sounds like simple gambling. But mathematician Edward Thorp wrote a book called Beat the Dealer, dedicated to explaining his undefeated formula at blackjack — "When your strategy is correct, even if you lose, you must play the same way next time you see similar cards. Because as long as you stick to the right strategy, you will win."

End of 2019 was NIO's darkest hour. "NIO loses 40 billion in 4 years" dominated trending searches; the stock price crashed, hitting a low of $1.19 in October, with 87% of market value evaporated. At this point, NIO received two lifelines: first, a $100 million convertible note led by Joy Capital; second, money Li Bin raised himself.

Later, NIO received 7 billion yuan from Hefei government and 8 billion yuan from the UAE. Its stock price surged back to $60 a year later, brought back from the dead. Many then asked Liu Erhai why he made that investment decision, speculating whether it was due to personal ties with Li Bin.

In the classic VC question of "bet on people or bet on thesis," Joy's answer has always been "thesis is foundation, people are key." But this formulation often leads people to overestimate relationships in business. "I think this is a product of agrarian civilization," Liu Erhai said.

Joy's decision to invest in NIO at that moment had Li Bin's credibility as CEO as merely the first reason. Liu told An Yong Waves that most people only looked at the stock price, but he looked at delivery numbers — in 2019, NIO's annual vehicle deliveries grew 81% year-over-year versus 2018. Second, treating autos as territory, just as discovering the automotive after-sales market, meant believing in electric vehicles' future.

Of course, 2019 lacked today's hindsight. The moment of decision had "too much noise, too much psychological pressure." "But this was investing with conviction in your own logic. If wrong, so be it."

Now, Luckin has become his second "NIO." Three years later, Luckin completed its epic resurrection. Ma Ziming, founder of Snow Lake Capital — which had participated in shorting Luckin — published a Luckin research report calling "Luckin Coffee's phoenix-like rebirth a miracle in Chinese business history!" On September 6, the day after Luckin's Moutai collaboration, Luckin rose 3 billion yuan overnight on the U.S. OTC market, reaching 70 billion yuan total market cap — double from a year prior.

Yet probabilistically, Luckin's later story didn't have to happen, and very likely might not have. Whether unexpected triumph or unexpected collapse, both are in some sense unavoidable scenarios in the VC context. But perhaps this is what's fascinating about the VC game. In the fundraising-investing-managing-exiting process, pulling the trigger is the most dangerous and important moment, because it's the beginning of everything. Though every GP has various methods to digest risk — Joy Capital's strategy, for instance, is long-term stationing in territories like automotive and new energy to reduce uncertainty when cherry-picking across domains — but as VC's original name suggests: venture capital cannot avoid risk.

In a 2020 interview, Liu Erhai said: The most important thing in doing venture capital is learning to admit defeat.

Learning to Venture, Learning Restraint

"VC isn't a craft, it's technical work." This veteran investor of 20 years repeatedly told An Yong Waves, Perhaps there is no such thing as practice makes perfect in VC: no matter how many years you've done it, every decision still feels like walking on thin ice.

Compared to growth and early-stage, VC may be the riskiest and most difficult phase. So Liu Erhai believes that recognizing the value of risk is the essential capability of a successful investor. Liu told An Yong Waves: "When discussing deals, some people prefer projects that won't make much money but can't lose. But no risk means the thing is fundamentally wrong from the root — we don't even need to discuss risk for things without value."

Of course, a necessary clarification is establishing the boundaries of this risk. Liu Erhai's early career as department head at Jitong Communications and VP of China TieTong gave him heightened sensitivity to systemic and policy risks — this is why Joy Capital "missed" certain hot investment areas at the time but avoided pitfalls.

But compared to the boldness on the investment side, Liu Erhai maintains restraint in running Joy Capital.

In 2022, Joy Capital completed a dual-currency fundraising of nearly 4 billion yuan, basically consistent with its $700 million raise in 2019. Liu told An Yong Waves that Joy Capital has always kept its size small, controlling venture capital at $300-400 million annually, but additionally allocates opportunity funds for follow-on investments in companies like NIO.

Though restraint is a virtue VCs should possess, when truly facing the possibility of scale expansion, few GPs can resist the temptation — especially in China's venture capital development cycle, where getting "big" first enables getting bigger. But in Liu Erhai's view, VC is a tool closer to industry; platformization deforms VC, eventually becoming de facto asset management companies. Scale is not a necessary reason to persuade founders at the VC stage.

The balance of risk and restraint is a technical dimension of VC's tightrope walk. The extremes of fast and slow, loss and win, are the dangerous yet captivating evidence of venture capital as a game.

Having experienced loss, but also having experienced win, this eight-year-old institution now begins writing its post-turnaround story.

Image source | VCG

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