Exclusive | After closing its latest USD fundraise, XVC's Boyu Hu shares a painful awakening with us

暗涌Waves·April 6, 2022

On failure, self-reinvention, and evolution.

By Lili Yu

Edited by Jing Liu

"An Yong Waves" has learned exclusively that XVC has completed a new round of USD fundraising, raising $274 million. The LPs in this new fund come primarily from endowments of top global universities, nonprofit foundations, established family offices, and sovereign wealth funds. This marks the third USD fund XVC has raised since its founding in 2016. The previous two funds were $115 million and $268 million respectively.

A month ago, Weee!, a major holding of XVC's, also completed its latest funding round of $425 million, reaching a post-money valuation of $4.1 billion. Weee! is the largest ethnic retail and food e-commerce platform in North America. Among its major shareholders, besides well-known institutional investors such as DST Global, Blackstone, and Tiger Global, XVC is the only China-based investment institution.

In 2019, when XVC invested in Weee!, China's community group-buying market was in the thick of fierce competition. XVC's bet on Dailuobo soon ran into a cash crunch. But Boyu Hu said this didn't affect XVC's decision on Weee! — "Investing in one unsuccessful company has no direct bearing on continuing to invest in another" — because their relationship was essentially that of "a snake and a well rope."

Yet there was no denying the impact Dailuobo had on him. This investor, described by friends as somewhat "nerdy" and accustomed to understanding the world through a stack of investment models, management frameworks, and hiring frameworks, used a drawn-out tone to describe that searing pain to us: "I'd never so vividly seen a company grow so rapidly, then collapse just as fast."

To some extent, this left Boyu Hu in retreat for a long stretch. Five years ago, when this investor labeled a "thinker" in the venture capital world burst onto the scene leading his XVC, he seemed like an anomaly in the investment world: while the entire VC circle was swept up in change and speed, carried along by trends and noise, he maintained a kind of deliberate obtuseness — one of the few investors who truly practiced what theories and research yielded.

As an investor who entered the industry in 2009, he caught the most important mobile internet wave of the past decade-plus. Boyu Hu told "An Yong Waves" that his 10 investments before 2016 "returned roughly 400x, making nearly $10 billion." It was precisely because of this that he successfully raised a new fund of over $100 million during the capital winter of the second half of 2016. He named it XVC,寓意ing the ability to think independently like the variable "X."

The turning point came in 2019. The shock of the Dailuobo incident made Boyu Hu acutely aware of how dramatically the venture capital environment had changed in recent years: The old dynamic where network effects and one or two major battles could decide victory or defeat had long since stretched into "a five-year war, dense with countless smaller battles of varying forms along the way." This meant that throughout the process, human decision-making ability and organizational capability were becoming enormous variables.

Thus, Boyu Hu and XVC began adjusting their playbook. The biggest change: amplifying the weight of "people" in their decision-making. Over the past two years, XVC has also made a series of investments: Moody, ONES, Weee!, Ba Wang Cha Ji, Lihe Weidao, Guangliang Jiuye, and others. According to XVC's annual letter to investors, as of the end of 2021, after filling the holes of loss-making projects, XVC's annualized return still exceeded 50%.

Rather fittingly, XVC has also moved from its isolated island in the middle of Tuanjie Lake to a corner of the Sanlitun neighborhood, where shadows of people overlap and the mundane world lies just outside the window. This seems almost like a metaphor: the once rather otherworldly investor has begun to enter the world.

Below is what we invited Boyu Hu to share with "An Yong Waves" about his evolving understanding of investing in recent years:

The Logic of Re-betting on a Failed Track

  1. In 2019 we came across Weee! by chance on social media. When we pulled the data, we'd never seen long-term retention this good at a fresh grocery e-commerce platform — otherwise we wouldn't have decided to turn the US market upside down. Our investment team has four people total; three of us went.

  2. Fresh grocery e-commerce is hard to scale anywhere in the world, because the unit economics of fulfillment are difficult to make work. Weee! found a highly efficient fulfillment model in the US market: through unique product offerings unavailable offline, plus WeChat social marketing to rapidly penetrate the Chinese diaspora. Once order density quickly crossed the critical threshold, it gradually expanded to other ethnic groups — Filipinos, Japanese, Mexicans — continuously stacking order density.

  3. We had invested in a domestic fresh grocery e-commerce company called Dailuobo. It also solved the fulfillment problem in a unique way. But later it ran into trouble: it failed in operational management. Its earliest single-store model was profitable, but during manic expansion, the model changed. Before the second-generation store was validated, the team poured massive resources into opening stores, then when that didn't work, closed stores at scale, leading to cash flow problems.

  4. When we invested in Weee!, we already knew Dailuobo's cash flow wasn't looking good, but that didn't affect us. Investing in one unsuccessful company and continuing to invest in another have no direct relationship — their essence is actually more like "a snake and a well rope."

  5. Before investing in the fresh grocery e-commerce track, we researched it for many years. Besides our home market, we also went to India, Indonesia, South Korea, the UK, and other countries to observe different fresh grocery e-commerce models. When we went to the US to research Weee!, we also examined its online-offline competitive environment and entire supply chain, spent time in its warehouses, and rode along with its delivery drivers. Investing always carries risk, but as long as the odds and probabilities work out, we're willing to take it on.

Reckoning After the Pain

  1. Stepping into a pit is painful. Your entire consciousness shifts — you can practically hear the sound of brain cells dividing. A company growing so rapidly, then collapsing so quickly, was enormously shocking to us. Although I'd been investing for quite a few years, my sample size still wasn't large enough to have given me that kind of searing pain.

  2. The macro environment is changing. When I entered the industry in 2009, the biggest opportunities were all in internet, where so-called "first-mover advantage" was especially important. Whether entrepreneurs or investors, people tended to focus only on scale growth, and a battle would be decided in a year or two. Now it's become a five-year war, with countless smaller battles to fight in between.

  3. As business competition cycles lengthen, demands on entrepreneurs rise too. In the past, picking the right track and making a series of correct decisions in a short time could win the day. Now foresight alone isn't enough — you need leadership, the ability to keep making correct decisions over a long period, and the capacity to build efficient organizations. After realizing how crucial founders' decision-making ability and organizational capability are, we at XVC made a major adjustment: in our investment decisions, we amplified the weight of "people."

  4. People are extremely complex. The investment decision cycle is short, so comprehensively understanding someone is nearly impossible. So we created a minimalist model for excellent founders, examining just two things: whether they're good at making correct decisions, and whether they're good at building efficient organizations. Now when we look at a company, we spend more than half our time observing people, then use various proxy variables to judge whether they meet our criteria.

  5. We've found some counterintuitively excellent founders. The year before last, we discovered a promising project in Yunnan. During due diligence, we found the founder had received no basic education whatsoever — illiterate before age 18. Could we invest? Later we discovered he had strong self-learning ability, systematic thinking, and rational decision-making. His organizational construction ability was also strong: even at the early stage, he attracted several core executives from industry-leading companies to join. Combined with our strong product conviction, we ultimately invested.

  6. When we discuss projects, we also retrospect: how has the founder made decisions in the past? What's their thinking habit? For example, when testing a new store model,叠加了打折促销 without proper control variables — that's unscientific practice, indicating suboptimal decision-making habits. We also examine whether they have any personality defects that might cause trouble in organizational building.

Self-Transformation and Evolution

  1. We've strengthened our middle and back office. We need to figure out where we can genuinely help founders, and try to only help without getting in the way. Our current post-investment service is helping companies with organizational building — we've found that companies basically all step into pits during the growth from 30-40 people to 300-400 people, and we want to help founders navigate around those pits together.

  2. XVC has built a commercial analysis and risk control team. Normally they mainly help portfolio companies with business analysis and strategic support, and also assist the investment team with due diligence. This team won't wrong you — they're the detective type; if they catch you, they catch you on something solid.

  3. We've invested in new things every year for the past five years. Starting in 2019, we went heavy in consumer. Perhaps consumer investment is ebbing, but consumption itself is not. New retail channels are constantly emerging, new fulfillment methods are constantly being invented. We've done extensive field visits and research — we once conducted on-the-ground考察 of discount retail formats in Japan, which led to several important investments.

  4. Consumer isn't like web 2.0 or search engines or social networks, where the opportunity is gone in three to five years — it will continuously have structural changes. Recently we've also invested heavily in some new areas, such as warehouse robots, construction robots, and some enterprise service infrastructure, etc. We believe these industries will have long-term structural changes.

On the Matter of Investing

  1. The investment industry is getting increasingly competitive. But we've retrospectively analyzed this, and small teams haven't actually significantly impacted our coverage capability or investment quality. Projects invested in over the past two years, like Moody, Lihe Weidao, Guangliang Jiuye, ONES, Weee!, Ba Wang Cha Ji, and others, are all star projects in their industries. Calculating to the end of last year, after filling the holes of loss-making projects, our annualized return exceeded 50%.

  2. Every fund has its own capability boundaries. We can't bloom in all directions like platform funds — we need focus, and our pace of boundary expansion won't be particularly fast. Before entering a new area, we repeatedly ask ourselves: do we understand this, and do we understand it better than others?

  3. Our principles for seeking investment opportunities are threefold: first, whether there is massive real demand, and long-term, high-certainty structural change; second, whether positive self-reinforcement exceeds negative self-reinforcement, and whether there is a sufficiently long or叠加的规模优势学习曲线; third is the founder criteria I just mentioned: whether they're good at making correct decisions, and whether they're good at building efficient organizations.

  4. I've always believed small teams are more efficient in certain respects, such as "cognitive concentration." Much cross-industry cognition cannot be obtained through large-scale investment teams — large teams, for management convenience, divide tracks very finely. Small teams don't have this problem; we can do cross-industry research and concentrate cognition沉淀 in a small group of people.

  5. Concentrated cognitive沉淀 can give every individual the decision-making caliber of an "investment committee member." Currently XVC's investment team has four people including myself: Yi Lu, Rui Yao, and Shixuan Chen, plus the research team for a total of six. They all have super learning ability, independent thinking spirit, and have each led teams to build deep cognition in certain areas — this makes me quite proud.

  6. Managing large teams inevitably requires collective decision-making, where you have to consider others' feelings and not say what you really think, or may enter无效争论 due to too large a cognition gap, so we don't believe in collective decision-making. We basically discuss one-on-one, with each person making independent decisions. We only meet collectively when we truly need to share information or brainstorm, or we use a silent approach. Everyone sits together, each at their own computer, not speaking, then everyone writes comments in a document, then comments reply to comments.

  7. To sum up, I was previously too highbrow, thinking that doing good investing was enough — if you invested well, everything was impressive. But it's not; (running a fund) is a systematic project. Doing good investing, having foresight, deep thinking — these are all important, but they're not sufficient conditions for doing good investing. You also need execution.

Image source | Visual China

Layout | Lili Yu