Tang Ning x Li Feng: Tech Won't Replace You — Your Competitors Who Master Tech Will | FreeS Fund Business School
How do you cultivate the ability to spot future trends amid uncertainty?
The pandemic continues to test our resilience and capacity to endure. Learning to coexist with uncertainty and, from it, discern trends and identify turning points is a question we've all been grappling with during this period. Not long ago, Ning Tang, founder and CEO of CreditEase, invited Feng Li, founding partner of FreeS Fund, to join his show Tangning Huiketing (Tangning's Living Room). The two old friends, who have known each other for over a decade, had an in-depth conversation on this very topic.
As Tang put it during their discussion: "If big data were to tag the two of us, we'd probably score very high on similarity." Both are Peking University alumni, both returned from overseas, and both once taught at New Oriental. Beyond that, Li was an investor in CreditEase, and CreditEase Wealth's private equity fund of funds is an LP in FreeS Fund. In 2019, the two also spoke at the third annual FreeS Fund CEO Summit. This time, they focused on the following questions:
- How do you cultivate the ability to anticipate the future and respond to uncertainty?
- During the pandemic, many companies saw their offline business disrupted and attempted to pivot online. Eight years ago, when Liaoyuan Zhang founded Three Squirrels, he started from zero online. What challenges did it face in its digital transformation, and how did it respond?
- Why will many purely online companies face greater competition than ever after this pandemic?
- From mask shortages to 116 million units per day — how has the pandemic affected China's industrial chain structure?
We hope this offers some food for thought. Feel free to share your thoughts in the comments.
/ 01 / How do investors find opportunity in uncertainty?
Ning Tang: When we talk about crises and opportunities after the pandemic, we really do need some foresight about the future. To see the future amid uncertainty requires an investor who can spot trends ten years out while still taking action today — someone with both vision and the appetite for risk. Based on the future, finding the best choice today, planting that seed so it becomes a towering tree in ten years. I'd love to hear how you gradually developed your ability to anticipate the future, and how your investment philosophy took shape.
Feng Li: Because I mainly do early-stage investing, it means needing to accompany companies for at least five, six, or seven years before seeing them achieve阶段性 success — say, being recognized through an IPO.
The growth trajectories of countless companies have proven this: if certain trends are destined to happen at the macro level, eventually some company will harness the power of that trend to grow and lead its industry, even if it starts out tiny.
So early-stage investing instilled in me a habit of thinking: striving to identify things that may seem unreasonable today but will unfold within two or three years, and continue evolving until they become major trends.
That said, no one can claim certainty about predicting the future. Everyone is constantly learning and growing.
Even if you recognize a trend emerging and sense that good companies might emerge from it, the hardest part is actually finding that project. When a company is still at the angel stage, just one or two people in a small team, how do you pick out, from all the different entrepreneurial directions and project types, which one will ultimately win?
Finding the project tests both your ability to judge value and the effort you put in, as well as whether your network and coverage are strong enough. There's also an element of probability and luck involved.
Even if we identify the trend and find what we believe is the best project within our reach at the time, it's still possible that later on, new entrepreneurs and teams emerge in that same trend and do even better. No matter how diligent, renowned, or smart you are, this is unavoidable in early-stage investing.
Our methodology is to first figure out what will improve between today and the future, then follow that thread to find strong teams and projects. This approach suits our team and culture, but it's only one VC investment method among many — certainly not the whole picture.
Whether in primary or secondary markets, there will always be different methodologies. Just like investing in stocks: some do short-term, some medium-term, some long-term; some do fundamentals, some do quantitative. Different strokes for different folks — everyone has a chance to make money.
As long as your methodology matches your team's DNA and capabilities, and you stick with it long enough, you have a better-than-average probability of outperforming.
/ 02 / The challenges of digital transformation aren't new — how did Three Squirrels respond in its early days?
Ning Tang: The pandemic has brought many changes, such as accelerated digitization. You originally helped Liaoyuan Zhang leave a large company to start his own business, growing from offline-first to online-focused, and now to an omnichannel model. I'd love to hear you share what challenges Three Squirrels faced in its digital transformation and how it responded. What was its secret weapon in building its brand?
Feng Li: Looking back today, some of the judgments we can make as investors stem from trends we observed at the time, but actually more of it comes from growing alongside good entrepreneurs and CEOs, observing and learning from their insights. Especially when it comes to specific capabilities and industry knowledge, we owe that to the CEOs.
In retrospect, there were three pivotal moments that profoundly influenced Zhang's move online and digital transformation.
The first important inflection point came in 2010. When Zhang tried to pivot online, he faced problems similar to what entrepreneurs affected by the pandemic are dealing with today. At the time, the offline stores of Zhan's Food, the company Zhang worked for, had hit bottlenecks in distribution capability and efficiency that prevented the rapid expansion Zhang had envisioned.
E-commerce was riding a wave at that time. As a CEO, Zhang had both sufficient sensitivity and curiosity about new things, as well as independent judgment.
When testing the waters online, Zhang deliberately didn't pull from his core offline team. Instead, he brought in young people to form a small team. He also opened a Weibo account — trendy at the time — and posted on various e-commerce forums, becoming a KOL in the e-commerce space and drawing considerable attention. I actually first connected with Zhang by sending him a private message on Weibo.
The second pivotal moment came in Three Squirrels' early days. Through his e-commerce experiments, Zhang discovered two important capabilities and charms of e-commerce and the internet: first, direct access to consumers; second, direct access to consumer feedback. At the same time, he applied his offline understanding of branding and sales to optimize every consumer touchpoint in the e-commerce environment.
By then, Taobao's "qin" (dear) culture was already a significant and famous part of e-commerce culture. Three Squirrels made a change: from day one, it called its users "master," creating a better user experience and differentiating itself from other e-commerce brands through its "master culture."
Moreover, while many brands had customer service departments, Three Squirrels didn't do it that way. It didn't call it customer service; it called it the Customer Satisfaction Department. Within this department, there were three ranks: senior, intermediate, and junior customer satisfaction specialists. Rank was determined by various dimensions of customer satisfaction, not by conversion rates or similar metrics.
Across other consumer touchpoints, Three Squirrels made many thoughtful attempts and efforts from very early on: shipping boxes that could be easily torn open without any tools; boxes containing nut openers, wet wipes, and small bags for nut shells; even designs to prevent snacks from getting damp.
The key point is that in the e-commerce environment of that time, Three Squirrels went one small step further at every consumer touchpoint. Not just one touchpoint — all of them.
Of course, in the process of facing consumers directly, Three Squirrels also encountered enormous challenges. During the 2013 Spring Festival, Three Squirrels' sales surged, but logistics couldn't keep up. Shipping was delayed, drawing a flood of negative store reviews. The following Spring Festival, the entire team pulled several all-nighters, doing everything possible to get holiday orders shipped before the holiday.
The logistics challenge also made Zhang realize how agile e-commerce is as a system. Agility means there isn't much buffer in the middle, so you have to find ways to accurately forecast orders and rapidly feed that back into a closed loop.
From then on, Three Squirrels became extremely sensitive to its entire information and logistics systems, developing them in-house. In terms of the dimensions considered and system design, Three Squirrels' information system was quite outstanding among retail companies.
Its most recent challenge occurred between 2017 and 2018. Three Squirrels faced growth bottlenecks on one hand, and hit some minor setbacks in its IPO process on the other. During this period, Zhang must have been extremely anxious. (For more on how Three Squirrels regained growth, see: Dialogue with Liaoyuan Zhang (Part 1): Three Squirrels' Comeback Battle | FreeS Business School, 4.5-Hour Deep Dive, 10,000-Word Essential: Dialogue with Liaoyuan Zhang of Three Squirrels (Part 2): Every Stage Is a Race Against Speed and Time)
These difficulties are par for the course. Every entrepreneur will experience a moment of complacency at some point in running their business — a small achievement that breeds a little arrogance.
But excellent CEOs have managerial sensitivity. They're always able to rapidly focus, identify the core problems, and get back on track.
Starting from the end of Q2 2018, Zhang threw himself fully back into the front lines, acting like a CEO in the startup phase once again, re-energizing the entire team around brand innovation and product innovation.
My takeaway is that for a CEO, throughout much of a company's development, they need to stay focused on the front lines of the business in some form, paying attention to frontline feedback.
Because when a small company is growing fast, it's difficult to rely entirely on systems to drive it forward, the way a giant like GE can. Especially in an industry as fast-moving and fiercely competitive as e-commerce, a good CEO needs to stay on the front lines long-term, maintaining the most sensitive contact with information, customers, and the team, making timely adjustments.
Ning Tang: So Three Squirrels is both a good investment case and a good case of digital reinvention, of using technology to deliver extreme user experience. It's also a good case of how an entrepreneur can stay grounded and perpetually sensitive to customer contact.
/ 03 / Technology won't replace you — it's the competitor who uses technology better
Ning Tang: During the pandemic, customer behavior has changed too. For instance, when we used to talk with clients about private equity, fund of funds, global asset allocation, they'd say let's meet in person, it's hard to explain over the phone. This time, we've all collectively practiced communicating through video and livestreaming, and efficiency has improved dramatically.
Feng Li: I agree. The digitization of service industries is a typical outcome and trend.
Why hadn't many service industries digitized before the pandemic?
First, service industries provide "non-standardized" products. What each user wants may not be exactly the same.
Second, service industries are experience-heavy. Sectors like education, finance, travel, healthcare, weddings, and renovation have inherent professionalism. They require careful, professional communication with users to create a sense of the service.
Additionally, with some low-frequency, high-ticket services, users won't readily try online alternatives.
But this time, with users unable to go out or meet in person, they tried online versions of most services they previously wouldn't have. When users discover that online service experiences and outcomes can also be guaranteed, they may shift some of their consumption behavior online. This is what we're seeing — many services, including online education, are having their moment.
But after the pandemic, many purely online companies will actually face greater competition than before. Because many offline companies have been forced to accelerate their digital push, the number of companies that can ultimately provide online services will be an order of magnitude larger than before.
Especially some excellent offline brands and companies — they have offline service, offline experience, and offline brand equity they've built up, but they've also learned how to do online and use online tools, and can combine the two. Compared to purely online service companies, they have far more weapons in their arsenal. (For more analysis on how the pandemic is affecting business, see After the Pandemic: A New Era for "Good Companies" | Frees Fund, After the Pandemic: New Patterns in Fresh Food, Dining, and Food | Frees Fund, After the Pandemic: The Survival Elimination Round in Education | Frees Fund, 2020: The Reshuffle and Restart of the Travel Industry | Frees Fund)
Although there are many hurdles to cross, some service industries already went through a wave of digitization more than a decade ago.
Roughly from 2009 to 2018, China's first-tier and lower-tier cities successively completed the process of bringing retail online, developing e-commerce.
E-commerce mainly sold physical products, but this pandemic has pulled many service industries online that previously had high barriers to user trial and were low-frequency.
In a sense, service industries have undergone forced upgrading during the pandemic.
Take the restaurant industry, which we're all familiar with. Facing existential pressure, Xibei leveraged its supply chain advantages to sell pre-made dishes to users on platforms like Taobao, JD.com, and WeChat. It also had employees communicate directly with users via WeChat, with users placing orders directly through WeChat. Xibei transformed from a dine-in-focused restaurant company into one capable of both service online and retail online — directly connecting with customers while also getting on numerous online platforms.
Affected by the pandemic, many offline restaurants will close. It's foreseeable that offline malls will also go through a painful round.
I suspect that the vacant spaces in malls will likely be filled by new "Xibeis" in various formats — brands with better brand equity, capable of serving more users, and operating with higher efficiency. (For more analysis on how the pandemic is affecting the restaurant industry, see After the Pandemic: New Patterns in Fresh Food, Dining, and Food | Frees Fund)
04 From mask shortages to 116 million units per day: how has the pandemic affected China's industrial chain structure?
Feng Li: The pandemic has had even greater impact internationally, with different countries responding differently. Let me use a small example to illustrate what might change in our industrial chain structure after the pandemic.
According to Xinhua News Agency reports, as of February 29, China's daily mask production reached 116 million units, 12 times the figure from February 1. Why was China the only country able to multiply mask production more than tenfold in such a short time?
The core material of masks, melt-blown fabric, is made from fossil materials. China has the largest chemical industry and is the largest oil importer. In other words, China has the production capacity foundation for manufacturing masks.
Moreover, numerous Chinese companies converted to mask production. Even BYD, an automaker, was able to become the world's largest mask manufacturer by volume in just over a month, producing 5 million masks daily. This shows how much elasticity Chinese manufacturing now has.
EFORT Intelligent Equipment, an industrial robotics company invested in by FreeS Fund, applied to resume operations in early February and independently developed a fully automatic mask production machine within just one week. Each machine produces roughly 6,000 masks per hour. These machines were purchased by Chinese manufacturing companies with such high elasticity and capacity. (The behind-the-scenes story will be revealed later.)
Therefore, multiplying mask production more than tenfold in a short time is something only China could accomplish. Because we have the complete industrial chain for masks, sufficient capacity, and great elasticity.
Viewed through this small lens of masks, after the pandemic — whether from a national perspective, industrial structure perspective, or business operator perspective — there will be further push to improve the completeness of industrial chain structure and the digital capabilities of the chain itself. "Completeness" means accelerating technological innovation to achieve autonomous control of key technical nodes and the full chain. "Digitization" means more agile infrastructure and overall management, with higher degrees of automation.
We need better digitization to accomplish overall coordination, whether in smart healthcare, smart logistics, smart manufacturing, or 5G infrastructure.
China's industrial chain was already the world's largest and most complete. Optimistically, in three or four years, China's industrial chain will be among the best in the world in terms of completeness, strength, and resilience.
Ning Tang: Seen this way, after the pandemic, there may no longer be companies lacking digital capabilities, missing "this arm or that leg." Because companies without digital capabilities may have been eliminated during the pandemic.
For companies, digital transformation and digital reinvention are imperative. Learn from leading companies in your industry where you should; bring in technical talent and build technical teams where you must; communicate and interact directly with customers, using big data to analyze customer behavior and gain deeper insights — do this immediately.
At the same time, digitization and technology can enable business model innovation and organic diversification of models. What was offline becomes online-offline integrated. What was a single revenue stream becomes two or more. What was understanding customers through hearsay becomes direct access to customer feedback.
So technology won't replace you — it's the competitor who uses technology better who will replace you. This competitor may come from within your industry, or from outside it.
The pandemic is an opportunity and a turning point for every industry to shift mindset and take immediate action. Dig deep into any industry and there will be opportunities for technological innovation and business model innovation — winners will emerge in every sector.
05 Making young people's voices matter
Ning Tang: CreditEase Wealth has a program that places clients' children as interns at certain funds. FreeS has been our partner for several years now — Feng, your partners, and investment team personally mentor these young people. I think these are excellent opportunities, whether for understanding venture capital, industry development, or how an organization operates. We look forward to continuing our partnership with FreeS Fund this summer.
Feng Li: Thank you to CreditEase for giving us opportunities to work with outstanding young people. If you've interacted with our colleagues or know us, you'll find that our fund is genuinely friendly to young people. Our team culture truly has no sense of hierarchy — people communicate and learn from each other quite easily.
For example, young people are an important part of our investment committee; they participate in investment decisions.
When some LPs conduct due diligence on us, they often ask why our investment committee is structured this way.
Our investment committee has two somewhat unusual rules. First rule: only those who have met the founding team can vote. Including myself — if I haven't met the team, I can share opinions but cannot vote. Because we're doing VC, we must meet the people. We can't judge a project as good or bad based solely on data and business plans.
Second rule: anyone who has worked on the investment team for more than a year and has seen the project has the right to vote. There are some weighting differences between partners and non-partners when voting, mainly for risk control to ensure our investments don't go off track.
Our purpose in doing this is, on one hand, to encourage everyone to engage more with the front lines and learn from founders; on the other hand, to encourage young people to express their views and make their expressions count. Because we believe that even when young, if you're smart, eager to learn, hardworking, and diligent, you always have perspectives on things, and you have the right to voice your stance and opinions.
From the rules of our investment committee setup, you could say we're quite welcoming to young people, with an open mindset.
Summary
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Our methodology is to first figure out what will improve between today and the future, then follow that thread to find strong teams and projects. The growth trajectories of countless companies have proven this: if certain trends are destined to happen at the macro level, eventually some company will harness the power of that trend to grow and lead its industry, even if it starts out tiny.
-
When a small company is growing fast, it's difficult to rely entirely on systems to drive it forward, the way a giant like GE can. In fast-moving and fiercely competitive industries, a good CEO must always stay on the front lines.
-
The digitization of service industries is a typical outcome and trend. This pandemic has pulled many service industries online that previously had high barriers to user trial and were low-frequency, forcing service industries through an upgrade. Companies with better brand equity, capable of serving more users, and operating with higher efficiency will have more pronounced competitive advantages.
-
After the pandemic — whether from a national perspective, industrial structure perspective, or business operator perspective — there will be further push to improve the completeness of industrial chain structure and the digital capabilities of the chain itself. "Completeness" means accelerating technological innovation to achieve autonomous control of key technical nodes and the full chain. "Digitization" means more agile infrastructure and overall management, with higher degrees of automation.
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2020: The Reshuffle and Restart of the Travel Industry | Frees Fund
After the Pandemic: The Survival Elimination Round in Education | Frees Fund
After the Pandemic: New Patterns in Fresh Food, Dining, and Food | Frees Fund
After the Pandemic: A New Era for "Good Companies" | Frees Fund
Feng Li Column 16 | Fresh Food Retail — Learning Early-Stage Investment from the Secondary Market
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