Livecast #10: Richard Xu of Grandview Capital on Investing in Chinese Entrepreneurs Going Overseas "Chuhai"

Rui: Richard, thanks for being here.  Could you give us an introduction about yourself?

Richard: So first of all, it's my great pleasure to be here today. Currently, I am doing cross-border investments in Silicon Valley, and I come from a fund called Grandview Capital.

So our firm typically focuses on Chinese going oversea companies, in Chinese, it’s called Chu Hai. It means the Chinese team doing their business in a new market. Maybe emerging markets other than China.

Rui: What about yourself? What did you do before joining Grandview?

Richard: Actually Grandview was founded in 2015. So I was in Silicon Valley, seeking some investment opportunities. The founder is Joe. So he was the first investor of Tik Tok.  He is funding Chinese go overseas direction firm. So by then I just joined that team together with him. 

Rui: So you co-founded Grandview capital.  

Richard: Yes, kind of like that.

Rui: What were you seeing back then that made you want to start Grandview?  What were the environmental factors that made you guys say, okay, 2015, this is the right time to focus on Chinese entrepreneurs who are attacking overseas markets.

Richard: By then I was focusing on DTC and the production go overseas, and Joe he is focusing on the mobile internet. By then he was the investment team leader in Cheetah. And Cheetah is a very big famous company that is doing their applications in the oversea market, they are doing a pre-master, yeah.

Actually the trend, both the production from the manufacturing side and also the TMT side. So those two industries started their expanding to new markets from maybe 2010 or even earlier, we could see that some combinations like Cheetah Mobile, or 3G desktop. They produce their applications and launch them in a foreign market, like in the US or in an emerging market, like Southeast Asia.

From 2013 to 2015, that big company, which is one of the best Chinese go overseas companies Musical.ly what do we call it at right now, Tik Tok has been growing up.

So that's what gave us a potential opportunity to look at a Chinese-made application that can be released as rank one in a certain market, even in the US, so that gave us some idea when we build up a fund to find out more Musical.lys.

So that's why we tried to fund this Grandview Capital in 2015.  And even though the US has a very long history of the globalization of China because the domestic market is big enough. So many of the Chinese companies do not have the need to go outside, to expand to a new market, but the TMT industry and also the manufacturing industry because their industry they tend to have more corporations between different companies in China and all over the world. So they put their eye into the world. Earliest stages, early years.

Rui: So you think the nature of these two industries, specifically manufacturing as well as just technology makes it easier for these companies to globalize. You're based in Silicon valley and your partner's based in China, what's a reason for having one of you based here?

Richard: One big thing for the go overseas industry — this is a theory created by Masayoshi Son. Some call it the time machine theory. Because I think it's called a mature business model which is very sophisticated in a mature market like China or the US and then we brought them into a new emerging market. And then we can copy the business model. So I think this is something that both China and the US team, those two big mature markets have many successful advantages, like the business model and also the technology, the engineers, and it can be used in a foreign market.

Rui: So you're basically thinking that there are Chinese entrepreneurs who can make businesses that you learn through this time machine paradigm either from other US businesses or other Chinese businesses.

Richard: Yeah, exactly. So many companies that are rooted in China on their first day, some of them started their business in Silicon Valley. And some are Chinese teams and some are even foreign teams. So we invest mainly in the US and Chinese team and doing their business in a global market.

Rui: So Grandview’s been around for six years. Is there anything that's changed? 

Richard: Yeah, I think the opportunities we can see are evolving all the time, from six years ago. I think five years ago most of the Chinese team doing their overseas businesses were trying to do a TMT and it's called application go overseas. So they just develop applications and they just put it into the iOS store. Maybe the Android store, it's very easy. You don't need any local team.

So we can see that right now, many companies, they build up their local team to emphasize they are localizations, so it's different. Many teams are doing applications. Many are doing gaming, like e-commerce, many are doing the DTC, the branding. So I think many teams are doing SaaS. We can see that, Zoom, those companies, although they are Silicon Valley-based (the team), you can see that there are Chinese background funders, so many teams are starting to do a higher level of high technology.

And also in terms of the markets. So previously, for many Chinese teams, their main market was the US market. But right now we can see especially the last year after the COVID, the top three markets, which Chinese entrepreneurs invested in were Brazil, Indonesia, and the US.

Rui: I wasn't aware that Brazil had become so big. I know Southeast Asia has always been popular with Chinese entrepreneurs.

Richard: Actually, yes. Currently, you can hardly find any market without any Chinese or US entrepreneurs, so we can see that many Chinese teams are doing their business in Africa, in Europe. Some are unicorns. So for example, in the Middle East, they have a very big company called Yalla, it's a US stock listed company and it’s a Chinese company.  So I think that in many markets, they all have all kinds of different entrepreneurs there.

And why are many people talking about Southeast Asia and Latin American areas? I think the reason is that those markets have large amounts of customer numbers. For example, Jakarta is one of the big cities that have tens of millions of people, especially young people. You can just put a new product onto the market, then it proliferates very rapidly and it’s very easy to make it your go-to-market strategy.

Rui: I wanted to ask if you have any sort of key lessons that you can share from the last couple of years of investing and then watching the companies grow, right? 

Richard: I think two things are very important right now, one thing is that the go overseas investment is different from a global investment. So how do we need to interpret their sales? I think the situation is quite different.

There is a world called F O M O: fear of missing out. So many companies like Andreessen Horowitz, like Sequoia, started their investment in India. I think for most of the VC is actually, they do not have the advantage and they do not have enough resources to invest into the local companies.

From the past experiences, we find out that good material or a market team can do their business much better than the local company.

So we tend to invest more into a Chinese company or a US company. And the other way is that we've been talking about a time machine theory. So currently you can see that so many companies are trying to copy Chinese or US business models, but they are evolving a lot and they create their own different way of doing business. They are very successful. For example, the Oyo, which is an Indian company. And also Gojek obviously, which is a very big company, giant team in Indonesia. I think many opportunities growing locally right now. So it’s different.

Rui: So how does that impact your investment thesis? Your point earlier was that you still prefer more entrepreneurs from more mature markets. But then you're also saying that the emerging markets have their own innovations.

Richard: The thing connecting those two issues together is that a good team, you need to study the needs of the local market very well. And right now the air force business model doesn't work. Previously we can see that you just throw your application onto the markets without putting in any local team.  

Many of our team's operations teams are locally in the emerging market. So I think that this is very important. For example, the Lime bike team San Francisco, it's a Chinese go overseas market actually. So built by the Chinese founders and also the supply chain, basically in China first beginning. So they try to build the bicycle obviously, but later on, after the localization, I find out that the bicycle doesn't work. So they've switched to the electric scooter, right? I think that many similar examples can be drawn.

Rui: I didn't realize you would consider that as a Chinese Chu Hai Xiang Mu. I guess that makes a lot of sense.

What are some interesting portfolio companies, you have that embody this behavior that you just talked about?

Richard: Yeah.  Still, as we said, we cannot focus on three different industries currently. Why is the mobile internet? TMT. In this part, almost half of the TMT entrepreneurs doing the go overseas business are doing the gaming.

So gaming is very big. So we invested in a company, which is very interesting. It’s called Habby and their product is called Archero.

And the other one, I invested in a company called Shoplazza. So it is very similar to Shopify. So the second direction for our fund base, obviously, is e-commerce and DTC. Shoplazza is serving the needs of the emerging e-commerce entrepreneurs to build their online store, which is very similar to Shopify.

And the third one, we focus on the Chinese SaaS companies. We invested in several SaaS companies in Silicon Valley, actually founded by Chinese founders. One good company is called Hiretual, that they are helping the HRs to use AI tools to do the hiring in the future.

Rui: So I wanted to really dig in specifically on DTC.  DTC has been such a terror in China recently in the past, I would say maybe five years, but especially the last two years. And I think the most impressive cross-border one is Shein. We have everyone talking about it! That's like a huge company that might overtake Zara in terms of gross revenues in the next year or so.

What do you think about the industry? And besides ultra-fast fashion, what are some of the other opportunities that you think are interesting for Chinese entrepreneurs going abroad?

Richard: Previously we were talking about the production, the manufacturing industry. China has been the world’s factory for a while. So from 30 years ago, many Chinese companies around Shanghai, around Guangdong, have been doing the OEM. They produce for the big brands in the US or Europe. They offer the factory, they offer the workloads, and then after a couple of years of doing ODM and OEM, they find out that they have the production ability. They want to have their own brands. So I think this trend is growing even gradually.

Before I joined the Grandview Capital, I was working at Hao Hai Zi. So a Good Baby, a Chinese listed company. And this is the route that they walked through in the past 30 years ago, the 1990s so started from OEM and then they started to try to do some of their own business, their own brand in the US. So previously they did not have enough funds to do all kinds of production, to do all kinds of the brand development, they are not very good at it.

So the thing is, it's changing right now. So right now, the whole ecosystem is complete. Especially last year because of the COVID-19, many of the companies and many people are staying at home, so more e-commerce to purchase things online. So I think that's one big reason for Shein to come out to be noticed by most people. And also the Chinese supply chain has become a very mature status in the past, like five years. 

Their silver bullet is very simple. They can launch like 3000 new SKUs in one day and they try it fast. So if they find out some SKU is a good catch, easy to sell, they will duplicate it immediately. They will produce that SKU immediately. And they also have very strong merchandise on the marketing app.

If you're talking about the opportunity in DTC, I think at least there are two different kinds of opportunities right now that we could focus on. One is branding. The new brand itself. So many companies are trying to build new brands or new products.

And also the other trend is that the services that help the DTC companies to expand into the new markets. Here you can find the SaaS company, you can find the MarTech company.

Rui: When you talk about brands, are there specific sectors that you think are interesting and also you had said that Shein is very hard to replicate?

Richard: I think in the early several months, there were many companies trying to say that they are trying to do a new Shein now. But right now you can see that almost no people will see that they want to copy Shein because all the players in this market started to notice copying Shein is impossible. They just try to copy Shein in some sector or maybe just one layer, one stage in the whole supply chain.

Currently, most of the Chinese companies are doing fashion which is very big. And also the home decoration is very big and also electric, especially the smaller appliances in the kitchen.

Rui: But you haven't invested in them, I guess it sounds like you are less enthusiastic about the brands and more excited about the services. So with these services right now, Shoplazza is servicing Chinese merchants trying to go abroad. Do you expect that ultimately they're trying to service much more than Chinese merchants?

Richard: I agree with that actually, the team is actually the team is trying to be able to have more advantages and try to seek that opportunity to seek customers in other emerging markets, something like that. So I think the ecosystem is getting more and more mature and definitely, Shoplaza is seeking the possibility to do that. But who knows, Shopify is very powerful.

Rui: Besides I guess DTC, we talked about SaaS, right? Are SaaS portfolio companies of yours from day one, are they interested in selling outside of China?

Richard: So currently there are two different things in this industry in the SaaS direction. If you're talking about, so the companies that are offering e-commerce, many of their customers, actually, live in China, so they are selling their service to the Chinese customers.

But for the other ones, for example, the Hiretual, payments Arrays, maybe like some CRM service or something, tend to have at least the first batch of the customers from the US or the mature market because the SaaS business is different in the US and China.

So in China, we don't call it Software as a Service, sometimes we joke, we call it ‘Service as a Service’. So you have to build up a very particular service for each of your customers and it is very hard for a startup to do that. So companies like Zoom or other SaaS companies that the environment is more welcoming in the US.

Rui: Are you seeing a lot of competition these days? Are there more and more funds who are doing what you're doing? I would assume so, but I want to hear your opinion. 

Richard: The answer is definitely yes. The thing is that in 2015 there were only three funds in China that put their focus on go overseas markets. So I remember very clearly that at the end of the year, 2018, we had a cocktail party in Shanghai and there were like 70 different funds that joined our cocktail party. And almost all the Chinese famous funds started to build a team or maybe a department to focus on the Chinese Chu Hai. 

We feel like this is a high-speed way, and we are driving a taxi. We get onto this speedway very early, and we're moving very slowly. From 2018, we'll find out there are many competitors that drive a Ferrari onto this high-speed way and they are starting to catch up.

And I think in China, especially for the TMT industry, there are only two possible directions to seize more market share: one is called Xiachen which is going to the subprime market, to the villages, to the small places. The other one is Chu Hai. It's going to the new emerging markets. So they do not want to miss this opportunity. 

Rui: I have a lot of friends who are operators in China and they tell me they're constantly getting recruited by these funds to say, Hey, like that app that you're working on, do you want to make it for the Middle East market?

Richard: Now, many funds are trying to do this kind of thing. And also, almost all the Chinese big internet companies are doing this. CBC is doing this right now. Like Tencent Alibaba, they started, they are a global investing as well.

So currently you can see Bytedance and also many of the successful go overseas companies, they started to do the investment. I think that actually helps the whole ecosystem become more mature and healthier. So if the whole system is only 3 or 5 early-stage funds, many of the portfolio companies still do not have the resources to grow big, but right now it's small, sophisticated, and we have a very comprehensive investment and entrepreneur environment both in China and the emerging market.

I think that this is good. This is the thing that once we have, and also many US companies offering their resources to the Chinese go overseas companies too, like Google, Facebook. So I think this is good. 

Rui: You mean through their cloud programs or things like that?

Richard: Yeah. So many of our friends feel like Facebook is not launched in China. Google is not launched in China, but you know what a huge amount of the income of those two companies comes from China. Because their advertisement customers are all Chinese go overseas companies.

And also actually their products are really helpful to those Chinese companies who want to expand to the new emerging market, maybe to the US. So there's obviously that they try to pull more results into the whole Asia market, especially with the Chinese market. 

Rui: I like to ask always, what is either something that people always get wrong about your industry, or what you do that you wish people would really understand?

Richard: Okay. I think one thing I want to point out is that previously there was a big trend that Chinese companies are copying from the US right now. And actually currently many people, many funds see that the trend is that it's very important to copy the business model from China. So I think currently in the go overseas markets we can't just rely on Chinese or US business models. We have to have more localization-based models. So I don't think the way of just copying is working. 

Rui: Got it. I agree with you. That's why I like to call it inspired by China. Okay, cool. Richard, how can people find you on the internet?

Richard: Yeah, I have my LinkedIn page. That's Richard Xu Grandview capital.  

Rui: If you're an entrepreneur who's inspired by China and wants to do your business globally, maybe you should look up Richard at Grandview.