Just this past 2021, we stand at an important turning point for the Chinese economy and capital markets, where many core logics are clearly shifting. The global economic situation looks uncertain, with the big post-epidemic release sending many countries into hyperinflation, stimulating the economy but not consumption, and creating the risk of stagflation, all of which are accumulating new problems.
In addition, the global supply chain is still in a vulnerable period as it is still affected by the new crown pneumonia epidemic; the sudden energy shortage experienced by many countries in 2021 also shows that there is still a large distance between the long-term decarbonization target and short-term energy demand.
This is the macro-environmental uncertainty we will face in 2022. Domestically, we need to understand the international uncertainties, but we also need to be able to focus on and understand some of the opportunities that exist: First, industrial upgrading is driving forces to shift more clearly to the digital economy, specialization and "neck" zone. Second, how to understand the innovation of the technology industry?
In the big era of change, many people have more entanglement, and even choose to lie flat. We have also organized internal teams of investment, post-investment, and data to discuss the new situation, and our most front-line colleagues shared their experiences of dealing with research and technology entrepreneurs. The energy embodied by the founders makes us feel more and more that the era of research technology startups has arrived, and we are more firmly bullish on Chinese technology innovation.
We believe that technology convergence will lead the next wave of growth, i.e. growth and breakthroughs that were in separate areas are now converging to create a new and powerful momentum.
For example, in the smart electric vehicle sector, technology convergence has exploded with great power. In the past decade, thanks to the innovation of power battery technology, from the initial lead-acid batteries, nickel-hydrogen batteries, and now lithium-ion batteries, and even the future of hydrogen fuel cells, graphene batteries or solid-state lithium batteries, the range of electric vehicles from one to two hundred kilometers, into five to six hundred kilometers, the cost has also dropped significantly, paving the way for large-scale popularity.
Once the car power is converted into electricity, the whole electronic and electrical architecture has the basis for change. Thanks to the development of chips and AI technology, technological breakthroughs in these two fields have brought us powerful computing and processing capabilities, allowing electric vehicles to receive and calculate large amounts of data.
When "big computing power" is used in cars, we move from a fragmented distributed architecture to a domain architecture, and pave the way for a centralized computing architecture in the future. So today's electric cars can be upgraded remotely (OTA), and the whole car becomes "alive" and can be iteratively upgraded through updates just like a smartphone.
If "big computing power" is the human brain, we can also add many sensors to the car to replace the human eyes and ears. Emerging technologies in other fields such as positioning systems, LIDAR, vision recognition, etc. can be applied to the car to truly achieve autonomous driving.
Many of the above technologies are the dividends of the "competition" between the cell phone and computer industries in the last decade, and when they intersect with the power battery technology revolution, they have a huge impact on the car industry, which has a history of 100 years, so there are today's ideal, Xiaopeng and other new car-making forces.
There are many other examples of technology convergence, such as the Matrix-backed Sandianji, a startup that combines 3D printing and pharmacology. Similarly, there is Wanzhong Yixin, a startup that uses semiconductor technology for gene sequencing. Another very promising area of technology convergence is synthetic biology, which is the culmination of almost all the underlying technological developments in biology, chemistry, physics, mathematics and computer science. According to McKinsey's prediction, biologically manufactured products could cover 70% of chemically manufactured products in the future. In the past two years, a large number of startups have emerged in this field, and they are moving from the laboratory to industry.
The downstream application scenarios are also very broad, ranging from biomanufacturing, cell and gene therapy, to food and alternative proteins, consumer products and agriculture. We have invested early in synthetic biology and have supported over 10 startups cumulatively.
These are just a few real examples of technology convergence, all of which have breakthroughs in many niche areas that will dramatically change our lives in the near future.
There are many reasons for China's rise, but we believe that the upgrading of the global industry chain is a very important part, because there are many areas where simple domestic substitution is only a short and quick opportunity, and what really has long-term value is the ability to climb further up the global industry chain.
From a more fundamental logic, one way to understand economic growth is to break down the economy into three basic elements: labor, capital and technology. 2021 is a turning point for China in all three of these basic elements.
On the demographic side, we are moving from a demographic dividend to an "engineer" dividend, and the potential we need to tap is higher education/vocational education penetration to achieve higher value-added growth. The remaining two elements are capital and technology. In recent years, the country has introduced a lot of industrial policies to guide and encourage capital investment in science and technology. Science and technology is the first productive force, the core driver for mankind to get out of the Malthusian trap, which exponentially makes the cake bigger and allows people to get rid of the consuming in-roll.
The Chinese market is so big that, for example, more than one-third of the world's chip demand is in mainland China, and we have taken on the third global industrial shift, with many industries moving up the value chain.
The most typical example is LCD panels. Professor Lan Xiaohuan told a history in "Being Inside": Initially, Japan and South Korea LCD panels were the only ones in the world, and they made excessive profits from China every year, resulting in very expensive TV sets. As long as there is no technological breakthrough in the Chinese market, there is no possibility for these companies to lower their prices.
China has finally made a technological breakthrough and mass-produced LCD panels by investing and investing in scientific research regardless of cost, and even giving BOE super national treatment. Now, in addition to the highest OLED, most of the panel industry from Japan and South Korea to China, LCD TV production costs and selling prices have also dropped significantly. The original Japanese and Korean companies that can make high profits, have withdrawn from this industry.
Countries standing in the first echelon will definitely limit the chasers, because once you make it, their profit margins will drop. From the historical point of view, the price strategy of foreign enterprises in China is generally, as long as the local enterprises have not mastered the technology, the price can be set relatively high; once a local enterprise developed, the first half of the price reduction, and then see the situation. Business competition is inherently cruel.
From the perspective of the global industry chain, if China's domestic market continues to prosper and continues to invest in technology R&D, the cornerstone towards the high value zone will be stable. Through exchanges with the new generation of entrepreneurs in the last two to three years, we also clearly feel that they have a stronger ability to innovate in technology, and many entrepreneurs have a first-class international vision at the beginning of their business, and they are more likely to stand in the center of the world stage.
In the past five years, two companies have overturned the capital market's traditional perception of technology companies: Tesla and Apple.
Both point to the need to be more disciplined, to focus more on long-term value judgments rather than short-term valuation levels, and to understand how changes are happening and their impact.
For technology companies like Tesla, estimating value in the early stages is more of an art than a science.
Many technology companies have no profits in the early years, or profits that are far from reflective of its growth, and change so quickly that it is difficult to predict what will happen 10 years from now based on financial models. Many analysts once benchmarked Tesla against traditional car companies and exclaimed that this valuation was a bubble, but then Tesla went up more than ten times. Therefore, it is difficult to focus all our attention on financial indicators, but to shift to study the profound changes, many of the previous experience may instead be a fetter.
Another cognitive change is brought by Apple. Our perception of technology companies has always been high growth, but what kind of growth is considered high growth? As the volume gets bigger and bigger, it is hard to achieve high growth. For example, Apple's revenue growth in 2015-2017 and 2018-2020 is negative and weak respectively, can it still enjoy the valuation premium of a technology company at this time?
The answer is yes, but the source of the valuation premium at this point is more of a popularity premium. When Apple itself in a mega market, a few hundred million sales a year, good enough products, brand, popularity, will form a sufficient market share moat, to develop consumer habits. If you keep taking traditional thinking to valuation, you will definitely miss Apple's 500% rise from 2015 to today.
It is not easy to judge how big a company can eventually be, and it takes enough time to research and understand, rather than simply taking a broad scale, as a company's forecast, and requires a deep understanding of what the real changes in the market are.
Of course, technology investment is not a smooth and arguably risky track, and one of the core points is the judgment of the technology route. Historically, Changhong chose to do plasma back then, and other families did LCD, with the result that those who did LCD later became bigger, and those who did plasma all failed.
The power battery field in previous years is the same problem, is the choice of lead-acid, NiMH, or lithium iron phosphate, ternary lithium batteries? If you choose the first few technical routes, there is almost no longer exist today. But on the contrary, standing at that node, it is really not easy to do the precise judgment of the technology route.
Technology investment is often accompanied by bubbles, because we tend to overestimate the short-term effects of a new technology and underestimate its long-term impact. Many huge bubbles, both in the primary and secondary markets, are often initially the most enticing directions for development.
Today, as technology iterations and upgrades become faster and faster, the opportunity for domestic substitution in "neck" areas and China's complete industrial system have changed the fundamentals a bit.
Matrix Partners started to cut into some technology innovation fields by way of industry groups in 2014; in mid-2016, we started to emphasize technology to empower everything, and did a lot of industry layout and talent reserve. Our playing method can be summarized as: investment ecologization. First, we invest in the "anchor" companies in the core of the industry chain, and then extend up and down, so that each field aggregates into an ecology, forming a more extended network structure in the new energy industry chain, medical, cutting-edge technology, enterprise services and other tracks.
I asked the team to have higher judging standards at the Matrix Partners investment decision meeting: first, all projects need to have certain technological attributes, and second, there are higher requirements for the final market scale.
Technology innovation brings breakthrough technology, or the creation of new products and services, behind these changes, new organizational management is very much needed to support.
The organizational forms can be divided into four types: industrial organization, digital organization, system organization and intelligent organization. Industrial organization is characterized by the control of the process; digital organization is also a kind of early mesh organization, its core difficulty is to find the organization technical architect; and system organization is the combination of network platform and traditional industrial organization.
In fact, not all companies need to evolve to a smart organization, but why are smart manufacturing companies evolving from a system organization to a smart organization? Because at the beginning, such companies contain manufacturing and software, and the most important value is reflected in the software, for example, when they do updates through OTA platforms, produce according to user needs and personalization, and have a thousand faces, people start to consider using a relatively complex mesh organization, which is a form of digital or system organization.
Further on, such companies have a great potential to jump over the $100 billion valuation threshold, when the company starts to move from product/platform to a real ecology, and the distinguishing feature from the organizational level is that it finds it very difficult to do strategy.
Many new opportunities arise from within. When such organizations start to taste the sweetness of bottom-up and start to pursue internal innovation sustainability is when they start to really think about smart organizational forms. This is also the time when companies are about to explode into more vigorous life, thus calling for more STI attributes.
The competency requirements of a smart organization also change at this time, and a third role in addition to business and technical architects will emerge - that of an organizational architect. The most important thing for a team's hand is not to propose goals, but to be able to discover new goals and support their eventual implementation into products, into innovation and change because of sharing and co-creation of cognition.
The most important feature of an intelligent organization is that the organization comes first, adding cognitive co-creation and synchronization on top of the features of a system organization. If we think of business as a philosophical proposition, then the brand answers the question of "who" and only the organization can answer the question of "where we come from" and "where we can eventually go."
On the other hand, if the organizational form can drive the innovative strength of a company, there is another change that needs to be noticed. More than ever, we need to care about our company's membership as a member of society, about corporate social responsibility, and about being sustainable.
Under the general platform of common prosperity, every entrepreneur needs to re-understand CSR, and the company's goal is not to maximize profits, but to make the whole big ecology better under the premise of its own strong.
Companies that do well in environmental, social, and governance generally have better supply chain management and corporate governance, factors that are needed to survive the impact of the new crown pneumonia epidemic.
In 2021 we contacted hundreds of outstanding research and technology entrepreneurs, and it is clear that there is a very benign entrepreneurial atmosphere and quality upgrades in many technology areas, such as electric vehicles, smart manufacturing, synthetic biology, innovative drugs, chips, 3D printing, etc. These are all areas that may achieve a bend in technology innovation and are areas that deserve serious polishing.
At the same time, it should not be overlooked that China's huge market and complete industrial chain allow huge space and growth potential for the head enterprises in any industry, especially those where technology is integrated. They have a chance to break through to world leadership by making a hard jump upwards, and many ambitious founders are fighting for this.
In the face of the challenges and unknowns of 2022, we have listed a few tips based on past experience for your reference.
1. In the era of technological innovation, founders and teams with scientific and technical backgrounds have a full range of iterative opportunities, so they should make maximum use of this time window, from finding true nuclear partners and strategic HRD for their teams; trusting the power of financial and legal-related professional institutions to front-load to avoid stepping on potholes; systematically designing their own comprehensive growth from strategic, organizational and management dimensions, and not setting limits to collide with founders in different fields. We can accelerate growth and iteration from the perspective of collision with founders and so on.
2, many technology companies are characterized by a long and difficult technology cycle, which requires advance design of the core turning point, which can also be called the risk release point, that is, when the breakthrough of this turning point, the survival rate of the project will be greatly increased. The cash deficit needs to be revisited at the beginning of the year to develop a reasonable plan for the use of funds and a realistic and executable budget to manage internal and external expectations, such as the founder reviewing his cash burn rate (Cash Burn Rate) and expense flow (team/IP, etc.) at least monthly. If there are less than 9 months of funds, it is recommended that measures be taken in advance to alleviate financial constraints.
3. In the context of the state encouraging institution staff to start enterprises on-the-job, there will be more and more science and technology transformation projects in the future. We remind founders to pay attention to the ownership of intellectual property rights of the target company and the issue of part-time formalities in the target company. When designing the equity structure of a research and technology company, a core point is that there must be decision makers, especially not to share the equity equally, which is a pit that many companies have stepped on.
4, 2022 A shares will soon enter the era of full registration system, which is good for scientific research technology companies, but the registration system is not the same as the relaxation of the threshold and conditions of listing, but more attention to the accuracy of information disclosure, the quality of the listed company itself. The founder of scientific research technology is authoritative in his field of expertise and has accumulated deep technology. But often also because of the strong scientific orientation, there will be some ineptitude outside of science. Therefore, in the early stage of financing, we should pay enough attention to the problems prompted by professional institutions that have substantial impact on the listing and solve them as soon as possible; in the middle and late stage of the company's development, it is recommended that the founders introduce professional intermediaries such as brokerage firms at least two years before the listing, so as to correct mistakes in the process of enterprise growth in a timely manner.
5. In the context of "strengthening anti-monopoly and preventing disorderly expansion of capital", enterprises need to strengthen their awareness of compliance more than ever. In the past, people thought that small and medium-sized enterprises might not be involved in antitrust risks, but in fact there is no universally applicable "safe harbor", and the regulation is not only for giant enterprises; data protection is no longer "paper talk", and the "data sovereignty" conflict between countries has intensified. Data sovereignty" conflict intensifies, and government enforcement strictly controls excessive data collection and abuse.
6. In the current extraordinary period, it is also a good time to "grab people". The epidemic has brought about industrial restructuring and talent flow, and companies should pay attention to the changes in demand for talent skills, increase the reserve of innovative talent, and optimize the talent structure in a timely manner. Of course, they should also plan well to avoid blind expansion after financing. Selecting people not only depends on experience, but also on potential as well as resilience. Balance the pace of development from all dimensions, and be more rigorous and prepared to face 2022.
You can say that the world is changing too fast these days and be overwhelmed by many changes. But remember, no matter what time it is, the truly great companies never grow in good times, they must grow against the trend. The wave of companies that rise up after the adversity is the real leading company in the future.
