Cao Yi established Source Code Capital in 2014. Today, the company’s investments span numerous segments, including Internet finance, industrial Internet, gaming, media and entertainment, online-to-offline, as well as the increasing presence of Chinese virtual/digital products in the global market.

Source Code Capital specializes in early-stage investments in the telecommunication, media, and technology (TMT) sector, currently managing close to USD $500 million and RMB 1.5 billion. One of the distinguishing characteristics of Source Code Capital is that the company enlists founders, entrepreneurs, industrial and New Economy veterans from close to 30 leading Chinese IT companies into its inner circle called “Code Class.” Code Class links industrial capital with financial capital and forms a super-hub strategic alliance between technology, innovation, and investments.

Cao Yi previously worked at Sequoia Capital and has over ten years of venture capital investment experience. In the past two years, Source Code Capital’s investments include:

Fintech companies such as Qudian, Licai.com, Yinker, Yongqianbao, Ether Cap, Nongfenqi, and Suishouji;

Industrial Internet companies such as Yijiupi, Shanghai Kakao, uban, Weimai, Baibu, and Ruigu;

Online services providers such as Meituan, Lianjia, CHJ Automotive, Jiaoer Waimai, Hainabian, and Meili Inc. (Mogujie);

Digital enterprises that are increasingly global, such as Toutiao, Mobi Magic, and Zenjoy.

Cao Yi has a unique investment philosophy:

Industry capital typically does not partner with many start-ups, and their investments usually only target ones that generate high returns. We think that start-ups should avoid siding with any single investor too early on. Instead, they should establish a solid internal structure. Only then are they able to negotiate on equal terms with Internet giants and form equitable partnerships down the line.

Cao Yi’s exclusive interview with CYzone during the Demo China Finals (Autumn Summit) in 2016

1. New Investment Trends

Investors and entrepreneurs from the supply and demand side of venture capital have been experiencing changes in recent years. Cao Yi believes that as an investor:

More and more industrial capital and traditional financial institutions are starting to get involved in venture capital and private equity investments. At the same time, insurance companies and banks are also moving into equity investments. This could generate an additional tens of billions of RMB in funding.

Yi tells CYzone that the surge in capital supply has benefited many industrial leaders. The well-established “Internet+” framework will likely see further financial support and accelerating market presence.

• Companies such as Alibaba, Tencent, Meituan, Toutiao, Didi, and JD.com have a significant amount of allocable capital, and they will likely be the biggest beneficiaries here.
• The top two leading companies in each industry should always be in a good position to receive funding.
• Relatively conservative sectors that have an explicitly set investment structure, or industries that have lower risks, will also benefit, but the competition will be more intense there.

As a result of the lengthened period from investment to returns, greater competition, and thus relatively higher risks in start-up investing, venture capital investments may not see a massive influx of funding. The competitive pressure of venture capital investments is lower in comparison. However, every investor should have a clear investment strategy, and focus on where they have a competitive edge.
2. A “New Wave” of Entrepreneurship

Although “Internet+” is still a hot topic, as Source Code Capital founder Cao Yi sees it, the new breakthrough opportunities within this space may start to cool. “Internet+” has provided society with deep infrastructure, connected many industries, and laid the foundation for the next wave of entrepreneurship.

Based on this line of thinking, Yi predicts two trends for the future of entrepreneurship, which are “AI+” and “Global+.”

1) AI+. “Internet+” is about embedding the Internet with offline industries, which in turn, uses the Internet to assist industries to better manage their resources. As such, efficiency is enhanced. When “Internet+” has successfully connected and accumulated data, artificial intelligence (AI) can then begin to work, hence we have “AI+.” The allocations of resources that were once completed by people can now be done by machines and algorithms.

Yi believes that this year is the starting point of AI. While the industry is still in its infancy, we are already seeing AI emerge in companies in the education, financial, and security sectors.

2) Global+. The world is becoming flatter, like one world sharing one dream, and one entrepreneurial company in one global market. The trend is that Chinese companies will go global. The first companies that did so, such as 360 and Cheetah Mobile, have achieved excellent results.
Yi thinks that this trend will grow, and more companies, including Internet giants like BAT (Baidu, Alibaba, and Tencent) and even smaller start-ups, will try to enter the global market. They are likely to resort to “dimension reduction attack” tactics, sacrificing innovation in favor of competition, or they may use their cost leadership strategy to compete for international markets.

Cao Yi points out that the two trends will continue for five to ten years, as there will unlikely be a sudden burst of opportunities within the coming year or two. Within the coming two years, opportunities for entrepreneurs are still within the framework of “Internet+,” however calmer it may be. Of course, entrepreneurs should plan for the long-term for the upcoming “AI+” and “Global+” trends.

3. Industrial and Financial Capital “Superhub”

Cao Yi defines Source Code Capital’s strategy and positioning as an “Industrial and Financial Capital Superhub.” While it is difficult for start-ups and industrial capital to collaborate directly or intuitively, they can do so through Source Code. Source Code Capital can help start-ups and industrial capital work together, and aid the development of start-ups with both financial and industry capital and knowledge.

Source Code Capital’s limited partner base initially came from more than 30 top-tier New Economy and A-share listed companies. This includes executives from companies traded on China’s domestic stock market, as well as U.S. and Hong Kong stock markets, as well as senior management teams from the BAT. This group collectively has a vast amount of accumulated capital and social resources, such as business connections and licenses.

Key members of Code Class.

One of the core competitive advantages of Source Code Capital is its ecosystem, which is designed to serve entrepreneurs. That ecosystem stems from its Code Class.

Code Class is an inner circle, a strategic league for entrepreneurs to exchange ideas and assist one another, similar to an alumnus society. Limited Partners act as “senior students,” and the investee companies are like “incoming students.” Code Class connects the two groups, enabling the sharing of resources through internal and closed-door learning events, regular meetings and brainstorm sessions.

Take Yijiupi, a Source Code Capital portfolio company, as an example. The company supplies fast moving consumer goods to 15 million restaurants and convenient stores in China. Source Code helped Yijiupi attract Meituan as a strategic investor. As both businesses share similarities, the 4 million companies on Meituan’s platform now have the potential to become the most direct and efficient customers of Yijiupi. Through Source Code, Yijiupi is able to establish and deepen its connections with industry capital, which is a key factor enabling the company to rapidly attract and receive Series C financing.

4. Seeking Investment Opportunities in 27 Fields

Cao Yi describes his system of investments as “forming an investment matrix based on our “Big 3” fundamental drivers, and across nine sectors.”

The “Big 3” fundamental drivers refer to “Internet+,” “AI+,” and “Global+.” The nine sectors refer to nine broad segments: including media, mobile search engine, travel, catering and accommodations, industry B2B, business informatization, finance, education, and healthcare.

These “Big 3” fundamental drivers and nine sectors form 27 “fields” for investment, each with varying degrees of maturity.

Some are already mature, so these spaces are considered to be in the grey area. Some are like red ocean, others are like blue ocean, the least mature spaces (not ready for venture investment) are referred to as icebergs.

“When the water is at the right temperature, that is when Source Code moves in,” says Cao Yi.

Some of these fields emerged five years ago. For example, in the media industry, “Internet+” has helped transform traditional media groups, such as magazines and newspaper publishers, into today’s digital media groups. As “AI+” emerges, there are new areas for investment, such as using AI algorithms to form personalized content recommendations. That is why Cao Yi chose to invest in Toutiao (also known as ByteDance).

In the future, “Global+” could also be applied in a similar manner. “Where is the global version of Toutiao? That is the opportunity that venture capital investors need to look for.”

5. The Era Needs Multi-Faceted, All-Rounded Entrepreneurs

Cao Yi’s deepest impression over the past two years (since founding Source Code) is that entrepreneurs nowadays are different from the past.

On the one hand, this era requires entrepreneurs to be more well-rounded. A few years ago, an entrepreneur might have some apparent shortfalls, but he or she will ultimately succeed, as there were fewer absolute elements needed to succeed in the industry.

However, the requirements on a start-up team today are far more demanding, including:

• Skills, organization, and ability to attract support from social resources;
• Ability to communicate and negotiate with policy;
• A thorough understanding regarding the development history of traditional industries;
• More comprehensive entrepreneurial and leadership skills, the need to be better at integrating resources, think more internationally, and so on.

On the other hand, business growth today is different from before. A start-up cannot merely rely on venture capital and private equity funding or help to scale and/or eventually achieve IPO. The trend is for companies to utilize industrial capital to build on strategic mergers, acquisitions, and also tap into IPOs to promote growth. Entrepreneurs and investment firms also need to adapt to this trend.

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