The following is the full text of the speech by Cao Yi, the Founding Partner of Source Code Capital:
It has been roughly 20 years since the establishment of the “Three Great Portals” – NetEase, Sina, and Sohu. The history of China’s rapidly evolving information industry is just as magnificent as the first and second Industrial Revolution. The market value of the entire industry has grown exponentially from under a hundred billion dollars in 2004 (the year I “strayed” into the venture capital business) to around USD $700 to $800 billion today. Tencent’s market value went from about USD $1 billion at its IPO in 2004, to $260 billion dollars today in just two years. It has since been recognized as one of the most valuable Asian companies, along with Alibaba.
Why did the information industry experience such an incredible growth in the past two decades? More importantly, where, when, and to whom, will the opportunity present itself? How big will the entire industry reach in size? These are fundamental questions everyone should think about, very simply because you could be the very next Jack Ma, Pony Ma, Neil Shen, or Masayoshi Son.
It has been twelve years since I began thinking, discussing, observing, testing, and forming my own thoughts about the information industry. Although I had missed a few high peaks, I was fortunate to have dodged many “land mines” along the way. I have learned a great deal from other leaders who have taught me how to navigate the industry and stay away from “hanging in limbo.”
Till now, I have continually immersed myself in this grand revolution of information.
I will be sharing some stories today, please accept my humble remarks. Perhaps this may serve as my kind of contribution to the information revolution.
What is the source of China’s exponential growth? I think that would comprise two areas: The mighty “Push” from a powerful computational supply, driven by “Moore’s Law,” and the economic behavioral “Pull,” brought on by the gradually growing demand in consumption and production.
Graphic: An overview pyramid showing the evolution of the information industry
The Supply Push: As defined by “Moore’s Law,” computing costs, storage costs, and transmission costs are constantly decreasing. For example, this happens within a nuclear reactor, where nuclear reactors’ energy is generally transmitted from the bottom of the core to the end of the application, and its application extends to and nourishes all walks of life.
The Demand Pull: All industries are gradually “inspired” by informatization. Sooner or later, this leads to the adoption of information technology in transforming products, services, and configuration methods. Take the earliest “inspired” mass media industry, for example, where it evolved from graphics to short video clips, then from high-definition HD to mobile HD. The “insatiable” consumer demand stimulates the rapid development of the industry.
Due to their IT infrastructure, including basic software such as chips, OS, and databases, U.S. companies still have a relatively advantageous lead in the global market. For the time being, we will pay more attention to the application layer of innovation. Next, we will focus on the development logic of the top application layer. Then we believe we will begin to understand from where, where to, when, and to whom, the next big innovation opportunity will come.
1. The momentum: “Our “Big 3” Fundamental Drivers”
We divided the applications of Information Revolution into three major “waves.”
The first wave is the “Internet+” wave. Digital transformation has become one of the most important topics in the past two decades. A common term used in this industry is “Market Economy 2.0,” also the most crucial concept and first step within this industry. As the name suggests, “transformation” is the process that transfers all offline economic behaviors into online networks, with its greatest value found in improving the efficiency of resource allocation, inventory optimization, and maximizing incremental consumption satisfaction. This in turn will help average users and small-to-medium-sized businesses enjoy high-quality goods and services at an affordable cost. Examples of the earliest online media transformation allowed consumers to browse through newspapers and magazines all over the world through the three “Great Portals.” The result is that even those who do not buy newspapers can also form the habit of obtaining information online.
This same idea applies to the online retail transformation. In the past, consumer decision-making and choice was limited to goods offered by nearby department stores or markets. Now, affordable goods can be purchased all over the world through online B2C sellers like Taobao, JD, VipShop, and Mogujie. The Internet has been re-inventing the way companies operate, by improving the efficiency of internal management, as well as improving transactions and communications between other companies.
One of our portfolio companies, Yijiupi, has helped more than 10 million small businesses, such as restaurants, tobacco stores, and convenience stores, to establish a more efficient procurement process. Massively under-serviced classes of individual consumers and firms can benefit significantly from the recent progress made in Internet finance.
Financial institutions, such as banks, used to classify mid-to-low-earning individuals and small-to-medium-sized businesses as the “ugly ducklings,” because it would be extremely cost-inefficient to provide services to them through the conventional Teller-counter model. Other companies that Source Code has invested into, such as Qudian, Yongqianbao, and Yinker, have made good use of new tools such as online customer acquisition, remote big data risk control, and high-efficiency information system management to turn these low-hanging fruits into “gold mines.” This is an example of “incremental optimization.”
Internet+ can be roughly divided into two phases: the initial phase being PC Internet+, and the second phase being mobile Internet+ combined with IoT+.
The first phase revolves around solving major issues for “mid and high-income groups,” and addressing the need for “anytime” consumption, and “macro configuration.” The second phase addresses problems related to “universal accessibility,” “anywhere” consumption and “new supplies.”
During the transformation from PC Internet+ to mobile Internet+, some leading players are able to maintain a solid presence, holding on to their “boarding passes” in the new age, while others who cannot as successfully transform may run out of luck and be disrupted or replaced by the new “climate.”
The second phase is the “Smart+” wave. “Internet+” has made three major fundamental contributions to the “Smart+” wave: Connectivity, data accumulation, and mass usage scenarios. Artificial intelligence can flourish when all three elements are actively working together. This phase works similarly to that of the human brain: learning from previous authors (data accumulation), practicing decision-making in various situations (usage scenarios), and “moving our limbs” (connectivity). Connectivity would include the connection between human beings, human to objects, and between objects themselves. With these connections in place, we are able to control electrons with electrons, and atoms with electrons.
Let’s take the “Smart+” wave in the field of media content as an example. Toutiao, a company we are invested in, provides users with a “private content consumer assistant.” This program acts as a personalized assistant to select and summarize information based on consumer needs, a perk similar to the tailored assistance executives and presidents receive from personal assistants. In the area of lifestyle consumption, Meituan provides users with e-commerce services like dining and entertainment. As Meituan develops, they will begin to provide a “personalized life assistant,” similar to Amazon’s Echo/Alexa. This can enable users to quickly and accurately pinpoint their offline shopping destination.
In the domain of transportation, there is an intense race taking place in the U.S. between Google, Uber, and Tesla, to see who can make the first successful self-driving vehicle. The winner could be the ultimate source of the “personalized chauffeur or driving service.” In the manufacturing industry, the employment rate of machine workers is gradually decreasing in many places. In the future, it is possible that these functions may be replaced by more well-rounded “super robots.” At that point, only cyborgs may be compatible or can compete with these “super robots”.
If the wave of “Internet+” mainly focuses on resource allocation, optimizing inventory, and stipulating growth, fundamentally speaking, it is helping the offline economy move online. There are no “new products” necessarily being created. “Smart+”, on the other hand, would be inventing new “species” – robots or something on a different level in terms of value creation.
The third fundamental investment driver we see is what we call: The wave of “Global+”. The era of “Global+” has arrived, but it has not been evenly distributed. The world relies on significant benefits stemming from the information revolution. However, most countries are not capable of providing quality products and services to their residents. Therefore, we believe there is opportunity for corporations from China and the U.S. to eventually become major providers of quality IT products and services globally.
The success story of Huawei is proof that Chinese companies have the capability to enter and provide services in major nations worldwide. We have witnessed outstanding achievements from companies like HKVision, Kunlun Tech, 360 Security, Apus, and Cheetah Mobile. Based on the continual expansion of an already vast pool of talent, a more sophisticated capital market, and continually growing political and cultural influences, we believe that Chinese corporations have opportunity will eventually service half of the global market.
One of Source Code’s LPs, Kunlun Tech, is one of the first Chinese businesses to tap into the overseas digital market (six years ago). The founder, Mr. Yahui Zhou, barely spoke English and the company had no base abroad to expand operations. However, backed by excellent development resources and operational experience in internet and mobile games, the company made its way into the international market. This year, Kunlun Tech will be expanding into more advanced markets by acquiring companies like Opera and Grindr. Another company we invested into is Mobi Magic, which is known for its “Security 360” program. This program has already accumulated millions of active users and subscribers, especially in the U.S., where active daily subscribers reached over ten million. This demonstrates that “Global+” has only just begun and will continue in the years to come.
2. The right timing: “The Four Seasons”
Currently, we believe that the entire information industry is at the later stage of the Cambrian period. Though some major species have “claimed their turfs” so to say, countless new species are emerging from the shadows due to tectonic plate movements and climate change.
Each of the twenty-seven grids I mentioned in our “Big 3” fundamental drivers (shown in the chart with the 3 by 9 investment matrix) has its rightful “season.” The four seasons represent the “frozen icebergs,” the “blue ocean,” the “purple ocean” (blue and red mixed), and the “red ocean,” which signifies the various stages of development of an industry. During the “frozen iceberg” period, species lack the necessities for development due to the overly cold-water temperature. During this period, we patiently observe and pay close attention to temperature changes, and wait for the precise moment to sprout. The “purple ocean” resembles a stage where new businesses can achieve exponential growth if they have gathered the true components to mature.
Many industries currently still remain in the “blue ocean” (representing new, untapped markets, potentially new breakthrough products or disruptive technologies) and “frozen iceberg” stages, waiting for investors and entrepreneurs to unleash their potential.
3. The human factor: “Being Well-rounded”
Today, entrepreneurs are obligated to master all skills, just as one must be able to obtain all “nine weapons” to be claimed as a martial arts master in ancient China. The entrepreneur is required to pinpoint user requirements quickly, address user pain-points, and have the ability to gradually establish a home base for open combat. Other areas an entrepreneur must be well-versed in, include strategy, culture, organization, marketing, fundraising, etc.
The wave of “Internet+” is infiltrating its way into more industries. For instance, the industrial Internet, compared with Internet+ Media, involves segments such as retail and traditional distribution. Therefore, increasing entry barriers and implementing more difficulties in cross-industry integration is a must. With this strategy, one will relatively encounter fewer opponents, which will likely result in a higher success rate. After the transition from “Internet+” to “Smart+”, entrepreneurs will not only have to know their own industries, but also integrate technologies, infrastructure, and ideas or application of artificial intelligence into their businesses. This new wave sets a higher standard for entrepreneurs in which they must be a master-of-all-trades to be able to have a profitable business.
Now, back to our original question, what scale can the information industry in China reach? We consider the market size to be USD $15 trillion, basically equivalent to the U.S. GDP. Presently, the information industry in China has a combined value of approximately USD $750 billion. Currently, “Internet+” possesses at least twice the amount of room for growth (think about Internet financing and Ant Financial). In the “Smart+” era, imagine if robots can increase growth, there can be five times more growth space. After entering the “Global+” era, customers served by Chinese businesses will increase from 1.3 billion to 7 billion. The market could double or expand even more, if Chinese technologies and businesses serve half the globe. So, if we do the math, we have still 20 times more growth space in the information industry… How lucky we are indeed!
By then, there will no longer be Internet companies or artificial intelligence companies. Internet and artificial intelligence will become daily necessities for every business, just like water, electricity, and heating. Eventually, the symbol of value to a business will be defined as follows: The quantity and quality of connectivity, the amount of exclusive data owned, and the value of its brand.