On August 17, 2018, China Renaissance hosted an Investment Summit in Beijing with the theme, “Go Beyond Opportunistic Arbitrages and Look for the Truth.” The Summit brought together expert investors from renowned institutions, as well as proven entrepreneurs from technology and new economy industries, and attracted an attendance of nearly 2,000. Key topics discussed from the Summit relate to the new wave of technology-driven growth and the rise of new consumption.
Cao Yi is Source Code Capital’s Founding Partner. Below is a transcript of his keynote speech, the “Nine Snapshots of Technological Innovation.”
Good afternoon, everyone! Today’s theme is quite imaginative. “Everything that has not yet been transformed by technology is temporary.” I originally wanted to discuss artificial intelligence, but after seeing the speeches given by our friends from iFLYTEK and SenseTime, I decided to revise my topic last minute, which resulted in me staying up until 2 a.m. this morning. I want to share some of my thoughts as an investor focused on the technology industry, especially as an early stage investor. I want to discuss how we should view the role of “technology” in value creation and what those characteristics may entail.
1. Five Elements of Creating Enterprise Value
Before I talk about technological innovations, let me briefly discuss the sources of value creation for companies. Entrepreneurs create companies and investors invest in them, but what kind of companies achieve a market valuation of one billion, ten billion, a hundred billion, and one trillion?
Market values must come from value creation and we have summarized the elements of value creation as the following: technology, model, management, production resources, and creativity.
Usually, a company needs more than one important element to have the opportunity to create lasting value in the long run. It is not only about having competitive technology, good business models, excellent management, or good resources and ideas. What is more important is the ability to excel across all these areas. Under these circumstances, there is an opportunity to create very large value, giving way to form a large company with high market valuation.
2. Nine Snapshots of Technological Innovation
When looking at all these elements, technology is not only the most important, but also the most difficult factor to predict. In the past 15 years, China has not been the most advanced country in generating technology innovations as compared to the U.S., but we have innovated on the marketplace business model, we were the first to adapt the Freemium model in gaming, as well as using cloud services, rental, and mergers and acquisitions to create value.
The element of technology is also the most interesting with its many different facets. Today, I want to share some of our own observations and analysis, based on facts and logic, experience, and emotional perception.
We often see these facets of technology, some with qualities of being “small yet tough” and indestructible (like roaches), while others are like “angry birds,” with accumulated high energy, wildly colliding and exploding. Some facets are like the “spring rain,” nurturing the earth gently but quietly, while other facets are like “beasts,” powerfully pushing for business transformations. Sometimes, technology offers a snapshot of a “wise old man,” using hard and soft tactics to steadily move forward.
The whole picture of technological innovation is not easy to understand as it is ever-changing. But for now, let us take a look at nine of its many facets.
(1) The Hype Cycle. The Gartner curve is also known as the Hype Curve in China. Those who work in AI today may find they are in the “Technology Trigger” part of the curve. The curve is ever changing, but usually when the hype starts to fade, the real value begins to show, much like a lotus seedpod appearing from the waters. This phenomenon usually appears when technology is creating value and changing industries. It represents the phenomenon where people are typically overly optimistic about the influence of a certain technology (in the next year or two), but often underestimate the influence it can have in the coming 10, 20 years. There needs to be a process of accumulation and disappearance of the “halo” (through disillusionment and enlightenment), and only then will it reach a plateau of productivity and bear fruits.
(2) The Triple-Waves Phenomenon. This refers to the superimposition of three continuous waves. Usually, the influence of the first wave of technology creates a major impact, the second wave builds momentum, and the third wave brings accumulated power and strength. This is often seen in the technology industry, especially under the backdrop of China’s rapid economic development.
A classic example was China’s retail industry in 2008. There were three forces at play. The first was the traditional retail industry, which had been continuously improving its efficiency with advancements in technology. The second was big-box stores like Gome and Suning, which expanded nationwide through organic technical improvements, rolling out chain stores, and acquisition growth. The third was the force of e-Commerce retailers as represented by Taobao.
In 2008, everyone seemed overjoyed with experiencing growth in multiples of 10%, 100% or more, but many did not fully realize the competitive threat of e-Commerce.
In particular, the first and second forces believed that even though the e-Commerce industry was growing rapidly, the size was still too small to have any impact on themselves. Everyone shared the same illusion: those riding the second wave thought they were at the peak, without realizing that the third wave was ready, waiting to take over. This is why we say that the current wave will still be asleep when the next wave takes over. This phenomenon occurs frequently, especially in China.
(3) The Seven Dragon Balls: Have We Collected Them All? This is my most memorable case personally. I joined the investing world in 2004 and spent 100% of my time looking at mobile Internet opportunities. It was not even called mobile Internet then, it was called “cellphone Internet” or “wireless Internet”. The only way to get online at that time was through a wireless application protocol (WAP) and accessing the Internet through a function browser. The first wave of companies included Monternet, 3G.cn and Yichan.cn. After a few years, Java, Symbian and other companies appeared as the second wave. Did it feel like the spring of mobile Internet was finally arriving when the second wave hit? Mobile devices became better, computational power became stronger, and performance functions became even more robust. It felt like spring was coming, but in reality, it has not come yet. There was a big assumption about 3G networks as well. People believed that if 3G networks were to arrive, then the spring of mobile Internet must also arrive. Nevertheless, even after 3G networks came, spring still did not come.
In the end, Steve Jobs appeared and brought with him the iPhone, which I term as the “Seventh Dragon Ball.” After the arrival of the iPhone, all Seven Dragon Balls were brought together, and it was time to summon Shenron the Great Dragon (as in the manga series). That – was the official start to the mobile Internet wave.
Therefore, one can say it took me eight years to wait and collect all Seven Dragon Balls, and this for me is incredibly memorable. The initial four to five years were not necessarily “wasted,” but in comparison they would seem uneventful.
(4) The Excessive Hype. A large number of “species” will appear once a tide starts rolling, and there will be many varieties of the same species appearing. For example, all the butterflies in this photo are, of course, butterflies, but they each have small differences in appearances. After an industry begins to have an explosive number of opportunities, it will enter into the “Excessive Hype” stage.
The startup scene consists of thousands of companies doing the same thing. Some companies have micro-innovations, some simply copy from others. At this stage, many different types of species will appear, and some species will only last a few days before they are wiped out by the changes in the climate. For example, in the home appliances industry, when the second Industrial Revolution hit, many appliances appeared, but only few are still used in people’s homes. Many of the “taken for granted” and so-called “interesting” inventions did not survive in the end.
Another example is the e-Commerce industry. When the e-Commerce tide appeared, there was an explosion in all types and varieties of platforms, such as vertical e-Commerce, product discovery e-Commerce, traffic-routing e-Commerce, platform e-Commerce and now, social-Commerce. Another example is the now over 1.5 million apps within the mobile industry. We can say that there are over 1.5 million different species, but only 1%, or just 0.1%, will remain in the ecosystem at the end of the mobile Internet tide. Currently, industries such as online-to-offline (O2O) and unmanned equipment are all undergoing through this phase. Fintech has passed this stage and has now reached the stage of convergence.
(5) The Super Titans. After going through the Excessive Hype competition and optimization phase, usually lasting three to five years, a few super species will remain. An example of this will be the two “Super Titans” as in the Chinese Internet industry today.
The two Super Titans refer to Alibaba and Tencent. There are opportunities for another echelon of companies to become the next super species. In fact, becoming a super species does have its downsides, such as consequences of being a monopoly. However, all in all, Super Titans are meaningful to the ecosystem.
Therefore, after experiencing a major explosion in the number of species, there will be a consolidation effect to form an ecosystem surrounding a few Super Titans, which will create great value for the ecosystem.
(6) The Ice Age. The ice age refers to a period of time when the Super Titans are too dominant and controlling in the ecosystem, making it hard for other species to emerge and survive. The period of time can be said to be very orderly, but also dull and lack vitality. Unfortunately, this Ice Age period might last a very long time.
Take the automotive industry for example. 80 years before the emergence of Tesla, this industry had not really seen new companies or key breakthroughs. Leading car manufacturers spent 80 years in peace and made decent money without Tesla in the picture. But even a capital-intensive industry with high standards, like the automotive industry, will eventually see the ice thaw, and see new species emerge after a long Ice Age.
We believe that cases like Tesla will also appear in the fields of e-Commerce, social media, and informational search in the next 10 to 20 years. The disruptors will cause the downfall of the previous generation of super species, and eventually be replaced by a new generation. We see that in how the industrial Internet (B2B) is fundamentally changing some “ancient” and stable industries.
Therefore, we need to have patience and perseverance, as the Ice Age may be extremely long. Changes could happen in our generation, or in the generation after ours. Even though the Ice Age may last a long time, the ice will melt one day.
(7) The Big and the Small. This means that the magnitude of changes in technology may be of a limited effect in the initial period, but after five or ten years, the difference will become apparent. Also within a same industry, the technological impact differs. Sometimes the impact is huge, like on social media and e-Commerce. Sometimes the impact is smaller. As an example, in the same social media industry, the impact of technology on social media for people you know is bigger than the impact on ones made for strangers. If we are comparing different dimensions, then we can look at mobile e-Commerce and mobile games. The impact on mobile e-Commerce is much greater than that of mobile games, while the impact on mobile Internet is bigger than that of PC Internet.
(8) The Hare and the Tortoise. This refers to the variations in the speed of change brought by technological innovations. For example, the effects of mobile payments came much faster than that of point of sale (POS) terminals. In social media, the penetration of applications like Facebook, WeChat and WhatsApp came much faster than that of e-Commerce. Since the invention of the iPhone, the adoption of smartphones have exceeded the previous generation of mobile phones – and also exceeded the rate of cloud computing development. Additionally, the car sharing economy is growing faster as compared to the house sharing market. An example of that would be Uber and Didi Taxi versus Airbnb.
(9) The Long-Lasting and the Short-lived. This refers to the variations in the length of impact from technological innovations. For example, the changes brought by operating systems and office software are long-lasting, but the impact of MP3s, compact digital cameras, wearable devices and others, may be short-lived.
In the end, the speed of change brought on by technological innovation does not matter. Whether it is faster or slower, the most important aspect is that of sustainability, practicality, and magnitude. Some people say that the Internet is now “dead” and that the industry order has already been set in stone. Whether as an investor, or as an entrepreneur, we hope that everyone has more to look forward to.
We must persevere through the “Ice Age” (period of pause), be sharp-minded enough to see through the “Hype Cycle” (not to be tied into a short-lived craze and miss out on mainstream adoption and growth), to wait till all “Seven Dragon Balls” are in place (to summon the great dragon), so as to be ready and well-positioned to embrace creative disruption and tech breakthroughs, in order to support the “Super Titans” (as in the internet giants) – and collectively create long-lasting, sustainable and impactful value.
Thank you, everyone!
