Those Pitfalls we Encountered When Starting Out

On April 20, 2018, Source Code Capital’s 2018 Code Class, “Opening Sources | Decoding the Future,” convened in Beijing. At this year’s Code Class annual meeting, CEOs from companies backed by Source Code Capital discussed the Industrial Internet, new models for Online-Merge-Offline retail sales, international expansion, entrepreneurial spirit, the pace of founding a business, talent acquisition, management, and other topics.

“Those Pitfalls we Encountered When Starting Out” – a most popular topic from 2017’s Code Class returns in 2018. Zhang Xingchen (Source Code Capital), Li Lei (Founder of Huifenqi), Zhou Jian (Founder of Nongfenqi), and Wang Peng (Founder of Julive) shared their struggles and epiphanies in setting and executing a strategy, raising capital, building and organizing a team, and other personal experiences and worries.

FOUNDER QUOTES / CEO QUOTES

  • High turnover requires rapid sales and rapid returns. The pressure becomes bigger and bigger.
  • Getting customers and sources of real-estate is not all that important. The most important thing is improving efficiency.
  • The farming village market is quite special – so much so that even many talented individuals are not willing to get into it.
  • At first, I looked for people with expertise. Then I realized that some people quit quite quickly.
  • At first, when the group came to be, we focused on a “family culture.” The thinking was we could not let a family member go. This meant that the whole management level was in a fix when it came to letting staff go. We were not able to make cuts.
  • Now when I look for funds, I could practically be an FA (Financial Advisor) myself.
  • Pitfalls and hurdles become particularly evident when raising capital.
  • In the early stages, we were overly optimistic in estimating what kind of revenue we could bring in.
  • If you want to raise capital in advance, do not over-optimistically estimate your cash flow. It is a pitfall.
  • We believed that if you put your head down and work hard, someone will discover you – someone will notice you.
  • I am worried every day. I am never most worried but only more worried.

From the left: Zhang Xingchen, Li Lei, Zhou Jian, Wang Peng

The full transcript of the panel discussion is below.

Source Code Capital’s Zhang Xingchen: Our main topic for this panel discussion is the second installment of “Those Pitfalls we Encountered When Starting Out.” First, let’s have the three CEOs introduce themselves.

Huifenqi’s Li Lei: Hello everyone. My name is Li Lei. I am from Huifenqi. We have two main lines of business. One is home rental financing. As rent becomes increasingly expensive, young people are spending over 30% of their after-tax income on rent. So, it has become a relatively significant burden to go the traditional way of putting down one month’s rent as a deposit and paying three-months rent. With Huifenqi, renters only need to deposit one month’s rent and pay one month’s rent. We cover the rest. The second line of business is looking for rental units. We are kind of like a T-Mall for renting. With the help of this platform, users are able to find housing more efficiently. Thanks everyone.

Nongfenqi’s Zhou Jian: Hello everyone. I am the founder of Nongfenqi, Zhou Jian. We provide services to large-scale crop farming groups. Their aptitude for management is very solid. Previously, farming was done by individual families. Nowadays, with the trend moving towards large-scale cultivation, the national land circulation rate has passed 40% and is predicted to reach about 70% within the next five years. Our services follow the process of crop cultivation, providing large-scale farmers with capital, production resources, technical skills, and more. Currently, we are mostly developing our business in the major farming provinces, the Yangtze Plain, and the North China Plain. A moment ago (at Code Class), Mr. Guo spoke about policy iteration. Actually, we are likely in the industry with the most policy advantages.

Julive’s Wang Peng: Hello everyone. I’m Wang Peng, founder of Julive. We do e-Commerce for new condos. The products available in e-commerce have gone from high frequency to low frequency, from minor decisions to major ones. Cars can be purchased online, and, in all likelihood, next will be condos. Recently, the premier international real-estate media company, Zillow, has also switched gears into doing transactions. Currently, new domestic units account for upwards of 60% of all transactions. We are entering this market as an online retailer of new units, stepping into individual condo purchases, to help everyone buy units at a lower cost with better service, and through safer channels. Compared to the old-fashioned service process, we are much quicker and safer.

Source Code Capital’s Zhang Xingchen: Now there is a phrase we have often heard: “A company’s biggest bottleneck is at its CEO.” A CEO mainly does three things: find people, find capital, find direction. This sounds easy, but in fact it is a job that is “full of pitfalls.” So we begin with setting and executing a strategic direction. First, let’s ask Li Lei. At first, you began with transactions, then you shifted towards a financial direction, and now you are spiraling upwards, getting back into transactions from a financing angle. In this process, you would have come upon many challenges. Could you share your experience with us?

1. Understanding the need for iteration and adjustment

Huifenqi’s Li Lei: Our company was founded on the December 10, 2014. Originally, we wanted to serve as a rental housing Internet broker. I went myself to hundreds of traditional brokerages but did not have a thorough understanding of the industry at the time. I thought the industry was too inefficient. Something had to be done. At the time, this was my immature understanding. At first, we were a home rental brokerage kind of like Aiwujiwu. We worked in this field for seven days. Then on December 17, 2014, we made a tough decision. We made a total change of business and became the Huifenqi we are today. We started to do financing. Why?

I miscalculated what my team and I were capable of doing. At the time, my understanding of our society and the world was probably not up to par. I thought it would not be that complicated or difficult. Also, two things happened at that time. One is that Aiwujiwu amassed a huge sum of capital quickly – faster than I could imagine. Second is that another major player also put out a new home rental brand. Eventually, my team and I thought, if we cannot be sure that we are the best at this, we should switch gears right away. In the end, we figured this industry has financing needs first, and transactions second. The facts speak for themselves. From 2015 to 2016, the home rental market faced many tests, and many players were left behind by the market.

In traditional industries, doing consumer financing or niche financing has a huge number of platform-based marketplaces. It does not matter whether you are talking about e-Commerce, education, travel, or whatever. The only one still without a platform for transactions is home rentals. Plus, the home rental industry is sufficiently traditional and untouched. So, it is a good move to get into transactions from financing.

In October 2016, we made the important decision to enter the home rental platform business with Huizhaofang (literally meaning, “can find a home”). Since the turning point had arrived, we had to make a platform for transactions or else financing might be cut. From the start of 2015, the whole home rental industry’s business model underwent a huge change. Previously, it was customer to customer, and a broker would collect a mediation fee. Now, a lot of sub-landlord-style operators have come out. It has become business-to-customer. We are helping small and mid-size brokerages in their sub-letting business, through financing and software-as-a-service, providing smart equipment, digital signatures, payment processing and other services.

We are always changing and adjusting in a spiral pattern. Firstly, with rental financing, we resolved the financial pressure of signing a new lease. Secondly, we came up with a source of housing. Thirdly, we offered digital signatures to increase the efficiency of each transaction. Fourthly, we offered online payments without card or cash. One after another, we relieved the major pains of the industry. This is the best method. This is a problem which we did not understand when we were first starting out.

2. Attitude causing failure

Source Code Capital’s Zhang Xingchen: Thank you, Li Lei, for sharing your story with us. Home rental is a very offline business. There is a lot of traditionally-minded people who aim to provide services. You have to go service sub-landlords. You have to change them. You have to find their needs. There are definitely still a lot of difficulties out there.

Next, let’s hear from Zhou Jian. Source Code Capital has always been an investor with you. We have witnessed you go through your processes of change. You started out with agricultural machinery financing, and moved on to cover the whole agrarian Internet space. In this process of discovery, has there been any pitfalls that you’d like to share?

Nongfenqi’s Zhou Jian: To my understanding, a “pitfall” is a failure and a setback caused by attitude. Because agriculture has its unique consumer niches, it has got a strong production property.

At first, we too looked to large-scale agricultural production. From that, we noticed the core needs. The first core need was a lack of funds. So we decided to go into financing. But financial products alone turned out to be a tough business in farming villages. In the early stages, we were overly optimistic in estimating of what kind of revenue we could bring in.

We realized that the cost of taking on a consumer mortgages was too high for farmers. They could not take it. Production needs to take into account the input and output ratio. While still in the process of exploring, every month we were doing RMB 200 million worth of loans (about USD $31.5 million), which already made us the biggest new financial services company in the field of agricultural production. At the time, whether you looked at our interest margin or service fees, there was not much pressure on our income. But if we wanted to go up to hundreds or even just tens of billions, we’d have to accumulate businesses over a longer period of time.

Later on, we married financial services to local needs and immediately broke into the agricultural resource trade. Not only were we providing farmers with capital, but we were also providing them with production resources: fertilizer, pesticides, machinery, etc. This marked a change from our initial understanding.

Another thing – farming can be divided into two kinds: livestock and crop. But the two represent completely different domains. They each have their logic. The needs of each sector are completely different, too. At first, we treated crop and livestock farming the same. We also tried financial services for livestock farmers. Later we realized this path was not viable for our current team. So we gave up on that idea. This was a pitfall in our understanding of the industry. Previously, this was a set pitfall for financial services in agricultural production. Thanks.

3. Tactics and strategy

Source Code Capital’s Zhang Xingchen: Judging from the sharing from our last two speakers, a lot of challenges come from understanding the industry, needing to adjust to a team’s ability – and both CEOs got into transactions from financing. Now we can finally see a clearer model taking shape. Next, let us hear from Wang Peng. When it comes to tactics and strategy, could you share with us which adjustments you have made and what problems you encountered?

Julive’s Wang Peng: A little different from our two panelists just now – when we started we were actually doing transactions. In the four years from the construction of our team until now, we have not changed our strategic direction. But in terms of tactics, we have made a few different adjustments: adjustments to the flow of procurements, changes to our work-flow processes, and other changes. Plus, every month we’d make a few internal adjustments. Recently we started looking into whether to get into some new follow-up expansions based on the core transactional sector.

First of all, you have to have a clear strategy. A strategy comes from your values: why are we in this business? Before starting this company, I had worked in the real estate industry for many years and noticed two barriers. One was that it was becoming increasingly difficult for developers to sell new units. It was very clear that developers are now focusing on shifting from lower turnover to high turnover; those low turnover developers are quickly dying out; those high turnover developers are quickly growing – and high turnover requires rapid sales and rapid returns. The pressure becomes bigger and bigger. The other was that the pressure on individual buyers was getting bigger and bigger. In the last twenty years, if the buyers were buying for investment, there was a phrase in Beijing and Shanghai: “Just get in the car.” Have the money? Buy the unit. Investment needs is a single deciding factor – only looking at the return on investment and not looking at whether it is a decent place to live.

Now, buyers looking for a home are slowly becoming the mainstream. Deciding factors are becoming more personal. Those with pets would rather live on a lower floor. Those with aging relatives want to have an elevator. Those who work in Mentougou cannot buy in Fangshan. These and other personal reasons are making it so that a full understanding of real-estate needs is much more complicated than when it was just about satisfying investment needs. This was something which, previously, no transaction service provider could offer. No one could really collect all that real-estate information and efficiently use it to make suggestions.

Later all, all our work centered around the problems which this strategy was trying to resolve. On the tactics side, I also have a point to share. Once our strategy was set, we had to center our work on the strategy’s vow-power. (In Buddhism, vow power is the idea that if you believe in something it will happen.) At the time there were a lot of distractions. At the time, the typical way of going about business was to gather brokers onto a single platform and let them sell their stock. But after repeated discussions, we felt that that strategy could not solve the developers’ problems, and could not solve the customers’ problems either. We had to come up with our own valuable solution. Then in this process, we realized that, as the days and months went by, things really got smoother and smoother, better and better.

On the tactics side, for transactions as big as real-estate transactions – for a while we put a lot of energy into getting customers and sources of real-estate. But later we realized, in this kind of low-frequency market, getting customers is not actually that difficult. First of all, the total number of buyers out there is not that big, and they all like to shop around. Getting in touch with a customer is very easy. Sources of real-estate are the same. It doesn’t matter whether we are talking new units or resale units, sellers are all anxious. They’ll go with whoever can sell their unit. So, getting customers and sources of real-estate isn’t all that important. The most important thing is changing efficiency. Already we have taken the transaction time for something as complicated as buying a home and shortened it to just 16 days. That’s 16 days from the time the customer finds us to complete the transaction. On average, they will look at three buildings. We will escort them to a viewing 1.7 times. This is how efficiently we can help customers find their dream home.

I think, in providing services for low-frequency difficult transactions, a platform is a very important step. To increase customer retention, you have to minimize mismatches, or, to be more precise, minimize losing customers to gaps and delays in service. Because of this, from 2015 onwards, we have doubled down on our efforts to construct a unified system. Creating this system has been a slow process, but as Mr. Zuo of Lianjia says, “do the difficult and right thing.” This is certainly something difficult, but also valuable. Once complete, it will be difficult for others to replicate.

4. The people pitfall

Source Code Capital’s Zhang Xingchen: Thank you Mr. Wang. There was one thing you mentioned I found quite touching – the idea of vow power. You have to believe that with persistence your goals can be achieved. Secondly, on the topic of finding people and a team, let us hear again from Mr. Wang. In managing a team or talent acquisition, can you share insights or challenges faced?

Julive’s Wang Peng: Our company’s rate of attrition at the senior management level is very low. In the four years from the founding of the company until now, of all of those who reported to me directly, including city-level managers, there have only been two losses in total. The vast majority of senior managers and business partners have remained in the company. So it’s not really a pitfall.

This is after all my first business venture. So when I first started looking for senior managers, I probably tended towards looking at abilities. Could they quickly and properly handle a problem? But I did not really look at whether they shared the same dream or core values, like whether we’d all work so hard, whether we wanted to push ourselves so much, whether we emphasized short-term profits or long-term values, whether our primary focus was on customers or shareholders or employees, etc.

Truth to be told – at first I did not put that much energy into whipping up a team. But still our rate of attrition among senior managers is very low to this day, and at its core is vow power. Every moment of every hour of every day, we really focus on customers in our work, we should have a dream, and we focus on the long-term value of the company. I think my values come from how my parents raised me and from groups I have been a part of, especially from my first job and my boss there. At my first job, we would continuously talk about how to look at a problem, continuously hold group discussions. This is another difficult but right thing to do.

Source Code Capital’s Zhang Xingchen: It can’t have been easy. And I’m sure our other two CEOs were moved by your experiences. Let’s listen to what they have to say.

Nongfenqi’s Zhou Jian: The farming village market is quite special – so much so that even many talented individuals are not willing to get into. One of our founding members once said that smart people are not willing to do farming villages, and for this exact reason it will be especially difficult for us to get top talent.

When we were looking for specialists, eventually we realized that people would sound good in interviews. They would be really impressive. But when they got down to business, they were not that good at what we wanted them to do. The reason was that our understanding was relatively limited. We felt the interviewee’s understanding of the field was much better than ours and we’d immediately conclude that the interview was great. This meant that there were a few positions which would be refilled on every round of funding. This was a problem we had early on: judging ability.

Now our social network is bigger and we have been introduced to friends with technical expertise. We can find friends to help with interviews or give suggestions. So we’re getting better on that front.

In the field of agriculture, those with great talent really are that strong, but once they really get into the industry, they do not actually end up working that long. The most painful time for us must have been around 2016-2017 when we were raising funds. At the time, we’d just hired a new CFO, a very capable individual, someone who’d spent time in the Big Four and who had been a CFO for a company in Shanghai. But when all our senior managers got to work, after going into a farming village to work for a week, the new hire came back and quit right away. And that was a crucial fund-raising time for the company.

Looking back – at the time when we were looking for senior managers, we did not think beyond the question of ability to consider whether a prospective hire would be passionate about the industry or be able to fit into our team. This caused a lot of our early oversights and mistakes.

Huifenqi’s Li Lei: At first I looked for people with expertise. Then I realized that some people quit fast. I speak with them and they’d say they felt that they didn’t feel confident at our company, that the first few months were comfortable, but that things got really difficult after three months.

We reflected on it and eventually just hoped to find a bunch of people who were good at learning. We’d disregard what they had for work experience. Of course, the experience was still good. But those with more experience also had more to forget. If hiring was convenient, we’d hire. If there was no one to hire, we’d first try to get a better understanding of the industry. The company has developed very quickly. The accumulation of history only shows one part. The more important thing is to have everyone in the team eager and able to learn. This is the only way we can resolve our long-term problems.

As for the second question – to be honest – we did not use to do that well when it came to performance management or team improvement. At first when the group came to be, we focused on a “family culture.” The thinking was we could not let a family member go. This meant that the whole management level was in a fix when it came to letting staff go. We just could not make cuts. But last year, just after the Spring Festival, we did some internal brainwashing. What do I mean? We did some internal reflection. When we say we want to be good to our family, we mean that we want them to do better in the future. If an employee is really struggling in his position, if he cannot really handle the job, then that’s a kind of suffering for him and it’s even worse for everyone else in the family. Teams have an aphorism: “a team can only move as fast as its slowest member.” More recently, we have made cuts for the sake of team improvement and it has gone well. Something that makes me really proud is that even though we optimized some of our staff, about 15%, they did not get into conflicts with us. They even felt that the company made better plans for them. This was one of the really moving things in our work over the past few years.

Julive’s Wang Peng: All new companies face more or less the same HR problems. We also explored a few solutions. When it comes to performance evaluations, a company has to have an OKR system (Objectives and Key Results). When I add someone to my team, I have to think about what problems I want this person to solve. I might not know how to go about solving these problems, but I have to articulate goals and how to measure them. This way everyone knows before they even get started how well they have to perform to remain and at what point they might be demoted – or even have to leave.

On the topic of values – I think it is important to lead by example and to set up a system for assessing value. Suppose you say “customers first.” Are those who really put the customers first rewarded? Are those who fail to do so punished? Suppose you want everyone to push themselves. Are those who really push themselves at work rewarded? Once all these things have an established internal mechanism, you will begin to realize, the most basic values will start to align. This is really important for a business. It’s just like any natural organism. Only with the same species can it multiply and develop.

5. The money pitfall

Source Code Capital’s Zhang Xingchen: Let’s start again from Li Lei. You have a lot of experience in fundraising. You have gotten at least a few gray hairs from it. Could you share with us some of the difficulties which you encountered in fundraising?

Huifenqi’s Li Lei: Now when I look for funds I could practically be an FA myself. On my WeChat contacts list I probably have over 500 investors. I have been in touch with many of them over four rounds. Why? Because fundraising is bitter work, especially back in 2015. Rental financing was not looked upon well. Everyone thought without the need, where would you get funds? That was because everyone ignored the big changes to the whole real-estate market between 2015 and 2016. In those two years, I was always looking for funds, but could not get any. It was a painstaking process. But this was great training for me. The difficulty is the cornerstone of progress and success. Every time you are challenged by an investor, it is of great value. It sets off deeper contemplation, makes you think things through, keeps you questioning yourself. Why are the investors asking such stupid questions which show that they understand you so little? But after a while, when you have really thought things through, you realize that your business development vision has become clear. The rest is straightforward. Lead your team to better execute and get down to work. This will be a little easier than deep thinking.

Nongfenqi’s Zhou Jian: Everyone says that starting a business is actually like jumping out of a pit and next is a hurdle. Pitfalls and hurdles become particularly evident when raising capital. A pitfall, to my understanding, is like a bottleneck of understanding. Because of this bottleneck, a few unforeseen situations come up. A hurdle is an ability problem, a challenge which the team needs to work extra hard on to stand a chance of passing.

When it comes to fundraising, pitfalls and hurdles really do abound. In earlier times, I started a few businesses and never once had the experience of an investment group jumping right on board. I always had to tough it out myself. When working on Nongfenqi, there was an early investment of RMB 20 million (USD $3 million). When the company entered the capital markets in 2015, it was not very old, and it faced a big challenge. I was too optimistic back then. I made the mistake of misjudging my cash flow. I thought we could hold out until the end of the year or even turn profitable – that was a big mistake. Later on, I figured out that if you want to raise capital in advance, do not over-optimistically estimate your cash flow. It’s a pitfall.

But at the same time, we came up to a hurdle. We could not raise funds. The team always had their heads down working hard, but our fundraising abilities were weak. Our understanding had changed, but our abilities had not improved. To crawl out of one pit after another and just to jump hurdle after hurdle – that’s how things go when you are starting a business. Even when fundraising goes well for the team, and your strategic direction is on, it is a process you will not forget and there are many, many lessons along the way. So now we have become aware that we have to find some dedicated fundraising talent to proactively communicate and prepare with investment groups. And on that note, I’d like to voice my gratitude to Source Code for stepping-in to help from round one and continuously supporting us.

Julive’s Wang Peng: The pitfalls we all stepped into in fundraising are about the same. At least of the friends I know, those who are starting their first company all run into cash flow management problems to some extent. Maybe they think their funds are enough to keep them going for a while, but when they get there, they realize they seem to be short, and that little shortfall cannot be filled in right away. So, a good financial director or CFO is very important.

In terms of process, Julive has been about the same as everyone else. In the past four years, altogether I have met over two hundred investors. There are two dimensions to talk about. From talking to investors, you can get a third-person perspective on whether or not you are doing things right, where you can improve. I say within our team that no matter whether the company needs to or not, we must sporadically go out and do some fundraising, talk with others about our business model and statistics. There will always be wise investors who will notice something. Take that back to your business, and you will notice areas for improvement. This is very valuable to the company, and as a result, we perform better and better after each round of fundraising. We are able to think about our issues more clearly.

Source Code invested in us from round one. At the time we were doing well in Beijing, and the team was debating whether we wanted to set up shop in Shanghai. It was Source Code that told us to get into Shanghai right away, that we needed to limit the influence of a single market. It turned out that as soon as we opened up shop in Shanghai, regulations came into Beijing. By continuously talking to investors, you can realize things you are not able to see yourself. They have experience with a lot of companies: good, bad, still going, and gone. This is an important experience.

The other crucial point is that as a business, you have to have the power of meditation. You need to be able to resist an investor’s less viable ideas and think for yourself how you want to develop.

6. A CEO’s worries

Source code capital’s Zhang Xingcheng: Last question – it’s one that some special guests already answered yesterday. What is your biggest worry right now and how are you dealing with it? Alternatively, what understanding did you think was accurate, only to find out that in fact it was inaccurate?

Julive’s Wang Peng: My biggest worry is seeing customer feedback and employee feedback. When a customer says, your service is not good or has problems, and I myself realize the problems were due to a solution which the company thought was already pretty good, then for a while I feel pretty bad. Also, if an employee says that company management has issues, I will feel bad – or, if we run into cash flow problems, it’s easy to get worried. These worries are not necessarily bad things. They push you to find problems and solutions. It is an enjoyable process.

Nongfenqi’s Zhou Jian: I choose understanding. We stepped into a lot of understanding-related pitfalls. Early on we did not really take the government into account. We believed that if you put your head down and worked hard, someone will discover you – someone will notice you. Later on, after ongoing internal discussions and adjustments, we added a government relations team. Their main job for the first year was to declare projects. From 2017, we started to apply for every kind of project support possible. Not many got approved, but the effect is still quite obvious in the end.

Huifenqi’s Li Lei: I am worried every day. I am never most worried but only more worried. Besides the cash flow problem mentioned by Wang Peng, for half or two-thirds of 2016 our cash flow was totally cut off. I’d think, when things hit rock bottom, they can only get better. In the process, there are three phrases we’d say internally. The first phrase was, “making the impossible possible.” This represented 2015. The second phrase was, “the harder you work, the luckier you’ll be.” This represented 2016. When our cash flow problems are this bad, we just have to work hard, and we’ll get through it. The next phrase, “if you think you are not lucky enough, it is because you have not put in enough effort yet. Just keep it up for a bit and things will work out.” In 2017, we had our third phrase: “the unknown is the future.” This phrase was a great inspiration and motivation for me. If you are worried, be grateful for the present moment, because your worry comes from the uncertainty of the future. If you knew what the future held, you’d realize this just means there is no future. I’m quite a believer in vow power. It’s because you believe that you are able to see and not because you see that you can believe.

Source Code Capital’s Zhang Xingchen: Thank you to our three special guests for your insights and stories. I wish that all of you will continue to grow and develop as leading companies. “Opening Sources | Decoding the Future” – today in our discussion, we decoded many mysteries. Thank you for joining us.