Venture capital firm ZWC Partners, which invests in Southeast Asia besides home country China, made headlines in December when it announced the $400 million first close of its new USD-denominated fund.
With the new fund, ZWC will continue to invest in early growth startups in the industry internet and new consumer sectors, it said. “We give priority to Series B and Series C rounds as we believe that these stages would be great turning points for the startups, while it’s also a great opportunity for us to balance risks and returns,” Vivian Xu, a partner at ZWC Partners, told DealStreetAsia in an exclusive interaction.
With offices in Beijing, Shanghai, Shenzhen, Hong Kong, Singapore, and Jakarta, ZWC Partners manages over $1.5 billion in total assets. Since its inception in 2015, it has nurtured about 10 unicorn companies such as the New York-listed electric vehicle (EV) player Xpeng Motors, mobile social dating platform Tantan, and bike-sharing giant Mobike.
More recently, ZWC led a 150 million yuan round of financing in cereal product brand HONlife late last year. “As China will undoubtedly become the world’s biggest consumer market in the future, we firmly believe that more and more quality consumer brands and business models will continue to emerge,” Xu had said in a statement.
In Southeast Asia, ZWC will continue to focus on AI-driven application scenarios in industries, Xu told DealStreetAsia. In May, ZWC participated in a $6 million Pre-A round in Singapore-based voice AI solutions provider Wiz.AI. The consumer market is also a target for ZWC in Southeast Asia, she added.
Edited excerpts of the interview with Xu:
How will ZWC use the new $400 million USD-denominated fund?
Industry internet, or an Internet of Things for industries, and new consumption are among the principal sectors that ZWC Partners targets for investments. Within new consumption, ZWC has narrowed its forte to two niche segments— consumer brands and consumer internet. In the industry internet sector, we place heavy emphasis on industry-based digitalization and intelligent innovations. Generally speaking, we prefer to invest in startups’ Series B and Series C rounds.
Why Series B and Series C stages?
Not only do these two stages show whether the startups are well-balanced in terms of risks and financial returns, but they also reveal the growth curves of the investee companies. For example, in the field of industry internet, startups usually have to undergo the lengthy process of integrating technology. If they enter into Series B or Series C rounds, it means they have achieved integration and are getting ready for mass commercialisation.
What’s more, the relaxation of rules for taking companies public in China has inspired more startups to go public [which has increased the valuations in rounds just before an IPO as more VCs are attracted by the lure of fast exits].
In other words, the later the stage we step in, the fiercer the competition we face, and the more limited is the return we are likely to derive from the investment. From both risk control and return perspectives, we think it’s a proper investment strategy.
What are ZWC’s focus segments within the consumer space?
ZWC ‘s interests within the consumer sector include new brands, networks, and service supports. As the ecosystem evolves with changing consumer needs, ZWC pays close attention to demands based on demographics. For instance, people born after 1995 have developed a preference for China’s emerging brands; or new moms who were born in the 1990s are calling for new products and services; while newly-retired and elderly people are contributing to the growth of the silver economy [the market for senior citizens].
You said investments right before an IPO have less value now, due to the popularity of IPOs in 2020. Has this influenced valuations in the primary market?
Objectively speaking, we’ve witnessed valuations in the primary market rising, resulting in challenging investment activities.
What’s your outlook for consumption-based investments in China in 2021?
Overall, we think the wave of investments in the market will remain as demand is rising. As a VC, we have to ramp up efforts to search for prominent startups that are capable of meeting customers’ expectations and with huge potential.
With the rise of domestic brands in China, consumers’ preference for foreign brands has weakened. What do you think are the advantages of emerging brands?
Chinese domestic brands are more sensitive toward what consumers want, as they are closer to the market. They are also swift with product iterations that meet customers’ rapidly-changing demands.
Chinese consumption brands are going global. Cosmetics brand Perfect Diary, for instance, listed recently in New York. Is this a new trend in the national consumer industry?
We are optimistic about Chinese brands going overseas, so we have taken efforts to look at investment opportunities in Chinese cross-border supply chains. We’ve seen competitive changes including logistics efficiency, product design and innovations, and premium pricing for Chinese brands in foreign markets. However, one of their biggest challenges is that it will take some time for overseas consumers to accept [Chinese brands].
Could you share details of ZWC’s bet on the industry internet sector?
Around 40-50% of our investments are designated to the industry internet sector in China. We give priority to two segments within the sector. One, we tap on new generation IT infrastructures such as AI and 5G network. Two, we focus on industries like manufacturing, finance, and retail that are driven by industrial internet technology. Take robotics for example, we see high potential for its applications in areas across manufacturing, service, retail, and others.
Do you see huge opportunities in the industry?
Self-reliant innovations and products definitely offer a [door] for our Chinese investors. We’ve seen Chinese startups delivering novel solutions for industry transformation, besides producing unprecedented imported substitutes. Especially since the Chinese government unveiled “Made in China 2025” [a national strategy initiated in 2015 to produce 70% of semiconductors locally by 2025] we are bullish on stepping further. Overall, we hold on to our optimism cautiously.
How’s the potential in Southeast Asia?
First and foremost, we will continue to focus on AI-driven application scenarios in industries. For instance, in May this year ZWC participated in a $6 million Pre-A round of financing in Singapore-based voice AI solutions provider Wiz.AI. In June 2019, ZWC also led an angel round funding for Wiz.AI.
Secondly, consumer market is also a target for ZWC in Southeast Asia. With ZWC’s foray in the market by venturing into e-commerce sector, we will extend to sectors spanning across industrial infrastructures. In July last year, ZWC joined hands with Golden Gate Ventures and Jafco Asia, completing a $8.5 million Series A round in Ritase, Indonesia’s leading digital shipping platform.