Song Xiangqian: A good project that can survive and grow should not be short of money
2024-08-06
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(The author of this article is Song Xiangqian, founding partner and chairman of China Renaissance Capital)
In the magnificent course of China's economic development, the relationship between finance and industry is like veins and blood, complementing and relying on each other. Facing the dual challenges of the wave of globalization and domestic economic transformation, Mr. Song Xiangqian, founding partner and chairman of China Renaissance Capital, recently shared some thoughts on key issues such as finance, investment, consumption, mergers and acquisitions, innovation and development.
Finance should serve the real industry, but it has lost its direction in overdevelopment and deviated from its "people-oriented" nature. However, truly excellent projects should not lack money, and investment should return to rationality to inject lasting power into rigid and high-frequency people's livelihood consumption. In this new era, technology and consumption should not be in opposition, but complement each other and jointly promote social progress. We firmly believe that China has entered an era where good people do business, and doing things down-to-earth and pursuing quality upgrades are the entrepreneurial spirits that are truly worthy of respect.
With these thoughts in mind, we hope to explore the true meaning of economic development together and find the power to move forward.
-01-
“Finance should beIndustryServe”
Finance is meant to serve the real economy. However, for a long time, our financial industry has been overdeveloped, transactions have been too frequent, and arbitrage has been prevalent. As a result, finance has not been able to provide enough help to the real economy, nor has it been able to empower the real economy. Finance does not have the "people-oriented" nature to support the development of the real economy, the improvement of people's livelihood, and the enhancement of social welfare.
From this perspective, we can even say that the financial industry is "alienated". On the one hand, China has serious structural financial repression. On the other hand, since 2012, the degree of financial liberalization has been too high.In some areas, the degree of financial deepening and liberalization even far exceeds that of the West. This is particularly evident in the over-prosperity of financial arbitrage-type idle businesses, coupled with excessive money supply, a rapid decline in the return on industrial investment, and insufficient financial support for the real economy. This is particularly evident in the fact that shadow banking, derivative instruments and markets are frantically eroding the profit margins of the real economy and squeezing the survival space of the real economy, resulting in today's monetary policy transmission mechanism being poor and basically ineffective.
I personally disagree with the past rapid, low-quality arbitrage development model. From the bottom of my heart, I support the country's strict rectification of the chaotic financial market, emphasizing that the financial industry should return to its essence as a service industry, serve the real industry, and serve to enhance national welfare. From this perspective, the people-oriented nature of such finance is justified.
Transactions are divided into two categories. Transactions such as those conducted in the capital market are actually called "zero-sum games". If you win, others lose. Such transactions have little significance for economic growth and even have spillover effects, triggering money multiplier effects, wealth effects, etc. However, real industries are different. Real industries increase GDP, increase citizen welfare, and increase output. They have real positive value in economic growth.
Industrialists and investors are two different roles. The focus of investors is to grasp node contradictions, solve bottleneck problems, solve functional strategic configuration problems, solve strategic direction positioning problems, and then lead the company onto the right development path. Entrepreneurs are required to go deep into the front line of business, the entire value chain, and the entire industrial chain. In daily work, they must obtain daily profits through operations. They have to work on the ground, improve daily standardized processes, optimize and improve operational management, and then through deep insights into the consumer market and consumer groups, continuously improve and provide good products and services, and iterate and upgrade little by little to achieve an ideal business operation state, so as to obtain appropriate profits.
The products we are making now are rigidly needed, high-frequency, and people's livelihood products with certain infrastructure functions, rather than profit-seeking and profit maximization as the goal. In this process, how to improve profits, how to optimize management and operations, how to control costs, especially the quality control requirements are very high, and the relatively detailed insight requirements are also relatively detailed.
-02-
“A good project that can survive and grow should not be short of money”
There is little change in consumption investment this year. Although the popular concept in the market, such as the "poor man's meal" mentioned by young people, we have already laid out these industries.
Necessities consumption should be the mainstream of China's consumer investment, the most inevitable direction, and the core keyword. In the past, most investors in the consumer track bet on so-called upgrades, pursuing functional release and emotional release, which will not last long and will certainly not be big.
There is nothing new under the sun.The so-called "new changes" can all be perfectly explained by the laws of macroeconomics and industrial development. They are prescribed actions.Neither profound nor obscure.
The key problem is that our market is full of noise and emotional. The alienated financial industry is keen on arbitrage, but such a financial industry has no time to think deeply. Everyone is chasing hot spots, chasing value stories, chasing so-called models, business models, and chasing so-called hype. No one has seriously studied what the characteristics of the Chinese economy are, what stage China's economic development is in, and what are the huge challenges facing our people's livelihood consumption sector? No one has thought about these issues, and the starting point is wrong, so the result cannot be perfect.
The past was an era of arbitrage, and people wanted to get in today and out tomorrow, so they invented Round A, Round B, and finally Round F. This is a joke.For a company to develop into the F round, unless it is a project that is truly a gift from heaven, the rest are all "toxic" horns, toxic gas.Except for companies that are engaged in technological advancement and truly have unique business models, more than 90% of companies that lack money are not good companies.
Most companies are mediocre, and the business models of most companies are clear to you. The basic characteristics of a good company are:If it can really survive and grow bigger, then it is not short of money.
-03-
"financeCan't do itHigh-profit industry
The two attributes of the financial market are investment and speculation. They are not inherently contradictory, but rather coexist. The capital market needs investment, and it needs professional institutions that invest based on fundamentals and long-term development. The market also needs speculation, because speculation objectively increases the activity of the market.
only,We must recognize "financial power", which is inclusive finance, financial depth, industrial finance, or we can call it the industrial nature of finance.From the current perspective, the degree to which finance has returned to its essence as a service industry is far from enough, and finance is still a high-profit industry, which is definitely a problem.
We can observe the financial industry in developed countries and the salary levels of their employees. Except for Wall Street, the employees in the banking industry are all middle-income earners. Its purpose is to provide financial transactions, intermediary services, deposit and loan services to the society. It should be a low-profit industry, an industry that conforms to the characteristics of modern service industry and participates in the process of market profit equalization.
Of course there are other reasons, but finance is one of the main factors. So from this perspective,The goal of patient capital is not to allow capital to "passively invest in the long term", but to push capital to support the development of the real economy and real industries, so that the return on investment in the real economy can return to the highest level in the market.
For us, the right thing is important, teammates are not important. We just need to walk with the truth, walk with the truth, which is a state that all of us dream of. True knowledge or humble opinion will show the final answer after time.
Moreover, finance has indeed played a huge role in China's economic development. It will play an increasingly important role in the future and will serve the real economy more and return to the nature of the service industry, because the core of the people-oriented nature of finance is to support the development of the real economy and empower the real economy.
-04-
“Investors need to observe patiently and be a good audience”
Star entrepreneurs and star companies were the topics of the last venture capital era.I don’t comment, because without investigation, I have no right to speak. And one of the prerequisites of patient capital is to learn to observe patiently, wait patiently for the flowers to bloom, wait and see, and be a good audience.
I don’t really believe in star entrepreneurs.The traffic gameplay in the last cycle was to create a star, a business model, and a hot spot, and everyone would add to the investment together. This is the way of arbitrage, so there are rounds of ABCDEF in the market. All star companies that have had multiple rounds of financing have not been able to go public until now. At least it is very troublesome now, the entrepreneurs are in trouble, and the investment institutions behind are in trouble. So in most cases, we invest exclusively, or we don’t do it.
The reason for doing so is firstly due to accumulation, secondly due to our willingness to spend time, and thirdly due to our sincere altruism. Others really need you, need you to run a business together, rather than just investing money. What the market lacks the least is money, what is lacking the most is ideas, ability, and the "altruistic heart" to truly help others and fulfill their wishes. How many people truly have the "altruistic heart"? Just ask yourself and you will know.
Many people ask if there are any changes in our investment strategy. Actually, there is no change. For many years, we have been focusing on projects that are in urgent need, high frequency, and related to people's livelihood, because this is the phenomenon of the Chinese economy.Moreover, our persistence in this theme has not only lasted for ten years, we believe it is an investment logic that can last for 100 years.
What you need to do is to seize this era, follow the development direction of the times, and adapt your capabilities according to the changes in infrastructure capabilities and technological advances provided by this era.
So we haven’t had such a big change, and the impact we have received is relatively small. Many people say that consumption is not doing well today, and tomorrow they say that consumption is almost gone. This is market sentiment, market noise. How can consumption disappear?
Investors should go beyond the perspective of retail investors and clearly understand the social function of the consumer track. I have always said that consumption and technology are by no means binary oppositions. Technology empowers consumption, and consumption provides a huge application market for technology. Without a massive consumer market to provide it with a massive consumer market user population and tax support, technology cannot develop. Technology must eventually be used and survive in the consumer market. I have written many such articles, such as the "Four Little Dragons of AI" and Nvidia. How can they be applied without a consumer market? Nvidia was once a small company worth tens of billions of dollars.
In the enterprise of this era, the market chooses you.The market has both investment and speculation. If it is a speculative idea, then of course it is a quick in and quick out. The stories that are most easily spread in the public opinion are also centered around speculation and arbitrage. Everyone assumes that turnover is everything and quick in and quick out is everything. Patient capital needs to be adhered to. This is not something that is advocated today, but the standard configuration of value investment is patient capital.
-05-
“M&A is not an assignment for us to copy”
We have considered M&A funds for a long time, not just today, and we are definitely not preparing for an exit. Most M&A funds fail, because this is essentially a non-professional trying to do the work of a professional.
Moreover, M&A funds are a very common organizational form. Any mature institution can use this organizational form. We have also done a lot of preparation and research in this regard. We believe that the time is not right yet.
First of all, I want to emphasize that the success rate of M&A funds is even lower than that of IPOs and corporate listings. Many people take it for granted that since IPOs fail, they can just set up an M&A fund and exit through M&A. Yes, this does exist and has existed for a long time. It is not a new way that has just been opened today. But the problem is that M&A has not become the main exit channel.
So if a channel that was originally an auxiliary tool and not so smooth is used as the main exit channel, what changes do you think will take place in the market?We need to think about this problem. It shows that the liquidity of our market and the exit channels of the market are indeed affected by various factors. We need to change this situation. This is positive thinking.
The US capital market has been around for more than 100 years longer than ours and is the world's largest market. The successful experience of M&A funds from the US may not be so instructive and replicable in China. Secondly, our capital market is not mature, so it is meaningless and worthless to compare it with the US.
Why did Wang Ran's words some time ago sound so fierce, but I supported him? Because as a professional practitioner, when you face a market environment with a structural contradiction and a regulatory resource mismatch, the entire industry should speak out. Now no one is speaking out. This is the legitimate interest of the industry, and the country also strongly advocates the development of the venture capital industry and the construction of a fair market competition environment and a fair entry and exit environment.
China has no homework to copy, because the Chinese economy is very special. But we have some basic things to learn from, such as Japan. I think the current situation of the balance sheet (recession) mentioned by Mr. Koo Chaoming in his book "The Chased Economy" and "The Great Recession" is very correct. When the debt of enterprises and residents is too high and they are in a state of shrinking balance sheets, their purpose is not to maximize profits, but to minimize debt. Then in such a situation of insufficient output, insufficient investment, and insufficient consumption by residents, the government is the only department that can spend money. It needs to efficiently boost the economy, spend money in the most efficient place, and directly subsidize people's livelihood. This is the fundamental way to get out of deflation and truly start domestic demand.
What we need is a five-year plan to double the national income for 30 to 50 years. Only when the people's per capita income level is improved and their disposable income is increased, will they dare to spend money. In addition, we must support a scientific social security system, medical insurance system, and pension system. In this way, everyone will feel at ease. This is also a reference for Japan.
So I often recommend everyone to read "The Chased Economies" written by Mr. Gu Chaoming. Although many so-called economists have criticized him, I think from a sober perspective, this book is of great help to the future economic development, the improvement of people's livelihood, and getting out of the middle-income trap and moving towards high-quality development.
-06-
"China has entered an era where good people can make money"
The current macro environment is that the entire market needs to achieve structural optimization, develop new quality productivity, and improve the level of high-quality development. Therefore, we must be prepared for the expectation that it will be "very difficult" because this is an optimization in the process of dynamic adjustment. Few countries in the world can accomplish such a task. We need to understand what is happening in China. Everyone is a product of the times. Most people make money from β. Don't be so superstitious about α.
We have enough resilience and flexibility, and we still have huge energy to release. In the current public opinion environment, how to take the path of high-quality development in the process of pursuing sustainable economic development,How to truly establish Chinese-style modernization is being hotly debated and a consensus is gradually forming. This is the driving force for reform.
Our judgment is that this is an era where good people become entrepreneurs, and only those who earn hard-earned money are truly worthy of respect. We must really calm down and learn how to run a business, do industry, honestly deliver good products, provide good services, and create better consumer benefits for consumers. We can upgrade the quality, but at the same time we may only earn a tiny profit.
The function of investors is not only to make money, but also to shoulder a lot of social responsibilities. You obtain social capital through investment, and in turn you also have to assume the function of optimizing the social industrial structure. Through your work and hard work, you grow together with the enterprises and help the Chinese entrepreneurial team improve their capabilities. These are all our functions. Our work is not simple, but many of us make it simple and turn it into arbitrage.
This era needs a group of people who contribute silently and move forward with determination in their hearts.
(This article only represents the author’s personal views)
