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CBN Dialogue with JP Gan: Investment Insights on Internet Consumer in China

Source: CBN

Author: Qiu Zhili

Now is a time when new funds are burgeoning, but the industry is facing unprecedented challenges. Unlike the “capital winters” in the past, the investment sector is witnessing a parallel decline in both investment and financing, while the industry experiencing a cliff-fall. This means new funds need to be more focused and targeted. Investors on the other hand need better insight and judgment. 

Internet consumer is where JP Gan(甘剑平)has the sharpest edge. From Dianping, Meitu, Mogu, to, Tujia, Mafengwo, etc., his iconic investments in the consumer field abound. But as China’s mobile Internet penetration reaches its peak and benefit from traffic growth narrows, the days that mobile Internet generates massive investment dividend seem numbered. Investors are filing towards industrial Internet.

JP Gan doesn’t agree with this notion. INCE Capital’s first fund has just raised $350 million in total, which focuses on early-to-expansion stage investment in China’s Internet, consumer and smart technology sectors, 

He believes that the generation born after 1990, who have not experienced war or economic difficulties, will become the primary consumer group. Most of them are single child, well educated, and willing to spend more. Besides, this generation doesn’t care much about the so-called luxury brands, but would instead chase products that can express self-identity and offer good service experience. "Young people's preference will always lead the entire consumer trend. New consumer group and new consumption would mean new opportunities. For us, new brands and new categories are what we are staying on top of", says JP Gan.

JP Gan is extremely upbeat about the pet economy. He has been tracking the sector for many years, but waited a long time to make the shot. The reasons are that the population of pet keepers was not large enough by then, and pet keepers were not sophisticated enough. The market was firmly dominated by several big international brands, with the majority of consumption on dog and cat food. Now, he believes as more and more young people tend to raise pets and spend more on them, there are still opportunities in channel marketing and branding of pet merchandise.

In response to the context of massive consumer investment swarming into lower-tier markets in 2019, JP Gan believes that "cities will always be the influencer in consumer trend as opposed to rural areas". The reason behind the strong focus of the industry on lower-tier markets is that Internet companies always need to seek growth. As users in tier 4 and tier 5 cities have not yet been reached by most Internet products, it is relatively cheaper for the platforms to acquire traffic there. But this does not mean that lower-tier markets will lead the consumer trend. Superb products will always gradually spread from cities to its surroundings. Companies, including Pinduoduo, are all working hard to increase ATV (average transaction value) and boost user spending power.

As consumer Internet drives the industrial Internet towards industry integration, the innovations in front-end applications and business models of the consumer Internet is catalyzing the digital synergy with the back-end production and other sections along the value chain. Under this general context, smart technology is another area that JP Gan sees great potential.

He says that in terms of criteria for deal sourcing, hardcore or “futuristic” technologies are not the most important. Instead, deals that help companies transform the less-sophisticated operations and improve its “lean” and efficiency through the use of data, algorithms, AI and other technologies, are more favored.

Specifically, the technology shall first be "usable" and can be immediately applied to the operations of a company. Second, the technology shall come with barriers against competition, i.e. whether large companies have the ability to do the same, and how much time and labor it takes to do it. Third, what kind of talents need to be recruited, and whether large companies can easily find such talents. Fourth, whether the technology can improve productivity, generate more revenue or reduce costs within a period of time, and whether it requires a highly standardized business process to apply such technologies.

For example, network security technologies such as face recognition can also be developed by large companies like Alibaba and Ctrip. However, it takes a lot of time and efforts. Plus, talents are relatively difficult to recruit. Large companies are more willing to seek third-party service providers. As for business services like automatic reimbursement, large companies can also develop on their own. Given the varying internal business processes of different companies, it is difficult to use standardized software to manage all sales teams. Hence, JP Gan doesn't view general OA or sales management software as suitable for China.  

JP Gan is a strong believer in the “special troop” type of investment. “Rational” and “fast decision-making” are what many entrepreneurs use to describe him. JP Gan believes that the establishment of the new fund allows a "small but specialized" structure to determine deals faster. Talking about INCE Capital's future expectations, he is firmly bullish about the Chinese Internet industry. "Hopefully I can make the right investment in more great companies and bring significant returns to our LPs", says JP Gan.