ZWC Insight|ZWC Partner Patrick Cheung: Good Projects Can Sustain and Survive All Periods, Favorable or Unfavorable
May 19, 2020

Yang Qiao From

For a technology or digital transformation of an industry, an in-depth understanding of the industry is needed.

“One thing is noted from what I’ve learned from my twice startup experience in consumer Internet and industrial Internet: For a technology or digital transformation of an industry, an in-depth understanding about the industry is needed.”

It is the greatest enlightenment to Patrick Cheung from ZWC Partners, who has opted for a career shift from entrepreneur to investor.

In 2015, Founding & Managing Partner Patrick Cheung founded ZWC Partners (ZWC). As a dual-currency fund platform of Zhongyiwei Business Management Consulting (Shanghai) Co., Ltd., ZWC covers early, early growth and growth-stage investments, focusing on consumer technology, industrial Internet and China Southeast Asia cross border opportunities among other areas.

From business startups to equity investment
Investment philosophy has taken shape step by step

Before working on equity investment, Patrick founded two startups.

The first startup was a photo printing company. In the 1990s, two corporations monopolized the photo printing market: Kodak and Fujifilm. Kodak was the dominant player which occupied 2/3 of global film printing market with the highest market cap of US$31 billion. In year 2000, Fujifilm occupied 70% of market share in Japan with the operating revenue of JPY1.44 trillion.

However, start from year 2000, as the new digital technology swept the film printing market, it caused shocks in whole industry. The global film printing market declined by 20-30% year over year. Within a decade only, total demand for film plummeted to 1/10 of its historical value.

Kodak was worried about digital imaging encroaching on the film printing market and grabbing the company’s profit while maintained its view that consumers would prefer keeping memories by printing photos. In slow response to digital imaging technology, Kodak was reluctant to leave its comfort zone, leading to its application for bankruptcy eventually.

Meanwhile, it became evident that digital imaging was prevailing. In the wake of technical breakthrough and price decline, market was reshuffled.

In earlier 1999, Patrick founded URPhoto in Hong Kong, which was specialized in three businesses: digital photo storage, digital photo sharing and digital color photo printing.

“At that time, the level of digitalization in the market was not high and there remained requirements for photo storage as many preferred memories to be kept by printed photos.” Targeting such requirements, Patrick took the initiative to develop and combine URPhoto’s online color print with offline digital color print shops to increase efficiency and photo print quality at lower cost.

Besides, URPhoto also set up more than 30 digital color print shops in Hong Kong collaborated with Fujifilm. In earlier 2003, URPhoto was sold to a listed company – China-Hongkong Photo Products Holdings Limited (agency of Fujifilm in Hong Kong and Mainland China).

The second startup was an advertising company. And it was the startup experience that directly contributed to Patrick’s career shift towards investor.

In 2002, Patrick went to Shanghai to start advertising business. “Advertising bears a direct relation to consumption and outdoor advertising was an very fragmented industry, indicating huge potential of market consolidation.”

He founded Chuanzhi Outdoor Media Group based on technologies and databases, Chuanzhi connects between market and corresponding service providers to enhance information efficiency in the industry. Moreover, Chuanzhi also rendered professional technology-based value-added services to advertising customers.
Thereafter, Chuanzhi evolved into the then biggest outdoor brand media network service provider nationwide, covering over 300 first-third tier cities. At the end of 2007, Chuanzhi was successfully merged with Focus Media Group.

Patrick told Iyiou that he benefited greatly from the experiences of two startups, especially for investment in industrial Internet in particular.

“I accumulated valuable industry resources and took great inspiration from my mentors. To invest is to help other companies as a mentor, which is of great significance. Equity investment not merely provides funding, it empowers companies by providing support such as businesses and resources, etc.”

Reflecting on the transformation from startup to investment, Patrick established an “Altruism” spirit as an investment philosophy of ZWC. From where investors are standing, excellent entrepreneurs should be influential and capable of drawing and integrating external resources. In this respect, ZWC is specialized in enabling startups to create value by helping them analyze and integrate resources.

Pandemic is a harsh test

The Year 2019 saw a great depression in venture capital investment. The industry was supposed to recover in 2020. But the unexpected “black swan” COVID-19 disillusioned all hopes for the year and added uncertainty.
A tremendous amount of change happened to the industry: many institutional investors shifted priority of investment from early-stage investments to later stage investments, emphasizing post-investment asset management rather than investment with higher bar on number of deals and investment amount. From business models to technology-driven, core technologies is the key, including semiconductor, new infrastructure, 5G, industrial Internet, etc.

The pandemic is a harsh test. Players need to figure out a way to pull through the crisis safe and sound.
“In a broad sense, the pandemic is a survival-of-the-fittest test. At the moment, investors are tested whether their portfolio are successful, whether their portfolio can survive the tough period. If the portfolio companies fail to sustain, their investors will be affected accordingly. In a word, only when the tide goes out, you find out who’s been swimming naked,” said Patrick.

“Institutional investors will see business models with better logic and wonder whether cash burning model can drive long-term growth. On the other hand, the crisis will stimulate the rise of some sectors in new economy, such as online and digitalization, to name a few,” concluded Patrick.

For startups, cash is king. A small portion of companies that maintained long-term stable growth were struck by tight cash flow in the short term. In this situation, investors should lend a hand to such companies financially. “Deal judgement should not be swayed by short-term sentiment,” said Patrick.
The truth is that some leading institutional investors did do bottom fishing during market downturn. For example, KE Holdings Inc. was funded US$2.4 billion in Series D financing and NIO was funded CNY14.5 billion in strategic financing.

ZWC also acted as the lead-investor in the Series B financing for KTU56, an industrial Internet company at the end of this April. Targeting pain points in logistics operation, KTU56 is specialized in addressing relevant problems for small- and medium-sized enterprises through technology and model innovation.

Patrick affirmed the rise of a leading player in the present small, fragmented, and inefficient less-than-truckload freight market in the coming future. He spoke highly of KTU56’s team building capability, altruism, learning ability, view of landscape, and toughness, etc. “KTU56’s Founder Liu Chenhuan understands technology and TMT with rich experience in the less-than-truckload freight market. It is indeed a typical case of industrial Internet company reshaping traditional industries by technology.”

Good companies can sustain and survive all periods, favorable or unfavorable. In nature, these companies can enhance efficiency in the industry and reduce costs of relevant enterprises while creating social value. It is also a crucial criterion ZWC uses in vetting projects.

Whether a tech firm can become influential in its own field is not merely based on the industry. More importantly, the tech firm should deliver transformation to the industry and create value for the industry.
Google, for instance, has successfully reinforced its leading position despite every periodic downturn. ZWC believes that judgement of whether the underlying model of a company can change the industrial landscape, create value and enhance efficiency is crucial in “value investment”.

Invest with sense
At any moment

ZWC has followed consumer technology, industrial Internet, and China and Southeast Asia cross border opportunities for a long time. Patrick shed light on the logic behind ZWC’s view towards the three fields to Iyiou.

Despite the pandemic, consumption remained an important growth engine to economy and policy support was given to consumption in all respects at the state level. For example, consumption coupons were given out nationwide to drive a recovery in consumption. In industrial Internet sector, COVID brings the demand for digital transformations of 2B enterprises. For cross-border companies, ZWC had set up local team in Singapore and Indonesia in earlier days to help these companies to connect local resources and create value.

In technology enabled consumer, industrial Internet and cross-border opportunities, successful companies share something in common, which involves capabilities in three aspects, according to Patrick, (1) product-driven capabilities; (2) operation-driven capabilities, including whether founding teams can build lean operation models, with profitability and organizational capability; (3) culture-driven capabilities, for development of corporate culture is conducive to building stronger internal execution power.

In Year 2020, ZWC will continue to follow projects in the three fields. “This year we will take an investment strategy of spending 70% on new deals and 30% on follow-on investment in existing portfolio.”