Summary of Key Points
This interview focuses on the investment career of Xu Xiao, co-founder of Oriental Jiafu. He shares his transition from investing in US-dollar-denominated private equity (PE) to RMB-denominated venture capital (VC), his unique investment philosophy (emphasizing major trends and avoiding overconfidence), his approach to investing in high-tech sectors such as quantum computing and controlled nuclear fusion, and his expectations for more trust within the VC industry. The interview includes several real-life examples, such as investments in Cambricon and Guoxuan High-Tech, showcasing the thoughtful and pragmatic mindset of a hard-tech investor.
I. From US-Dollar PE to RMB-VC: A Forced Transition with Founding Value
Xu Xiao entered the PE industry in 2007, focusing on consumer and manufacturing sectors. However, with the launch of the ChiNext market in 2009, RMB-PE funds began to compete for early-stage projects—projects with net profits of tens of millions were being invested in by RMB-PE firms. The large-scale projects that US-dollar PE wanted to invest in (with net profits of hundreds of millions) were either snatched up by other investors or required a red-chip structure, which the companies found cumbersome. Additionally, the US-dollar PE investment committees failed to understand the potential of mobile internet and new energy technologies; for instance, they were skeptical about the prospects of electric vehicles when evaluating Guoxuan High-Tech in 2011. As a result, the available investment opportunities for Xu Xiao narrowed significantly.
In 2012, he switched to RMB-VC and took over a national-level new materials fund. At that time, few investors were interested in new materials, and securing funding was extremely difficult (for example, it took him to approach twenty or thirty institutions before finding a willing investor for a company listed on the SciTech Innovation Board). Yet, this experience brought him a sense of fulfillment for the first time—he felt that by working with scientists to drive technological advancements and solve critical issues (such as transitioning from relying on Japanese aviation materials to domestic alternatives), he was making a real contribution to the industry, beyond just making money.
II. Investment Philosophy: Focus on Major Trends (β) and Avoid Overconfidence
Xu Xiao’s core investment approach can be summarized in three points:
1. Invest in major trends (β) first, then consider individual projects (α): β represents macroeconomic cycles and industry trends (e.g., new energy ten years ago or AI today). He believes that trying to grow against the trend is like gambling, as most investors will fail. His investment in Cambricon was not due to the excellence of the company itself but because he happened to identify the “domestic chip” trend and had connections through Zhejiang Oriental and Hikvision.
2. Controlling ego is the greatest form of rationality: He views investing as a business like selling tea eggs at the stock exchange—both involve buying low and selling high. He rejects the common belief that investing is about betting on individuals, arguing that success is often attributed to external factors, and assessing people only improves decision-making efficiency but does not guarantee outcomes.
3. Don’t blindly trust elite narratives: He believes that even academicians founding companies may not have a high success rate; while scientific innovation creates value, commercialization requires different skills. Elite entrepreneurs often suffer from “resource overload,” having too many resources and becoming distracted, leading them to seek shortcuts.
III. Hard-Tech Investing: Wait for the Right Turning Point and Focus on Upstream Technologies
Xu Xiao’s approach to investing in hard tech is practical:
- Controlled nuclear fusion: He does not pursue short-term commercialization but focuses on essential technologies (e.g., low-temperature technology for quantum computing) because these industries will be driven by leading companies.
- Quantum computing: He waits for the technological breakthrough (starting to invest heavily in 2024) and targets core teams, emphasizing that quantum computing complements, not replaces GPUs.
- New materials: These were initially unprofitable but have become popular recently. He warns that hard-tech investments should not be too ahead of their time; if only one investor is involved, it’s difficult to succeed without follow-up funding. The primary market requires a “small dissent within a broader consensus.”
IV. Reflection on Investments: Focus on Failures and Move On
Xu Xiao has a unique approach to reviewing his investments:
- Only reflect on failed projects: Successes have various reasons, while failures often stem from common issues (e.g., lack of resources or poor team execution).
- No regrets about missed opportunities: For example, he regretted not investing in Moore Threads and decided to sell his shares in Cambricon in 2021 due to uncertainty about the success of domestic GPUs. The key is to recognize changes in circumstances promptly.
- Attitude towards failed entrepreneurs: He is willing to invest in those who have experienced failures once but avoids those who fail twice, as they are more likely to repeat the same mistakes.
V. Expectations for the Industry: More Trust and Patient Capital
Xu Xiao believes that trust is essential for the VC industry:
- LPs should trust GPs: Avoid forcing them to exit investments quickly and provide long-term funding.
- GPs should trust entrepreneurs: Let them develop at their own pace without excessive interference.
He emphasizes that patient capital stems from trust, and a more trusting environment would make the industry healthier. He also reminds newcomers that they are fortunate to be part of an era of industrial transformation.
This interview, free from grand rhetoric, uses real examples and simple principles to reveal the clarity and pragmatism of a hard-tech investor who focuses on doing what is right—aligning with major trends, using reason and trust to drive industry progress.