Xu Xin, also known as Kathy Xu, is not the kind of investor who casts a wide net. Capital Today, which she founded in 2005 and currently manages $2.5bn worth of funds, targets only three sectors – internet, consumer products and retail – and, on average, invests in only five to six companies annually.
But the narrowed focus and small number of deals have not stopped her from building a reputation in China as “Queen of VC."
Xu has made it into the Forbes Midas List that recognizes the top 100 VCs across the world. She ranked 6th in 2019 and 14th in 2020. She also topped the Forbes China Best Women Venture Investor List for three consecutive years from 2018.
Her portfolio includes a number of household names, including Wahaha, NetEase, JD.com and Vipshop. She has shown a preference for consumer-related businesses, a passion that dates back to the 1980s when she was in high school and university and when she witnessed the huge consumer market taking shape while bidding farewell to an era of shortage of consumer goods.
For her, the consumer market is also brutal. “Consumers remember only the name of the number one brand off the top of their heads,” Xu said. “It’s important for an investor to spot the ones that have the potential and provide funds and support to help them grow into number one players.”
Always a step ahead
Xu invested in Wahaha while working at Peregrine Investments in 1995 when bottled drinking water was rarely consumed in China. Wahaha later became China’s leading beverage firm. Its CEO and founder Zong Qinghou was ranked as China’s richest man in 2012.
When Richard Liu, the founder of JD.com, met Xu in 2007, he had already been turned down by dozens of investors. Back then, e-commerce had just taken off in China and JD.com’s sales volume was worth only about RMB 50m. The company had only 50 employees and did not even have an accountant. After just four hours of talks, Xu decided to fund the company. “Liu was a dark horse and I wouldn’t send him to other investors,” she later recalled.
Consumers remember only the name of the number one brand
Xu had faith in Liu who aimed to address the issue of late deliveries, a common complaint from online shoppers, by building his own logistics network which became JD.com’s competitive advantage and continues to differentiate it from other e-commerce players. Today, JD.com is China’s largest B2C e-retailer by sales volume. As the only investor of JD.com’s Series A round, Capital Today invested $10m although JD.com wanted only $2m. According to Xu, that investment has generated more than a 100-fold return.
Around 2015, Xu set her eyes on new retail. Based on a survey of 2,000 consumers, Capital Today came to the conclusion that consumers were becoming lazy and unwilling to leave their houses and had shorter attention spans. Xu placed her faith in the prospects of improved cost efficiency and user experience brought by new retail, which combines the best of online and offline shopping.
In late 2016, Xu invested in Yonghui Life, a chain of community-based fresh produce stores under Yonghui Superstores, although it only had 20 outlets and an average daily sales value of less than RMB 4,000. A year later, Yonghui Life grew to more than 200 outlets with sales rising 10-fold and attracted funds from investors including Tencent.
Unlike internet giants, who only recently rushed into the online fresh produce market, Capital Today placed its bets five years ago and invested in quite a number of startups in this market, including Yipin Shengxian, Xingsheng Youxuan and Dingdong Maicai. Its portfolio also includes firms working on cold chains and logistics.
The fresh produce market is worth RMB 7tn, but the online penetration is only 3%. “Fresh produce is certain to be the last segment to be unlocked in e-commerce,” Xu had repeatedly said in public. “Those winning in this market will have the last laugh.”
Patience pays off
Xu invests in only those that have the potential to grow into a great company. “It’s important for an investor to hold his/her horse,” Xu said. Once the decision is made, Xu patiently grows with the companies despite ups and downs, and her patience has paid off.
According to a social media post Xu shared via WeChat, she personally began to buy Tencent stocks when it went public in 2004. Since then, she has bought more whenever she had the money and never sold a share over the next 16 years. The company has become a heavyweight in China’s internet world and rolled out a series of products touching the lives of over 1bn people through the instant messaging tool QQ and the ubiquitous WeChat. “I also get a return of 50,000% by book value,” she said.
However, such patience also brought pressure when she made investments on behalf of others. In 1999, while working at Baring Private Equity, Xu invested $5m in the then little-known NetEase, believing its founder Ding Lei, also known as William Ding, could build the company into the top internet company in China.
She purchased the stake at a price of $5 per share. NetEase went public on NASDAQ one year later and the stock price soared up to over $30 at its peak, but Xu didn’t exit the company. Soon, the dot-com bubble burst and NetEase stock price plummeted to less than $1 per share. Believing the company’s potential for further growth despite the pressure from limited investors and subordinates, Xu held onto the investments till 2004, and got an 800% return from the deal.
But Xu still has regrets because NetEase grew strongly after the exit, with its market cap increasing from $1bn to over $70bn. The experience strengthened her resolve to stick to a long-term investment strategy. The first fund that Capital Today raised had a life of 12 years, longer than the average of 10 years. In 2014, Capital Today aimed to raise a $400m evergreen fund with a 28-year life, China’s first ultra-long fund, and finally raised $600m by 2016.
Deep, continuous learning
Born in a small town in the west suburb of Chongqing City in 1967, Xu had been interested in business as a kid and often asked her father, head of a local auto-making factory, about business management and workers.
While studying at Nanjing University with a major in English, Xu found literature and language were not what she wanted to do in the future and began to attend economics courses. Upon graduation, Xu worked as a teller at the head office of the Bank of China. Her excellent performance won her an opportunity to work as an intern at the PwCoop Hong Kong, which turned out to be a turning point in her career.
Xu has never stopped learning and values that quality in those enterprises she intends to invest in. She still spends a great deal of time doing research to better understand the target consumers of every project she is working on. “Some said it’s unnecessary for me to do so much dirty work myself, but for me, it’s just the most effective way to understand a project,” she once told media.
Using Meituan, one of Capital Today’s portfolio companies, as an example, Xu called Meituan CEO and founder Wang Xing a “deep learning machine." “He might not be the first mover, but once he decides to do something, he can learn from you and then beat others to be number one,” Xu said. Meituan, an on-demand food delivery platform, started later than ele.me, but is already the sector leader.
"As an investor, the sense of accomplishment comes from not only making money but also seeing founders making progress through constant learning," Xu said.
