Venture Capital 'Pig Farming Theory' Emerges: Investing Is Like Raising Pigs—But Don’t Force-Feed Growth

After the great shakeout of 2018, the venture capital and private equity community has once again gathered in Sanya.

At this time last year, the cryptocurrency market was booming, with many VC/PE firms jumping into the fray. However, a year later, most projects have “rested in peace.” Last year’s winter chill of pessimism has given way to the dawn of the “Year of the Pig,” rekindling hope in the venture capital and startup community as it embarks on a new journey. As Ni Zhengdong, Founder and Chairman of Zero2IPO Group, remarked, “In Sanya, many people fail to see the ocean; they only know how to fight.”

On March 1, 2019, the Top 100 Investors Forum was held in Sanya, where the “Pig Farming Theory” emerged within the venture capital community: The VC/PE industry is akin to pig farming, raising piglets to maturity and selling them at a favorable price. The difference lies in the fact that the pig farming industry uses feed to accelerate fattening and rapid growth, whereas investors must nurture projects in accordance with natural laws and cannot force premature scaling.

In 2019, anxiety gradually receded as venture capital (VC) and private equity (PE) firms regained confidence, ready to embark on a new journey.

In 2018, venture capital and private equity firms each faced their own challenges, but also enjoyed their own successes.

Zeng Zhijie, Founding Partner of Yuanhe Houwang Growth Fund and Chairman of Houwang Investment, lamented: “In 2018, none of the entrepreneurs I met were faring well; despite net worths valued in the tens or even hundreds of billions, they could not muster even tens of millions in cash.” This was perhaps a year that dealt a severe blow to the entire entrepreneurial community. Decades from now, history may well remember this period.

In the venture capital and private equity industry, fundraising difficulties have been the most pressing challenge. “We expended tremendous effort to barely raise RMB 2 billion for one of our funds, a stark contrast to our fundraising experience in 2017,” said Zeng Zhijie. “Over the years, I have never seen anything like last year, with daily roller-coaster-like volatility.”

Recalling the period, Qiming Venture Partners’ Managing Partner Gan Jianping noted that in the first half of 2018, investors were highly aggressive and active; however, the market underwent a sudden major shift in the second half, nearly reaching a freeze by year-end.

Li Jiaqing, Managing Director and Chief Investment Officer at Legend Capital, had much to reflect on: “2018 was a year of dramatic ups and downs, marked by intense turbulence—quite intriguing.” He analyzed that, first, external environmental fluctuations were significant; second, with the opening of overseas secondary market windows, a large number of companies rushed to pursue initial public offerings (IPOs) in Hong Kong and the United States. Meanwhile, emerging trends such as blockchain arose during this period, stirring up the entire market.

Looking back on 2018, Luo Zhuo, Founding Partner and Chairman of Tsinghua Holdings Yinxing, summarized it as “a tale of two extremes.” “During last year’s ‘Two Sessions,’ the market eagerly anticipated unicorns, which puzzled me. Our entire industry had not produced that many unicorns, and I believe some of them were fake unicorns.”

Nevertheless, setting aside the pessimism surrounding the difficulties in fundraising and entrepreneurship over the past year, many venture capital firms have demonstrated an optimistic outlook. Shi Anping, Chief Partner and CEO of Guozhong Venture Capital, pointed out: “Yi Huiman has made his debut as Chairman of the China Securities Regulatory Commission, and the China-U.S. trade negotiations are nearing their conclusion... Faced with this new landscape, we have begun to shed our anxiety.”

How to Face the Coming Year 2019? Numerous VC/PE Firms Share Their Latest Strategies:

First, proceed step by step and maintain your own pace.Li Jiaqing, Managing Director and Chief Investment Officer at Legend Capital, believes that regardless of whether the broader market environment is hot or cold, investment firms should first ensure effective management of their existing portfolio companies, and then allocate resources across industries according to a predetermined rhythm.

Secondly, focus the bullet.For Legend Capital, the coming year will still see increased investment in technology-driven and efficiency-enhancing projects, while consumer-facing (2C) initiatives that rely on traffic growth and lean more toward capturing integration dividends should be approached with greater caution.

Third, fundraising takes a backseat, with exit and management prioritized over investment.Luo Zhuo, founding partner and chairman of Qingkong Yinxing, stated that listing on the STAR Market is currently his top priority as he seeks exit opportunities. “Last year, we invested over RMB 1 billion; this year, our expectations are somewhat lower.”

Many VC/PE firms have revealed that they still have “dry powder” on hand; even if they failed to raise new funds in 2018, they still have capital left over from their 2017 fundraising. However, compared with the rapid growth of the internet sector over the past decade, business model innovation has entered a relatively sluggish phase, making major breakthroughs unlikely in the near term.

In contrast,Some traditional industries, such as aquaculture and animal feed, are witnessing new breakthroughs.“We once made a life-or-death investment in an aquaculture company that we held for nearly a decade. At the time, we thought it would be good enough just to exit, but it turned out to be the company with the highest market capitalization in our portfolio,” Li Jiaqing joked. He remarked that the VC/PE industry has even underperformed the livestock farming sector; many pig-farming companies have reached market caps of RMB 100–200 billion, with increases of RMB 40–50 billion. Zeng Zhijie also devoted considerable time to monitoring the animal feed industry. He believes that New Hope’s former dominance is now a thing of the past, as numerous other companies have grown significantly within the industry.

Returning to the investment industry, Shi Anping believes that the VC/PE sector is akin to pig farming: the goal is to raise piglets to maturity and sell them at a favorable price. The difference lies in the fact that the pig farming industry uses feed to accelerate growth and fattening, whereas investors must nurture projects in accordance with natural laws and cannot force rapid expansion. Investment requires the patience to withstand the test of time.

The STAR Market is destined to become a milestone event in China’s capital markets in 2019. Over the past few months, there has been little noise from the venture capital and private equity industry regarding the STAR Market. So, what does everyone have to say?

In this regard, Zeng Zhijie stated bluntly that, given the current market enthusiasm for the STAR Market, there is no need to set a threshold of 500,000 yuan. He argued that the STAR Market should operate in accordance with market principles; if it reverts to the old practice where relevant authorities decide which enterprises can or cannot list, the situation is likely to become problematic again.

Luo Zhuo stated that the most critical issue for the STAR Market remains the registration-based IPO system, expressing a genuine hope for changes in the capital market. Regarding the STAR Market, venture capital and private equity firms should seize opportunities if they arise; however, frankly speaking, navigating the first wave is quite challenging. Nevertheless, he believes that a more favorable window of opportunity will emerge by next year.

Li Jiaqing revealed that Legend Capital had long established various communication groups with securities firms regarding the STAR Market, maintaining a positive outlook. However, he cautioned that stakeholders should adopt a relatively balanced perspective toward the STAR Market. “There seems to be a prevailing external belief that institutional mechanisms alone can resolve all issues, as if the launch of the STAR Market would instantly revitalize the nation’s technological innovation landscape,” Li stated. He added that while venture capital (VC) and private equity (PE) firms should certainly seize opportunities in the first wave, there is no need to devise specific, systematic strategies tailored exclusively for the STAR Market.

The STAR Market is set to launch on the Shanghai Stock Exchange, with every move closely watched by Shanghai’s VC/PE community. “We have recently been studying the relevant rules of the STAR Market and find them quite complex,” said Gary Gan, Managing Partner at Qiming Venture Partners. A staunch believer in free-market economics, Gan expressed his hope that market forces would largely determine which companies are eligible for listing and which are not.

In Gan Jianping’s view, the development of innovation and technology is often a chaotic and disordered process. The U.S. NASDAQ serves as an excellent example, hosting a wide variety of companies—from giants like Microsoft and Apple to many firms with market capitalizations of only a few million dollars. Regardless of their size, these companies are able to list; thereafter, strong companies continue to grow, while weaker ones are eliminated by the market.

“I believe that if the STAR Market is to serve as a genuine source of innovation, it must be allowed to grow in an unconstrained manner, with market participants using their own judgment and real capital to select and filter out high-quality companies. Just as leading semiconductor enterprises emerge victorious through competition, not by being cultivated in a greenhouse.”

Therefore, Gan Jianping suggested that the STAR Market should allow market forces to determine outcomes and raise entry barriers as much as possible, particularly with regard to market capitalization. “Market capitalization is the most important metric for assessing a company’s value. Apple is a company with a market cap approaching $1 trillion, whereas even the best of other companies are valued at only a few hundred billion.”