Is There a Winter Coming for Startups and Investors? Ideas From the Big Names

After Zhang Ying, venture capitalist at Matrix Partners China, wrote a Letter to CEOs to warn of a possible “winter” for startups, there has been a heat discussion among startup entrepreneurs and investors. Below is a summary of a forum held by the Angel Investor Association of China in October.

The genes of entrepreneurs

Xu Xiaoping, co-founder of New Oriental: Entrepreneurs’ genes are vital. But what are an entrepreneur’s genes? I worked as a consultant for fellow students for five years at university. I dealt with problems ranging from study to campus activities. Five years later, a voice inside my head told me that I was born for student consultancy as well as education development consultancy. And what is the ultimate pattern for education development? Entrepreneurship. That is my gene.

I once invested in a young man who was neither good-looking nor eloquent. He tried running a bar, a clothes shop, and came to me for money for a couple of times. Though he had failed many times, I still gave him money, because he has a deep understanding of street culture. With such a passion for his cause, his gene is hugely charming. Now his community keeps expanding. This is not a bubble. He is doing something unique ever since the first day.

How to survive this winter

Bao Fan, founder of China Renaissance: The winter will come. Be prepared. Why do I think the winter will come? Let me introduce some basics of finance. Next year America will enter a cycle of raising interest rates. Interests will rise. That means asset prices will drop. There are going to be some big adjustments in securities and stock markets. When there are adjustments in the secondary market, there will be knock-on effects on the primary market. That is because many IPOs will be postponed when the secondary market goes bad. They would not buy small companies. So many firms would be unable to quit. If they can’t quit, they would not have money to make new investments. Capital markets are extremely rational. However good your fundamentals might be, what matters is the supply and demand. The development will be affected if there is less supply from capital markets.

Here are some ideas for entrepreneurs

First, spend one penny as if it were three pence. In a normal day like today, you may be able to do ten or eight things. But in winter, you might be able to do only three. You have to make a choice. Only after making choices will you understand what is worth your money and what is not.

Secondly, manage your cash flow wisely. Because of the winter, you might have to find new finances earlier than you expect. For now it may only take you a few days to find new investors. But it could take a long time in winter. So you had better take good care of your cash flow.

Thirdly, prepare enough cash in hand. For the same reason, financing in winter will be different. That VCs come to knock on your door and offer a price several times the investment you have just made will not happen in winter, because they will have run out of money like you. In this regard, you have to prepare enough cash.

Fourthly, a crisis can be an opportunity in disguise. How to survive the winter is a real test for each enterprise. During the process, you have to survive first and find out how to make the most of the opportunities in winter.

Zeng Liqing’s law

Zeng Liqing, co-founder of Tencent: There is a Metcalfe’s law for the internet. I have developed a new one based on that. Metcalfe's law explains some phenomena that we saw on the internet in the past decade or more. In traditional consumer businesses like beverages, however fierce the competition might be, there are usually more than two competitors. In local markets, there could be even three or five. But that did not happen with social networks, because it has to do with the nodes.

With the internet, each social development becomes bigger. Some attribute this to the distance. Based on this, I propose a Zeng’s law:

The value of a network = K × N2 / R2

First, the connection time is different. Secondly, the speed is different. Thirdly, the interface is different. Fourthly, the content is different. The mobile internet features “long connection”. The 3G network substantially promotes the connection time and the speed. Secondly, the internet has soared from narrow bands to broad bands. Thirdly, smartphones improved user experience. Fourthly, the human body will be enabled to offer more content to be connected with networks. There will be more information, more industries.

All in all, connecting everything is the future.

The imagination of next 30 years

Cai Wensheng, founder of 265.com: Three years ago, I came across the book Singularity and was amazed by it. Now looking back at the book, coupled with what have happened, I find it got 80% of its predictions right. As we know, the overall human development can be defined by two axises. One is communication, and the other one is energy. We have developed from primitive face-to-face communication to telephone. As information develops, human energy keeps increasing.

Back in 2000, no one could imagine the internet would evolve into what it is today. It means it is accelerating.

We need to have a correct direction for our businesses. It has be close to the trends of human civilisation. This comes before execution. Think wildly. The room for future is big. The world will become interesting.