N5Capital Will Jiang: If consumer entrepreneurs can’t create value and net profit, they are all false propositions

What is consumption? How to do consumption investments? How big is the opportunity in the consumer sector today and how high is the ceiling? Will Jiang, founding partner of N5Capital, answered these questions at the “2018 New Wind Summit”.


“Consumption is a relationship between supply and demand, to solve the needs of everyone about food, clothing and housing.” Will Jiang said.


Will Jiang said that it is still necessary to concentrate when making consumption investments. Entrepreneurs who develop faster in the market have the ability to grab on both ends, one is on the supply side (supply chain) and the other is on the need side.


How big is the consumption opportunity today, and how high is the ceiling of today’s consumption investments? This involves the issue of “time, place, and people.” The so-called “time, place, and people” is “ceiling, gross profit, and human efficiency.”


Will Jiang believes that entrepreneurs who choose a track which already have giant or branded players, the cost of success will be high. Because entrepreneurs have to spend several times the usual cost to educate customers in order to acquire users, at the same time the ceiling facing entrepreneurship is bottlenecked.


“Place” is the gross profit, the gross profit is the pricing power, which is the price difference between the price bought and the price sold.


“Human efficiency is a way that high-tech companies often like to measure their own, that is, to comprehensively consider the number of employees and the total value in order to get how much income each person generates, how much gross profit can be generated, and how much net profit can be generated. Human efficiency is the core standard that determines how much net profit a company can generate in the future,” said Will Jiang, founding partner of N5Capital.


Will Jiang, founding partner of N5Capital, shared the keynote speech of “Returning to the Truth”


The following is the full text of Will Jiang’s speech:



Thank you, host. When I know that I would share on the theme of consumption, I thought that it is a difficult topic to talk about. Because consumption is too big, but in fact it seems that no one in venture capital can afford to not investing in consumption related projects. The reason is very simple. If you look up a set of data online, China’s GDP growth rate last year was about 6.9%, but the compounded growth rate for China’s consumption sector in the past five years was about 12%.


Combined with the current situation of China’s investment and financing and trade environment, we find that consumption may be the only one that can pull us out of the economic environment that is not particularly good right now, but because this track is too large and too wide, it also makes investment difficult. This is also very confusing for entrepreneurs.


In fact, we are very worried when everyone talks about consumption, they often ignore what is consumption and how they can make a profit. We have experienced several consumer-related bubbles, the most recent being the sharing economy. When I saw sharing bicycles three years ago, I often said that sharing bicycles will one day become consumption waste. Yesterday I saw an article in the news app said that “shared bicycles are shared garbage dumps”. It is a typical capital blowing bubble, which was previously O2O. The role of capital in consumer investment may be to help the entire industry to grow, and to help China to make GDP transformation. On the other hand, it has created a lot of unnecessary waste, such as investors’ funds and the time of the entrepreneurs.


Therefore, N5Capital believes that we must concentrate on consumption related projects. Today, everyone has been talking about consumption, what is consumption? We believe that consumption is the relationship between supply and demand which solves the needs of everyone.


Looking back at the Chinese economy, with the 30 years of economic reform, who are the beneficiaries?


If you are an entrepreneur, there will be three categories of benefits in the development process before 2017: the first is the e-commerce platform that relies on the Internet to obtain “the dividend” of low-cost users; the second is the offline channel brand with coverage; the third is the commodity brand with the deepest and most extensive channel layout. In particular, e-commerce has produced several listed giant companies.


But much has changed since 2017. Large-scale online channel companies have extensive and penetrating power to pave the channels needed for first- and second-tier cities. However, the development of these companies in the last one or two years has slowed down. Why did they slow down? Because these companies have certain limitations in the development process because of the selected categories. For example, some of them focus solely on consumer categories, such as 3C, women’s wear, etc., as the main development direction, until the category is fully developed. If they expand to other categories in the future, they will suffer from growth weakness and development dilemma to varying degrees. In addition, offline channel companies will also experience some confusing exploration stages.


What is the value of the channel now? What is the opportunity brought by the new wave of bottlenecks? When the giants encounter bottlenecks, they often create opportunities for entrepreneurs, so we hope to find new entrepreneurs in these bottlenecks, and these entrepreneurs can find opportunities in the industry where the giants already exist. We found that the entrepreneurs invested by N5Capital and the entrepreneurs who were develop fast in the market, all have the ability to grasp both ends of the consumer, one side is supply, and the other is demand. Supply is actually about the supply chain.


At the same time, we also find that many consumer startups, especially those that are known to be based on technology or the Internet, tend to be weak in the supply side. These entrepreneurs are young, and the mainstream entrepreneurs are all born in the 1980s or even the 1990s. The supply chain resources they have cultivated in the consumption field are relatively weak. However, they also have strengths. Their entrepreneurial teams tend to show outstanding abilities in the channel, that is, on the demand side.


Of course, we see on the demand side, where comes the demand today? What is the ultimate channel of consumption today? We believe that the ultimate channel is self-employed, self-employed refers not necessarily to micro-business, and micro-business is only one form of self-employed.


In today’s high-traffic environment, consumer companies that can effectively capture the underlying channels will be the beneficiaries. But at the same time, if the startups have no control over the supply side, then I think these ventures are meaningless. The reason is very simple. Today’s business must not be just about traffic, or just about production. Today only the entrepreneurs who can get the upper and lower industries together really have a chance. If these entrepreneurs can only create value on one end and blind at the other end, give rise to the unbalanced state, the result is that the bottleneck will appear soon.


I am talking about technology empowerment today. I don’t like the word very much, but there seems to be no more suitable vocabulary to replace it. At present, all people who invest in consumption sector, or people related to consumption, want to talk about technology, but what can technology do? There is a hot topic that is discussed today called S2B2C. It is more related to channels. All previous consumption patterns are layered agent, one layer after another, and today’s effect is to let the agent do information communication only, and the platform will hand over rest of the things, which means logistics, cash flow, inventory, and related supplies.


However, if technology only solves a single problem, it cannot truly meet the important factors for the successful development of a consumer platform. For this reason, if your supply side is ordinary, you will always be squeezed by channels and suppliers, so it is difficult to achieve the desired gross margin.


We also find something successful entrepreneurs are often very capable of: by applying technology, he or she can make the company more profitable than others. What can technology change? There is a saying within N5Capital that if technology can’t turn into productivity or gross margin, the technology is useless.Why? If the technology can’t change the gross profit potential nor the human efficiency, then what is the value of technology? The so-called technology empowerment is a false proposition, which is why I think that in the previous waves, regardless of the O2O wave or the shared economic wave, the valuation of technology is overestimated.


For example, sharing bicycles, everyone thinks that the single bicycle model is established, but everyone forgets how many people and cars are needed in order to move the bikes, and this is what everyone did not involve in the model at the beginning. Thus the value of technology is overestimated and the potential of human beings is underestimated. Under the current environment, if we want to have real technology investment and real technology entrepreneurship, we must apply technology to change the industry and the entire “supply to demand” network.


Of course, from another point of view, how big is the consumption opportunity today and how high the ceiling of consumption is, which involves time, location, and people. First of all, “time, place, and people” is an old saying of China. I personally think that the most important factors in “time, place, and people” are the ceiling, the gross profit and the human efficiency.


What is ceiling, consumption is a 35 trillion market in China, the market is very large, so it is easy to find any sub-sector that is said to be a billion-dollar market in China. The question is whether this 100 billion market is suitable for everyone to start a business. Does the 100 billion market mean that the ceiling is relatively high? There are two very different things. The high ceiling means that in the current entrepreneurial environment, because many brands and categories have been deeply rooted in the hearts of the people, thus when you do it again, the cost of success is very high. Because you have to spend several times the cost to educate customers and to acquire users, the ceiling of entrepreneurship is bottlenecked in this environment.


The “place” is gross profit, and the gross profit is the pricing power. This is what most entrepreneurs ignore today. Many people do scale first, and then do pricing power, perhaps in some subdivided categories they have the possibility of success. However, there are many platforms for consumption, and the scale is based on the variety of SKUs, and all are standard SKU explosions to scale. What’s the consequence of that scale? Ten billion still no pricing power.


Therefore, we believe that the truly excellent consumer entrepreneurs are able to effectively increase the gross profit through the control of the raw materials on the supply side and the understanding of the industrial chain from day one. When the quantity reaches a certain level, the non-standard brand can be standardize, which is the price premium of the brand. Therefore, if the gross profit can’t be improved by changing the industrial chain through technology, then we think that the industry itself cannot be subverted by science and technology. Gross profit is a must for any startup company. This is also a test of entrepreneurial selection, because some of the gross profit cannot be changed. Some of the gross profit is created due to the lack of supply, because the supply is less than the demand, so the result is no pricing power, and the result of no pricing power is no gross profit. Therefore, I believe that a business without gross profit is a business that cannot be invested, and a business that cannot be helped by capital.


Finally, the new concept of investing in consumption is human efficiency, which is more in line with the Internet concept. Today, everyone sees consumption and many people have been talk about area-effectiveness, which is the noun of the previous era. Area-effectivenessis how much turnover per square meter output. But consumption itself has a big problem, that is, the increase is made by monomer growth, and the result is linear growth, while investors prefer curve growth or exponential growth, which mean that the simple calculation of the area-effectivenessis not an effective way.


Human efficiency is a way that high-tech companies often like to measure themselves, that is, to comprehensively consider the number of employees and the total value to derive how much income each person generates, how much gross profit and net profit can be generated. For a startup company there may be zero net profit. Therefore, N5Capital believes that human efficiency is often the core criteria that can determine how much net profit the company can generate in the future. The reason is very simple. The so-called high-tech is a light asset, it can strip off some heavy assets. In the process, technology helps to integrate the two, so that a small number of people may be able to operate the same size company as before. The ultimate stage comes when your gross profit is higher, human efficiency is higher as well as the net profit is higher.


Investing in consumption is not about investing in bubbles, not in storytelling, nor in creating pseudo-needs, but in investing in new businesses that create value. And this value in the capital market, in the long run, more practical is the net profit, do not forget the importance of net profit. Today, few people discuss where the profit comes from when investing and starting a business. However, we feel that if we can’t create value and can’t create net profit by investing in consumption projects, then entrepreneurship is a false proposition. Thank you all. (Text: 36Kr/Zhu Xin)