Xia Zuoquan, founder of Zhengxuan Investment, is a record-breaker for yielding 50,000 times his investment in BYD Auto. Some attribute the miracle simply to good luck, but foresight is the prerequisite for his success. This all-in early investment style has not only witnessed a growth trajectory, but also foretells another expedition of Mr Xia.
The Atypical Angel
On May 28, Xia Zuoquan announced he would reduce his holdings in BYD by no more than 12 million shares. Based on the share price at the time, Xia's return on investment exceeded 50,000 times – hence his nickname, "the number one angel investor". But when Xia invested in BYD, the concept of angel investment was barely known in China, and even he regarded the investment as a coincidence.
Let us rewind to November 1994: Xia earned his first sum of money through public market investing. But the fluctuating public market was an uncomfortable place for someone used to having long-term plans.
So, Xia travelled to Shenzhen for opportunities and met the renowned chemist and founder of BYD, Wang Chuanfu. At that time, Wang had rich experience in the battery industry, but for institutional reasons, he needed to create a new entity, his own entity.
Xia's stay in Shenzhen was a brief one – just three days and two nights. But during it, he "talked to Wang almost every day until two or three o'clock in the morning". In the jungle of modern management theories, most tactics come down to either rationality or sensibility. Though the management theory leans to the rational side, investing is all about investing in people, and Xia had the perfect eye for the perfect person.
Wang Chuanfu's detailed explanation of battery technology, product technology and future market development fascinated Xia, even though Xia majored in computer science – a completely different field.
"Wang Chuanfu has something I can't even explain today – trustworthiness," Xia recalled.
Xia and Wang agreed that when BYD grew to a certain level, Xia would take a management role. And that is the key: Xia was already as passionate about BYD as Wang before investing, which explains why he preferred to go directly into business operation than just provide post-investment services.
In 2001, the time came. Following rapid development at BYD, Wang invited Xia to participate in the company's operation. Xia joined as executive director and vice president to take charge of the operation of the whole BYD group. He even took charge of the IT and legal departments, superseding others.
Xia's established his investment company, Zhengxuan Investment, in 2003. But he was too devoted to BYD to save any energy for it. Indeed, it had no business activity in the first few years.
With Great Plans, Come Great Success
Xia always has his plans. And his journey to founding his own venture capital firm couldn't have been planned any better. Resigning from an insurance company in Hubei, he went to Beijing Iron and Steel Institute (now the University of Science and Technology Beijing) to receive further education in computer science. Then, he stepped into securities investment, which was followed by joining BYD and founding Zhengxuan Investment. He realized a perfect career trajectory that left him educated and experienced enough to find success.
Xia's time at BYD secured it a period of rapid growth and transformation. In 2002, BYD was listed on the Hong Kong stock market. It acquired Jichi Motor Dies of Beijing Jeep Corporation in the same year, then Xi'an Qinchuan Auto Company in the following one, kickstarting BYD's car-making journey and transforming the former "Battery King" to the "Chinese Emperor of Automobiles".
"My experience in BYD turned me into a semi-entrepreneur, giving me excellent business operational know-how. I participated in decision-making at each stage, learned how to correct mistakes and drove an overall advance at BYD. I think entrepreneurs are the definers of this generation – its true movers and shakers. If I had Wang's ability, I would choose to be an entrepreneur. But I'm better at investing, so I choose to be a pro investor."
Xia agreed with Wang to serve at BYD for six years. He resigned as executive director of BYD in 2008 and vice president in 2010, quitting its operation and management. Behind him he left an era of success, having fulfilled his promise. He had secured BYD rapid growth and ensured it would not suffer from his stepping down.
Now, after the great success of betting on BYD, Xia wants greater self-realization in new investments. Following his long-held plans, he shifted to a new role as a pro investor, and his Zhengxuan Investment also began capitalizing on hard tech investments.
After the journey at BYD – the epitome of successful growth companies – Xia has deeply understood that his mission is to find enterprises like BYD and help them grow.
From Entrepreneur to Investment Professional
Xia has a simple investment methodology for Zhengxuan Investment: betting his own money on enterprises like BYD. That is why the firm focuses on artificial intelligence, advanced manufacturing, informatization, semiconductors, and so on. The investment thesis differs from consumer company investing because the former requires advanced tech and manufacturing, while the latter can earn money only with some business models or services.
Zhengxuan Investment was completely fueled by Xia's own wealth at the outset. "I have proven my capability in business operation, but investment is another thing. There are risks and a probability of failure, so I invest with my own money," states Xia.
Data shows that Xia reduced his holdings of BYD shares in 2013, 2018, 2019 and 2020 respectively, creating cash returns of about CNY1.135 billion. All these funds were injected into Zhengxuan Investment.
From 2010 to 2016, Zhengxuan Investment never raised a fund, yet it invested in over 20 tech startups to the tune of CNY440 million. Over 40% of the invested firms have succeeded. That is not a bad grade report, but Xia still saw problems.
Due to a lack of opinion from external investment professionals, the investment decision making was too emotional. And the due diligence research was not thorough enough. Xia knew these were the reasons why 60% of the invested firms failed, and he knew he had to make a change.
"Having found financial success, it was no heavy burden to invest my own money. But this has drawbacks: I might incline from sense to sensibility and relax due diligence. But if I invest with raised funds, Zhengxuan Investment must run like incorporated companies do, and it will become more cautious. Our style and the number of invested firms will all change," said Xia.
Xia discovered how to shift from being an entrepreneur to an investment professional, and he began a reform in Zhengxuan Investment.
Assembling the Superhero Squad
In 2015, Zhengxuan Investment made a "call to arms" for assembling a professional team. Engineering majors and ten plus years of work experience in a well-known enterprise were the two prerequisites. Soon, talents from BYD, Huawei, ZTE and other companies flocked to him, and a strong investment team took shape in Zhengxuan Investment. Now, investment would be a team decision.
"Our team members are highly experienced in all kinds of fields – advanced manufacturing, automobile, communication technology, software, finance or other fields. But I ask them to keep learning and never stop creating their own breakthroughs. Because investment is about future sci&tech, experience alone is never enough. Also, I believe investing requires diligence – you can't do well without working hard," remarked Xia.
In 2016, Zhengxuan Investment officially began a new chapter. Xia raised capital from other partners of Zhengxuan Investment and his friends to invest via pooled funds. By 2019, Zhengxuan Investment had invested in a total of 30 tech companies, with an investment scale of CNY450 million.
Creation, professionalism, win-win results and friendly terms became the four characteristics of Zhengxuan Investment. This means it will always:
target creative companies or it creates new companies;
stay professional when choosing the investment race track and stage;
share returns with limited partners (LPs) and employees to keep running;
and provide friendly terms for invested companies without terms like repurchase or bet-on agreement.
Because of Zhengxuan Investment, several high-potential tech companies began to surface. And Xia himself as an angel investor really has an eye for investments. His investment in the unicorn UBTECH Robotics, whose estimated value was CNY36 million in 2013, has become another classic case after BYD.
Reflecting on his transformation efforts, Xia concluded: "You have to give time to let the investment team adapt – they will step into some traps in the beginning, but through continuous self-reflection, their decision-making will become more and more correct and scientific. Investment decision-makers have learned a sense of timing and teamwork, and to properly help invested enterprises at their various stages. In the end, the failures will be far fewer."
Both Xia and Zhengxuan Investment have evolved, but Xia's goal has never changed. As he stated: "The original motivation is to help a group of enterprises with core technology and help achieve national prosperity by investing and creating a group of powerful high-tech enterprises. I am particularly eager to pay Shenzhen back because this land has given us so many opportunities."
Crossing the Finish Line, and Waiting for the Starting Gun
Life is like a game of Go. You can always reset. After Xia and Zhengxuan Investment embarked on a new journey following the BYD success, their investment strategy became as sophisticated and subtle as that of a master Go strategist.
A wise player in Go games knows to step away from competitor's encompassing pieces, fighting for your own leading position. For Xia, that means avoiding distraction from rivals and focusing on equipping the invested high-tech enterprises so that they can grow and deliver returns.
If you look at Zhengxuan Investment's website, you will see how it has drawn a great map in the hard tech space, holding stakes in UBTECH Robotics, Unifortune, Mould-tip, Double CNC, Bominwell, Xiner Semi and Radrock. It further proposes to reach CNY100 billion in total asset value of invested enterprises within the next decade and become a well-known investment group in China. Truly, it is planning big! But that has always been Xia's style.
A winning player in Go games knows to drive his competitor into the corner to win a battle. But at the same time, he knows how to carve out broader space to win the war. For Zhengxuan Investment, early investment is where you win the battles, but the subsequent middle- and late-stage investment is where you win the war.
Now, Zhengxuan Investment's new fund with a total size of between CNY12 billion and CNY15 billion is flexing its muscles, and Xia once again is standing on the starting line just as he planned.