Interview Dr Alfred Shang: Former Bain & Co Partner and Founder & CEO of BitRock Capital on Investing in Venture Capital, Fintech & China

By Caproasia - Jun 16, 2022

Key Interview Highlights with Dr. Alfred Shang

On Fintech, China Financial Industry:

·        In China alone, there are thousands of commercial banks, hundreds of insurance companies and brokers, and millions of financial advisors and agents that are looking for more effective ways to conduct businesses, manage risks and analyze data.

·        Demand for innovations and digitalization are increasing significantly by financial institutions.

·        Traditional financial services are playing catch up and increasing their spending on SaaS-based solutions.

·        The young and underbanked population in developing markets will leapfrog to cashless digital wallets.

·        The exchange of value will be the centerpiece of Web 3.0.

·        Abundant opportunities for fintech venture-stage investment to capture the trillions of dollars of value in this next era of the Web (Web 3.0).

12 Years Consulting Career: “Formulated strategies that focus on my clients’ core businesses and long-term value creation to their customers.  Often, I had to advise against our clients’ original “empire-building” plan to expand in non-core areas or to invest in short-term growth.”

Academic Research at Harvard (PhD) / Chicago (Bachelor, Masters):“My passion for investment started from my academic studies and research in investment and capital markets in which the core thesis is that productivity improvement will drive significant and long term growth of the economy and that innovations in the financial markets are most pivotal to promote efficient growth.”

On Crackdown in China:

·        China’s financial service industry has evolved significantly after the regulator’s crackdown on P2P lending and Bigtechs.

·        Bigtechs such as Alibaba and Tencent will restrain from developing financial service businesses due to antitrust laws and the regulator’s stance on preventing “unchecked expansion of capital.”

·        Current market downturn has created the opportunity for long-term investors to take a step back and re-construct their portfolio to capture the lower valuation.

On VC Exit Options:

·        The IPO market will be very challenging for startups in the next 6-12 months.

·        M&A activities in the region for trade-sale opportunities. 

·        Blockchain technology will enable the digitalization of primary assets such as VC investments that will provide additional exit options and liquidity.

Observations of Investors, Family Offices:

·        More investors in the region including family offices and HNWIs are tapping into venture markets as VCs have created high returns for investors in the last decade.

·        In Asia, many family offices and HNWIs have over-concentrated in traditional asset classes such as real estate.

Direct Investment: “ A few family offices that I have talked to prefer to focus on direct investments rather than investing through VC funds.  This approach is particularly risky because as we all know the success rate for early stage startups is low and only investing in a handful of startups across different industries in a year will likely not generate positive returns unless someone is really lucky.  As the recent downturn has shown, a number of big firms and branded asset managers have lost a lot of money. “

Bitrock Capital VC Strategy:

·        Do not hurry into the next investment trend that may be crowded.

·        We spend disproportional amount of time and efforts with our portfolio companies to improve their strategy, operations and fundraising.

·        Focus on early stage post-revenue startups that are typically valued between US$50 million – 200 million.

·        Invest in companies that have the potential to become unicorns or decacorns.

·        Looking at >5x returns when we make our investment in a startup.

·        AUM target of US$500 million by 2028 and gross IRR target of 35% p.a. 

·        Create value to our LPs in terms of financial returns, co-investing opportunities as well as thought partnership.

·        Long-term goal is to become the leading VC in the fintech industry globally with a top quartile track record.

The Full Interview:

1. You were a former Partner at top management consulting firm Bain & Co, and had led the financial services practice in Greater China.  Why not continue as a management consultant?  Why did you set up BitRock Capital in 2018? 

Dr. Alfred: I started Bitrock Capital in 2018 intending to build the franchise to become a leading investor and thought leader in fintech VC investment. We focus on early stage investments in Series A and B startups in the fintech in China, Asia and United States. The mission is to work with our investors, entrepreneurs, and advisors to foster an ecosystem of partners and to deploy capital to the most innovative startups that create sustainable value for the industry and markets. 

My passion for investment started from my academic studies and research in investment and capital markets in which the core thesis is that productivity improvement will drive significant and long term growth of the economy and that innovations in the financial markets are most pivotal to promote efficient growth. In addition, in my 12-year consulting career, I formulated strategies that focus on my clients’ core businesses and long-term value creation to their customers. Often, I had to advise against our clients’ original “empire-building” plan to expand in non-core areas or to invest in short-term growth. I believe I can make a significant contribution to the way that capital is being deployed in the venture capital industry by leveraging my understanding of business cycles and the economic functions, my years of experience in investment banking and strategy consulting, and my beliefs in focusing on the core and sustainable value creation. By working closely with investors and partners who share similar values, over-time we will be able to achieve the mission that improves the efficiency of capital allocation that will lead to value-added innovations in the financial systems, which in-turn will support efficient developments in other industries. 

2. How do you differentiate Bitrock from other VCs? Do you have a vision or goal for BitRock Capital?  

Dr. Alfred: To differentiate Bitrock from other VCs, we focus our efforts on the following dimensions:

·        Focus on building long-term relationship with our investors, advisors, entrepreneurs, and team to create a win for everyone. We do not hurry into the next investment trend that may be crowded. We focus on what we know best while being curious on learning about the technological trends and winners

·        Maintain the highest level of integrity to build trust with our partners

·        Leverage our network and resource in deal sourcing, deal diligence, and post-investment support. We spend disproportional amount of time and efforts with our portfolio companies to improve their strategy, operations and fundraising 

·        Create value to our LPs in terms of financial returns, co-investing opportunities as well as thought partnership

Our long-term goal is to become the leading VC in the fintech industry globally with a top quartile track record and thought leadership. For immediate targets, we set an AUM target of US$500 million by 2028 and gross IRR target of 35% p.a. 

3. What are the key trends and opportunities in Fintech today for the VC industries?

Dr. Alfred: There are a few important factors promoting growth in fintech. Firstly, the demand for innovations and digitalization are increasing significantly by financial institutions. In China alone, there are thousands of commercial banks, hundreds of insurance companies and brokers, and millions of financial advisors and agents that are looking for more effective ways to conduct businesses, manage risks and analyze data. More importantly, as data are being created and digitalized at an unprecedented rate from IoT, blockchain, and cloud computing, fintech innovations will leverage this interconnectivity of data to enable the “exchange of value” through the internet. From our perspectives, the exchange of value will be the centerpiece of Web 3.0. As a result, there will be abundant opportunities for fintech venture-stage investment to capture the trillions of dollars of value in this next era of the Web. 

Specifically, we expect fintech to continue to be one of the most important growth engines and investment focus globally as well as in Asia driven by a few tailwinds：

·        The young and underbanked population in developing markets will leapfrog to cashless digital wallets with embedded features such as BNPL, wealth management, and merchant loyalty programs. For example, only 25% adults in Southeast Asia have access to holistic financial services of banking accounts, credit, investments, and insurance.

·        Traditional financial services are playing catch up and increasing their spending on SaaS-based solutions, especially in AI applications, customer acquisition and servicing, automated processing, and risk management. 

·        Fintech will be a pivotal enabler to facilitate the “exchange of value” in Web 3.0. In 2022 we will continue to see new fintech opportunities in decentralized finance (DeFi), blockchain applications in financial services, payment innovations in non-fungible tokens (NFT) and the metaverse. 

4. What is your outlook for China’s financial services industry and investment opportunities?

Dr. Alfred: China’s financial service industry has evolved significantly after the regulator’s crackdown on P2P lending and Bigtechs in the last few years. When the dust settles, the financial market structure and trajectory will become more clear:

·        Licensed financial institutions will carry the primary responsibility as financial intermediaries and growth engines of the market. They are currently investing massively into the digital capability.

·        Bigtechs such as Alibaba and Tencent will restrain from developing financial service businesses due to antitrust laws and the regulator’s stance on preventing “unchecked expansion of capital.”

·        Capital markets continue to increase its breadth and depth. In addition, foreign institutions will continue to establish in China with an increased presence.

In contrast to the common understanding, the Chinese regulators actually encourage the development of the financial industry and the adoption of fintech. Vice Premier Liu He remarked that the financial system should attach greater importance to fintech and improve industry quality and efficiency at the 2021 Annual Conference of Financial Street Forum. In addition, the PBOC released its Fintech Development Plan for 2022-2025 in which financial institutions are required to ensure effective implementation of digital transformation, improved data capability, and comprehensive application of data. 

There are a few interesting specific opportunities related to enterprise solutions and SaaS for financial institutions: 

·        Technologies that enhance data connectivity between IoT, ERP, credit bureau, and supply chain to enable efficient supply chain payment and financing.

·        B2B payment especially in cross-border trades and e-commerce.

·        Wealth management and investment, including robo-advisory, platforms for financial advisors, and holistic offering of investment, insurance, and health.

·        Underlying technology incl. AI, blockchain applications, and federated learning to enable encrypted data sharing and modelling.

·        Infrastructure and SaaS that support the development of the capital markets, for instance, market data, trading operations, and risk management.

5. Stepping back to the overall VC investment as an asset class, given the recent market volatility, increase in interest rates, and uncertainties arising from geo-political risks, will VC suffer in performance or face exit issues in next few years?

Dr. Alfred: Venture Capital funds invest in companies at early to growth stages that are backed by breakthroughs in technological innovations and business models. We see technological advancement as a secular trend that will continue to disrupt market ecosystem and create new revenue and profits pools. As a result, while there are short term market volatilities and geo-political risks, we are positive on the medium to long-term outlook and will continue to invest. 

In fact, we believe that the current market downturn has created the opportunity for long-term investors to take a step back and re-construct their portfolio to capture the lower valuation and potentially higher value gain going forward. 

At Bitrock, we focus on early stage post-revenue startups that are typically valued between US$50 million – US$200 million. We only invest in companies that have the potential to become unicorns or decacorns. Hence, we are looking at >5x returns when we make our investment in a startup. The future value will be driven by both the business growth and recovery in the valuation of the tech sector.

In terms of exit options, the IPO market will be very challenging for startups in the next 6-12 months. However, we think that there will be additional exit options and increased liquidity in the APAC region as the stock markets continue to develop in China, Hong Kong, Singapore and Thailand. There will also be additional M&A activities in the region for trade-sale opportunities. Furthermore, we think that blockchain technology will enable the digitalization of primary assets such as VC investments that will provide additional exit options and liquidity.

6. Venture Capital like Private Equity, requires 7 to 15 years holding period.  Do you see mainly institutional investors and family offices investing into VCs?  Or do you also see wealthy individuals, UHNWs & HNWs also investing in VCs in their personal capacity, and able to hold for 7 to 15 years? Any advice you would like to give to investors allocating into venture capital funds?

Dr. Alfred: More investors in the region including family offices and HNWIs are tapping into venture markets as VCs have created high returns for investors in the last decade. As explained earlier, I believe VC investments will continue to generate attractive returns for investors driven by innovations in technology and business models.

More importantly, VC investment is a key asset class for portfolio construction and for diversification. In Asia, many family offices and HNWIs have over-concentrated in traditional asset classes such as real estate. VC investment provides a complementary asset class that, if one picks the right managers, will mitigate risk and increase return for the overall asset portfolio. 

A few family offices that I have talked to prefer to focus on direct investments rather than investing through VC funds. To me, this approach is particularly risky because as we all know the success rate for early stage startups is low and only investing in a handful of startups across different industries in a year will likely not generate positive returns unless someone is really lucky. Following bulge bracket private banks to make co-investments at high fees may not be a good approach either because as the recent downturn has shown, a number of big firms and branded asset managers have lost a lot of money. My suggestion to family offices and HNWIs is to first conduct a diagnostic their overall portfolio and adopt a top-down asset allocation assessment in terms of the risk and return profile they want to achieve in 5, 10, and 20 years. Then, they can construct a portfolio of various asset classes that will get them the risk-return profile they want based on data and outlook. Within primary equity investments in PE and VC, they should consider allocating to both the established global managers with long track records of success and also the emerging managers that have expertise in certain markets or industries that may outperform the market.

Source: http://www.caproasia.com/2022/06/16/interview-dr-alfred-shang-former-bain-co-partner-and-founder-ceo-of-bitrock-capital-on-investing-in-venture-capital-fintech-china/