‘Fast Pitcher’ Says It Is Too Early to Invest in AR, VR in the Shadow of the Valley of Death

Qiu Zhili / Yicai

2016-12-07

(Yicai Global) Dec. 7 -- Famed Chinese investor Zhu Xiaohu told Yicai Global that the currently hot alternate reality (AR) and virtual reality (VR) industry is now in a ‘valley of death’ and investing in the sector is thus “a bit premature indeed.”

Often referred to as a 'fast pitcher' and 'venture killer,' Zhu, managing director of GSR Ventures, told Yicai Global that any technological innovation undergoes an S curve, and will enter this Death Valley after a period of transient popularity.

After traversing this stygian trough, 90 percent of its bubbles are bled out as the company ascends again, looking more mature and completely different from its original state, Zhu said.

“For venture capital (VC) investors, investment may start when the penetration rate reaches 15 percent. For entrepreneurs, a rate of at least five to 10 percent betokens opportunity. Today, the rate is less than one percent, so it is still a bit early to invest,” said Zhu.

He also tried to sum up some of the law that applies to investment on wide fundamentals: “We always hew to the 3S theory of investment.” 3S refers to Significant (large market), Scalable and Sustainable.

First, the market should be expansive. In Zhu’s view, this means annual output value of more than CNY100 billion. “Like the small fish that persevered in jumping the falls and turned into a golden dragon when the winds of opportunity blew, this is the favorite field for VC investment,” said Zhu.

He said scalability refers to internet investment that is typically one-off and which offers an exponential model of explosive profit. At the same time, large companies also need to be able to take up upstream and downstream industries. The mergers of DiDi Chuxing and Kuaidi and the merger of Ctrip.com International Ltd. [NASDAQ:CTRP] and Qunar Cayman Islands Ltd. [NASDAQ:QUNAR] all served to enhance their defensive capabilities -- particularly important in China, he noted.

Zhu sees the internet as undergoing a cycle every three years. The first cycle was web portals in 2000, the second was the SP (mobile Internet service content and service application providers), and the third was game providers, followed by video and ecommerce enterprises.

“Changes in the internet over the past five cycles have been strikingly obvious, especially in China. Once the mob thinks a new development is the final stop, everyone jumps aboard. Then it turns into a bubble and six months later this bursts. Offline-to-offline (O2O) is a typical case. O2O was very popular last year, and investors shoveled all their money into it. Yet this year, no one dares to invest. At present, the web is in a transition between cycles and its development direction is unclear,' he added.