An FA decides to engage in incubation | Enter the game

“Joining the Game” is a regular column of “Undercurrents Waves”. It stems from our observation that the once-effective operating models are facing new challenges, and the industry rules inherited from the West to the East have been disrupted. People are eager for a new map and order of innovation and capital. And “joining the game” is the most precious attitude.

“Joining the Game” was born amidst the changing situation. To summarize the subjects of this column in one sentence: We hope to find new players and new gameplay that are more adaptable to the changing environment. The following is the thirteenth article in this column.

Text by | Chen Zhiyan

Today, Lighthouse Capital announced that its Lighthouse Founders’ Fund (L2F for short) has completed its first - round fundraising ahead of expectations. The final fundraising scale of the fund is expected to be no less than $50 million, and it has officially entered the investment period.

According to Zheng Xuanle, the founder and CEO of Lighthouse Capital, the fund mainly focuses on “ultra - early - stage” investment opportunities in the fields of AI and frontier technology. It will invest in seed - round and angel - round enterprises in a dual - currency form and continue to incubate and empower them. “We plan to make ten investments a year, with each investment ranging from $300,000 to $2 million.”

Whether from the perspective of the efficiency and success rate of ultra - early - stage investments or the current situation in China where there is a lack of truly continuous and successful incubation cases, incubation doesn't seem to be a “good deal” for Lighthouse Capital, a leading FA. But obviously, Zheng Xuanle's thinking goes beyond this.

In his view, the current development stage of AI can be compared to the mobile Internet era from 2009 to 2014. When non - consensus far outweighs consensus, a large number of opportunities emerge in the early stage of this industry cycle. The primary market is essentially a match between tools and vintages, and incubation is the “best tool” that Lighthouse has chosen to enter the market after clarifying the industry vintage.

Currently, the Lighthouse Founders’ Fund has 15 projects in reserve and has invested in (including planned investments) 5 projects. The first investment was made in “Lingyun Zhikuang”, a pioneer in AI - based mineral exploration. This project was not only led by the Lighthouse Founders’ Fund but also received full - scale support from the 3i Industrial Innovation Incubator Team of Lighthouse during its early development. Relying on the world's first intelligent AI decision - making system for mineral exploration developed by Dr. Wang Xuance, the founder, the company is committed to deeply integrating AI with geological exploration, improving the production efficiency of the entire industry, and reshaping the exploration and development model of mineral resources. In the early stage of contacting the project, Lighthouse had dozens of exchanges with university professors, senior industry experts, and leading industrial enterprises, comprehensively verifying the feasibility of the AI - based mineral exploration technology and the downstream demand. It also assembled an interdisciplinary entrepreneurial team (including geology theory, mineral exploration, AI, capital operation, and operation management) and successfully incubated Lingyun Zhikuang. In the subsequent incubation stage, it not only provided financial support but also assisted in connecting with mine resources, technical experts, and local governments to accelerate the verification of the product from the laboratory to the mine.

Zheng Xuanle told “Undercurrents Waves” that the LPs of the Lighthouse Founders’ Fund mainly include the following types: (1) Successful Internet and technology entrepreneurs; (2) Enterprises and entrepreneurs in the upstream and downstream of the AI industrial chain; (3) Entrepreneurs and their families with a global perspective and resources. At the same time, an advisory committee has been established for this fund, and most of the entrepreneurs among the LPs will join the advisory committee to provide guidance and assistance to the invested entrepreneurs.

“The English name of this fund is L2F, Lighthouse Founders’ Fund. On the one hand, we want to create a Founders’ Fund in the field of AI,” Zheng Xuanle said. “L2F also means ‘leap to future’. We believe that the future will surely be an era of extremely abundant productivity and greatly improved happiness, where humans can live longer and better. AI should create such an era, and Lighthouse should be the promoter of moving towards such an era.”

In his office in Shanghai's Lujiazui, Zheng Xuanle talked with us about why a ten - year - old FA wants to enter the fields of incubation and ultra - early - stage investment, as well as his understanding of AI, cycles, and entrepreneurship.

The following is the transcript of the conversation, edited by “Undercurrents Waves”:

The Optimal Layout Point of AI + Incubation

“Undercurrents”: The concept of “AI + incubation” has started to emerge sporadically in the industry. What are the reasons for this?

Zheng Xuanle: AI is in the early stage of a major industry transformation. A large number of new opportunities are being bred under non - consensus. This is very similar to the state of the mobile Internet era from 2009 to 2014, or even from 2009 to 2011, a time of “all things waiting to be built”. The primary market is essentially a match between tools and vintages, and incubation is the tool that we believe is most suitable for the current stage of industry development.

Moreover, the biggest and most valuable difference between the AI era and the mobile Internet era is that the mobile Internet itself is about connection, creating value by connecting everything and all things, while AI is productivity itself. AI is like “electricity”. When introduced into software and hardware, it forms an end - to - end solution to create value.

As a form of productivity, AI has two attributes. Firstly, it is fully industrialized. As a form of productivity, AI can be applied to all industries, which is also the underlying reason why the industrial circle is increasingly recognizing the huge role of AI and more and more industrial players are rapidly increasing their demand for AI. Secondly, it is globalized. Productivity has no national boundaries. The cross - border replication of Internet products often faces challenges because the transfer of production relations is restricted by various factors such as culture and nationality. However, productivity does not have such restrictions. For example, British mechanical equipment can be used in China, and American electrification experience is also applicable in China. Similarly, as a general - purpose productivity, Chinese AI companies have a global nature from the very beginning of their establishment.

Another important factor is the influx of new people and money. Currently, and for the next few years, there will continue to be a group of very capable entrepreneurs. More and more people from large companies and large - model companies (level - 1 and level - 2 employees) will engage in entrepreneurship, and the quality of entrepreneurs will continue to improve. Chinese technology - related assets are being re - evaluated, and more new and high - quality capital will enter the market in the future.

“Undercurrents”: Do you mean that incubation in the early stage of a technological wave is the most promising thing?

Zheng Xuanle: Exactly. In addition to the above points, there is another very important understanding: We should do early - stage things in the early stage when market liquidity improves.

Currently, the market is still short of funds, but front - line participants can clearly feel that Chinese AI assets are undergoing a re - pricing process, and more funds will flow in the future. Therefore, instead of waiting, we should actively get involved and do things that create value and support value creation.

“Undercurrents”: Investments in the incubation stage highly depend on the investor's judgment of the industry and the project. How has your understanding of AI evolved?

Zheng Xuanle: Lighthouse has been paying attention to this wave of AI since 2022. In the second half of 2022, we contacted and served the AI project Shenshi Technology. Its essence is using AI to learn mathematics, physics, and chemistry to assist scientific research. Starting from the point of “AI for Science”, we began to realize that this wave of AI is actually creating a new producer: AI can predict whatever it learns. We can think of this AI as a child. What should be the first lesson for a child? It should be language. After learning language, the child will lay a foundation for learning various subjects. This is how the large - language model was first born, and its subsequent booming development further verified our judgment. Along this line of thinking, we wondered if we could create videos by teaching AI physics and art?

The idea of focusing on video is based on two reasons. Firstly, we firmly believe that the video market has great potential and is close to both applications and money. Secondly, although the market generally believed that China was lagging behind the United States in AI exploration at that time, I believe that Chinese people have an advantage over Americans in the video field, as evidenced by the success of ByteDance and Kuaishou. The idea of “AI + video” was thus born, and the development of Aishi Technology today has proven that our judgment was correct. The latest data shows that Pixverse, a video - generation product under Aishi Technology, has reached the fourth place on the overall list of the US App Store and the top of the video - application list, with a global monthly active user base of over 16 million and a global user number of over 60 million.

“Undercurrents”: How deeply was Lighthouse involved in Aishi Technology?

Zheng Xuanle: From the very beginning of discussing the business direction and strategy of Aishi Technology to later introducing various types of capital, resources, and building the team, Lighthouse was deeply involved. Initially, some colleagues in Lighthouse wanted to start a business. We also found Wang Changhu, who was previously in charge of video technology at ByteDance's AI lab and had left ByteDance at that time. After chatting with him, we hit it off, and he was indeed the most suitable person for this task. There are many specific directions for “AI + video”, but from day one, our goal was to create a top - notch product. During the brainstorming process, we rejected many directions, including game - material generation, until we finally decided to develop a large - scale AI video - generation model and application. This direction really excited us. To this day, we have continuously invested in the seed round, angel round, and Series A of Aishi Technology. It can be seen that Lighthouse's in - depth involvement in the incubation process of Aishi Technology is the result of the combination of the knowledge, capabilities, and resources we have accumulated over the past decade or so, spanning from the mobile Internet to industrial technology and then to artificial intelligence. The combination of these three aspects is relatively rare in the industry, and this unique scarcity of Lighthouse is also a very important foundation for us to engage in incubation.

“Undercurrents”: The large - model trend was very popular at that time.

Zheng Xuanle: At that time, the market was very skeptical about the “AI + video” market. Many people didn't believe that Chinese people could create a product that the Americans hadn't developed yet. But a few months later, in February 2024, Sora was released. On that day, many VCs and companies approached us. It was not until then that the industry consensus was truly formed. In fact, even today, the top - notch “AI + video” teams are still mostly Chinese - led.

“Undercurrents”: I remember we had a conversation eight years ago, and you said at that time that you wanted to be an “external partner at the strategic and capital levels” for enterprises. Is there any difference in this regard from being an FA to engaging in incubation?

Zheng Xuanle: I think it is the projection of the same original intention and the same set of capabilities onto different things. The core logic is the same, but in the case of incubation, since the process is longer, we do more things with the enterprise, and think more with the founder, it is more comprehensively manifested.

“Undercurrents”: Generally, it is believed that FA is based on transaction thinking, while incubation requires creative thinking. What are the points of fit for Lighthouse to engage in incubation?

Zheng Xuanle: Firstly, it is of course the financing ability. As mentioned before, the market is short of funds now, which makes financing ability a hard currency for entrepreneurship. Moreover, today's capital market is more complex than before, with more types of investors. This makes financing a complex decision. For most entrepreneurs, they need someone to help them with the overall planning.

On the other hand, it is industrial resources. Under the trend of “AI + N”, entrepreneurs have a great desire for scenarios and industries. Lighthouse has accumulated industrial resources from over 100 listed companies in the past, which can help AI entrepreneurs and scientists verify their technologies, and some can even be directly converted into orders.

In summary, there are three points: the scarcity of knowledge, the scarcity of capabilities, and the scarcity of resources.

“Undercurrents”: Entrepreneurs need in - depth industrial resources with a certain degree of influence. Can an FA achieve this?

Zheng Xuanle: Let me give you two examples. In a certain week in April, within one week, I took the founder of a leading embodied - intelligence enterprise to successively visit a trillion - level and a hundred - billion - level industrial leader. We directly met the actual controllers and negotiated strategic cooperation and order implementation. Lighthouse was also fully involved in the design of the cooperation plan.

In the initial incubation stage of the Lingyun Zhikuang project, which was the first investment of our incubation fund, Lighthouse introduced the top entrepreneurs from the fields of artificial intelligence and the industrial sector to participate.

I can say that among FAs in the industry, only Lighthouse can continuously and systematically facilitate direct conversations between the top leaders of entrepreneurial enterprises and those of industrial leaders, form strategic alliances between entrepreneurial enterprises and industrial leaders, and promote implementation through capital and business cooperation.

“Undercurrents”: How can Lighthouse ensure its influence among the main players in the industrial chain?

Zheng Xuanle: Based on the fact that in the past ten years, Lighthouse has truly covered and served over 100 listed companies in the industrial chain. This coverage is not just about knowing them; we have actually done business with these listed companies in various dimensions, including mergers and acquisitions, business spin - offs, and financing for innovation projects.

I previously proposed the concept of “the integration of three waves”, which refers to the close connection and interaction between globalization, intelligence, and industrialization, where each element positively promotes the other two. In fact, through our real - world contact, service, and cooperation, we have found that the “leaders” of each wave are very eager for the new forces in that wave. When these “top leaders” want to communicate today, as the channel for them to contact the new forces, Lighthouse has established a strong - link and strong - trust network on both sides and built a path through the Lighthouse tool - chain system. This is the core competitiveness for us to systematically achieve ecological connection.

“Undercurrents”: Most people still perceive FA as a “third - party service provider”.

Zheng Xuanle: I understand what you mean. But Lighthouse's relationship with industrial players is not just about transactions.

Take Sany Group as an example. Lighthouse Capital has deeply participated in its strategic transformation layout through a dual - wheel - drive model of “capital empowerment - industrial resource introduction”. It promoted the independent development of Sany's incubation projects, led the financing of a series of Sany ecological projects such as RootCloud and Yigongpin, and assisted Sany Heavy Truck in completing a nearly 1 - billion - yuan Series A financing, introducing industrial investors such as GLP and China Merchants Capital to strengthen the synergy of the new - energy logistics ecosystem and inject innovation momentum.

Due to the large information asymmetry and resource imbalance, Lighthouse has the opportunity to deeply participate in the AI or globalization - oriented transformation process of industrial players, and then jointly evaluate with them the new things they want to do and how to achieve them “within the company” or “outside the company”.

You can understand it this way: When cooperating with industrial players, Lighthouse is not only a capital and strategic partner but also an innovation partner.

A Super - Engine Pulling a Small Cart

“Undercurrents”: The fundraising for this frontier fund exceeded the initial target and was completed within two months. How did you achieve this?

Zheng Xuanle: During the fundraising and preparation stage, my expectation for this fund was to keep it small and efficient. Initially, the planned fundraising scale was $30 million. My original intention was to “pool resources” with my successful entrepreneur friends around me to quickly launch this project. After discussing the fund concept with my friends, they quickly over - subscribed. Considering the need for continuous investment in high - quality invested projects during the investment period, which would inevitably require a larger amount of funds, the final scale of the fund was determined to be no less than $50 million. It can be said that the entire fundraising process went very smoothly.