Feng Weidong of Tiantu Capital: It's time to change the strategy of consumer investment.

Since 2011, we've focused on consumer investment. Among numerous projects, the ones that achieved the success we expected were in the consumer sector. There were also successful tech projects, but they were more like "planting beans and getting melons." Such success is not replicable.

Consumer investment is slowly climbing out of the trough. This trend was also within the expectations of Feng Weidong, the founding partner and CEO of Tiantu Capital. "Most economic activities ultimately lead to C - end consumption. So, the consumer track is broad, and there are always opportunities."

In 2011, on his advice, Tiantu Capital transformed from a comprehensive investment institution that "invested in everything" to one that cut off side branches and focused on consumer investment. It endured a few years of being in the cold at first, then witnessed the boom of new - consumer investment, and later entered a capital winter. In fact, as Feng Weidong put it, "We've experienced the cold many times." In short, over the past 14 years, Tiantu Capital has gone through several ups and downs in the consumer investment track, encountered many pitfalls, and gained multiple project cases, including well - known companies like Xiaohongshu, Zhou Hei Ya, Cha Yan Yue Se, and Guoquan Food. These gains and losses have gradually woven Tiantu's knowledge map in the field of consumer investment.

Feng Weidong calls it "knowledge rent," which refers to the industry insights that others don't have. He believes this is very important. Entrepreneurs can build moats with it, and investors can earn high returns. With a background in management consulting, Feng Weidong is good at theorizing investment experience. He summarized the "eight moats" of consumer enterprises, refined the "VISIBLE" model to analyze entrepreneurs' profiles, and published a book on business theory called Upgrading Positioning. In fact, the decision to focus on consumer investment was related to this. Before that, Tiantu invested in various fields. But when reviewing successful projects, only those in the consumer sector met the expectations. For others, such as tech investments, although they could make money and even yield high return multiples, they were more like accidental successes, which Feng Weidong didn't want to see. "Such success is not replicable. We don't even understand the causal relationship. It's just luck, not real success."

Source: Respondent

Real success should be able to withstand economic cycles and uncertainties. Take the past two years as an example. Consumer investment has faced unprecedented challenges. "It's not just a winter; it's a mini - ice age," and investors in the industry felt it strongly. Many investment institutions completely disbanded their consumer investment teams, and the entire industry was even in a state of "fear at the mention of consumer investment." However, for institutions like Tiantu that focus on consumer investment, there was no way back, so they could only find a way out. "We gritted our teeth and persevered. After most institutions chasing the trend withdrew, it would be our turn again." Feng Weidong firmly believes this. The past two years were the ones with the fewest investment projects and the lowest investment amounts in Tiantu's history, as well as the years with the most significant strategy adjustments.

"After the strategy adjustment, the prospects are broad, and we can see a completely different landscape in consumer investment," Feng Weidong said. "The effects of the new strategy will basically show this year, and Tiantu will enter the next harvest period."

The following is an edited transcript of Feng Weidong's exclusive interview with China Entrepreneur magazine:

01 There are always opportunities in consumer investment, but the investment content has changed

The changes in consumer investment in recent years have been very significant. We've experienced various cycles before, but this one has lasted longer. I think it's not just a winter; it should be called a "mini - ice age." One common challenge comes from the uncertainty of IPO exit prospects. There has been some improvement in this regard since last year.

These are all short - term fluctuations. In the long run, it's the change of the consumer era. Now, some scholars have proposed the "Fifth Consumer Era" (from the book The Fifth Consumer Era by Japanese sociologist Miura Manabu). That is, with different stages of economic development and changes in driving factors, the overall consumer culture, consumption concepts, and consumption expectations will change and continue to do so. Another factor is the technological change on the supply side, which will bring huge changes to the future consumer market and consumer investment.

Actually, there is no so - called cycle in a complex system. Any major change is irreversible, not a simple cycle. Industries that die out basically won't revive. Getting out of a crisis depends on the rise of new industries. The same goes for consumer investment. The prosperity of the previous wave of new - consumer models is gone forever. On the one hand, the consumer track is broad. Most economic activities ultimately lead to C - end consumption, so there are always opportunities. On the other hand, the content of consumer investment is constantly changing.

Currently, the Chinese consumer market is clearly stratified. Some first - tier cities have entered the Fourth Consumer Era, some are in the transition period between the Third and Fourth Consumer Eras, or even at a lower stage. This depth provides different investment opportunities. On the one hand, consumerism focusing on cost - performance has risen in the past two years. On the other hand, high - end brands that have withstood the test are becoming more and more popular, and consumers regard them as "small certainties of happiness" to reward themselves. Meanwhile, the kind of internet - celebrity novelty - seeking consumption has been squeezed. When consumers have low expectations of income growth, they will first reduce this kind of trial - and - error consumption and return to conservative consumption.

In our investment portfolio, we can clearly feel these changes. For example, both Zhou Hei Ya and Bao's Pastries, which are positioned as mid - to high - end products, are developing well. So, in future investment choices, Tiantu still tends to focus on opportunities in this segment. Because those focusing on cost - performance need to compete in scale, and the "Matthew Effect" is strong, with usually only one winner. The investment path is quite risky. In contrast, mid - to high - end brands focus on differentiation, and there can be multiple successful mid - to high - end brands in each category, with a higher investment success rate.

This will also become a trend in Chinese consumer investment. Different from the previous wave of national - trend brands, which were mostly short - lived based on traffic operation, with the improvement of China's manufacturing quality and entrepreneurs' deeper understanding of brands, many new Chinese brands targeting the mid - to high - end market will emerge in batches. Germany and Japan have gone through such a process, and China is also entering this stage.

In addition, there are several other trending directions for investment. One is the silver - haired consumer market brought about by the aging of Chinese society. Another is the trend of young people focusing on health preservation. Nowadays, even middle - school students are into it, so the health trend will be a long - term driving force for consumption. There is also the pet economy. Recently, we reviewed an interesting project that uses vaccines to sterilize pets. I have a cat at home, and I know there is a strong demand for this.

02 Eight "moats" and the "VISIBLE" model

Tiantu started to focus on consumer investment in 2011. Before that, it invested in various fields. Later, through feedback analysis, we found that among numerous projects, the ones that achieved the success we expected were in the consumer sector. The success of consumer projects was mostly in line with our expectations. There were also successful tech projects, but they were more like "planting beans and getting melons." Although we made money, and the return multiples were even high, we didn't understand the causal relationship. Such success was just luck, not real success.

In economics, there is a saying that "there is no excess profit under competition," which is accurately the "zero - profit theorem" in economics: economic profit = revenue - opportunity cost = 0. It's not accidentally zero but always zero. So, how can investment institutions obtain high returns? It's through knowledge rent. The complete formula should be: investment return = capital interest + knowledge rent. That is to say, the return that investment institutions get beyond the capital interest depends on the return of our unique knowledge. Many founders are very charismatic. If you're an outsider, you can be easily convinced by them. So, we need to focus, form a deep and systematic understanding of the consumer track, build long - term capabilities, and make analysis and judgments based on economic laws and business essence.

Source: AI - generated

Do consumer enterprises have moats? This question has been around since we started investing in the consumer sector. When we invested in Zhou Hei Ya in 2010, many people didn't understand: it seemed that any couple with a pot could do the same business. However, we got a 20 - fold return on this project. So consumer enterprises must have moats. But different from tech enterprises, which can build moats with a "big idea" to solve a major problem and a core patent, consumer enterprises need to solve many complex problems. Their moats are more comprehensive and a complex system.

Breaking it down, we think there are eight important aspects:

There are four aspects on the demand side. The first is the brand effect, especially in highly professional fields such as healthcare and education. The cost for customers to make their own judgments is high, and the losses from wrong decisions are significant. So, the brand is even more important. The second is the network effect. The larger the user scale, the greater the use value. This type of first - mover advantage can easily lead to a winner - takes - all situation, like Xiaohongshu. The third is the switching cost, also known as the customer's "sunk cost." For example, if a user has spent a lot of time and energy on the Windows system, has mastered it proficiently, and has purchased many software programs compatible with it, it will be very difficult for them to switch to the Apple system. The fourth is economies of scope. From the consumer's perspective, it's the advantage of one - stop shopping. For example, an ordinary supermarket offers common seasonal fruits, while Pagoda offers many rare and exotic fruits in addition.

There are also four moats on the supply side. The first is economies of scale. Early entrants can use high prices to compensate for the initial lack of economies of scale. Then, through large - scale sales, they can gain cost advantages and lower prices, suppressing later entrants. As long as these enterprises don't make mistakes, they will lead the way with their first - mover advantage.

The second is the learning curve, which can be regarded as a special form of economies of scale. It's a knowledge barrier obtained through cumulative production. As the saying goes, practice makes perfect. These are formed through time accumulation and repeated iteration. It's not easy for later entrants to bypass this curve and overtake. So, continuous learning and innovation are very important.

The third is factor monopoly, such as the formula and technology of processed food, certain industry licenses, and the advantage of store location. Although a store lease for a few years may not seem very reliable, it can still form a certain first - mover advantage.

The fourth is economies of scope on the supply side. Through the overall planning of the supply network, products can be jointly supplied, or by - products can be fully utilized to optimize costs.

So, consumer enterprises are different from tech enterprises. They don't have a single, overwhelming advantage like a core patent. Instead, they build a multi - dimensional and more complex competitive barrier by having a little advantage in various aspects. The "moat" of consumer enterprises is more about eliminating weaknesses rather than competing with long - board advantages because any obvious flaw can lead to a fatal crisis.

This characteristic also determines the different qualities required for entrepreneurs in the consumer field. The founders of tech enterprises can be one - sided geniuses, but founders of consumer enterprises need to have more comprehensive abilities. We've tried to summarize some regular elements, which we call the "VISIBLE" analysis internally. The seven letters represent: Visionary (foresight), Integrity (honesty), Sharing (the spirit of sharing), Innovative (innovation ability), Branding (brand - building ability), Learning (learning ability), Execution (execution ability).

Of course, entrepreneurs who are excellent in all aspects are hard to come by. In most cases, we need to make trade - offs. In the past, we also discussed whether to invest in product - oriented founders or marketing - oriented founders. In our investment portfolio, there are examples of both. By comparison, enterprises founded by marketing - oriented founders can grow rapidly but are also prone to stumble. We have projects whose valuations increased ten - fold and then quickly went to zero, and some of them haven't been fully exited yet. So Tiantu still prefers to invest in product - oriented founders. It may be slower, but it's more stable. For example, Bao's Pastries has been developing better and better while many internet - celebrity brands before it have disappeared.

03 Investment logic independent of IPO

In the past two years, many institutions were afraid of consumer investment and even completely disbanded their consumer investment departments. Tiantu also faced great difficulties, but it always believed in the long - term value of consumer investment. So, it persevered. After most institutions chasing the trend withdrew, it would be Tiantu's turn again. At the same time, it actively adjusted its strategy.

On the one hand, it appropriately broadened the investment scope and added two new tracks: biomedicine and low - altitude economy. Since these two are relatively close to the consumer sector, we further divided consumer investment into tech - related consumer investment and non - tech (or low - tech) consumer investment. On the other hand, it adjusted the investment strategy. In the past, the default exit method for primary - market investment was IPO. But think about it. In the past 20 years, the entire VC industry has accumulated 200,000 projects. Assuming 5% of them are good projects, there will be 10,000 projects waiting for IPO. At the current IPO speed, it will take 50 years for all of them to exit. So, IPO is like a narrow path. We can't just assume that we'll be the lucky ones. Based on this judgment of structural variables, Tiantu established a new strategy: finding investment methods that don't rely on IPO.

Source: Respondent

The first is the merger and acquisition (M&A) fund. The sources of projects are diverse. One is from diversified groups that sell business units due to strategic adjustments. Another is from "first - generation entrepreneurs" who have difficulty passing on their businesses and choose to sell them to continue the enterprise's life. This is also a trend. There are also serial entrepreneurs who are good at starting a business from scratch but don't aim to list the company. Instead, they sell the business at the 0 - 1 or 1 - 10 stage and then start a new one.

The M&A fund will become a mainstream choice for domestic investment institutions in the future, but it's still in the initial trial stage. M&A transactions are extremely complex, and each transaction has a different strategy. The threshold for overall control is high, and there are few professional teams capable of handling this complexity. There are also few leverage - financing tools available, so the frequency of M&A transactions is still low. Tiantu