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Baidu Ventures: AI in China has potential, but needs real business models

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Unlike general funds that invest in various industries, Baidu Ventures is a $500 million independent venture fund focused only on artificial intelligence investments. Vice-president Felix Fang recently told TechNode that this focus has helped the firm to gain strong experience in the field.

As vice-president, Fang is responsible for AI investments and how the technology can empower and transform traditional industry. He told TechNode that Chinese AI first took root in the security and surveillance market because of government policy. High importance is attached to the sector as it can save lives, he added. In fact, China’s four leading AI companies—Sensetime, Megvii, Yitu and Cloudwalk—are all present in this field.

Fang said that in the future, AI technologies would expand to other fields gradually dependent on the basic datasets available and the digitization of different industries.

“For example, AI in the medical, retail and industry fields will develop incrementally because the ability for commercialization will not be as strong and its uses will be less widespread,” he said. “But we do think these industries represent potential markets for future AI applications and will have better development prospects in the future.”

Valuation bubble

Fang believes that there is a valuation bubble in terms of AI investment. He cites the lack of talent in the sector as a key reason. While funds are abundant in the market, companies will pay more when choosing investment targets, thus further inflating the value of the AI industry.

“So, I think we have to go back to the value of the investment itself,” Fang said. “We should consider a firm’s valuation from a more quantitative perspective, rather than over-scoring some projects that come with a lot of hype.”

As an investor, Fang said they could provide help in several ways. The first is to provide crucial talents for early-stage companies. Secondly, the VC can provide industry partners to help them better understand the real application scenarios, and thirdly, it can help with ideas on how to bring a product to market.

Fang contends that entrepreneurs often overlook pain points associated with doing business in the real world. He suggests they remember to carry out enough market research before pushing ahead with commercialization efforts, which can help them to know the actual drawbacks of their plans.

“We also need to have a clear road map on how to grow into a $1 billion or $2 billion unicorn,” he said. “It’s a process that requires constant adjustment throughout the whole entrepreneurship.”

Starbucks or Luckin? Consumers voice support for locally brewed coffee king

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Luckin Coffee—the Chinese coffee chain that has used lossmaking, internet-focused marketing tactics to expand rapidly across China—is under increased scrutiny as it reportedly prepares for a US IPO.

Some analysts question whether the brand’s cash-burning marketing strategy can sustain Luckin’s position in the Chinese market, or if the coffee chain will burn out before reaching maturity.

Luckin Coffee has opened more than 2,000 shops since January 2018 but posted a net loss of RMB 857 million (around $128 million) over the first three quarters of 2018. And the company’s astonishing expansion doesn’t stop there. Luckin plans to surpass Starbucks by opening about 2,500 new Chinese outlets this year.

Chinese consumers have reacted positively to the brand, which has positioned itself as a more convenient, less expensive alternative to Starbucks.

One interviewee in Shanghai said he thought Luckin had found a niche audience that was different from that of Starbucks, although he himself said he had yet to drink a coffee from Luckin. “I think they are two different products,” he said. “Starbucks pays more attention to quality. They’re selling an experience. But Luckin Coffee is convenient and affordable.”

Luckin’s operations rely on a strategy called “fission marketing,” a concept conceived by Luckin Coffee’s CMO, Yang Fei. This approach focuses on storing and maintaining internet traffic in order to build a large pool of users. Luckin purchases are made entirely within the company’s app, where the coffee chain also pushes rewards to buy in bulk or refer new customers.

According to Yang’s fission marketing strategy, once the company builds a pool of users, the next step is to “pour” the traffic. Luckin does this by pushing constant coupons that reward sharing with friends.

Luckin Coffee has completed $200 million Series B at a total valuation of $2.2 billion in December 2018 with Joy Capital, Tai Chung Capital, Singapore Government Investment Corporation (GIC), CICC and other companies participating. According to an article in Sohu, the companies above are all the former investors of CAR Inc. While Luckin CEO Qian Zhiya and chairman Lu Zhengyao are all from CAR Inc. Zhihu users joke that it’s a “club deal.”

As to whether the local brand can overtake Starbucks, some Chinese coffee drinkers are optimistic. “It depends on how Luckin is positioning its brand and how it develops in the future,” said another coffee drinker in an interview. “I think anything is possible.”