Managing Partner's Message - An Abstract from the Media Interview

Abstract: Allen CHEN, Managing Partner of Dayone Capital has recently talked with 36Kr, one of China's top-tier business media outlets, taking a deep dive into the fund's strategy update and prospects, as well as sharing his thoughts on the outlook of the overall investment market and entrepreneurship environment in China.

Highlights from the interview follow.

Looking back upon 2022, we are glad the zero-covid shackles have finally been broken. Hustle and bustle have returned to airports and stations as well as on the streets, but we remain cautiously optimistic when it comes to the speed of economic recovery. If anything, the recovery will certainly be driven by different locomotives when compared to pre-covid days. We firmly believe that domestic consumption will take an increasingly more center-stage role in driving secular growth, whilst government spending and business investment will shift largely from real estate to digital and energy-transition infrastructures.

Despite macro headwinds, we have continued to cautiously deploy capital in the consumer sector. The core issue that the sector has had to reckon with in the past two years is a valuation hangover from too-easy-to-access venture capital, coupled with a growth-at-all-cost strategy that has caused many firms and entrepreneurs to deviate from long-term sustainable growth. Since the second half of 2021 and throughout 2022, we have focused our capital deployment mostly on early-stage (even sometimes incubation) deals such as Zhengong Spirits, ApicesRobotics, Hesung Innovation, Acacia, and Qrem. We have been very cautious and selective on later-stage opportunities (Giant Biogene, Guotai Liquor), making sure that they offer clear continued upside potential and at the same time comfortable valuation buffers.

While firmly committed to consumer verticals, we have carefully chosen to extend our investment strategy to include green-tech industries. The extension came naturally at first given our foray into two large consumer verticals which were EVs (investments in car manufacturers Li Auto and Hozon Auto and in battery maker Sunwoda EVB) and home energy storage systems. A deep dive into the full value chain of these verticals allowed us to better grasp the opportunities that energy transition would bring over the next decades. This is a very long-term secular trend that would offer a large beta opportunity, and China stands first-in-line to take advantage of this beta upside thanks to its leading position in almost all green-tech supply chains. More specifically, the core themes are divided into batteries (both for mobility and energy storage applications) and photovoltaics (heterojunction - HJT and perovskite solar cells). With battery technologies, we are focusing on large-scale challengers (Sunwoda EVB and their differentiated HEV battery product) as well as entrant technologies in All Solid State Batteries (Empower Greentech). With photovoltaics, the core focus will be on the next generation technologies (HJT and perovskite) with higher energy yield while staying cost-efficient. We fully acknowledge that entering this new field, albeit at a controlled pace, is a significant challenge for Dayone. This is why we insist on focusing on just a few sweet spots which we leverage off our external network of industry experts to help us assess and validate.

Projecting ourselves in 2023, we will continue to deploy capital at a steady pace in both consumer and greentech deals. On a deal count basis, we expect most deals to come in at an early stage (around Series-A). However, moving our investments to earlier stages does not mean that we have to give up our "Less is more" investment mantra. There is often a misunderstanding when it comes to earlier stage funds where the manager is expected to spread the fund's investments over a variety of verticals and a great number of deals. This investment rationale would only work if you can consistently strike 100x homerunners, but the probability of such outcomes is mostly dependent on the industry fundamentals. In contrast to these homeruns delivered by bigtech platforms in the mobile era, we have calculated that a successful consumer deal or greentech deal is most likely to deliver a 15-20x ro 25-30x return respectively with an entry point around Series-A round. This new normal in investment return distribution profiles means investors have to be good snipers, dutifully studying the terrain and patiently aiming before pulling any trigger. The following outlines how we make every bullet count.

• Making a good investment always starts with knowing what you are not going to invest in. It is hard to consistently capture value without an adequate filtering framework.
• Making a good investment is mostly about getting the basics right. The right vertical, the right founder and team, the right company and the right price. Getting the fundamental basics right is always easier said than done, especially when it comes to getting the right price.
• Making a good investment is about understanding the skews of value distribution and combining it with the right timing to buy and sell.

In our consumer verticals, building longlasting brand equity should always be the core focus of any company. Similarly, our capital should be allocated to entrepreneurs capable of delivering brand premium. The unyielding first principle here is that customers will always look for a better product with a better service at a subjectively reasonable price. In order to meet these demands, a good company would need in return to build the right team, the right culture, the right management fit, etc. Building brand equity is more of a marathon rather than a sprint, so solid fundamentals should never bow to short term revenue growth pressure. More specifically, our investment focus will be on the following opportunity sets:

• Challengers in large and "healthy" verticals (good margin, high barrier to entry and concentration ratios: sauce-aroma baijiu, condiments, bottled beverages)
• Invisible champions in midsize high margin verticals (aesthetic medical supplies such as hyaluronic acid or collagens, dental orthodontics)
• Emerging leaders in new consumer categories (innovation driven consumer-tech verticals)

Under our green-tech theme, the core investment thesis is delivering more efficient technologies at a relatively lower cost. We have built an internal analysis framework to assess different technologies according to different delta-factor cycles. This aggregate framework allows us to underline sweetspots which share the following characteristics:

• Entrant technology in the innovation cycle
• Early phases of production scale up in the industry cycle
• Regulatory tailwind from policy cycle
• Non-consensus view from a capital markets cycle

Dayone will celebrate its third anniversary this coming August. We have grown from 8 people in a shared office space to a team of close to 40 young professionals across two offices in Beijing and Shenzhen. As much as we would like to keep our startup mentality and hustle culture intact, we are also aware that going forward we need to emphasize on growing as an institution. Starting from last year, we have already started to redefine all management lines and and talent echelon programme. We have also layout out ground work on standardized processes in all core functions, upgraded our IT systems and tools alongside. We have also, with the guidance of some of our LPs, carried out a full-fledged operational due diligence which helped us clearly determine potential weakspots to remedy. We will continue to work on implementing and improving these initiatives.