Looking at What Could Be

Before JP Gan, ’99, became one of the most successful venture capitalists on the planet, before he was dubbed “the unicorn hunter,” before Forbes ranked him No. 5 on its “Midas List” of the top 100 tech investors, he was a frustrated young investment banker whose deal was about to fail. Working for Merrill in Hong Kong, Gan had spent months in India trying to arrange a deal for an emerging mobile-phone operator that later went public and became one of the largest of its kind, but he couldn’t get it done due to regulatory reasons.

Tired and frustrated, Gan complained about his job to Elaine Lingying Zong, ’98, a close friend from Chicago Booth. Zong had an idea. She had been referred for a potential job with the Carlyle Group, which was starting a venture capital fund in Asia and looking for a team in China, but she had never heard of the company and wasn’t interested. “Why don’t you interview with them instead?” she suggested.

That question determined the course of Gan’s life. He joined Carlyle at a time when there were few venture capital players in China but enormous potential for a startup boom. Millions of Chinese consumers were becoming more affluent, beginning to spend their surplus income on luxury products and experiences such as cars and travel. Gan recognized that companies using then-nascent internet technology to scale up faster could be great investments.

“I always believed in technology that can improve efficiency, improve people’s lifestyles, or change the world,” he says. “Venture capital is all about using technology and innovative business practices to not necessarily disrupt, but make incremental improvements to many, many things in the world. It was honestly very exciting.”

But first, he had to endure the bursting of the internet bubble. When Gan interviewed with Carlyle in March 2000, the Nasdaq hit a high of 5,048.62. Over the next 18 months, it plummeted, closing at 1,579.55 on September 17, 2001, when US markets reopened in the wake of the 9/11 terrorist attacks. Then came the SARS outbreak in 2002, which unsettled the Chinese economy. “I think the interview went smoothly, but everything else went downhill after I started my career,” he jokes.

The internet economy soon recovered, though, and Gan’s investment plans with it. One of his first deals for Carlyle was Ctrip.com, an online travel company that helped the influx of new Chinese travelers book hotels, flights, and tours. The company was founded in 1999 and had its initial public offering on the Nasdaq in 2003, closing at a gain of 41 percent increase in its market debut. Now under the umbrella of Trip.com Group, it has become one of the largest online travel agencies in the world.

Its rapid growth validated Gan’s strategy, which he has followed ever since. “Sometimes simple is beautiful,” he said during a September 2020 Distinguished Speaker Series discussion with Madhav Rajan, dean and the George Pratt Shultz Professor of Accounting. “Once you have one simple thesis, you should keep going after it again and again—making mistakes along the way, but eventually you are going to work with some great entrepreneurs, scale the business, and generate superior returns.”

Comfort with Risk

After Gan’s success with Ctrip, other tech-company founders began to seek his favor.

“His timing was really good,” says Steve Kaplan, the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance. “There weren’t a lot of people doing venture capital in China then, and once you have some success, it’s a huge advantage.”

First of all, Kaplan says, people know about you, so you get better deal flow. Second, you’re in a position to be more helpful, because you have a network of successful deals. Third, you become a preferred investor.

Gan left Carlyle in 2005 to spend a year as CFO of an online game developer. Then, in 2006, with a burgeoning network and an enviable early track record, he joined Qiming Venture Partners, a Chinese venture capital firm, as a managing partner. The next year, Apple introduced its first iPhone. Gan immediately recognized it as a revolutionary product. It was obvious to him that millions of people around the world—and especially in China—would begin using mobile phones as their primary means of accessing the internet, and that mobile technologies had the potential to generate outsize returns.

He led Qiming’s efforts to invest heavily in companies producing mobile apps, including Dianping.com, which started out as a restaurant-rating website similar to Yelp in the United States. As the audience for mobile grew, Dianping.com expanded into other services, then merged in 2015 with Meituan.com, a group-discount website that lets Chinese consumers pool their buying power. Today, the business, operating under the Meituan brand, is a sprawling shopping platform for food delivery, entertainment, travel, and more for nearly 670 million paying customers.

Qiming was outrageously successful, and funded 20 percent of all Chinese unicorns in the past decade, by Gan’s estimate. Two years ago, he made another optimistic move. He struck out on his own, cofounding INCE Capital in 2019 along with two partners, Steven Hu and Stella Zhou, ’18 (AXP-17), to invest in early-stage consumer-technology companies. It tested his comfort with risk in a different way.

Develop a groundbreaking idea too early, and you may not have a market. Too late, and competitors may have an overwhelming head start. “If you wanted to start an electric-vehicle manufacturer 20 or even 15 years ago, you weren’t going to be very successful,” Gan says. “Even if you started 10 years ago, like Tesla, it was really difficult. But if you started one five years ago, that’s probably pretty good timing, given that the supply chain has matured. That’s when you invest in those companies.”

The competition is fierce for Gan’s attention and funding. The first fund he and his partners raised closed at $352 million. His team meets with 800 to 1,000 companies a year, and about 150 of those get discussed in weekly meetings. Gan himself meets with the top 100 companies; INCE then issues 20 to 30 nonbinding term sheets and makes 10 to 15 investments in technology startups annually.

In January, INCE announced it had closed its second round of funding with about $700 million in commitments across two funds, bringing its assets under management to $1 billion.

For Gan, conversations with startup founders are crucial in determining which 1 percent of companies out of those initial meetings will be funded. It can be difficult to judge which entrepreneurs have the drive and stamina to succeed, a challenge only intensified by pandemic-driven Zoom meetings.

Gan always asks founders, “What do you want to be when you grow up?” He’s trying to judge the entrepreneur’s long-term vision for the company. If a person seems to be simply looking to cash out, it’s not a good fit. Gan wants a founder to bring as much passion to building a business as he brings to investing in it.

“Most of the established VCs have more wealth than they can spend,” he told Kaplan, who is an investor in INCE Capital, during a Booth fireside chat in March 2021. “You don’t come to work to make an extra dollar. You come to work because you love the game, you love to compete, and you have this fear of missing out. That’s what gets me up early in the morning and going to the office and meeting with a hundred new companies every year.”

A Young Heart

To bag his unicorns—privately held companies that grow to at least $1 billion in valuation, which are the quarry of tech investors—Gan refined a systematic, top-down approach that he learned at Booth. He reads voraciously about technology trends, analyzes demographics to gauge potential market size, hires Booth interns to help with proprietary market research, and taps into his network of entrepreneurs to predict what sectors may outperform.

Gan’s methodology is influenced by the efficient-market hypothesis of Eugene F. Fama, MBA ’63, PhD ’64, the Robert R. McCormick Distinguished Service Professor of Finance and the 2013 Nobel laureate in economic sciences. “You have to believe in the overall market reaction,” Gan says. “If there’s a company that no one likes but you, you really have to think hard about why you are the only person who wants to invest in this company.”

Once Gan feels confident about the direction of an industry, he seeks investments within it that have a higher beta, or volatility, and that will generate disproportionate returns if the business succeeds. “We all like to think we can find missed valuations or undervalued assets,” he says, “but finding the right sector, the right trend, or the right geographic location—in my case, it’s China—is probably more important than anything else.”

The late Booth professor Milton Friedman’s emphasis on free markets also shaped Gan’s philosophy. “I believe in the market economy,” Gan says. “I believe in competitive capitalism, because it really encourages innovation, which creates jobs and improves people’s lives. I have always invested with companies in competitive markets, which are not necessarily trying to get government support or special treatment.”

The importance of market competition was reinforced by Gan’s experience at Booth in an emerging-markets course taught by the late Booth professor Marvin Zonis. As part of the class, Gan and his teammates traveled to Argentina, met the deputy minister of finance, and wrote a glowing report about the country’s economic development. A few years later, the Argentinian government would shift in its policies, and the country would default on its debt.

Gan says he’s often reminded of business-school scenarios during meetings with entrepreneurs. But there are qualities of successful venture capitalists that can’t necessarily be taught, such as having an appetite for risk. The vast majority of startups fail. Even for the winners, it often takes a decade to reach the scale expected by the capital markets.

“Being a VC, you really have to embrace change and uncertainty,” he said during his fireside chat with Kaplan. “Without dramatic change, we’re not going to have a lot of opportunities because the big incumbents are going to dominate.”

He also believes he has to be more optimistic than the average Booth graduate. It takes a positive vision to invest in companies with, as he puts it, “nothing but a few computers,” paying hundreds of millions of dollars in valuation and hoping they take off.

“He is always looking for what could be rather than being skeptical that something might happen,” says Gan’s friend Zong, now a private investor in London. “He has a young heart, and he likes to know what young people are doing. The pop-up messaging thing—I was like, ‘People are interested in that?’ He said, ‘Why not?’”

“The pop-up messaging thing” was later termed “barrage” in Bilibili’s IPO prospectus. Bilibili’s Chinese website allows users to overlay real-time commentary on videos, adding a social dimension to their viewing. Initially focused on kid-friendly themes such as animation, comics, and games, Bilibili has since expanded into original programming such as documentaries, becoming one of the major Chinese streaming platforms. With Gan’s encouragement, Qiming invested early in the company and saw it through its 2018 IPO. Gan continues to serve on Bilibili’s board of directors.

Responding to the Moment

While COVID-19 has devastated and disrupted the globe in many ways, it’s also been a boon to the consumer-technology sector that is Gan’s specialty. At the beginning of the pandemic, Gan and his INCE Capital partners considered what industries would benefit. “The whole digital world—anything that allows people to either save time or kill time online—was going to be very, very popular,” he told Kaplan during their conversation.

Lockdowns spread around the world, and people stayed home, playing games and watching videos. Companies that provided online entertainment prospered. The pandemic prompted a surge in online grocery delivery, long considered a difficult market to expand. Gan noticed that even his parents, in their 70s, learned how to use their mobile phones to order food.

Online education seemed like an especially promising area for investment. One top prospect Gan identified was ClassIn, an online interactive classroom often used by after-school tutoring programs. In February and March 2020, as students were forced to stay home, the company’s revenue reached four times what it had been in all of 2019. In July 2020, INCE Capital invested more than $35 million in Series B funding in ClassIn. The startup then raised $265 million in Series C funding from INCE Capital and other investors in December 2020.

Much has changed since Gan started his career. Today, venture capital is the largest alternative-asset class in China, with hundreds of billions of dollars being raised every year. “We were joking around that nowadays, the unicorns are breeding like rabbits,” Gan says. An expanding money supply is also boosting his success, creating more available funding to invest in innovative companies.

One factor complicating the investment landscape is rapidly changing regulation. In July, for example, Chinese regulators declared that tutoring companies would no longer be allowed to make a profit. The consumer-technology space is “in a bit of turmoil now in China,” Kaplan says. “Navigating that will be challenging. The positive is, China is still huge, it’s still growing, and there’s a lot of good technology there.”

Right now, Gan has his eye on several promising areas, including startups addressing climate change. “Given the current technology, there’s no way the world can be carbon neutral,” he says. “So we need a lot of new, innovative technologies at very low cost and the manufacturing capability to bring those things from the lab to reality. I think it’s going to be a long-term goal, but I think humans are smart enough to fix their own problems.”

He’s bullish about the prospects for the metaverse, which encompasses immersive technologies such as virtual and augmented reality. “After the pandemic, you will see more and more people working from home, not going out as much as they used to,” Gan says. He also predicts that cryptocurrencies such as Bitcoin will become an enduring asset class, similar to gold and other precious metals.

Whatever the future brings, Gan plans to embrace it. “I don’t think I need to be remembered for anything,” he says, “but I hope that some of the companies that I invest in will continue to be major players, so I can tell my children and grandchildren that I was part of the early investors in those great companies.”