An Interview with Lu Junqing: How to grow a unicorn?

January 18, 2019 Beijing

Earlier this year, Mr. Lu Junqing, Chairman of the Board at ToJoy, was interviewed by business journalist, Ai Jing, from Chinese news outlet

Host: You are a business investor, you’ve devoted your life to business investment. How do you define the relationship between businesses and investors?

Lu: For me, an entrepreneur must think like an investor, and vice versa. A company can’t thrive without either of the two.

Host: Your life can be divided into three chapters: “Growing up in a peasant family,” “Working in the government for a decade,” “Doing business for twenty eight years.” How did it all come about?

Lu: I came from a rural village and worked in the local government before starting to run my own business. I’ve come a long way from a rural village to a town, a provincial city, Beijing, and eventually, the world. I’ve had a taste of everything, which helps me gain a deeper understanding of the world. Especially after running my own company for twenty eight years, I have an acute awareness of what an entrepreneur needs.

Starting one’s own business is a risky thing — nine out of ten fail eventually. Generally four factors can lead a business to failure: lack of experience, lack of funds, lack of resources, and lack of market demand. This discovery inspired me to set up a platform to help and empower these entrepreneurs. So I built the ToJoy Business Incubator in 2000. Now it’s evolved into the ToJoy Unicorn Incubator.

Host: When did you hear about “business” and “investment” for the first time?

Lu: My first mentor is Mu Qi-zhong, a businessman. In the ’90s he did business with the Russians and made 90 million yuan, which was a fortune back then and made him one of the richest men in China. I visited him at his residence at 21 Yongding Rd in Beijing. He shared his thoughts with me, including an important concept about developing a company through a joint-venture partnership, which is similar to a startup incubator.

It struck me as a very original idea and had a big impact on me. Mu was the first one who inspired me to be a business investor and build my own incubator. But his story doesn’t have a great ending. I think the reason for his failure lies in that he had the passion of a start-up entrepreneur but not the way of thinking of an investor. He didn’t generate a profit soon enough after he obtained capital and eventually his business failed. That’s why I find it vital to combine the passion of an entrepreneur and the mindset of an investor.

Host: A combination of the two qualities — do you think this idea belongs to a new trend or a revived tradition?

Lu: I think business investors are born out of the current age. In the ’80s, there was a lack of everything, and you could make money out of selling anything. The ’90s were a bit like that, too. But since 2000, businesses had to be creative to be able to make money. Now in this age of capitalism, it’ll be hard for a business to fly without the wings of the capital. That’s how business investors came into being.

Host: You have coined the phrase “brace the winter through joint-operating partnerships.” Is this what you would say to SMEs?

Lu: I often say to my entrepreneur friends: the winter is coming and the market is frozen, but the coldest place is neither the North Pole nor the South Pole, but where people stand alone without help or support. I consider the joint-operating partnership as a torch in the winter.

Host: Have you heard voices of opposition or criticism when you’re promoting this belief?

Lu: No, I haven’t. ToJoy has spent a long time studying and testing the joint-operating partnership (JOP). Now we’ve entered the third stage, building partnerships through the aid of big data.

That said, the joint-operating partnership is not failure-proof. A while ago, 32 executives from Tsinghua’s EMBA program partnered up to open a restaurant, which failed miserably. There is a method to forging partnerships, and ToJoy has invented a business model known as the Business Accelerator. The companies we select to incubate shall meet the following criteria: First, the company has a proven business model and has passed the most risky stage; second, the company has a good management team, which can direct the company’s development. Only companies that meet these criteria would be introduced on our JOP platform.

Host: Does it mean that if you find a company with a replicable business model and a good team, you’ll organize sort of a crowdfunding event for the company?

Lu: We have over 500,000 entrepreneurs on our platform, with a mass amount of capital, projects, and resources. We can mix and match these resources to optimal effect.

As China’s economy continues to evolve and rewrite itself, over 80% of companies won’t be able to survive the transformation. They have money, teams, resources, and business know-how, but they are still threatened by the change. We need to think of a way to unleash their potential, to introduce them to good projects and help them forge successful partnerships.

ToJoy not only helps the innovative startups to become unicorns, but also lends a hand to traditional businesses that are going down. What we do is to grow an ant into an elephant and share the profits among partners.

Host: I interviewed Dai Wei, the founder of Ofo recently. In 2018, this unicorn, which has entered the international market, had to leave the stage due to financial problems. What’s your thoughts on it?

Lu: “Cash-burning” isn’t a sustainable way to do business. The nature of business is getting paid for the services. What we’ve seen with Ofo is that instead of getting paid for its services, it gave its users money. It can’t last long, nor can such business model be applied on a large scale.

We are also incubating a bike-sharing project, which is called ZX Bike. From the very beginning, cash-burning has never been our approach. Cash-burning is destructive, it destroys many traditional businesses and violates the “Anti-unfair Competition Law.” I believe one should stick to the basic principles of running a business.

Host: And what is that?

Lu: To create value for clients. A company doesn’t live up to its name if it doesn’t make money.

Host: Could you give some examples of companies that are making money and serving their clients without burning cash?

Lu: Take Hanbond Tailoring for example. The company was founded by a few former C-suite executives from IBM. It took them four years to open four locations, but after Hanbond joined our platform, within 20 months it has added over 80 locations —  all generating profit. How did it happen? We’ve only done two things for Hanbond: First, I sent its suits as gifts to over thirty former presidents and prime ministers, thus making Hanbond a brand favored by the Heads of State. That’s a marketing strategy we’ve designed for them.

The second thing we did was attracting over 100 entrepreneurs to open locations in over 100 cities simultaneously, using their own teams, relationships, and, in some cases, their own real estate resources. In this way, we’ve grown Hanbond 100 times and share its value among the partners.

Host: What are ToJoy’s vetting standards?

Lu: Apart from the two I’ve mentioned — a proven business model and a good team — the company must also be able to go public within three years, with its valuation exceeding $10B.

Host: Last year we interviewed over 100 failed companies and realized that only a small percentage of companies can actually survive.

Lu: Businesses fail in three ways, basically: It has done something illegal and its CEO got arrested; the management team was too young and hot-headed about scaling, and the company ran out of cash flow; or they couldn’t reach consensus on certain issues. These issues seem unavoidable.

Host: Even top-rank VC funds have only 10-20% of success rate.

Lu: ToJoy is a platform and we feel obliged to oversee what happens on the platform. In a way we were pushed to come up with this protection mechanism: If a project fails, we will reimburse project partners by converting their shares of the project into those of another project.

Host: Such business model seems a pretty disruptive innovation in the VC world. What do VC companies think of you and ToJoy?

Lu: We consider traditional VC companies our partners instead of rivals. If the companies they invest in meet our criteria, we are more than happy to accelerate them and grow them into “Elephants.”

Host: What about traditional entrepreneurs, how do they feel?

Lu: Our business model is favored by both traditional and innovative businesses. As long as they meet our criteria, we can accelerate tech startups and invite traditional companies to grow these startups through partnerships.

Host: Who are the most important clients for ToJoy Holding Group?

Lu: First of all, the companies that we are helping to grow; second, the joint-operating partners; third, VC investors. We are building a win-win relationship with companies, partners, and investors. There are no competitors, only partners.

Host: What do you think is the biggest responsibility of a business investor?

Lu: Entrepreneurial spirit. If you have it, you’ll become a really good entrepreneur. I’ve seen a lot of entrepreneurs who lack a sense of social responsibility and are all about making money, of which I disapprove.

Host: We have a little tradition of inviting guests to leave a message for the future. What’s the most important thing for you?

Lu: The strength of a nation depends on the strength of its industries. We shall keep supporting companies with capital and resources.