Author, Liu Bo, from the investment sector PEdaily
This is a vivid stroke in the history of global venture capital.
Not long ago, in a speech at his alma mater Stanford University, Huang Renxun mentioned the first financing in his life – in 1993, two angel investors jointly invested $2 million, valuing the company at $6 million. It was this investment that turned the tide for NVIDIA, which was on the brink of collapse shortly after its establishment.
From then on, the NVIDIA empire emerged, dominating the tech world.
Calculating it, the angel round from that year has now created a myth with a market value of $2.8 trillion, undoubtedly the best interpretation of venture capital’s role in the rise of tech giants. Historical experience shows that the activity of venture capital directly affects the prosperity of technology innovation companies, and this is more worthy of our deep consideration at present.
No business plan
An angel round raised $2 million
This investment story starts in 1993.
At that time, Huang Renxun was working as an engineer at a chip company when two friends, Chris and Curtis, approached him, expressing their desire to leave their jobs to start a business and hoping Huang Renxun would join them. It was just before the PC revolution, with Windows 95 not yet launched, and the Pentium processor unreleased, making it clear that microprocessors would be crucial, leading to the birth of NVIDIA.
There is an interesting anecdote here – when Huang Renxun told his mother about his plans to start a 3D graphics chip company for gaming, she directly asked, “Why don’t you find a job at an electronics factory?”
In any case, Huang Renxun’s entrepreneurial journey was extremely convoluted, as he didn’t even know how to write a business plan at the time. So, he went to a bookstore and found a book titled “How to Write a Business Plan,” which had a whopping 450 pages, but he gave up after flipping through a few pages, saying, “By the time I finish reading it, the company would probably have gone bankrupt, and the money would have run out.”
How difficult was it for NVIDIA to raise funds at that time?
Sid Siddeek, responsible for NVIDIA’s venture capital department, still vividly remembers rushing to multiple investor conferences with presentation materials to help promote their story to investors. His office was just a small mobile room.
In his speech, Huang Renxun recalled that at that time, he had only about six months’ worth of living expenses in the bank, and the whole family had to rely on this meager savings. So, he simply didn’t write a business plan and went directly to his former CEO, Wilfred Corrigan.
After Wilfred Corrigan listened to Huang Renxun’s introduction, he bluntly admitted that he didn’t understand what he was talking about, calling it one of the worst entrepreneurial pitches he had heard. Nevertheless, Wilfred Corrigan picked up the phone and called Sequoia Capital founder Don Valentine, saying, “I want to send a young man over to you, hoping you can invest in him. He was one of our best employees.”
However, after Huang Renxun completed his presentation, Don Valentine said, “Start-up companies shouldn’t invest in other start-up companies or collaborate with them.” His point was that for NVIDIA to succeed, another start-up company also needed to be successful, namely Electronic Arts, a video game development company. The CTO of that company was only 14 years old at the time and had to be driven to work by his mother.
In this way, Don Valentine and Sequoia Capital each invested $1 million, allowing NVIDIA to secure $2 million in angel funding, with a post-investment valuation of $6 million. It’s worth noting that before this, Don Valentine had only invested a few hundred thousand dollars in Apple.
This investment remains indelible to this day, and Huang Renxun still remembers what Don Valentine said at the meeting: “If you lose my money, I’ll kill you.” Fortunately, Huang Renxun and NVIDIA did not disappoint his expectations.
A mirror
The daring capital
Today, this angel investment is written into history.
In 1999, NVIDIA went public on NASDAQ with a market capitalization of $230 million. Based on this calculation, the valuation of NVIDIA’s angel round has increased by 38 times, even if some shares were sold after the IPO, it was still a good choice. But given Don Valentine’s investment philosophy, he is bound to persevere and achieve even higher returns.
The subsequent story is well known, with NVIDIA rising to become a chip giant and, with the emergence of OpenAI, becoming a deserving ruler of AI chips. Accompanying this is NVIDIA’s skyrocketing stock price – over the past five years, NVIDIA’s stock price has increased 28 times, with its latest market value reaching an astonishing $2.8 trillion.
Perhaps only those who have experienced it can truly understand. Huang Renxun has emphasized the importance of financing more than once, believing that a start-up company is a company on the verge of collapse. “When I founded NVIDIA, I started raising the next round of financing immediately after each round, then the third round, survival is crucial, cash is king. As a CEO, you either make money, save money, or raise money.”
At the same time, NVIDIA has quietly built up a vast investment portfolio. According to S&P Global data, by 2023, NVIDIA had become the fourth-largest venture capital firm after Microsoft, SoftBank, and Google, with investments covering healthcare and biotechnology, AI infrastructure, generative AI and RPA technology, autonomous driving, robotics, 3D printing, and more.
As Huang Renxun has emphasized in many instances, the rapid development of the tech industry requires early investment in the distant future, which is NVIDIA’s path to success.
For Mi Lei, founding partner of Zhongke Chuangxing, NVIDIA’s success underscores the long-term nature of “hard technology” and the importance of “knowledge value,” requiring a continuous focus on technical innovation and a steady flow of R&D investment to maintain a leading position.
As an investor, Mi Lei has deep feelings. He believes that for venture capital firms, excessively pursuing short-term financial returns will not lead to the discovery of great companies. “The essence of venture capital is to support disruptive innovative technologies to create greater value, drive technological progress and industry transformation, and ultimately reap ‘knowledge value,’ ‘social value,’ and ‘economic value.'”
To some extent, this is also the best mirror for domestic venture capital.
In the 1990s, venture capital began to take root in China, and now it has been around for thirty years. However, at present, venture capital, as a foreign concept, is becoming more localized than ever before. Some VCs no longer seek to capture risks but focus on rigid financial returns, looking for short cycles, no risk, and guarantees.
At one point, buybacks, hedging agreements, and dividends were prevalent in China’s primary market. For example, buyback agreements between founders and investment institutions are now commonplace. However, since last year, the situation has changed – buybacks have even become a hard condition for investment decisions. If the controlling shareholder is unwilling to sign a buyback, the investment is off.
“The charm of venture capital lies in finding those uncertain but potentially disruptive innovations,” said an unnamed venture capital partner, cautioning against practices that may prevent the discovery of other great innovations.
Patient capital
The road to China’s tech rise
What role should venture capital play in the rise of technology? This is undoubtedly a question that every venture capitalist should ponder.
It is well known that technological innovation is not achieved overnight. To achieve original and disruptive results, one often has to go through the arduous process of laying a technical foundation, breakthroughs, commercializing results, and facing long and uncertain return cycles. In the market wave, many tech start-ups, due to large initial capital investments and obstacles to converting results, may not show good financial performance for a long time, or even collapse before dawn. The more challenging it is, the more need there is for patient capital.
What is patient capital? As the name suggests, it guides capital to be a “friend of time,” not disturbed by short-term market fluctuations, accompanying hard technology, scientists, and entrepreneurs on a long journey. However, faced with the current situation, some investment institutions seem to no longer value imagination and long-termism.
A prominent local VC in Shenzhen candidly stated that most RMB venture capital funds have a fund term of 3+2 years, with a maximum of 7 years. However, it generally takes 6-10 years for a company to meet the requirements for listing, making it difficult for some RMB funds to hold excellent companies in the long term.
“Some investors are used to making quick money, adapting to a fast-paced investment rhythm, and convincing them to make investments lasting more than ten years is indeed challenging. Moreover, Chinese investors do not like to entrust their funds to professional institutions but prefer to make investments themselves,” said Yang Bin, president of the Shanghai Science and Technology Innovation Fund.
Chang Junsheng, Executive Director, Investment Committee Chairman, and General Manager of Jinshi Investment, pointed out the underlying differences – overseas primary contributors seek long-term asset allocation, even hoping to extend the investment period. “But in China, whether it’s an individual or an institution, the assessment cycle is relatively short. If I can’t exit during my term, then the project will definitely not be pursued. Therefore, the fundamental solution to this problem can only be hoped for more long-term funds to enter the equity investment market.”
At the same time, he emphasized the need to provide LPs with reasonable guidance on expectations. “Based on the overall progress of China’s economic development, our fund returns, including the expected returns of our LPs, should be appropriately lowered, or the period extended appropriately, holding the concept of long-term investment and growing together with time.”
Mi Lei offered several suggestions, believing that strengthening patient capital first requires freeing the mind and updating concepts to realize that only long cycles can bring higher returns. From the government to companies to all LPs, everyone should recognize the long-term value of patient capital and its potential for significant future returns, to support VC/PE to make longer-term investments, leading to the emergence of funds with periods of over ten years. Policies should also provide certain benefits to patient capital. For genuine patient capital that supports technological innovation, tax incentives should be offered.
Entrepreneurship is tough, and the most exciting part of innovation from “0 to 1” is exhilarating. But before this moment arrives, one often has to endure a long and lonely journey, where venture capital is the essential companion. As Don Valentine said in “The History of Venture Capital”:
“Venture capital is not about looking at the world from a god’s perspective; it is about entrepreneurship, about starting a business together with the entrepreneur.”
