Source: Qingshan Capital (ID: cyanhillvc)
- Products suddenly stop selling. Consumers no longer flock in. The product is the same, but revenue numbers just don't grow day by day. Advertising efficiency plummets. Although the industry and competitors are also fraught with problems, it doesn't make you feel any better.
- The ambitious new product launch plan collapses. Suppliers want to raise prices or can't ship. Logistics stop. Material and content vendors urge for payment. You plan to rely on new products to turn the tide and clear the previous phase's unsold inventory, but there's no hope for launch.
- Inventory has nowhere to sell. Sacrificing brand positioning, giving up gross margin and premium, just to sell goods, yet live streaming or private domain traffic brings no payment in sight.
- Capital watches and even withdraws. A few months ago, you couldn't handle all the visitors; the door was bustling, with a dozen high-valuation term sheets, even reaching the late stage of investment process. But now capital no longer talks. You don't even know how to lower the valuation. Plans based on high growth have already been invested in: people hired, ads run. Now the ammunition can't be replenished.
- Every link holds, but the chain breaks. From production to shipping to sales to delivery, it still operates. But shipments are returned due to pandemic controls; after sales, distributors or e-commerce platforms delay payments; upstream can ship but raises prices and ships in batches; consumers can't get products, leading to refunds, complaints, and negative reviews; short-term bank loans have been extended several times but need to be repaid. Just one sum of money could turn things around, but that money is nowhere to be found.
- Raised big money but almost out of cash. In the past two years, you received investments from several well-known institutions. The brand is famous, with monthly sales near 100 million at peak. But better teams, broader advertising, and more downstream channels didn't bring growth. Profits and cash are limited. Soon you can't pay rent, salaries, or social insurance. Large orders placed have no revenue to turn over. Suppliers come to collect debts, and some company accounts have been frozen.
- Already seeking change, but stretched thin, no way out. Determined to cut half the staff, but panic leads to 80% leaving quickly. Many departments can't even carry out their work. The hero product stops growing. Considering new categories, you find few reusable capabilities and resources.
- You can get by with austerity, but the psychological hurdle is hard. You were on top of the world yesterday, now a complete failure. In front of consumers, media, employees, and investors, everything you do is wrong. The support of the few remaining believers is a drop in the bucket against disappointment and criticism.
"Abandon illusions, accept reality." Since the first half of 2020, this phrase has been ringing in entrepreneurs' ears. After pandemic control and economic recovery, many gradually forgot it. But now, consumer entrepreneurs desperately need to do this.
After nearly two years of fermentation, the post-pandemic social economy and various industries face severe situations. International tensions, war-induced uncertainty, and the overall contraction of Chinese concept stocks have wiped out trillions of dollars, leaving the capital market in shambles.
Intermittent supply chain and logistics halts, fluctuating public opinion... Accepting reality is the first and necessary step for startups to survive short-term, develop mid-term, and realize long-term value.
Qingshan Capital is still firmly investing in consumer projects, but compared to adding flowers to brocade, we now need to provide fuel in snowy weather. The attitude towards reality is key to whether it's worth rekindling the fire.
Face reality, recognize reality, accept reality. But unfortunately, as an early-stage investment institution dealing with different startups daily, most entrepreneurs we contact have only faced reality, not yet recognized it, let alone accepted it and made correct decisions.
What reality needs to be recognized?
Traffic dividends won't return in the short term
Since the first day of looking at consumption, the term "traffic dividend" has appeared frequently. From the earliest Taobao to Xiaohongshu, then Douyin and Kuaishou, to today's TikTok time window that most overseas brands aim for. In recent projects, most brands mention one channel: private domain. The market forces startups to retreat step by step, finally to the only territory they can control.
Why? So-called lowlands and dividends are benefits for pioneers. First movers have certain advantages, but after a large number of practitioners and capital gather in a short time, the lowland is quickly filled. As long as it's a dividend, it will disappear. It's just that this day came too fast.
Three Squirrels, HSTYLE, and Qigege led the Taobao brand era, ending around 2013. At that time, a large number of traditional brands began to enter Tmall, and Taobao brands' weight on Tmall decreased. Media at the time published articles saying, "The era of lying down and making money is over." After the tide receded, few brands remained standing.
Looking back at this gold rush in recent years, if you extract a thread, the most obvious is the change in ROI.
Every benchmark set by pioneers has countless followers.
In 2017, Perfect Diary chose Xiaohongshu at its inception, using massive KOL and KOC traffic. When discussing projects at that time, many used Xiaohongshu to seed and then divert to Taobao and Tmall. In the beauty industry, ROI was basically above 5.
In 2018, Douyin became popular and quickly commercialized. Many projects used Douyin for traffic, with incredibly high ROI, often above 10. Sometimes, people didn't even know where the traffic came from, but they sold a lot inexplicably. This high input-output ratio lasted until the end of 2020.
From Q1 2021, many founders began to feel ROI decline significantly. In recent project discussions, an ROI of 1:1.5 to 1:2 seems quite satisfactory.
In this process, everyone followed the footsteps of traffic dividends, telling stories of "Douyin brands," "Kuaishou brands," and "Pinduoduo brands" as continuations of Taobao brands. But they found that traffic dividends seem to have disappeared.
Not only content platforms like Xiaohongshu, Douyin, and Kuaishou, but also major platforms like Taobao, Pinduoduo, and JD.com, entrepreneurs exclaim they can't afford to invest.
Many new brands treat "Xiaohongshu seeding + Zhihu endorsement + Douyin/Kuaishou live streaming + Tmall traffic conversion" as a standard formula, diving headfirst into "traffic investment."
However, it's already 2022, and this formula no longer works. What awaits new brands is the peak of traffic dividends, involution, and red oceans, along with a group of sober consumers—beautiful designs, exquisite packaging, and sweet talk are no longer key factors in purchase decisions.
Excerpts from some entrepreneurs' statements:
"Recently, whether talking with capital or peers, it's a time to think clearly. Douyin started e-commerce, and everyone thought it was fine. A solid offline matrix takes 2-3 years, but Douyin only takes 4-5 months. Now Douyin's dividend has disappeared by 40-50%.
If the starting point is truly what you want to do, to really build a brand, you need to think about how to build a three-dimensional brand. From last year to this year, every brand says this year's goal is 50 million on Douyin, next year 100 million, and the year after offline closed loop.
We need to break the illusion of current financial model projections. Are there any Taobao brands that can be called brands? JD also produced a batch of brands; can any be called brands? Everyone pursues ROI, but Coca-Cola definitely isn't just street shouting and buying traffic. It achieved being within reach, value for money, and making people feel special."
"The current Douyin phenomenon is similar to when Taobao category managers started entrepreneurship. Did that batch succeed in building brands? Did businesses with good offline closed loops have Taobao experience? No.
When those managers collectively started businesses, they said, 'I want to build a brand, 300 million revenue next year.' These people can only be CMOs, not CEOs. We believe the volume, but that volume doesn't necessarily make a brand, definitely not a brand.
Now everyone is still quite dazzled by traffic prosperity, but categories also have dividend and decline periods. At this time, revenue is large, but when it rotates to the next dividend category, you'll be dumbfounded."
"The person known as China's best at traffic, XX, with top-tier traffic tactics and connections, can create over a dozen brands on Tmall and be number one in categories, but lacks the ability for brand closed loop. He can only 'suck on one platform.' After having sales, how to turn it into a brand? Thus, the title of 'leading female adult products brand' was lost, with severe losses.
People who can complete the online-offline closed loop are very scarce. Online people are easy to find, many. Offline people with this ability are too scarce. Taobao tactics have many drawbacks. Many categories have mobile dividends on platforms. If the top players can't break the circle, you can't make money."
"XX Audio, with 100,000 offline points, earns less than 100 million a year, less than 1,000 per point. Previously, online and offline were half-half. After the offline head left, offline directly declined, and IPO cooled off. Even a built system can decline like this in a year. This shows the importance of offline closed loop. Its brand power is already okay, but brand closed-loop capability is not."
"Adult products, China's third, Jissbon. Brand power doesn't need to be questioned; everyone knows it's condoms. But Jissbon's offline is losing money, so we can imagine what offline requires. Offline requires much higher capabilities than online traffic understanding: brand positioning, consumer habits, regional differences. Without understanding, you can't do it."
Where did the traffic go?
The cause of wild growth: competition between platforms
When a platform is born, it has incentives to give benefits to pioneers. Due to imperfect mechanisms, many loopholes appear.
Therefore, the platform's traffic advantages (like Douyin and Kuaishou's video content, Pinduoduo's high cost-performance label) + benefits for pioneers + platform mechanism loopholes together constitute "traffic dividends."
When the platform's growth peaks, enough merchants have entered, and mechanisms improve, the arbitrage space shrinks.
Capital, enterprises, and consumers jointly accelerated the tide's retreat.
After the pandemic began, capital accelerated into the consumer battlefield. A large amount of hot money flooded into the consumer industry. How was this money spent? Most went to advertising and recruitment.
Where did the advertising money go? Usually a complete set: most spent on Xiaohongshu content, Douyin/Kuaishou traffic, Alimama toolbox, various live streaming sales, and celebrity endorsements. Self-broadcasting and private domain were done on a tight budget.
Last year, I chatted with an MCN agency owner in Hangzhou. He joked that the capital invested in 20-21 made many streamers rich. His own agency only made a small profit. At the market's peak, top streamers' live rooms, besides regular slot fees and commissions, would receive private gifts.
At first, everyone gave luxury bags. At the craziest, two competing brands, to secure a slot with a streamer, directly transferred 1 million yuan. During 618 and Double 11, brands fought desperately, preparing half a year in advance.
Top streamers have high demands. New brands without brand advantages usually have only two paths: more money + lower prices.
Honestly, before 2017, the term "GMV" was rarely heard in the consumer industry. Even now, "GMV" isn't a key element in industry communication; everyone talks about "revenue." The influx of capital brought this term from the internet industry to consumer goods.
Each project has different GMV definitions: some include discounts, some include returns. But many capital still only recognize GMV.
Thus, under this GMV-first context, various market chaos emerged. Copying, IQ taxes, crazy discounts and promotions, all for a beautiful GMV number.
During traffic peaks like Double 11 and 618, how much money spent doesn't matter; what matters is that after this volume push, the next financing round will have a higher valuation.
In this carnival, many consumers benefited, but many were also harmed.
We observed repurchase data from many companies. Many had suspiciously high repurchase rates. It turned out most repurchases occurred during promotions, and many consumers only repurchased the brand during promotions.
The industry also has many "bad coins" that sell copied, fake, or IQ-tax products at low prices. The market is more mixed than ever. Interest algorithms and personalized traffic mechanisms don't seem to reduce consumer decision risk.
Channel and brand are essentially in a game of bargaining. Although it's a repeated game, internet platforms' self-correction and repair abilities far exceed brands'. So any traffic dividend is short-term, just a tailwind for the brand. Don't mistakenly think it's the company's capability.
Only by aligning consumers with your camp can you not fall behind in this game.
Capital dividends won't return in the short term
In the post-internet era, early-stage investment fields narrowed, creating a GAP period. At the end of 2019, the pandemic began, online consumption grew rapidly, and online penetration in many categories hit new highs. Many high-growth consumer brands emerged, and many star companies sought listings with valuations comparable to tech companies.
This made many capital see opportunities in consumer investment, entering the field and peaking at the end of 2020.
Media, venture capital, e-commerce, and content platforms blew up the trend. During the busiest time in 20-21, there were too many projects to review. At the end of 2017, most consumer seed projects were valued at 5-20 million yuan. In the past two years, many projects had entry tickets of 100 million, some even 300 million or 500 million.
At the craziest, pricing was based on the founder's original position. Consumer company executives, CEOs, Alibaba P8, P9—if they came out to start a business, raising 10-20 million was basically no problem.
Institutions focused on big company employees wanting to leave. A founder could be surrounded by 7-8 institutions a day. After a tiring day, returning to the hotel at night, they'd find another institution waiting in the lobby since afternoon. Thus, early consumer project valuations were pushed to incomprehensible levels.
By the end of 2021:
"I sent BPs to over 100 institutions that were looking at consumption in the past six months. 70 said they're not looking anymore, directly rejected. The remaining 30 met, praised the product, and then nothing."
"In the first half of last year, I just left a big company to start a consumer business. Somehow news spread, many investors added WeChat and asked for meetings. Angel round was quickly done. But when raising again in the second half, the market changed dramatically. Fortunately, data was okay, and I raised at half the expected valuation."
"According to last year's plan, this year we'd launch more new products, cover more channels, and do some marketing to break the circle. The team was prepared. But when communicating with the institution that was chasing us to invest in the next round, we found they had shifted to hard tech and healthcare."
"Last year, we ranked second in the number of consumer deals closed, but this year we'll all in on web3."
The above words come from entrepreneurs and FAs in the consumer track. Many consumer investors are also considering new career directions. These situations reflect the dramatic changes in the consumer capital environment over the past six months.
When the 2020 consumer investment wave came, many friends—entrepreneurs and investors—started doing FA. There were too many projects and too much money; no worry about deals or closing.
From mid-2021, the deal market began to change. Consumer deals accepted dropped to 50%, then to 10-20% by year-end. This year, few FAs are still taking consumer deals. When discussing many projects, they ask me to recommend good consumer FAs. This is very realistic because consumer deals can't be sold.
A FA friend specializing in consumption has only closed one early consumer deal since the second half of last year, taking nearly a year. For FAs, efficiency is too low. Many FAs are shifting to AR/VR, metaverse, and biotech.
Pessimism is spreading. How to adjust posture and mindset, how to face most investors' "consensus" and obtain sustained funding, will be a major challenge for consumer entrepreneurs.
The reason is obvious: the first batch of new consumer listed companies performed disappointingly in the secondary market. Valuation systems began to adjust, and pessimism transmitted to the primary market.
When the "trend" blows, the market shouts "all categories can be redone." Various capital enters, entrepreneurs with various backgrounds and motives join, irrational bubbles form, and capital and assets misallocate. Speculative entrepreneurs and investors disrupted the market. In the past six months, the market has been clearing these two.
The underlying reason is the structure and cost of capital.
USD funds and RMB funds constitute the primary market capital. Let's look at RMB funds first. Currently, 80% of RMB funds in the market have shifted focus to tech and carbon neutrality. Local governments, as the main source of RMB venture capital funds, use venture capital as an important means of attracting investment.
Today's RMB VC funds can be said to have almost no purely market-oriented capital. They are more or less composed of government guidance funds, which are oriented towards tech and carbon neutrality.
Now look at USD funds. Since last July, Chinese concept stocks have stopped listing in the US for nearly eight months. Listing in the US is the main exit for USD funds. This closure made USD funds tighten rapidly since last July, with investment speed dropping sharply.
The tension from the Russia-Ukraine situation spread to listed Chinese concept stocks, halving the market value of almost all Chinese companies listed in the US. Massive wealth evaporated. Companies invested by USD funds haven't exited. Last year, funds had 5x returns; now they're even losing money.
In such an environment, RMB and USD funds, for different reasons, won't have the same enthusiasm for consumption as before.
Note: It's not that there's no enthusiasm now, and it won't just be this year. Entrepreneurs must recognize this reality.
If past achievements were bubbles, overheating, dividends, or luck, why persist in consumer entrepreneurship and investment?
The key things haven't changed in the past two years and won't change in the future.
"What doesn't change?"
Consumption driving economic growth won't change
National growth needs a handle. Promoting internal circulation and stimulating consumption is the most practical means to drive our country's economic growth. Common prosperity and enhancing national happiness are also the most important ways to catalyze consumption.
Among the three main economic engines—exports, investment (infrastructure), and consumption—exports and investment are slowing. Relying on consumption to drive economic growth is not a choice but a necessity.
Stimulating consumption is a big topic, including population structure, value orientation, supply chain reform, etc. For entrepreneurs, providing better products, innovative products, and products with value propositions is the trend.
Technology must be commercialized through consumption won't change
Don't think the era's focus is on tech, not consumption. No matter how good the semiconductor, it needs electronic consumer products to monetize. No matter how clean the energy, it needs to be made into consumable power sources. Except for major national projects, most technology ultimately becomes the supply chain of consumer enterprises.
Just as from amino acids to seasonings, from semiconductors to computers, the transformation from tech to consumer goods requires more entrepreneurs with market sensitivity, innovation awareness, and brand philosophy.
There will always be new mindsets for brands to occupy won't change
Consumers grow up generation by generation. Each generation has its own language and values. No matter how big a brand, it's always anxious about how to win over the new generation. Solidly doing product and service innovation, providing better consumer experiences to new consumers—this always has demand and market.
How to adjust mindset, face, recognize, accept reality, and still persist in doing the right thing?
- Think about why you started the business. If the long-term goal is still there, strengthen your heart and hit the road again. Otherwise, stop entrepreneurship. For a period, there's no wind to ride; you can only step by step through the mud. Entrepreneurship has never been glamorous. If you liked the halo and bubbles, they're gone now. You can leave.
- Adjust expectations, adjust expectations, adjust expectations. Don't let expectations crush cash flow and deplete reserves. This is not a trough, decline, or fall, but a reset to zero. What to do is not a linear extension of the past year's work, not solving immediate problems, but returning to the original intention, back to the first day of entrepreneurship, making products with heart, communicating with consumers with heart.
- Forget the smoothness and growth of the past two years, high valuations and rolling money. Remember what was truly accumulated. Maybe team磨合, industry insight, brand philosophy, or recognition from upstream and downstream resources. Every future decision is a new beginning. Make daily progress, persist in the right things, which are accumulative and not in vain.
- Re-evaluate, re-formulate overall strategy, re-connect all resources you can cooperate with. Clear inventory, tighten advertising, manage payables and receivables, streamline the team. When shrinking in all aspects, find one or two things to still bet on, even heavily. They should be your core competitiveness in consumers' eyes, key buying points, and the foundation of your survival.
Keep the people who can fight with you. They are today's seeds and future veterans.
- People are the root of everything. In a trend, pigs can fly. In adversity, you need the right people, those who can lead the team to create results and lay a foundation, to practice "man can conquer nature."
As an angel investment institution that has persisted in investing in China's consumer market for seven years, what we've always done is find the right young people and help and support their growth in aspects including but not limited to capital. Youth is not age, but mindset. Angel investment is not about the company's founding year, but the business to be developed and the founder who maintains the original intention.
With founders who have cognition, sentiment, and resilience, the team will be there, the business will be there. Our still ample ammunition can play the role of providing fuel in snowy weather, nurturing great consumer brands for the next decade and century in difficulties.
Yes, in the deepest difficulties, we still talk about greatness and the future. The qualities that lead us out of difficulties include the most realistic means, the most pressure-resistant hearts, the longest-term vision, and the grandest ideals.
Are you "watching" me?