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TouTouShiDao Fund Director Liu Xiaoyan: “Change is a constant” Industry changes will usher in a wave of changes in how we produce and consume content, in which we will find new investment opportunities.

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“The diversification in the industry is becoming increasingly important. Investors need to have deep industrial knowledge and background, as well as a solid understanding of the structure within the industry, to effectively help entrepreneurs. You need to be invested in the industry yourself to discover those products, projects and people with great potential. ‘Immerse into the industry’ has been our core value in our investment process,” said Liu Xiaoyan, a trustee of TouTouShiDao Capital, “As to our business model, the macro environment and the capital market–they’re all changing. Change is a constant.”

In recent years, after the quick rise and fall of the record era, the music industry has embraced the mass digitization with streaming becoming the norm, resulting in a new wave of development with numerous new rights management and live events companies. At the same time, with the constantly improving government policies and market environments, more and more capital firms have started to pay attention to the entertainment industry. One of the most notable ones is TouTouShiDao, founded by Cao Guoxiong, founder of Puhua Capital, and Wu Xiaobo, well-known financial writer.

In 2015, with nearly no venture capital firms willing to invest in self-media, Cao and Wu’s Shixiangjia New Media Fund successfully helped an entire wave of self-media entrepreneurs, demonstrating great amount of potential that caught the attention of capital firms. Later that year, the two founded TouTouShiDao Culture Capital in an attempt to “upgrade,” leading the trend in new media investment. They have since invested in headline projects such as Read at Ten, The Lady with an Aromatic Soul, and Daily Food Journal. These projects are now attracting huge traffic, using high-quality content to retain its young userbase, who mainly focus on the improvement of their lifestyles. This high retention rate enables them to dig deeper into its users’ habits to expand their services.

TouTouShiDao’s phase 1 funding totalled up to ¥2 billion RMB, with high ROI in the past 2 years. They invested in big names like Ximalaya FM, Motie, Yitiao TV, Cloud Topo, 890 New Media, and Rainbow Chamber Singers. Late 2016, TouTouShiDao gradually became a culture capital that covered entertainment, shopping, sports, and education, 4 major areas of consumption. Cross-sector industries such as “Music+” are also the main focus of TouTouShiDao.

On December 6th, TouTouShiDao hosted, along with Puhua, Wu Xiaobo Channel, Qitouhui and Blue Star, the “2017 Culture, Consumer and Future Summit Forum”. During the annual event, TouTouShiDao announced that it has completed phase 2 funding. Wanxin Media, Zhejiang Erqing Group, Jizhu Transformation Industrial Fund, Hangzhou Cultural Investments, Yuewang Corporation, Zhejiang Daily Digital, and Tianlanxing all attended the event. According to a representative, the phase 2 funding will be used to continue its venture in the 4 major areas of consumption, while incorporating 3 “News”: New Crowd, New Consumers and New Merger.

TouTouShiDao’s trustee Liu Xiaoyan had previously held positions at Zhejiang Daily News and East Wave Film, and is now in charge of investment in the “pan-entertainment” field. This year, TouTouShiDao has invested in several music-related companies, including XinXi and other digital music distribution platforms. She believes that the younger generation will lead the direction that the music industry is headed, and the switch in direction will usher in a wave of changes in how we produce and consume content, in which we will find new investment opportunities.

Below is our exclusive interview with Liu.

China Music Business News (CMBN): After looking at over 40 music-related companies, what are your overall thoughts regarding them?

Liu: Well, currently, the music industry still mainly consists of content-focused startups–most of them are focused on rights management, artist management, and live events. The pan-music industry covers not just content creation, but also the consumption of content. It’s a bit more lifestyle-focused, if you will.

Also, the music industry now is still extremely fragmented, both in the front end–content creation, and in the backend, that is the distribution. This is what’s different about the music industry from all the others. Yet, it covers a big enough audience, that music still has traits like high spread rate, long-tailed consumption cycle, and high-level empowerment, the last of which is what we call “Music Plus.” This industry has now created its own relatively closed ecosystem, with several headline companies focus on using content to create “scenario economy.” Even though there aren’t many of them, these companies can certainly lead the entire industry in the right direction. Their adoption of the “Music Plus” concept is also why we decided to invest in Xinxi. In my opinion, market education in the music industry should be done by people actually invested in the industry.

Speaking of Music startups, I think that to succeed in the industry, the CEO must have a precise sense of positioning and a strong grasp of their product. More specifically, the CEO must know who their target demographic is, what drives them to make purchases, and what their needs and wants are for music-related content. Additionally, after you have successfully retained these customers, you need to know what else you can provide for them and how you can commercially exploit them (in a good way). I think the more consideration a CEO puts into these questions, the more valuable his/her company becomes.

CMBN: So among these companies, do you seen any common or shared traits in their founders?

Liu: Currently, most content companies are founded by people who either come from a creation or operations background. In some cases, there are also those who come from internet companies. Those people, granted, have a lot of experience dealing with predicting customer habit and attracting traffic online, but only very few have experience in using content to exploit both online and offline markets. Overall, there are mainly two types of these companies. The first kind is led mainly by young people. They are focused on what they love to do and consume; they know what young people like and dislike, so they can tailor their products to the generation’s needs.

The second type of companies is founded by experienced players in the industry. They have a lot of hands-on experience and industry expertise, as well as a broad professional network. The music industry has a pretty high price of entry–it’s driven by professionalism and resources. The only obstacle they face is the fast-changing market environment driven by the younger generation, to which they need to change and adapt.

There are an increasing number of entrepreneurs in the music industry, yet their business models are still fairly conventional. That said, a lot of the startups are trying new ideas, albeit some of them more successful than others–but a great sight to see nonetheless.

CMBN: What characteristics does a CEO need to possess, in your opinion?

Liu: As a founder of a company, he/she must be a quick learner. From our (investor) point of view, the head of the company needs to have two crucial qualities.

First, the person has to have strong knowledge of cost control, meaning he/she needs to have a clear bottom line for survival. Yuan (founder of Xinxi) said something yesterday that I find pretty important. He said, “You have to make the company feel ‘safe.’ You need to have a stable cash flow, so that even in the event of unsuccessful funding, you can still use time in exchange for space to achieve what you want to do.” Different industries have different patterns, some of them slower than others.

Secondly, the founder must have an insatiable ambition. Cost control affects the company in the short term, but a grand vision helps the company sustain in the long run. What you envision of the future can decide how far you can take your company.

CMBN: What suggestions do you have for entrepreneurs in the industry?

Liu: I think we need to return to a customer-centric train of thought. Whatever you create, you must know who your target audience are, what their likes and dislikes are, and tailor your products accordingly. The goal is the unite people in vertical markets. For example, hip-hop, which become insanely popular in China this year, is a very good opportunity for companies to exploit consumers’ interests.

The current means of commercial exploitation are still relatively traditional–they’re mostly revolved around rights, artist management and live events. Consumers are actually more willing to pay for content now than ever, but sadly the business end is still under construction. It is a good sign for us, nonetheless.

I remember seeing a smart instrument project that focuses on teaching young people how to play a music instrument in a short amount of time. If we were to properly lean an instrument, be it the piano or the guitar or the accordion, it has a very steep learning curve that discourages a lot of regular consumers. However, through smart instruments, I can maybe learn two songs in a week’s time, which is entirely fine for me, because I don’t plan on becoming a professional anyways; I just want to do something music-related as a pastime. This, for instance, lowers the price of entry and difficulty of learning music.

I think this is the trend of the future–to return to servicing the consumers.

CMBN: What is TouTouShiDao’s investing strategy in the entertainment industry?

Liu: We are mainly focusing on headline companies and projects that focus on content, because we believe that content is still where most of the commercial value is. Also, the entertainment industry has a pretty clear business model, with many different companies competing in a healthy way. The upper level of the market also has fairly big players with lots of capital, meaning there are always chances for merger and shake ups.

Whenever a company in the music industry goes public, it’s always good news to people working in the industry. It brings actual, measurable value to the industry, in turn accelerating industrial development.

CMBN: These headline projects are usually highly competitive. How do you make sure you make the right choice?

Liu: We need to make sure our evaluation of the company is reasonable. By that, I mean factoring in the company’s current state, scale, business model, products and its ability to commercialize to make an overall estimation. I think it’s a two-way understanding process: the entrepreneurs also seek to be understood by their investors, who would ideally know a lot about the industry.

CMBN: For projects in their infancy like Xinxi, how do you position yourselves?

Liu: We’re Xinxi’s founding shareholder, so we position ourselves more as a entrepreneurial partner, because we have a long way to go together in the future. We don’t want to be just a financial investor; we want to help coordinate and consolidate resources to help the company’s operation and development. When we first met Yuan Tao, we immediately felt like we found a match due to our belief in the “Music Plus” concept, which led to us partnering to bring Xinxi into fruition. In the early stage, it’s important to make the right judgement on the team you’re investing in. Xinxi has a very solid team, with high level of professionalism and strong operational abilities, so we believe they have a lot of potential in the pan-music world.

In a nutshell, partners need to be able to reach an agreement in their values, strategies and business models.

CMBN: What is TouTouShiDao’s exit mechanism?

Liu: We have been in consideration of this way before making our decision to invest in Xinxi. We wanted to judge a company in its scalability, growth potential and profitability, although different foundations have their own unique investment criterias.

As for Xinxi, I think it targets a very large market. Even though their core business is rights management, meaning a not-so-immediate commercial value, the long-term value in copyright is immeasurable. This means that it may take longer to see any substantial returns on our investment, but as long as there is no ceiling on what the team can do, you may end up venturing into things that you previously had never planned for.

CMBN: From an investor’s standpoint, what is your vision for 2018?

Liu: So for TouTouShiDao, we will continue to invest in the (entertainment) industry and dig deeper. We have always been focused on being a leading investor, planting a seed in the industry and doing our best to help it grow as fast as it can. We try to immerse ourselves in the industry, because only then can you discover the hidden gems–the people, products and projects. As for the market environment, it is ever changing, and this change is constant.

Translate by Kane Ge

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