Highlights 4 | Silicon Valley Innovation During and After the Pandemic (Week 4: A Conversation with a Successful Entrepreneur)

Highlights 4 | Silicon Valley Innovation During and After the Pandemic (Week 4: A Conversation with a Successful Entrepreneur)

It is an understatement to say that Covid-19 has had a sizable impact on global society and economy. As such, SVTC is using its platform to host virtual events. Through conversations with scientific experts from various fields, we hope to explain to Chinese audiences how Silicon Valley is innovating during the pandemic and the future direction of innovation in the post-pandemic era. These talks will take place on Saturdays at 9:30-10:30 am CST (Fridays, 6:30-7:30pm PDT).

 For our  session 4 virtual webinar, SVTC invited the CEO of Amprius, Dr. Kang Sun. He was the founder and CEO of RayTracker Inc. (acquired by First Solar in 2011) and the chairman of JA Solar Co. Lt (listed on NASDAQ in 2007). Dr. Sun has had many successful startup exits.

 This event was moderated by Judy Lee, general manager of Silicon Valley Technology Council (SVTC). Dr. Sun and Judy have been friends for over ten years, with Judy having helped Dr. Sun successfully list JA Solar on NASDAQ in 2007 when she worked at a Wall Street investment bank.

 Judy has previously worked at listed clean energy companies for many years and knows that this field is a very “money-burning” industry. Dr. Sun has been in this industry for several decades, and achieved the impressive feat of having successfully listed two companies and helped numbers of startups exit. Judy thinks that many entrepreneurs and business managers can learn from Dr. Sun's successful entrepreneurial experiences. For this virtual webinar, she and Dr. Sun had in-depth discussions about the field of technology venture capital.

Their insights were met with engaged discussion from the attendees. For those who were unable to attend, we’ve summarized the key takeaways from the event below.

What impact has the pandemic had on clean energy technology?

01 The macro impact of the pandemic on clean energy technology

Judy mentioned that because of the pandemic, the price of oil has decreased. Will this have a direct impact on clean energy technology?

 Dr. Sun quoted Saudi Arabia's former Minister of Oil, saying, “The Stone Age didn't end because we ran out of stones.” In the same way, the oil age won’t end because the oil ran out. He explained that the development of new energy wouldn’t happen because there is no oil. The extent to which the pandemic has impacted new energy and the decline in oil prices depends on a comprehensive consideration of environmental protection, politics, development and other factors.

 Dr. Sun also summarized the state of new energy in both China and America. The fact that new energy projects of the Chinese and US governments have not been terminated due to the pandemic reflects the resilience of the new energy industry. Compared to the government, consumers actually have a greater influence on new energy projects. For example, California's plan for solar energy projects in 2020 has not changed much, but orders in the home solar energy market in the United States have decreased a lot.

 China’s new energy industry has been hit harder than the United States’. For example, China’s sales of new energy vehicles decreased 75% in February (compared with the same period in 2019), while the world's sales of new energy vehicles increased 36% in the first quarter. Amprius has been negatively impacted by this situation; the company's lithium ion batteries are used in new energy vehicles, and the shortage of orders has been evident.

 He added that the impact of the pandemic on the industry has not yet materialized, and the real impact will be seen in the second half of the year. According to his 20 years of experience in the new energy industry, he asserts that the past 20 years of rapid development, during which the annual output value was increasing rapidly, has ended. Beginning 2020, the new energy industry will enter a few years of slow development.

 He believes that as an industry with high investment costs, the new energy industry has areas in which it requires government support, such as for power stations, energy storage, and automobiles. However, the government itself is facing difficulties due to the pandemic, so the development in these areas will slow down.

02 The Impact of the Pandemic on Industrial Supply Chain and Rate of Growth of Clean Energy Technology

Dr. Sun believes that the effect the pandemic has depends on the particular company’s position and products in the industrial supply chain. The tide of layoffs in new energy companies around the world has already begun, and the recession in the downstream industries of new energy has caused an imbalance in demand. Some large solar companies do not have enough customers and are already reworking their expansion plans for the future.

 At the same time, the rate of growth will slow down, and it will be more difficult to grow during the pandemic. People don’t use new energy because the cost of new energy is still higher than that of traditional energy. However, there are still opportunities for the new energy industry. For example, it is very expensive to transmit electricity to remote areas through traditional methods, so we will see the application of new energy sources in remote areas.

03 The Impact of the Pandemic on Power Station Investment

 

With Judy’s experience working at a clean energy company, Judy is well-versed in the situation of investment in power plants and asked, “Before, the investment in power plants had a 10-12% return, with the lower end having a 6-8% return on dividends. What is the return on investment now?”

Dr. Sun asserted that this requires specific analysis, mentioning that he’s a director of a publicly listed company in Hong Kong that makes power plants in a competitive landscape. Each new energy company needs its own competitive advantages, without which, it would need sufficient funding to develop these advantages. If a company has neither competitive advantages nor sufficient funding, then it will have difficulty surviving. The return on investment for the same company and product differs in different locations; even the payback situation is different in different places.

The survival and operation of startups during the pandemic

01 How do startups turn “risk” into “opportunities”?

Startups need to look at the innovation stage. The development of each company is different, and opportunities should be found according to specific situations. For example, Dr. Sun explained, though we are in a global pandemic, Amprius has established a new company in China because China offers  best incentives such as low rent and tax return for overseas startups..

 In addition, Dr. Sun notes that newly established startups have an easier time raising funding than companies that have already operated for a period of time. Investors already understand the financial performance of  companies in operation and are usually not satisfied. New startups are usually able to impress investors more easily, but on the other hand won’t get as high of a valuation.

02 How do startups get funding during the pandemic?

Based on Judy and Dr. Sun’s discussion, we have summarized the five main funding options for startups during the pandemic:

(1) Venture capital. Because of the pandemic, the chance of getting venture capital for startups have declined, because venture capital institutions need to spend time and money to rescue their portfolio companies. However, startups with good ideas will still be favored by venture capital funds. One example is Dr. Sun with his startup, RayTracker Inc., which received venture capital funds in 2009, the year when the solar energy industry was at its worst. He exited after two years and two months with 13x return on the original investment.

 (2) Strategic investment. Companies that have been operating for a period of time can seek strategic investment from their partners, customers, and suppliers. not only to meet the financing needs in terms of capital, but also to help the strategic development of the company in all aspects.

 (3) Bank credit and loans. This option is mainly for companies that already have some assets and some degree of scale of operation. Companies can obtain financing (credit and loan) from banks. 

(4) Promissory note financing. If the companies are not favored by investors, they can also obtain promissory note financing through the mortgage of intellectual property rights and patents.

(5) Government resources. With the pandemic, obtaining government grants and incentives is also a form of financing.

Dr. Sun paired these funding suggestions to startups at different stages:

According to its stage of development, newly established startups should focus on the use of venture capital and promissory notes. Companies of a certain size have more options, with the best way of going public to raise funds.

03 How do startups operate during the pandemic?

Judy, who has been working in the investment field for more than 15 years, understands very well that company operation is the fundamental component of the startup team, so she invited Dr. Sun to share his own experience.

1. Cash flow maintenance time and runway of the company. Dr. Sun shared his personal strategy: his main objective of each round of raising funds is to ensure the company has a 2 years runway Because he thinks that startups need at least two years to reach a milestone. It is risky to have enough for one year only, because the startup may not reach its target in time and will have no funds after.

2. Core team. Dr. Sun believes that the more difficult a crisis is, the better the startup needs to preserve its core team. Even under such difficult circumstances as a global pandemic, a startup should not reduce wages. Only by maintaining the morale and passion of the core team can a startup tide over the difficulties and make a comeback.

Judy also concluded that startups need a 24-month runway and cannot weaken team morale. They should put the funding received from the investors in good use, such as focus on research and development, even though there’s no incoming revenue. 

The impact of the pandemic on the capital market

01 Advantages and disadvantages of Sino-US listing or M&A

 Dr. Sun maintained that comprehensive consideration should be given according to the company’s specific circumstances, business environment, shareholders’ opinions, and the listing conditions and rules of various places. He gave an example to illustrate that companies listed in the first quarter raised a total of 2.6 billion USD, of which listings totaling 2.2 billion USD were completed by SPACs. A SPAC establishes a listed shell company of its own, and the target company will raise finances through M&A with the listed SPAC. SPAC is not a traditional way of listing and financing, so compared with traditional listing (IPO), backdoor listing, public offering listing and high-priced selling listing, SPAC's equity dilution is greater and saves more time.

 After that, they discussed JA Solar, which Judy helped Dr. Sun to list on NASDAQ in 2007. At the time, Dr. Sun chose to list on NASDAQ in the United States after considering the conditions and rules for listing in various regions, the trading volume of stock market investors, and the time limit for investors to withdraw. For example, it takes 3-6 years for investors listed in China to withdraw, while it takes 6 months in the United States and Hong Kong. Moreover, compared with the traditional way of listing, the US stock exchange has less strict management over SPACs.

02 The future development of China-US capital markets

Judy previously concluded that Chinese internet and solar energy companies chose to list in the United States because similar companies in the United States had higher valuations. Now, many companies have chosen to list in China because of high valuations for and low barriers to listing in China. Judy asked for Dr. Sun's views on such an assessment and on future trends.

 Dr. Sun explained that the regulations of China’s stock exchange up to 2019 are still not ideal, while those of the US stock exchange are very strict. However, he believes that the key is to look at the price-earnings ratio, which is relatively high for listed companies in China's stock market and will attract more companies to list in China.

In addition, he mentioned that listing also depends on where the investors and clients of the startups are located. If the clients and investors of the company are in the United States, then listing the company in the United States is more advantageous.

 Next, Dr. Sun also talked about his expectations for his future exit strategy of Amprius, where he is currently CEO. He plans to divide into 4 companies and list them in the United States and Hong Kong. As investors want US dollars and are not inclined to list in China, they want to stay for three years or more before withdrawing.

The insights shared during this week’s dialogue were wonderful and prompted attendees to pose many questions. We will summarize the four common questions below.

 1. The Amprius battery allows an unmanned aerial vehicle (UAV) to run for 3 months. What is its energy density?

Dr. Sun responded that the three months’ time is achieved because solar energy is also integrated. Tesla's latest battery has an energy density of 240 watt-hours per kilogram, while the energy density of Amprius’ listed batteries has reached 450 watt-hours per kilogram, and Amprius Laboratory has been able to provide 510 watt-hours per kilogram of battery samples to relevant customers. Though the current cost is still relatively high, there are no competitors at this level.

2. Why establish a company in Nanjing during the current pandemic? Is it because you are seeing an increasing demand in the new energy market after the pandemic?

Dr. Sun said that the results of attracting foreign investment are closely related to the performance evaluation of local governments. Amprius received the best incentives in Nanjing compared to that he received during his previous decades of experience; it was even more beneficial than that from Hebei during the 2009 financial crisis. Market demand is one thing, but the most important things for companies to do are to ensure sufficient cash flow and a stable core team, maintain a good consumer base, and improve the company’s operating efficiency.

3. Has the capital market started to recover at present or is there a massive contraction?

Dr. Sun believes that there will be a large-scale contraction. The capital market is now facing difficult times, and it will be even more difficult in the second half of the year. Considering the stage that the startup is at, the startup can now consider raising funds at the valuation of the previous round , which can be understood as giving investors a discount. In short, a startup should take what funding it can get; if it receives no funding, then the valuation is just some numbers.

4. If you can, should you exit a company with low valuation or should you wait until the pandemic situation stabilizes before deciding?

Dr. Sun replied that it depends on whether shareholders need to cash in on the Pre IPO and whether there is money coming in during the Pre IPO. It may not be a good opportunity because it is not easy for investors to invest in the Pre IPO. US investors often push companies to go public because it is expensive to raise venture capital while the cost of going public is low.

Judy fully agrees with Dr. Sun and summarizes this issue: at present, it is not whether it is easy or not to go public, but whether there is good financing after going public.

After an hour of insightful discussion, SVTC once again thanked Dr. Sun for coming on as a guest. With his many years of entrepreneurship and experience in exiting successful startups, he explained the impact of the pandemic on clean energy technology companies, how startups have turned this crisis into opportunities and his views on the capital market. We wish Dr. Sun all the best in his future business endeavors!