Interview with ＂Star Venture Capital＂： How to build an early-stage investment institution ＂born for network security＂ from 0 to 1？
As a field where the requirements are constantly iterative and there are many subdivision scenarios, network security never lacks new faces.
According to a report released by Ai Media Consulting at the end of 2021, there will be more than 170,000 new network security service-related enterprises in China in 2020, up by 135.0% year-on-year. From January to October 2021, the number of new enterprises exceeded 270,000. There are more than 700,000 enterprises in operation as a whole.
The rapid growth of the number of enterprises confirms the prosperity of the entrepreneurial ecology, but also brings changes to the investment side-since 2020, the number of institutions that carry out safety investment has also shown an increasing trend. This phenomenon has continued until now.
36Kr’s recent exposure to "Star Venture Capital" is one of them. This organization was formally established in March, 2022, and its current management scale is about 100 million yuan, mainly focusing on the Pre-A round and the early safety projects before.
And it is at least the second new institution that has publicly announced its main security investment in the past month. In mid-March this year, the listed company "Jida Zhengyuan" announced that it planned to participate in the Yinhe Jida Zhengyuan Digital Economy Industry Fund, mainly investing in information security, innovation, Internet of Things and other new-generation information industry technologies.
This is rare in the course of domestic network security. 36Kr had previously introduced that in the past, participants in security investment mainly included four categories, namely, some head comprehensive funds, CVC, investment department of security companies and emerging independent funds. The overall number of these institutions is not large, especially the last type of independent funds, which have only been in single digits for a long time.
The newly established "Star Venture Capital" is also an independent fund. Xu Jun, the founding partner of Fanxing Venture Capital, introduced to 36Kr that he had previously invested in Huawei, Datai Capital, Apple Capital and other institutions, mainly focusing on the pan-IT field. However, with the deepening of the understanding of the security industry, he believes that security is an area that will continue to give birth to new investment opportunities, which is very suitable for investors to dig deep. Therefore, from 2017, Xu Jun began to focus on investment in network security, and successively invested in projects such as Omniversal Technology, Xiaoyou Technology, Ruilai Wisdom, Alliance Cloud and Grayscale Security.
As he insisted, the newly established "Star Venture Capital" is also positioned as a fund "born for network security". At present, "Star Venture Capital" has been specially designed for the characteristics of network security enterprises from four aspects: fundraising, investment, management and withdrawal.
Xu Jun said that in addition to himself, the main sponsors of "Star Venture Capital" also include network security marketing accelerator "Siyuan Business Consulting" and network security FA "Navigation Capital". He explained to 36Kr that such an initiation configuration can gather the knowledge of the three parties in security business, investment and financing, and make the stars more capable of helping security enterprises.
In terms of fundraising and withdrawal, Xu Jun introduced that the current star LP mainly includes Mesozoic network security enterprises, funds focusing on security investment in the middle and late stages and some individual investors. He believes that this combination can not only revitalize industry resources, but also give start-ups more opportunities to carry out business cooperation, which is also conducive to their contact with richer investors-whether it is an investment institution that lays out mature projects or a Mesozoic security company, it may become an investor in start-ups and help them grow further. In addition, "Fanxing Venture Capital" continues to plan a series of activities and contents aimed at Party A’s safety, hoping to have a deeper linkage with the industry and provide value for Party A while helping to be invested.
"There needs to be a professional early investment institution in the industry." Xu Jun concluded. This is the opportunity he got from his long-term observation, and it is also the direction that "Star Venture Capital" will continue to cultivate in the future.
The following is an exclusive interview (edited by 36Kr without changing his original intention):
36Kr: Before 2020, the total number of investors who focus on safety is small. I’m curious, how did you start investing in security at that time?
Xu Jun: This is really a personal choice. I used to work in IT in the early days, and I started to make strategic investment in Huawei in 2012. In 2014, I left Huawei to become a financial investor. Based on my previous technical background, I mainly focused on IT projects. However, around 2016, the domestic trend is that there are more and more investment institutions and investors, so I am also thinking about how to build my own competitiveness. In other words, I wonder why a good project will find me. Why can I invest in good projects? Why is my judgment right?
After thinking about it, I think there should be many methods, but the easier way is to do subtraction, that is, only pay attention to a certain key area, and deepen and see through this area. In this way, the experience and related resources will be rich enough, and good projects can find me.
36Kr: There are many IT-related fields. Why did you choose security at that time?
Xu Jun: When I first started venture capital in 2014, the first company I invested in was a network security company. At that time, I found several characteristics in the security field. First of all, digitalization must penetrate deeper and deeper into our work and life, so network security will become more and more important. In addition, laws and regulations on safety must be more and more detailed and strict. In addition, the confrontation between new IT technology and attack and defense will make security constantly demand new technologies and new products. All these mean that there will always be new investment opportunities in the field of security. In other words, the long-term growth of this field and the possibility of new projects are relatively clear, which is a quite good track for investors.
Of course, when you first decide that all in is safe, you will receive different feedback from people around you.
There are mainly two kinds. One kind of people think that investing should be done more, not just in one field. The other group thinks that this is an attempt, but it is normal for many investors to change to a new industry after watching it for a while. However, based on the characteristics of the industry just mentioned, I think this field is worthy of deep cultivation, and it is not necessary to change it, so I have always mainly looked at this track. Now some more distinctive companies, such as Xiaoyou Technology and Grayscale Security, are all my projects.
36Kr: Since you have been deeply involved in the industry for a long time, why did you decide to set up a fund independently?
Xu Jun: I also see some changes in the industry, plus the personal career choices of several of our partners. As far as I am concerned, I feel that there is no early-stage investment institution in the industry for the time being, which will help enterprises grow completely through various resources. Then, since I have decided to invest in the security field for a long time, I think I should come out and be an early institution specially for security. I hope that every step from fundraising, investment, management and withdrawal will be specially designed for the network security industry.
Star Venture Capital has three sponsors, me, Siyuan and Navigation Capital. Hanghang is a professional FA organization in the field of network security, with a co-founder participating in our fund. Siyuan is a network security marketing accelerator and Bruce’s company. It means that Bruce, I and the co-founder of Sailing are all founding partners of Stars. Then why the three of us? Because the growth of network security enterprises actually needs the help of many resources.
Many founders of this industry are from technical backgrounds and often don’t understand sales very well. There are also founders who have doubts about many practices of sales and distrust each other. In the face of this situation, I think it will be very beneficial for them if Bruce is in the role. Because if someone who knows the security industry can tell him what sales are about from the perspective of a third party, what the sales team should do, and what the logic behind the sales staff’s behavior is, it will be more neutral and more convincing to them.
Navigation is a professional network security FA organization, which can help enterprises in the financing and M&A stages. Especially mergers and acquisitions, there are many fields of security subdivision. Generally speaking, many companies will consider doing some mergers and acquisitions to expand their product lines after they grow to a certain stage and scale, which is one of the ways for our investment enterprises to withdraw.
36Kr: Fund-raising is also very important. How do we design the fund-raising for network security?
Xu Jun: This fund is 100 million yuan in size, specializing in the early stage. In addition to our three parties, there is another partner, Honghua Capital. Honghua itself has also cultivated in the field of network security, mainly investing in the later projects of network security, so we feel that there are also opportunities for cooperation.
On the whole, about 40% of our LPs are Mesozoic Netan companies, that is, unicorn companies. These companies have their own needs for mergers and acquisitions, strategic investment or product cooperation, and more start-up teams can be reached through our fund. Moreover, we are not an investment fund of any independent company, which is different from some investment institutions that are strongly bound to a listed company alone, which makes our identity more neutral. The other 40% will be some network security institutions similar to Honghua. I will invest in the early stage, and if they want to lay out the middle and late stage, I can also help them screen. Finally, some are our personal friends in the industry.
This LP structure has laid the groundwork for the following investment, management and withdrawal.
36Kr: In terms of casting, what kind of design do the stars have?
Xu Jun: There are two things that are particularly important for early investment. One is the coverage of project sources, and the other is to make correct investment judgments. First of all, you should be able to reach these good projects, and it is useless to reach judgment. In terms of project coverage, there are actually a group of people in the network security industry who are very interesting, that is, the network security executives of Party A.. I think on the one hand, the outstanding talents in them may start businesses, and on the other hand, the outstanding entrepreneurial teams in the field of network security also have the ability to reach them. Based on these two premises, if we can communicate with this group of people in a normal way, we can reach them well.
Then we did the passive covering action. Now that the information is so developed, the entrepreneurial team will also conduct information search. We recently released an ecological map of cyber security entrepreneurship, which covers all kinds of roles needed in the process of cyber security entrepreneurship, including investment institutions, FA, general agents, media, incubators and recruitment agencies. The reason for doing this is that people will see these useful information when searching and pay attention to the stars. Now that this ecological map has been released, it can be seen from the picture that the whole ecology of network security is also relatively fragmented. This is also the reason why our organization is named Stars. There are few moons and suns in the security industry, but there are many stars, big and small.
36Kr: What do you think is the most important ability to make safe early investment?
Xu Jun: Actually, investing is the same. First, judge the direction, and second, judge the team. We are an organization for network security and a professional investor, and judging the direction is our advantage.
Next is the judgment of people, which is a very difficult topic. I don’t think any investor can raise his hand and say that I have solved this problem. However, we may have some advantages over other investment institutions because of our background in the industry. For example, it will be much easier to do everything. After all, it is very easy to find people and get a lot of first-hand information when we are rooted in the industry. If there is methodology, what I value most in the team here is learning ability, which should be summarized and iterated quickly.
In addition, from the business point of view, there may be some interesting classifications. I divide products in the security field into two categories, one is products that may affect the comparative business process, and the other is products that have little impact. The former, such as EDR, is difficult to promote such products in the early stage, so it is necessary for the team to have some aura so that Party A can trust you. The latter may not need this. There are also some such detail judgment dimensions, which may need to be judged according to specific circumstances.
36Kr: In the previous investment experience, were there some examples of judging teams?
Xu Jun: For example, Xiaoyou, I met the founder in 2018. At that time, I felt that the direction was definitely right, but it was a little early, so I can wait, and it just happened to inspect the inspection team again. In this process, I found that on the one hand, the team is very persistent in this direction, and its perseverance is strong enough, and it is always in constant contact with customers and improving products. On the other hand, I also see the team constantly speaking out in the field of cloud native security. This allows them to gradually establish the image of cloud native security experts on the customer side. This shows that the team has the ability to start a business in this field. Specifically, cloud native security has just begun to have market opportunities, and many aspects are still in the exploration stage, which requires the team to stick to its initial intention and stubbornly overcome various challenges. At the same time, cloud native security is a brand-new field, and customers are also learning. The establishment of expert image makes Xiaoyou team have a halo in this field and can reach customers more conveniently.
To give another recent example, Grayscale Security, they recently released their own safety risk assessment automation products. First of all, from the perspective of the industry, I think this will be a fast-growing market in the field of safety operation.
After the promotion of actual offensive and defensive drills, the network security construction of many head party A may have reached a stage. The next question is, how should Party A operate so many network security devices that have been purchased well, and at the same time, make their entire security team improve their operational efficiency.
I came into contact with gray scale in 2021, and I also spent a little time doing research at that time. At that time, I communicated with some Party A and found that they really had pain points. For example, some Party A originally bought a lot of equipment for actual offensive and defensive drills, but he still had to find a security service company to conduct penetration tests to test the effects of these products. However, if there is a platform that can help Party A to continuously verify some known problems, then they can focus on the discovery of unknown problems in penetration testing and red-blue confrontation, and the known problems can be continuously verified by this tool.
Give an example of a specific scenario. For example, Party A may change a strategy for some reason today, but they don’t know whether this modification will have other effects. Now with this platform, Party A can use it for verification. In fact, it will be a bit like the effect of regression testing in software development.
After the investigation, I think this matter is valid, so let’s go to the next question, the consideration of the team. I don’t think any team is perfect, but it’s better that every time I communicate with the founder, she understands quickly and moves quickly. If she should adjust, she should find someone, and her execution is very strong. More importantly, this trait is very compatible with the characteristics of this kind of product itself. Because this product has a platform attribute, it can be extended on the customer side for different types of needs. If the team’s execution is strong, things will move faster, and we can get a large number of customers earlier, thus generating a steady stream of income through subsequent extension. The temperament match between this team and products is also one of the reasons why I finally made up my mind to invest.
36Kr: Early investment is very important for the team and direction judgment. Besides the team, would you like to know which projects we are interested in at present?
Xu Jun: As just mentioned, the safe operation track where Grayscale is located will always be concerned. But it should also be carefully distinguished, such as safe custody, which is also considered safe operation. Maybe some Party A doesn’t have a large team to run the whole security system, so they need hosting services. There will be some investment opportunities, but at the same time, some problems need to be considered. For example, the hosting service is actually a very traditional business, and there has never been a big company. I think the reason is that this matter is too dependent on people, and it is difficult to scale itself. At this time, if a team can really reduce its dependence on people, or make this matter more standardized and rely more on platforms and tools, I will look forward to it.
Another aspect is the change of IT architecture, such as the change of cloud architecture, which makes people pay attention to cloud native security and brings opportunities for cloud native security companies like Xiaoyou. Then, as medium and large customers gradually introduce public cloud, their IT infrastructure will be more and more inclined to a hybrid cloud architecture. In the case of hybrid cloud, how to manage security conveniently and uniformly is a new opportunity. Therefore, we will continue to pay attention to the various possibilities brought about by changes in IT architecture.
On the whole, after so many years of observation, security has been proved to be an industry that can be continuously cultivated. Changes in IT architecture, favorable policies, and iterations of Party A’s needs will all generate new investment opportunities.
36Kr: It is true that the security industry has made rapid progress in the past two years. After 2020, many institutions and individuals will pay attention to this direction. In this case, will it be a better time for us to set up a new fund in 2022?
Xu Jun: That’s how I see it. Combined with the network security industry, no matter from the scale, the degree of customer demand for such products, and the enthusiasm of capital investment in network security, I think it is probably a point that a professional early investment institution is needed in the industry. Now that we have seen such an opportunity and the ability, we must do it.