- March 17, 2020
- 1499 Views
Dao Ventures’ Zhang: The impact ecosystem is developing very slowly in China
Tao Zhang, co-founder of Dao Ventures and founder of one of the first impact funds in China, discusses his latest clean food impact investment in Shenzhen and the slow development of the impact ecosystem in China.
- An ecosystem involving multiple stakeholders will be very much indispensable to the healthy long-term growth of impact investing in China, according to Tao Zhang.
- The latest investment in Starfield signals an increasing focus by the group to tackle the huge environmental impact in food production
- Zhang believes millennials in China can be geared towards alternative meat and related products.
Cross-border impact venture Dao Foods International, which aims to introduce environmentally friendly plant-based and clean meat in China, announced on 12 March its latest impact investment in Starfield Food and Science Technology Limited, a food technology company headquartered in Shenzhen, in partnership with New Crop Capital (NCC).
Dao Ventures, a cross-border impact investment, advisory and accelerator group with co-headquartered offices in both China and the United States, was co-founded by Tao Zhang. He also founded China Impact Fund (CIF) with the backing of a Hong Kong-based family foundation and several high-net-worth individuals (HNWIs) in Mainland China. CIF is considered as China’s first impact fund specialising in supporting environmental small and medium-sized enterprises (SMEs).
So far, the Dao Ventures consortium, along with its philanthropic affiliate Green Startups Accelerator, has invested in, assisted and provided a variety of services to over 1,000 SMEs and accelerated over 100 ventures. It has also made and/or facilitated investments of over $200 million in addition to providing over 40 seed grants of $500 to $20,000 to impact ventures across the United States, Canada, Israel and China.
Since August 2019, Dao Foods has been hosting Boot Camps across China to catalyse sustainable plant-based protein food entrepreneurship and has also announced the establishment of the China Next Gen Good Food Incubator to more effectively identify, nurture and support entrepreneurial projects like Starfield in the alternative protein space.
Starfield is an alternative meat venture with its own R&D and manufacturing capability. To date, it has reached product collaboration intents with over 20 local and international restaurants, including restaurant chains Papa John’s with 170 outlets, Nayuki’s Tea with 300 branches, and Element Fresh with 38 restaurants in China. Venture capital firm Matrix Partners China led the angel investment round for Starfield together with NCC and Dao Foods.
In this interview, Zhang discusses why Starfield was an attractive proposition for the group as well as how he selects suitable impact ventures. He also assesses the slow development of the impact ecosystem in China and how it can develop and gain traction.
Chris Georgiou (CG): Could you outline the structure of Dao Ventures and your investment criteria for working with enterprises?
Tao Zhang (TZ): Dao Ventures is a holding company, which serves as the brand for the consortium of impact entities that we have to support impact ventures. Over the years, we have had ventures in the environmental space, education and now increasingly in the sustainable food space – as its environmental impact is so huge that we cannot afford to ignore it.
Our investment criteria are mostly focused on people. Most of the enterprises are startups or early-stage SMEs. We believe that as long as the entrepreneurs have the impact DNA, they won’t deviate from impact no matter what business model or sector they choose.
In terms of investment, we typically make equity investments and provide acceleration services. We also provide grant funding and capital funding to over 40 impact ventures from the US, Canada, Israel and China. You could consider this blended finance, but for the equity and impact investments, we technically operate a venture capital approach – which is impact first and tends to be more patient.
CG: Congratulations on Dao Foods’ investment into Starfield Food this month. Can you tell us about your role in bringing foreign capital to this venture and why Starfield was a particularly attractive venture for you?
TZ: Dao Foods has been active in China for three years and having conducted our feasibility studies exploring plant-based and clean meat, we established as a cross-border impact investing organisation focused on the environment. Dao Foods’ mission is to help make Chinese consumers part of the environmental solution.
We played a catalytic and incubator role for Starfield. We have been looking for potential deals that we can invest in and incubate over the past couple of years. We encouraged them to develop from a vegetarian restaurant in Shenzhen into a food product venture by connecting them with the right manufacturing partner and Chinese investors.
In the process, we benefited from our partner and shareholder New Crop Capital as well as from domestic capital.
We aim to mainstream plant-based and clean meat products in China. The selection criteria for the kind of entrepreneurs we want to support should firstly have a science or technology logic behind their products, which needs to be attractive not just to niche consumer groups but to mainstream consumers such as the general millennial population. Second, they should have social media savvy capabilities so that they can market the products to this segment – particularly in China.
CG: Is there any evidence to suggest that the 400 million millennials in China have an appetite for alternatives to meat and non-meat diets? Per capita consumption of meat products in China is generally increasing.
TZ: I’m not aware of any specific research in this regard but extrapolating from our own market research and conversations with different stakeholders on the ground, we take the view that millennials in China can be geared towards alternative meat and related products.
Millennials look for diversity of food products, such as cool and sexy products, although that is not necessarily the product factor we want our entrepreneurs to focus on. We anticipate millennials in China to follow the trends of their counterparts in the West and become interested in the side-benefits they can obtain from consuming these products, either through their environmental or animal welfare concerns.
CG: It could be argued that China is the largest impact investing market in the world if it were recorded in a standardised way, perhaps similar to Western impact metrics. For example, there are vast sums invested in China alone by the private sector in afforestation, water projects, poverty alleviation, green energy and areas of the Belt and Road Initiative. To what extent do you agree? How can we get these activities standardised and recorded as impact investing?
TZ: Yes and no. China could be considered the largest potential impact investing market in terms of the myriad problems it needs to address through impact investing.
However, I don’t necessarily think there is a lot of technical impact investing happening in China. Take for instance the projects that you mentioned, they are generally policy-orientated rather than impact-orientated as we define in our approach. If you look at the players, they are generally state-owned companies, linked to corporate social responsibility (CSR), charity or not for profit.
CG: You have previously mentioned that China lacks the expertise and professionals for impact investing. However, impact targets do not always have to be complicated. For example, in addition to traditional financial analysis, an investor can contractually agree that a factory will recycle X number of plastic bottles this year to produce X number of products. The interest rate of the loan, or executive remuneration if working through private equity, could be linked and adjusted up or down according to these simple impact outcomes, thus encouraging the entrepreneur to achieve the impact. Is the impact community in China guilty of overcomplicating the process or not clearly communicating its simplicity where applicable?
TZ: I don’t think that we want to make impact investing overcomplicated, but the nature of the industry means it wants to achieve more compared to purely commercial investors. Therefore, it does require a holistic view as there are more factors to consider and manage as an entrepreneur.
Dao Ventures has categorised the environmental sector into seven sub-sectors, and each company within that sector needs to be looked at on a case-by-case basis. In the plant-based food space, the impact is more straightforward as it is inherent to the business.
However, in some companies, the cost implications, business and impact goals are not necessarily aligned with each other perfectly, such as in recycling. For example, we have invested and supported the recycling company Ecofroggy, which uses recycled materials to make stationery products for Chinese primary school students. From the business perspective, because they are using recycled materials, the price of their product is slightly higher than ordinary paper products. For that reason, the consumers – the parents of the primary school students – are not willing to pay a few extra cents for the stationery products.
The challenge is how to make the venture attractive to a venture capitalist for exits and to banks for loans by aligning the impact and business goals. That’s why we need impact investors who are patient and can support the entrepreneur to make the business viable in order to scale up the impact.
CG: How do you see the impact ecosystem developing in China? What role are the banks and financial institutions playing and to what extent is the funding still reliant on HNWIs and foundations?
TZ: As far as my work is concerned, I am still very much relying on HNWIs, family offices and foundations to a large extent.
The ecosystem has been developing in China, but very slowly. However, I believe that over the years an ecosystem involving multiple stakeholders will be very much indispensable to the healthy long-term growth of impact investing and social entrepreneurship in China.
For impact investing to grow and gain significant traction in China, a few impact funds such as our own are far from enough. The ecosystem must include mainstream venture capitalists, government organisations, policymakers, banks and financial institutions, professional services firms and multinational companies. Somebody needs to take the lead in convening all these different stakeholders and laying a good foundation for others who aspire to do impact investing but don’t necessarily have the knowledge or the toolkit to do it properly.