2018.06.01 Zhang Wei Views:
Reasons behind the rapid growth of unicorns are huge, real demand, a moat around them and advantages of technology and product. But eventually, they have to compete for market share with their management. Unicorns that take the lead in business model are even more unreliable than those that pull ahead in technology because business model is easier to replicate due to the ways they share. Reasonable valuation should also be taken into consideration in an investment. As primary-market investors, we have to evaluate the company’s profitability and potential for growth. If it is overpriced, it’s just a bubble.
Reasons behind the rapid growth of unicorns are huge, real demand, a moat around them and advantages of technology and product. But eventually, they have to compete for market share with their management. Unicorns that take the lead in business model are even more unreliable than those that pull ahead in technology because business model is easier to replicate due to the ways they share. Reasonable valuation should also be taken into consideration in an investment. As primary-market investors, we have to evaluate the company’s profitability and potential for growth. If it is overpriced, it’s just a bubble.
Most unicorns are not new species, but something that is dying or just a pig with a horn projecting from its forehead.
According to international statistics, the three reasons why unicorns fail to pull it off are: a lack of market demand, capital chain rupture and mismanagement.
For instance, the ever-popular smart bracelets maker, Jawbone, was once valued at $3B, and now it has closed. The primary cause of its failure is that its temporary advantage of technology hadn’t widen the gap with its rivals. After all it takes execution capability to quickly dominate the market.
Now the numbers of unicorns are ever-increasing, which says a lot about changes in technology, market and regulatory policies in addition to the liquidity of capital. If there are no new cases of financing or IPO, but a decrease in valuation, it is a bad sign.
CoStone Capital has been sticking to two principles when investing in unicorns: the potential for growth and the reasonable valuation. The potential for growth is assessed from the following three perspectives:
The demand: there are enormous real demand in the related sector with the large-scale market segment, and the company won’t hit the ceiling anytime soon.
The “moat”: they’ve gained competitive advantages of technology and product through consistent financial commitment in R&D; commercial advantages from brand and channel-building; the cost advantage through higher operational efficiency with segmentation of tasks; original creative capability through accumulation of talented pool.
Commercialization: they have the ability to turn above advantages into highly efficient profitability with cashflow to match.
The reasonable valuation is not about the actual value at the moment of trading. It’s more about recovering its value through returns on the rapid growth of corporations and achieving a margin of safety as soon as possible.
On the 6th Chinese Venture Capital Summit held by Securities Times, CoStone Capital Zhang Wei said that becoming a unicorn has become the envy of all startups, but only a few of the “unicorns” can succeed, and most of them have no way out. Access to the full article in Chinese: http://stonevc.com/news_view.aspx?TypeId=4&Id=697&Fid=t2:4:2
Rewritten by Lu Ying; Edited by Li Yunzhen, Du Zhixin
Over the past year, the bull market returned, with technology leading the way.
As I said back in October 2024, the rally that began on September 24 was not merely a rebound, but a reversal. Since then, China's capital markets have undergone a broad revaluation, moving from undervaluation toward fair value.
The Shanghai Composite Index reached its highest level in a decade. The "Yi-Zhong-Tian" trio—Eoptolink, Zhongji Innolight and TFC Communication, three prominent Chinese optical communications stocks—saw their share prices multiply severalfold in a single year. Cambricon's market capitalization briefly exceeded RMB 600 billion. Elsewhere in the technology sector, triple-digit price-to-earnings ratios and valuations exceeding RMB 10 billion became commonplace.
Some investors were greedy; others, fearful. Still others asked me: Are technology stocks in a valuation bubble?
My answer is that what we are witnessing is the hunger and anxiety of an era, reflected in the capital markets. Once you understand this, the current fervor for technology investing is no longer difficult to explain.
Investment has nothing to do with macroeconomics, but everything to do with geopolitics.
China-US relations will shape the investment landscape for decades to come. Geopolitics has played a major role in shaping the hunger and anxiety of our times, fundamentally reshaping the way we invest.
What, then, lies at the heart of China's hunger and anxiety?
The Fourth Industrial Revolution is already underway, yet China has not fully overcome the technological shortcomings left by the Third. There is no time to lose.
This is why some people wonder: Why do Chinese computing chip companies command such high valuations when their technologies still lag so far behind NVIDIA's? Why does NVIDIA trade at just 50 times earnings, while a company hailed as "China's answer to NVIDIA" commands a multiple of 300?
To me, this gets the logic exactly backward.
It is precisely because these companies cannot catch up with NVIDIA in the near term that they command a higher strategic premium. The wider the technological gap, the greater the strategic value.
The further something lies beyond our reach, the stronger our hunger. The harder it is to catch up, the deeper our anxiety. If China were to achieve a complete breakthrough in computing chips one day, valuations might actually come down.
Where can one find China's most spectacular natural landscapes?
Much of the answer, I believe, lies in and around the Hengduan Mountains: the Meili Snow Mountains, Jade Dragon Snow Mountain, Mount Gongga, Mount Siguniang, Jiuzhaigou, and many others. Vast differences in elevation and deep fault lines have given rise to landscapes of extraordinary grandeur.
Hard-tech investing follows a similar logic.
Technological gaps, discontinuities in capabilities, and missing links in industrial systems: a leap in difficulty brings a leap in valuation, and a successful breakthrough can, in turn, bring a leap in returns.
This logic extends well beyond computing chips. It is equally evident in memory semiconductors, commercial spaceflight, and other sectors where China still faces substantial technological gaps with other countries.
It was precisely this conviction that led CoStone Capital, starting in 2016, to decisively focus its investments on three areas: hard tech, emerging industries, and life sciences and healthcare. In this context, "hard tech" refers specifically to important industries in which China faces a technological gap with the United States.
Thanks to this forward-looking strategy, CoStone Capital established an early presence across the full value chains of key sectors, including semiconductors, artificial intelligence, and robotics.
Looking ahead, the frontiers of technological progress and industrial upgrading are boundless. Nor can the gaps in hard technology be closed overnight. The twin windows of opportunity presented by technological innovation and the development of homegrown alternatives to foreign technologies have only just begun to open.
The road ahead is long, but the future holds immense promise.
As an investment firm, CoStone Capital will continue to invest where the hunger and anxiety of each era run deepest, move forward with the tensions that shape our times, and extend our reach toward the most challenging—and most important—frontiers.
Spring 2026