Source: LatePost
Author: Dong Hui

On April 17, North American time, $霸王茶姬(CHA.US)$ It was listed on Nasdaq, with the highest stock price increase exceeding 48%, closing at $32.4 per share, achieving a Market Cap of $5.95 billion, becoming the second largest tea beverage brand by Market Cap.

Freshly made tea drinks are probably the only sector in the consumer field where venture capitalists are making money. Almost all tea brands expand through a franchise model; as long as the business is good, thousands of business owners are willing to invest money to open stores. Once they get through the riskiest early years of startup, there is no need to sell equity to venture capital firms. However, large institutions are individually putting their efforts to inject money.

The first 'perfect symbol' to emerge was Heytea. From 2016 to 2021, investors who queued to meet founder Nie Yuncheng presented an astonishing valuation of 60 billion. Starting from a small shop in Jiangmen, Heytea skipped the previous generation of powder polymer milk tea, creating new categories of cheese tea and fresh fruit tea, with innovative product names and stores designed as scenic spots.

As a result, Heytea became the first domestic brand to enter first-tier shopping centers in China, opening many stores next to Starbucks. However, the high-end positioning and insistence on direct operations led to the most direct impact during the pandemic. After 2022, Heytea lowered prices and opened franchises, reducing the differentiation space for its products, causing the company to fall into decline, and investors also fell into waiting. Since last year, Heytea has made a series of returns and adjustments, halting the expansion that had occurred over a period of time.

The most fiercely competed symbol is Mixue Ice City. It is so powerful and unique that it needs no explanation, "it's hard to miss it." When the investment circle just started targeting "ten thousand stores," Mixue was already the only tea brand with ten thousand stores. Investors are troubled by how to approach the Zhang brothers and get their approval. The initiative has never been with the investors. In Mixue Ice City, the investors have waited the longest and suffered the most. Correspondingly, the returns are also substantial.

Gu Ming is a non-consensus brand. Founder Wang Yunan is low-key and pragmatic, and Gu Ming has long been settled in a corner, sticking to third and fourth-tier cities, not stepping into north of the Yellow River or nearby large cities for a long time. It took 15 years to develop its core capability, "controlling the cost of fresh products to be close to room temperature." Investors who discover it have a keen eye, and simultaneously, competitors are few. Now, Wang Yunan has shown greater ambition, and Gu Ming has also become the tea brand closest to Mixue in terms of scale and profitability.

The recently listed brand霸王茶姬 (Ba Wang Cha Ji) on the U.S. stock market is an exception among tea brands. In 2020, founder Zhang Junjie actively sought a large check to resolve funding issues. XVC decided to release this money within six days, "paying a very high premium." They invested in Zhang Junjie as a person: he has grand vision, a small ego, can make correct decisions, and is good at building organizations. In the following years, they watched this brand continuously surpass expectations with hope and lingering doubts, as Zhang Junjie iterated himself at an astonishing speed, pushing the explosive "light milk tea" large SKU, rewriting the narrative of tea competition with extreme efficiency, which also triggered envy, regret, and endless review among large institutions.

Among investment institutions, Long Zhu is one of the biggest winners in this capital contest, based on the latest market cap calculations. $Gu Ming(01364.HK)$ and $MIXUE GROUP (02097.HK)$ The two projects brought in a net profit of 7.7 billion. The returns from 霸王茶姬 (Ba Wang Cha Ji) for XVC are equally substantial. This "strike-type" VC invested 0.245 billion and achieved over 30 times the paper return. The potential investment returns from the yet-to-be-listed Xi Tea remain unknown.

The tea beverage industry has developed for 8 years, with over 3,000 tea beverage brands and 420,000 stores, creating a huge new market through innovative categories. "Five years ago, it was hard to imagine that the tea beverage market would be bigger than hamburgers, and the scale of freshly made drinks is approaching bottled beverages," said Huang Yaoxin, Managing Director of Longzhu, who expressed that it is "shocking and unbelievable."

Hey Tea, the "perfect symbol".

When meeting Hey Tea founder Nie Yuncheng for the first time, Longzhu partner Zhu Yonghua deliberately prepared his hairstyle, outfits, and even contemplated how to speak to get closer to Nie Yuncheng, "After all, I am 10 years older than him." However, when this 26-year-old "kid" appeared wearing a hoodie, Zhu Yonghua's first reaction was, "I really want to protect him."

This is December 2017, Hey Tea has launched its first cheese fruit tea "Cheese Berry", opening stores in Peking and Shanghai, where the Chaoyang Grandjoy Holdings Group store can sell 100,000 cups in a day. Longzhu was just established at the beginning of the year. In Zhu Yonghua's eyes, Hey Tea is a project that must be captured.

The two chatted from 8 PM until the restaurant closed, discussing tea beverages and broader dining and retail topics. Finally, Zhu Yonghua spoke up: "It's the end of the year, do you have any financing needs?"

After the first round of financing, over 100 investors wanted to meet Nie Yuncheng. He is the 'little genius' entrepreneur favored by all the investors: young, with a business talent, able to perceive consumer needs and turn the milk tea that was previously made with hydrogenated vegetable oil powder into truly innovative products that consumers chase after, and can articulate clear methodologies in product, operation, and branding.

Some of his product insights at that time were later discussed as gospel by newcomers, reminiscent of how people speak of Jobs discussing Apple, such as the distinction between texture and flavor, with the former having standards and able to achieve perfection using good materials and methods. Even his naming method, such as 'Cheese Berry' and 'Mango Sweet Dew', in a reduplicative format, was emulated by nearly all subsequent tea beverage brands.

However, Nie Yuncheng has never opened up financing. More often, he just listens to investors analyze or satisfies their desire to meet him. The choice is not in the investors' hands.

During the conversation, Zhu Yonghua felt that Nie Yuncheng was somewhat hesitant. Looking back on LatePost, he feels that there were a few words that might have touched the other party: HeyTea needs funding for future expansion — the meeting coincided with the end of the year, and Nie Yuncheng had just calculated the budget for opening stores in the second year. Additionally, at that time the brand was still resistant to delivery platforms, believing that these platforms were there to grab traffic and resources. However, with the advent of the mobile internet, brands will need to cooperate with platforms in the future, and Longzhu could serve as a bridge for HeyTea to access these platforms.

Zhu Yonghua said that if he was willing to finance, he could name a price.

Zhu Yonghua's initial expectation was a post-investment valuation of 2 billion. A year ago, HeyTea had about 50 stores, and IDG and He Boquan invested 0.1 billion. A year later, the number of HeyTea stores exceeded 80, with revenue of about 0.4 billion, so a valuation of 2 billion seems high. But Nie Yuncheng quoted 4 billion.

"When he said 4 billion, I was also stunned and agreed on the spot," Zhu Yonghua said, "I felt the opportunity was there in that moment, and I didn't want to lose it."

HeyTea became Longzhu's third investment project. The previous two non-consumer investment amounts were two to three million, while this time Longzhu invested 0.4 billion. "At that time, there was only this much money left in the account, and I gave it all to him," Zhu Yonghua said, noting that Longzhu's investment style shifted to heavily invest in the best companies, aiming to invest in those they were most certain about, "even willing to throw in their own money."

To secure the project ahead of dollar funds taking a Christmas break, Zhu Yonghua planned to expedite the financing process as quickly as possible. Originally, he introduced other investment institutions, but they did not participate, "it was not easy to understand, there was innovation, but there were only dozens of stores at that time." Ultimately, this round became Longzhu's exclusive financing.

After the post-investment valuation of 4 billion was disclosed, everything accelerated. In the next three years, Heytea completed three rounds of financing in a row, each round "snatched very fiercely," said an investor who participated in the bidding.

In the third round of financing in 2019, Heytea rose to 9 billion yuan, with Sequoia Capital China’s Shen Nanpeng making an appearance, and Tencent also joining in this round.

By the fifth round in 2021, the valuation soared to a staggering 60 billion, with participants including Sequoia Capital China, Tencent, Hillhouse Capital, Black Ant Capital, and Temasek. An investor who participated in Heytea's financing recalled that the valuation was proposed by one of the investors in this round, "quite fierce, probably just a few minutes. He believed that only a valuation of 60 billion yuan could allow investment."

Longzhu did not participate in the subsequent rounds of financing. Zhu Yonghua said that Nie Yuncheng believed Longzhu had already obtained a 10% share in the second round of financing, gained a seat on the Board of Directors, and did not wish to occupy more shares, "Every time he hoped I could give up, and he was very firm."

Heytea's high valuation was like the starting point of a high fever, quickly spreading to the tea beverage sector and even the entire Consumer field. After that, brands like Mixue Bingcheng, $Naixue's tea (02150.HK)$ , Yuanqi Forest, and others have increasingly higher valuations. The story of investing in Heytea has temporarily come to an end, but investors could not foresee that this perfect symbol in every aspect would encounter changes after 2022, becoming a project that capital players could not temporarily withdraw from.

In 2022, Heytea first announced price reductions at the beginning of the year and opened franchising at the end of the year, pursuing larger scale to target rising competitors like Guming and the soon-to-emerge Bawang Chaji.

Shifting towards low stock price and franchising puts more pressure on the brand's supply chain cost control and management of franchisees' capabilities. After Gu Ming decided to make fruit tea, it invested in the construction of a low-temperature cold chain, with extreme efficiency reflected in the product's exceptional cost performance. On the other hand, Baba Tea Ji focuses on more straightforward large products to solve efficiency issues while significantly reducing management difficulties. Mixue Bingcheng does not compete in the same range as the aforementioned brands due to its bottom-line pricing.

At the beginning of this year, Xi Tea paused franchising. Two internal letters from last year and this year mentioned that it aims to return to its original strategy, to become the Xi Tea it once was: a differentiated brand and product, rather than merely pursuing scale.

Mixue Bingcheng, the most difficult round to "kneel."

In the second half of 2020, Zhu Yonghua began to suffer from insomnia. He felt at one point that he was suffering from depression, unable to sleep well for three whole months. Even though he had received a call from the founder of Mixue Bingcheng, who finally agreed to finance, he remained mentally tense.

Zhu Yonghua had been waiting over a year for this critical call.

After investing in Xi Tea in 2018, Longzhu began looking for new tea drink investment opportunities. They divided the tea beverage industry into three price segments: under 10 yuan, 10-20 yuan, and above 20 yuan, aiming to select three first places based on this logic.

In the lowest price segment, Mixue Bingcheng is easily spotted. At that time, Mixue Bingcheng's store decor was simple, store efficiency was average, and its performance in the southern market was poor—due to far delivery distances for raw materials, tea beverage competition was more intense than in the north, and many franchise stores closed down. A top FA had been recommended to consider Mixue Bingcheng before 2019, but they did not even attempt to contact the company. At that time, Mixue Bingcheng had already scaled up, with store numbers exceeding Xi Tea by more than 20 times, and revenue close between the two. Longzhu estimated that there are about 0.4 million milk tea stores in China, with nearly 0.2 million stores at the under 10 yuan price point, and Mixue is expected to capture half of that in the future.

The difficulty is akin to dealing with Zhang Hongfu. At one point, no one could help Zhu Yonghua arrange a meeting with someone from Mixue. Until early 2019, a project owner facilitated an introduction, creating a group chat for Zhu Yonghua and Zhang Hongfu. He quickly grabbed the chance to chat with Zhang Hongfu, and in March he rushed to Mixue Bingcheng's headquarters in Zhengzhou to visit the factory and sit in on training, finding Zhang Hongfu to be "simple and determined." Zhu Yonghua speculated that "what the other party wants is someone they can connect with, a 'family' member."

Zhu Yonghua said that Longzhu is the first batch of professional investment institutions received by Mixue Ice City. Previously, Zhang Hongfu mostly faced individuals with financial strength. Moreover, Mixue Ice City has stable cash flow and no clear financing plans.

In 2019, the image of Xue Wang was born, and the advertisement song "You love me, I love you, Mixue Ice City is sweet" became popular across the country. By the end of the year, the number of Mixue Ice City stores exceeded 7,000.

Zhu Yonghua admitted that this is the project where he has "kneeled" the hardest and the longest in beverage investment, "always staying at their door."

After the first meeting, he frequently sought Zhang Hongfu, hoping to push for financing, but the latter did not respond much later, "feeling that I was too pushy." He had to change his strategy, finding a friend close to the senior management of Mixue, who met with Mixue's management every month at that time. Zhu Yonghua asked for his help, and whenever Zhang Hongfu took any action, he would immediately inform him, "No more tricks, must be buried to this extent."

In the summer of 2020, a friend called to inform Zhu Yonghua that "good news" was coming—Mixue wanted to call Zhu Yonghua.

On the phone, Mixue's senior management told Zhu Yonghua that they were ready for financing but hadn't yet determined how much to raise, confirming that Longzhu and Gao Ling would be involved.

Zhu Yonghua just wanted to be faster than other companies, and then, "everyone revealed their cards."

Why did Mixue Bingsheng suddenly open up for financing? In 2020, Mixue Bingsheng had already surpassed 10,000 stores, with revenue from selling raw materials and equipment to franchisees accounting for more than 90% of total revenue.

An investor close to Mixue revealed that Zhang Hongfu believes that if the top investment institutions provide the most reasonable valuation, it could prove Mixue's long-term value to a certain extent. Zhu Yonghua speculated that Longzhu was trusted, possibly also due to investments in admired brands like Hey Tea and Gu Ming.

Zhu Yonghua has seen many entrepreneurs with grand and long-term visions, but Zhang Hongfu left a deep impression on him. The other party asked him in return, "Have you ever considered what we will be like decades from now? How do you want to operate then?" He then said, "You accompany us, and we will walk together."

According to sources from 'Wandian', many investment institutions and large corporations have sought to invest in Mixue Bingsheng but have not been successful. An investor who has interacted with Mixue said that during the roadshow for the IPO, dozens of top global investors were invited to visit the Mixue factory, originally scheduled to meet Zhang Hongfu, but it did not happen.

The large investment institutions finalized in the end were only Longzhu, Hillhouse, and CPE Yuanfeng.

Hillhouse also discovered Mixue Bingsheng around 2019. According to reports from 'Anchong', the rise of PDD Holdings made them realize that "the sinking market is vast," and they rushed into third and fourth-tier cities to find Mixue Bingsheng through street surveys. An investor close to Mixue said that Hillhouse founder Zhang Lei began chatting in Henan dialect with the founder of Mixue upon their first meeting, indicating familiarity—Zhang Lei is from Zhengzhou, Henan, and during the conversation expressed the need to revitalize Henan enterprises.

The competition for the lead investment rights began after Zhang Lei met with Zhang Hongfu. Longzhu aimed to invest 2 billion, saying, "Not only do we need to gain weight, but we must also be full. We absolutely cannot allow Hillhouse to invest more than us," and Hillhouse likely thought the same.

Zhu Yonghua felt increasingly tense; to capture market share, they frequently invited the Mixue Bingcheng team to the Meituan headquarters to discuss business, such as how to collaborate on delivery platforms. 'At that time it was so intense that one week, the other side seemed happier than us, and the next week after doing something, they were more worried about us.'

This battle for market share lasted three months. In the end, it was Zhang Hongfu who made the call, with a post-investment valuation of 23.333 billion. Longzhu and Hillhouse each took 4%, investing 0.933 billion, 'Let's not ask for 5 points, let’s be fair.' Zhu Yonghua recounted. CPE Yuenfeng received 2%. Longzhu and Hillhouse also decided to stop; if they continued, more competitors might emerge.

After the delivery, Mixue Bingcheng quickly embarked on the path of listing on the A-shares, applying for a Main Board listing on the Shenzhen Stock Exchange in 2022. This round of financing also became the only one before the listing.

In March of this year, Mixue Bingcheng went public on the Hong Kong Stock Exchange. In less than two days, the amount raised exceeded the planned target by more than 2000 times. Based on the latest market cap, the returns on investment for Longzhu, Hillhouse, and CPE Yuenfeng have now exceeded 6 times, with the first two earning over 5 billion yuan each—this is also their biggest gain in tea drink investments.

Guming, hard to identify, non-consensus.

During the period when Mixue Bingcheng did not agree to financing, the Longzhu team split into two groups: one team traveled along the coast, while the other went inland, both searching for the leading brand in the middle price range. Huang Yaoxin, who was responsible for the inland team, discovered Guming, noting that in 2019 the sinking market did not have Heytea, and 'Guming has always been able to compete with Mixue.' Zhang Hongfu also recommended that Zhu Yonghua contact Wang Yunan, as they had been classmates in the same training class.

In May 2019, Wang Yunan rejected Longzhu's first financing proposal. A month later, Zhu Yonghua met Wang Yunan in Hangzhou. Wang Yunan talked extensively about operational details, but still showed no intention of financing. Colleagues reminded Zhu Yonghua to push Wang Yunan to accept, 'but I didn’t want to ‘kneel’ at that time. I stood up for myself.'

By the end of that year, the two met again at a tea drink industry conference, and Zhu Yonghua suddenly realized that Wang Yunan had made great progress, 'His understanding of the industry, his presence, his state, his way of speaking, and details had all changed.' Moreover, only 5 months had passed since their last meeting, and the number of Guming stores had increased by several hundred. In the end, it was Lyu Liang, the founder of Chayan Yueshe, who gave Zhu Yonghua 'an important hint': 'Whether you invest or not is not important; Guming is whom I respect the most.'

Sequoia China also noticed Gu Ming at that time. Sequoia China partner Hu Ruodi heard that they had opened thousands of stores in the areas they were deeply cultivating. The investor's sensitivity told her, "This company is very noteworthy."

After a four-hour meeting with Wang Yun'an, Hu Ruodi found that, "Such a person who has never received any capital training and has no concept of capital markets thinks very far and has many long-term ideas, like how to open ten thousand stores, what challenges there will be, and it is sincere." What impressed her even more was that Wang Yun'an does not rip off his franchisees and wants them to make money. After their discussion, she knew, "Investment is a must."

An investor who has interacted with Wang Yun'an and Nie Yuncheng said the two are "naturally polar opposites." The former has a strategy, is meticulous and down-to-earth, thinks like an engineer, and confirms the accounts before proceeding, while the latter cares more about innovation and hopes to lead trends.

However, it was not easy to select the number one in the mid-price range in 2019. Sequoia China and Long Zhu both looked at Shuyi Shao Xian Cao and Chabaidao, which were similar in scale to Gu Ming at that time. From the end-user performance perspective, Chabaidao was growing very fast at that time and was "the company in China's tea beverage industry that excelled in online takeaway operations." However, investors were more optimistic about Gu Ming's offline operation.

Since 2017, Gu Ming has built its own supply chain, establishing warehouses in store gathering places, replacing part of the air transportation with cold chain vehicles to enhance delivery efficiency, ultimately supporting pricing lower than competitors. This capability is "more complicated, but harder to learn, harder to build, and more valuable, with more explosive potential in the later stages," said Long Zhu's Managing Director Huang Yaoxin.

At the end of the year, Gu Ming finally opened financing, planning to dilute 10-12%. In Hu Ruodi's view, this round of financing is not financially necessary for Gu Ming, but mainly to let more people know that such a company exists, thereby recruiting talent—several core executives joined the company after the financing. Hu Ruodi said, "Executives from different backgrounds enter this company, maintaining their abilities while fully integrating into the culture, which I very much admire about Wang Yun'an."

Hu Ruodi said, "(At that time) the market had no consensus on the franchise model and market penetration." Apart from Sequoia China, Longzhu did not have stronger competitors emerging at that time because "Gu Ming was really hard to recognize back then; investing in Gu Ming was a non-consensus."

To secure the lead investment, Zhu Yonghua suggested to Huang Yaoxin: as long as Wang Yunan did not chase him away, he should stay in Gu Ming's conference room, come every day, chat with Wang Yunan if encountering him, and if not, chat with Gu Ming's employees. Investors from Sequoia China almost simultaneously appeared at Gu Ming Company, with both teams stationed in different offices at Gu Ming's headquarters in Hangzhou. On Christmas in 2019 and New Year's Day in 2020, Zhu Yonghua also spent time with Wang Yunan, for which his girlfriend was very anxious, saying, "I am in another city during such an important holiday."

Two months later, Wang Yunan decided to allocate shares of 8%, 4%, and 1% to Longzhu, Sequoia China, and Coatue, respectively. The only round of financing before going public totaled 0.674 billion yuan, with Gu Ming's post-investment valuation around 5 billion.

After securing funds and hiring people, Gu Ming learned from Chabaidao's online operation capabilities while enhancing its offline operation, becoming a tea beverage company with a self-built large-scale Cold Chain throughout the process. When the number of stores in a region reached 500, Gu Ming deemed it reached a critical scale and began building inventory. Only after achieving concentration did they consider expanding into the next region.

"This is a process of 'building blocks,'" Huang Yaoxin explained. Having sufficient raw materials for procurement, strong combination capabilities, and robust logistics and transportation capacity, along with sufficient store density and networks, allows for rapid expansion after a product is successfully validated by the market.

Among tea beverage companies, both Gu Ming and Mixue Ice City have established large-scale Cold Chain logistics. Mixue transports its ingredients using a two-temperature vehicle (ambient and frozen) once the source is established. Gu Ming uses a three-temperature vehicle (ambient, frozen, and refrigerated) to preserve the freshness of fruits as much as possible. In the 17 provinces Gu Ming has entered, the Cold Chain network is densely woven like capillaries.

"Mixue's advantage lies in the standardization brought by industrialization, allowing for rapid expansion. The scale effect is larger, seizing brand recognition more effectively. However, the drawback is also due to industrialization; products cannot be developed and diversified as quickly. Gu Ming, however, can introduce new products weekly, ensuring that whatever consumers want is available; this is an advantage. The disadvantage is that management becomes more complex and detailed, with higher demands on all aspects." Huang Yaoxin said. But from an investment perspective, both are good symbols.

Bawang Chaji, looking for a big check.

After 2023, a recurring theme in the reflections of consumer investors will be why they did not see Bawang Tea Princess.

Earlier, this brand, which aimed to become the Eastern Starbucks, was continuously questioned by investors, not only failing to make it to the investment committee but even not being able to meet potential investors.

A leading investment institution rejected Bawang Tea Princess in two rounds of financing in 2020 and 2022. The founder explained that at that time, Bawang Tea Princess's data was average, and Zhang Junjie’s plans sounded 'like bragging'. He was too empirical, believing that the tea beverage industry had stabilized with the current top ten players, with the dividends nearly gone, saying, 'How could a new company emerge?' Now, he has many regrets, saying, 'I did not understand Zhang Junjie well before.'

In 2020, Zhang Junjie was seeking the first round of financing for Bawang Tea Princess—he needed a substantial amount of money to buy back shares from three other partners. In the third year since the company's establishment, the partners were seeking stability, while Zhang Junjie wanted to take risks and scale the business, which also meant needing more funds to build infrastructure, expand the team, and invest in the brand.

If the financing failed, Zhang Junjie would have to leave Bawang Tea Princess—he was already working on a brand called 'Milk Tea General Mobilization', comparable to Mixue Ice City, and had opened several stores.

At the end of that year, XVC got in touch with Bawang Tea Princess. The team initially received vague news about Bawang Tea Princess: 'Doing quite well in Kunming, the founder is minimally educated, but is a great person.' An investment manager first met Zhang Junjie in Kunming, then Zhang Junjie came to Peking for discussions, and finally XVC went to Nanning for research. It took only six days from their first meeting to signing the TS (Term Sheet).

This early-stage VC, established in 2016, missed the opportunity to participate in any rounds of financing for Heytea, Mixue, or Guming, stating, 'They all shot up to extremely high valuations and then immediately stopped financing,' ultimately investing nearly 0.25 billion in Bawang Tea Princess.

When XVC personnel first met Zhang Junjie, they also had many questions about Bawang Tea Princess, some of which remained even after investment, such as the early low store efficiency. However, they saw a potential target that could serve as a 'strike target', and it was not within the range of others.

At that time, the average monthly revenue of a single store of Bawang Tea Princess was only 0.15 million yuan, which far lags behind Xi Tea even in the best-performing Nanning. However, XVC believes that data cannot be viewed statically. During their research in Nanning, the XVC team found that the locations of Xi Tea stores were better than those of Bawang Tea Princess, with larger stores and fewer quantities, coupled with strong brand momentum, making it normal for store efficiency to be higher than that of Bawang Tea Princess.

Another question is that Bawang Tea Princess stores are mainly distributed in the Southwest region, with only a few scattered in other provinces, but the store efficiency is poor, and they are gradually closing down. XVC is concerned that the possible reasons are that operation and branding are still inadequate, or that the original leafy fresh milk tea flavor does not adapt well in other places.

According to an investor familiar with this round of financing, XVC's judgment is that Zhang Junjie’s store closures rather indicate that he is decisive.

XVC has a set of excellent standards for evaluating founders, focusing on two main points: whether they are good at making the right decisions, and whether they are skilled in building efficient organizations.

Before making decisions, they had two discussions with Zhang Junjie. The first chat mainly revolved around personal stories, while the second discussion, in Nanning, delved into the operations, site selection, pricing, product strategy of the milk tea store, and how to view other brands.

XVC founder Hu Boyu concluded that Zhang Junjie’s judgment and strategy are practical, and his understanding of the business model and insights into management, 'are superior to most CEOs we know.'

The second standard looks at whether Zhang Junjie can attract excellent people and make sound judgments about them, whether he has strong enough leadership to empower talent, build a sufficiently effective organization, and still manage well as the organization grows.

Public information shows that the XVC team spent an entire day communicating with the management team that Zhang Junjie wanted to bring in—several former senior executives from Xi Tea, who had been persuaded by Zhang Junjie to join. Ultimately, XVC assessed that Zhang Junjie scored high on both standards.

On the sixth day of their meeting, both parties chatted all night until four in the morning. XVC's investment decision meeting ended very quickly. "The most important thing is investing in Zhang Junjie as a person."

Unlike other investment stories in the tea beverage brand sector, the investment in霸王茶姬 at that time did not involve competition. A person close to霸王茶姬 told the late night report that the valuation was set by Zhang Junjie at 0.7 billion yuan. Based on霸王茶姬's few tens of millions in sales at that time, the P/S was close to 10, showing a high premium. However, XVC did not negotiate, deciding to invest 0.12 billion, "never have I written such a big check before." Zhang Junjie immediately signed the TS on site, and both parties happily went for breakfast together.

The first round of investment also included Fosun Group. Zhang Junjie used most of this round of financing to buy back shares and bring in a new management team. Subsequently,霸王茶姬 secured a second round of financing in a very short time, with a valuation of 1.8 billion yuan. Congbi Qiushi led the investment, and XVC fully participated.

After obtaining financing in two rounds,霸王茶姬 did not rush to open stores, but instead began a comprehensive rebuild: building an IT team from scratch and developing an internal control system; establishing branches before opening stores, hiring a large number of provincial managers, expanding, marketing, and user operation targeted in each region; promoting a major product strategy, focusing on the "Boya Juexian," and eliminating fruit tea; as well as opening a national flagship store in Chengdu Chunxi Road to upgrade the brand image of霸王茶姬.

For XVC, Zhang JunJie's performance as the founder continues to exceed their expectations. A person close to Zhang Junjie told the late night report that his vision is very large and long-term, but he can manage his ego well and make objective decisions. An example is that Zhang Junjie spent a long time recruiting a senior executive he particularly liked, but the investors disagreed; after a few weeks, he found the match was not right and immediately asked the person to leave—he wouldn't avoid issues just to maintain his so-called status but is able to address things directly.

Another thing that has changed the perception is that Zhang Junjie did not let his personal aesthetics influence the brand upgrade. Zhang Junjie was once proud of the initial national trend design of霸王茶姬. However, he quickly restructured the brand team, spending more than half a year discussing with external consultants to develop a more modern, minimalist brand, store, product, and packaging, thus upgrading the brand to a different appearance.

A person close to XVC said that after seeing the luxurious-looking "Tea Horse Road Cup," the team's reaction was "brilliant idea," realizing that Zhang Junjie had advanced again.

After the new brand image was implemented in the flagship store, Bawang Chaji immediately held a Board of Directors meeting. A consensus was reached that Bawang was ready and "can expand now." Zhang Junjie also decided at that time to initiate a third round of financing.

This was in 2022. The capital winter swept through the Consumer industry, with almost all tea brands' single store efficiency declining. It became difficult for consumer brands to raise as much money as before, while Bawang Chaji's data was still not bright enough; for example, store efficiency did not exceed 0.2 million, and they lost tens of millions in 2021. Zhang Junjie contacted thirty to forty investment institutions, and even made a special trip to Peking to meet investors during the peak of the pandemic, but no one was willing to invest. An investor who was recommended to look at Bawang Chaji believed that they hadn’t defeated other brands in Zhejiang, Fujian, or entered into direct competition in Changsha and with Chayan Yuese, and thus ultimately did not invest.

XVC and Congbi Qiushi decided to invest themselves. Just before the financing closed, Coatue entered as a co-investor. In the end, Bawang Chaji raised 0.33 billion in the third round of financing, with a post-investment valuation of 3 billion, and XVC held more than 20% of the shares.

The investment institutions that rejected Zhang Junjie would not have imagined that Bawang Chaji was on the verge of an explosion. They had prepared enough city managers and provincial managers and established a mature approach for expanding into new cities and provinces, standardized opening and management processes, and planned to open 2,317 new stores in 2023, a number that exceeds the total of the previous six years' store openings, while its doors to primary market financing had already closed.

Unlike Xicha, Mixue Bingcheng, and Guming, Bawang Chaji desperately needed VC funds.

In addition to buying back partner shares, this brand invested heavily in marketing. An investor who had early contact with Zhang Junjie stated that even when Bawang Chaji was still small, its online and offline marketing investments exceeded those of Mixue Bingcheng. According to Bawang Chaji's prospectus, in 2024, the company spent 0.78 billion on marketing expenses — it needed to educate the market and promote light milk tea products, in order to establish its own brand.

The founder of a leading tea brand once commented that the original fresh milk tea was an "old style" product that even fresh fruit time wouldn't consider making in 2010. Guming had previously listed light milk tea before Bawang Chaji, but after a while, it was taken off the shelf. It was only after Bawang exploded this product that it was re-listed. However, it was proven that even when fruit tea had disrupted the entire industry, consumers could accept simple milk tea and the healthy concept behind it under a new marketing wave. Furthermore, marketing inspirations like "attractive" packaging could manufacture a new tea drink trend.

The story of Bawang Chaji offers the most dramatic narrative in the tea beverage industry: an atypical entrepreneur who never received an education, alongside a non-top-tier VC, created the fastest reversing tea beverage.

XVC once wrote in a letter to LP entitled "Focusing on Seeking 'Scarce Features'": 'We are snipers, what we hope to obtain the most is a huge but inefficient market. In such a market, we can discover many 'diamonds wrapped in excrement' that go unnoticed. Moreover, the long-term inefficiency of this market is determined by the mechanism, it is determined by human nature.'

Beyond what was imagined when placing bets.

Looking back at the tea beverage industry today, there are too many changes that exceeded investors' imaginations when placing their bets. For instance, the three price bands initially divided by Longzhu have merged into two due to Heytea's price reduction in 2022.

Mixue Ice City continues to upgrade on extreme low prices and is constantly growing. As of the end of last year's third quarter, Mixue Ice City had over 0.045 million global stores, more than the combined size of the industry’s second, third, and fourth places. What surprised investors even more was that the Mixue brand reached a new stage, where 'people no longer think of Mixue Ice City as low, it's cheap, not deceitful, cute, and gives you a sense of spirit,' said Zhu Yonghua.

After sales and profits, only second to Mixue Ice City, Bawang Chaji continues its brand strategy—down to the pixel, benchmarking against Starbucks. This year, it has begun to try pushing 'the second cup of tea', using self-developed equipment to treat tea leaves like coffee beans, grinding and extracting them, divided into concentrated and light extracts based on the extraction level. In the English menu in the prospectus, the new product line is categorized as 'Teaspresso', corresponding to Espresso, Italian espresso. Its stock code is set as CHA, which is the pinyin of 'tea.'

Guming is extending its strategy along the core advantages it has established. It is the second tea brand to break through the ten thousand store mark, but Wang Yunan still controls the pace of expansion. Some investors have discussed speed with him during this process. Perhaps opening stores faster would not leave room for Bawang Chaji to rise, ending the milk tea war earlier, but this is a choice that cannot be verified as right or wrong, as overly rapid expansion could also be fatal.

Hu Ruodi previously commented for LatePost, 'Lao Wang's composure is truly remarkable. He believes that the tea beverage market ultimately boils down to street fighting; it doesn’t matter when you open, as long as you can do better than the one opening nearby. In uncontrollable situations, maintain control over your own pace.'

The biggest star of the year, Heytea, has no plans to go public. In 2024, Heytea announced its exit from the price war and in February this year announced a suspension of franchising. In an internal letter to all staff at the beginning of the year, it was stated, "In recent years, due to capital objectives and considerations of revenue and profit, the price war and blind expansion of store size have led the industry into homogenized competition and oversaturation of stores. In this process, user needs have been selectively ignored."

A key investor in Heytea reflects on whether not going public quickly after the last round of financing was a missed opportunity to wait for greater development. If they had gone public that year, external supervision might have helped entrepreneurs adjust earlier, "Nie Yuncheng is someone with strong reflective abilities, perhaps the franchising strategy would have been more cautious, and the opportunity for Ba Wang Tea to take his position might not have arisen." Heytea is still making continuous adjustments.

Consumer investors are also adapting to the ever-changing investment environment. Valuable new opportunities have decreased, and many institutions have disbanded their consumer teams.

Zhu Yonghua is still observing the consumer sector, "We need to be able to pick a few gems when the market is rich."

Hu Ruodi said that Sequoia China has pushed its focus to both ends, from early opportunities to mid-stage growth, and then to late-stage industry consolidation, aiming to lengthen the stages.

The investment story has come to a close with the listings of Mixue Ice City, Guming, and Ba Wang Tea. Any story can be simplified—protagonists and supporting roles, winners and dark horses, success or failure, first place or second place. For entrepreneurs, they know the perilous and lengthy process well, and opportunities and risks always coexist.

Mixue Ice City had been operating for 23 years when it opened financing, Guming was seen by institutional investors in its 9th year of entrepreneurship, and Zhang Junjie of Ba Wang Tea first expressed interest in creating a Starbucks in 2020 when dozens of investment institutions did not understand and some were not even interested in meeting him.

The founders of the tea drink industry have created a large market and rewarded capital, but the story is not over. Those who were not mentioned by name may remarkably appear in subsequent stories.

Editor/rice