Chapter 19: Rejecting the Wager

Liao Wenwen from Green Tree Capital also provided a response. Their primary concern remained a difference in opinion regarding valuation methodologies. During a conference call via Tencent, Liao spoke to Old Jia with an air of indisputable authority: "Mr. Jia, regarding the valuation of this project, we could reference market precedents for similar products, but we must sign a valuation adjustment mechanism agreement with the actual controller or major shareholders."

Old Jia retorted immediately: "That is out of the question. We will not sign any such agreements. Dr. Yu Ying and his team are a university-based research group; how could they possibly enter into a gambling-style agreement with you? Even if this project were to fail, we would not hand over the major shareholders' equity to you. If you were to become the major shareholders, you would only sell the project off as scrap metal! Scientific research projects carry significant risks, but even in failure, their technical foundations and engineering pathways retain immense reference value and utility. As a venture capital firm, are you capable of re-evaluating the technical value of a failed project?"

Liao Wenwen paused, then immediately argued her case: "If a project fails, it has no value. Even if there is technical accumulation, if no further application scenario can be found, the valuation is meaningless because it cannot be monetized. Our funds have a seven-year term, and our investors cannot wait that long."

Long Wuyang interjected, "Developing an aircraft is not like building a car; you cannot produce an excellent aircraft without twenty years of refinement."

Liao added, "We are very keen to participate in the angel round, but the maturity mismatch is a real issue. We have never worked with an industry with such a long cycle as aviation. Even in the longest-cycle industry, biopharmaceuticals, there are opportunities to exit midway. Therefore, we need a mechanism that allows for a mid-term exit. Some of our investors are particularly insistent on this clause. Furthermore, if the local government platform company becomes the major shareholder, could they provide a guarantee?"

Mr. Jia replied with ironclad resolve: "The local government is even less likely to provide you with a guarantee. With equal shares come equal rights; why should other shareholders provide you with a safety net? How do you venture capitalists still hold such outdated notions? It is time to change your mindset. Why don't you design and issue a series of funds, rolling them over to resolve the issue of using short-term capital for long-term investments?"

Liao seemed deflated: "We are only putting these requirements forward for now, but we still need to consult with our funders. If there are some safeguard measures, it will be easier for us to negotiate with them. If all else fails, issuing a series of funds is not entirely off the table, but that would greatly increase the difficulty of building a target pool."

Old Jia laughed: "Your series funds could all be invested right here in Jingchu City. Issue a Jingchu Regional Fund, roll it over—there are plenty of good projects here. Once this drone project launches, it will drive an entire industrial chain, from aviation materials to avionics and aero-engines. You can invest in all of them; the projects are endless."

"Could the Jingchu City industrial fund subscribe to some of the shares?" Liao Wenwen finally revealed her true agenda.

"After all this circling, you're looking to raise capital after all!" Old Jia thought to himself with a smirk, while casually agreeing: "That can be considered. I can suggest it to Chairman Hong Jun. If you cooperate to issue a series of funds for investment recruitment in Jingchu City, I don't think that will be a problem."

"That would be wonderful! If we can do that, we could issue a series of funds, with us acting as the General Partner and Zhanghe Aviation Investment as the Limited Partner," Liao said excitedly.

"Hold on, hold that thought!" Old Jia hastily cut short her daydream. "I promised to help you talk to Zhanghe Aviation Investment about investing, but I never agreed to let you be the GP while they remain the LPs. How the fund structure is designed is something the three of us must discuss together. Don't try to take control of the host's house. In this project, you will always be a supporting player." Old Jia crushed her confidence without mercy.

Seeing the sparks flying, Long Wuyang feared the project might fall through and whispered to Old Jia, "Uncle, aren't you being too harsh? Won't you scare the financiers away?"

"Rest assured, I won't," Old Jia comforted him confidently. "These funds are the type to bully the weak and fear the strong, simply because few of them truly understand high technology. Most of their investments are just following the trend, much like you retail investors. Their risk control method is the valuation adjustment mechanism. Just like banks, if a loan cannot be recovered, they turn the debt into equity and become shareholders. If their fund's investment cannot be exited or monetized, they demand the major shareholders buy it back or pledge their own shares to them so they can sell them at a low price to recover cash and mitigate losses."

"Mr. Jia, you are truly impressive!" Liao conceded. "Then I will trouble you to take the lead in setting up the fund. We will certainly cooperate and play our part well. However, we still have to do the work of convincing our funders; that communication will be quite arduous."

"I believe in your ability to communicate. If needed, I can cooperate with you to talk to your funders," Old Jia said with satisfaction, then followed up with a question: "What is the background of your funders?"

Liao answered proudly: "Oh, there are all sorts of investors, all very powerful in the market, and some are foreign capital."

"Foreign capital?" Old Jia asked, surprised. "If there is foreign capital involved, I am afraid you cannot participate in this project, as it involves military-related matters."

Liao became nervous instantly. "Let's not discuss the issue of foreign capital for now. If absolutely necessary, we can choose not to involve foreign capital."

"Then, can we set a timetable based on the project's progress? And for each milestone reached, we can revise the valuation. If the tasks for a milestone are not met, would the major shareholders need to face some punitive measures?" Liao changed the subject again, circling back to the issue of the valuation adjustment mechanism.

"No!" Old Jia answered once more with ironclad resolve. "High-tech research and development certainly has a timetable and a roadmap, but whether we can complete the corresponding tasks and workload according to the schedule is hard to guarantee; we might even encounter errors in technical direction. We understand that capital has a need for security, but we cannot transmit this capital pressure to our researchers and shackle them. If we do, scientific research will be kidnapped by capital. Of course, we need capital for our research, but we hope this capital is truly patient—capital that conforms to the laws of scientific work, not capital that is eager for quick success and instant profit."

Liao mumbled, discouraged: "Very well. I will consult with our investors and report back to you if there are any developments."

"Agreed. I hope you will communicate well with your investors. Furthermore, I am quite concerned about the foreign capital issue. I hope it will not appear in the first round of investment. Otherwise, I suspect there will be problems." Old Jia warned her again.

"Understood. We will certainly avoid such a situation," Liao replied, sounding dejected.