The two lifelines that helped Nio pull through its toughest times

William Li has once again worked his magic.

On December 27, 2023, Nio announced a strategic investment of USD 2.2 billion from Abu Dhabi investment firm CYVN. Coupled with CYVN’s previous investment of USD 1.1 billion in Nio back in July, the Chinese electric vehicle manufacturer raked in a total of USD 3.3 billion in funding from CYVN last year.

This is the kind of Middle East funding that companies wanted to score in 2023.

The last time Nio got a capital lifeline was back in early 2020. In 2019, Nio was cash strapped, and it was the Hefei municipal government that came to the rescue, investing RMB 7 billion (USD 990 million) in equity to “pull Nio back from the ICU,” just as it did with BOE Technology Group.

In the eight years under Li’s helm, Nio has navigated over 20 rounds of financing, amassing over a trillion RMB of funding.

CEOs are the ultimate maestro of investor relations (IR) at their respective companies In this respect, Li could very well be the most financially attuned IR manager in China. From large-scale dollar funds to government-guided funds, and most recently to the expansion of Middle Eastern capital, Li seems able to find the money needed most at the right time.

Hefei’s capital arrived in Nio’s hour of need

In the race to become China’s first EV company listed in the US, Nio once seemed to be leading the pack. However, the global landscape would take an unexpected turn right before the company’s IPO.

This grim atmosphere persisted until the end of 2019, with Nio’s stock price plummeting from its peak of USD 10 to a low of USD 1.32 in October that year, wiping out over 80% of its market value.

One of the most notable sell-offs occurred during this period. By the end of 2019, Hillhouse Capital, which had a 6.2% stake in Nio as of February that year, completely divested all of its Nio stocks. HongShan (formerly known as Sequoia Capital China) chose to reduce its holdings around the same time as well.

The exit of top-tier funds carries significant signals. Insiders told 36Kr that a state-owned enterprise interested in understanding Nio’s situation had once met with a major shareholder over dinner. During this meeting, concerns were raised about Li’s “reckless spending” and Nio’s high management costs. The latter remains a widely discussed issue today.

Li was on a relentless quest for funding. According to 36Kr, sources with knowledge of the matter said that Li even reached out to a major shareholder, one of the country’s top “deep pocket” institutions, but received no response.

Market-driven funds were running dry.

In 2019, Li visited Beijing’s E-Town Capital as well as various local governments including the Wuxing district of Huzhou, Changsha, Xi’an, and Qingdao. E-Town Capital and Wuxing were considered the most promising prospects at that time.

However, a series of battery incidents involving Nio during this period scattered the potential RMB 10 billion from E-Town Capital. The Huzhou municipal government’s intended RMB 5 billion investment also fizzled out due to perceived project risks and management issues.

This set the stage for the Hefei municipal government to make its entrance, adding a sense of destiny: neither too early nor too late.

This story is characterized by a twist of fate. At the time, Li sent a new year’s greeting message to the chairman of Anhui State-owned Capital Operation Holding Group, leading to a scheduled meeting. Notably, the message was sent on January 8, after Li had been rejected by 18 cities in a row.

As a city adept at attracting investments, Hefei had taken bold leaps twice before Nio: first, allocating a third of the city’s fiscal revenue to invest in BOE Technology Group during the financial crisis, and later in 2016, investing over RMB 10 billion (USD 1.4 billion) in semiconductor companies like ChangXin Memory Technologies.

These experiences provided Hefei with a deeper understanding and the ability to make calculated bets.

According to sources, Joy Capital also played a crucial role as a mediator in bringing Nio to Anhui.

In April 2020, Nio officially inked a deal with Hefei, injecting RMB 7 billion (USD 986.6 million). But that was just the beginning—Nio later revealed plans to centralize its business development in Hefei, establishing a R&D base while deepening ties with local industry chain players like JAC Motors.

Photo of a ceremony commemorating the completion of Nio’s vehicle pilot center in Hefei. Photo and header photo source: Nio.

From that point onward, Hefei’s reputation as the “city of venture capital” solidified.

In contrast to the wave of funding from local government and state-owned investors in the primary market over the past two years, Li realized the shift in capital trends earlier than others.

According to Jenny Zeng (also known as Yu Zeng), managing partner at MSA Capital, Li’s decisiveness and strong delivery capabilities, coupled with superior “data points” and awareness, set him apart.

In fact, even before Nio’s underwhelming performance in the US market, Li once confided in his wife that “an era has ended.”

The best form of capital is not just cash

Li’s knack for spotting the “money trail” has once again come to the forefront.

While expanding into the Middle East has been a pivotal move for Chinese companies and institutions over the past couple of years, most have reaped meager rewards. Nio, however, seems to be the exception, not just because energy transition is an investment focus for the Gulf nations, but also because it’s the company that has secured the largest amount of capital among its peers.

Interestingly, Nio wasn’t the first to catch the attention of Middle Eastern investors. In June 2023, Saudi Arabia’s Ministry of Investment joined hands with Chinese automaker Human Horizons. CH-Auto, another Chinese automotive manufacturer, inked a collaboration with Manaseer, one of Jordan’s largest private companies. In October 2023, Beyonca and Pony.ai also announced that they had closed investment deals in Saudi Arabia.

The value of all this cash lies not just in its amount. Beyond the funds, the Middle East, with its stable policies and immense spending power, is undeniably an enticingly large market.

Li Auto is reportedly gearing up to expand overseas in 2024, with the United Arab Emirates, Saudi Arabia, and various North African countries among its initial target markets. Xpeng Motors and Zeekr announced their plans to enter the Israeli market in July this year. In the following two months, Leapmotor, HiPhi (Human Horizons), and Hozon Auto joined the fray with announcements of their respective ventures in the Middle East. The underlying geopolitical dynamics make for an interesting topic amidst these collaborations.

The Chinese automaking industry, once compelled to “exchange technology for market access” to cooperate with foreign firms, has witnessed a reversal in 2023.

An industry insider who has invested in Nio said that, whether it is Volkswagen putting money into Xpeng, or Citroen backing Zeekr, it is becoming increasingly obvious that, “in the era of new energy vehicles, China’s emerging automotive players have attained world-class competitiveness.”

The investors that rode the waves with Li

Among Nio’s venture capitalists, Joy Capital stands out as one of the few that extended a helping hand during the company’s low points.

The initial story of Joy Capital’s investment in Nio is well-known. What’s less known is that even before the USD 7 billion lifeline from Hefei in early 2020, Joy Capital had already doubled down on its commitment to Nio with an additional investment of USD 30 million.

On February 6, 2020, Nio announced a USD 100 million funding round, with a notable investor referred to as an unaffiliated Asia-based investment fund. That investor turned out to be Joy Capital.

However, Joy Capital’s USD 30 million investment came in the form of convertible bonds, which give the holder the option to convert them into stocks at a predetermined price.

This move made sense at the time. Back then, when Nio was teetering on the brink, the investment risk was substantial for a VC firm, and providing assurance to the fund’s limited partners was paramount. Liu Erhai, founder of Joy Capital, diversified this investment across several of the firm’s US dollar funds to minimize the risk for each individual fund.

Joy Capital’s bonds were later converted into stocks, and Nio’s stock price quickly soared, reaching a high point that surpassed USD 60, while Joy Capital’s entry price was a modest USD 3. This investment turned out to be one of Joy Capital’s ventures with the best returns. Liu later disclosed that the returns from this investment were akin to “recovering several funds.”

Moreover, Joy Capital’s initial USD 30 million served as a benchmark for pricing the remaining USD 70 million that Nio received from that round.

Several VC firms have close ties with Nio. One widely known example is Li’s strong connection with Annabelle Yu (also known as Yu Long), founding partner of Bertelsmann Asia Investments (BAI Capital). Li once gifted Yu’s daughter the owner number 0003 for the ES8 model, highlighting his relationship with Yu. However, Yu is not a director at Nio, and BAI Capital has not invested in Nio. Yu told 36Kr that Nio is a game for big players. However, BAI is a limited partner of Joy Capital, and can somewhat be considered an indirect backer of Nio.

Besides Joy Capital, Tencent also reignited its interest in Nio, albeit undertaking a more cautious stance. In September 2019, Nio issued USD 200 million in convertible bonds, with Tencent subscribing to USD 100 million, and the remaining half being personally subscribed by Li, using his pledged shares of Yiche.

A source close to Li and Tencent’s top management told 36Kr that, during the Nio executive meeting in Q4 2019, Tencent’s representative investor issued an ultimatum to Nio management: “Solve the money issue within two months, or control expenses.”

Another noteworthy player is Baillie Gifford, a significant investor since Nio’s IPO, when it became the largest shareholder after Li and Tencent. It held onto Nio’s shares even during the company’s downturn. Baillie Gifford’s  holding of its stake in Tesla since 2013 and enduring Elon Musk’s rollercoaster journey for a decade might also provide some context on its view of Nio’s prospects for the future.

What it means for a fund to miss out on the EV boom

A few years back, Huang Mingming, founding partner of the Future Capital Discovery Fund, said that domestic institutional investors can be roughly categorized into two camps: those who invested in EVs, and those who didn’t.

While Huang’s words may be subjective in nature, Future Capital’s involvement in seven funding rounds of Li Auto’s funding speaks volumes on its own. Whether a fund has made strides into the EV landscape, and to what extent, is notably now a significant indicator of its overall performance.

Over the past two decades, the ranking of Chinese funds were significantly shaped by their moves in the mobile era. The likes of Nio, Li Auto, and Xpeng, representing the EV realm, happen to sit at a crucial crossroad between the internet and the manufacturing sector, with the latter pointing toward a major capital battleground for the next decade.

Wang Huadong, partner at Matrix Partners China, once said that investing in Li Auto holds significant importance for him, not just for the investment itself but also for realizing a larger world beyond the internet. Another Nio investor echoed a similar sentiment. “For Tencent, early-stage Nio was a key to entering the automotive industry. Now, Nio is more of an ongoing project, and whether Tencent will continue to support hinges on its performance,” the investor said.

Zhang Lei, founder and chairman of Hillhouse Capital, decided to invest in Nio after an encounter that unfolded against the snowy backdrop of the Changbai Mountains. During a conversation with Li, Zhang said, “You’ve done well in the internet space, what else can create greater value?” Li shared his vision for new energy vehicles, and Zhang greenlit the venture on the spot, subsequently doubling down on multiple occasions.

In HongShan’s case, it was founding and managing partner Neil Shen and partner Caroline Fu who hashed out the details with Li. Although the discussion took a while, the decision to invest was made swiftly.

Interestingly, as the heavyweights of China’s primary market, both HongShan and Hillhouse Capital have had rather modest performances in the EV sector. Hillhouse’s exit from Nio is widely known, and while HongShan invested in Nio, Xpeng, Zeekr, and WM Motor, its overall stake is limited. Later on, HongShan also merged its industrial investment team with its outfit overseeing technology, media, and telecommunication (TMT) deals, shaping into its current high-tech focus.

The secret to William Li’s investor relations

When it comes to fundraising, Li’s track record stands out. Before Nio went public, it had garnered support from over 50 investors, raising over USD 2.4 billion in six funding rounds. Li once expressed the challenge of turning down potential investors, emphasizing the difficulty of convincing those eyeing a USD 100 million investment to settle for USD 30 million, and similarly persuading those considering USD 30 million to opt for USD 10 million.

This was not an exaggeration. In a widely circulated video featuring a conversation between Zhang Zetian, prominent Chinese investor and wife of JD.com founder Liu Qiangdong, and Wang Yizhi, former host of CCTV, details surfaced about Liu’s initial investment in Li. When Li dined at Liu’s residence, he spent 15 minutes laying out his vision, and Liu took just ten seconds to say yes. As for getting Jack Ma on board, it was said to have taken only an hour.

How did Li achieve all this?

According to an investor familiar with Li, this stems primarily from Li’s shrewd exits through the IPOs of Yiche and Yixin, as well as the strategic exit from Mobike. This made everyone involved understand that working with Li can be profitable.

As for the unwavering confidence in Nio during its toughest times, Joy Capital founder Liu cited an episode from a Nio Day event. He said that, at the time, he felt a strong sense of loyalty among Nio’s fanbase. Yet, this emotional connection is just one piece of the puzzle. More importantly, Liu believed in Li’s top-notch entrepreneurial skills, combined with Nio’s rising delivery numbers and the company’s positive cash flow.

However, investor confidence was ultimately boosted the most by Li investing substantial amounts of his own money into the venture.

Even Lei Jun, CEO of Xiaomi, who initially viewed car manufacturers as potential scammers, had his skepticism dispelled when he asked Li why he would endure additional hardships after having already achieved success. Li did not provide a clear-cut response, but he said he was personally willing to invest USD 150 million. This resolute commitment played a pivotal role in convincing Lei.

Under Li’s charge, Nio has ostensibly become one of the ideal choices for USD funds and various venture capitalists to invest in.

According to a Nio investor, during 2014 and 2015, nearly all major USD funds recognized the emerging trend of EVs. They sought a project to replicate the relative success of Tesla, and Li’s Nio emerged as the perfect candidate.

Song Chunyu, senior partner at Lenovo Capital, was among those who invested in Nio. Song said that traditional automakers had begun to face setbacks while newer car manufacturers prospered because EVs represented a new frontier, which “must be disrupted by cross-industry pioneers. Li, staging his comeback after a two-year hiatus, became a prime example of what Song defined as a cross-industry pioneer.

If money adheres to the law of attraction, then Li’s ability to attract capital is undoubtedly a testament to his skill in uniting people under a common cause. He has consistently shown little trepidation in the face of larger forces, demonstrating a willingness to accept failure, tolerance of capital influences, and ability to prioritize the growth potential resulting from such collaborations.

In many ways, this approach has played a crucial role in sustaining Li’s successful fundraising endeavors to the present day.

An unexpected twist

Surprisingly, the list of Nio’s rescuers includes a formidable competitor: Tesla. Initially, Nio planned to establish its manufacturing facility in Shanghai, receiving significant support and more favorable conditions than Tesla. Consequently, Nio had made substantial pre-orders for long-cycle equipment.

However, complications arose after Nio went public. Failing to secure the planned USD 2 billion, construction of the Shanghai facility was put on hold. To shuffle funds, Nio sold the pre-ordered equipment to Tesla, which needed the equipment to keep pace with its accelerated factory construction schedule.

On the surface, this deal saved Tesla approximately 6–7 months of waiting time. However, without the money Tesla paid for the equipment, Nio could have faced a serious risk of collapse.

​​​​KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Yu Lili and Shi Jiaxing for Waves (36Kr).

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