Kuei Chen, SKS Capital: It’s All About Forging Human Connections
The founder of SKS Capital takes us through his selection process when it comes to investing in new brands.
Headquartered in Shanghai and Taipei, SKS Capital is a private equity investment firm that has worked with numerous brands across Asia. Founded by Kuei Chen in 2017, the company is constantly on the lookout for burgeoning brands that need that extra help in expanding their operations.
However, Chen has strict guidelines in picking the right brands to invest in. For Chen, it is pertinent that the brands he works with have great storytelling and possess a human aspect so that whatever product or service sold is meaningful.
Can you tell us more about SKS Capital, its heritage, and how have it has evolved from a family office to a General Partner? Also what inspired you to create the company?
To know about SKS Capital, let me share the history of our roots. Since 1960, the family business over the past two generations was beauty packaging. It started with my grandmother who designed the original matte black of MAC cosmetics, which is still the main product line to this day. She designed the colour with the two original Canadian founders before they sold the company to Estee Lauder.
When my father took the helm, he was the first to establish an overseas office to cater to brands like Helena Rubinstein, Guerlain, Estee-Lauder, Shiseido and many more. While my mother, on the eco-side of things, developed the first modern paper lipstick with Mary Kay two decades ago and other brands like Crazylibellule soon followed. We went from producing mass-market cosmetics to designing and setting packaging trends with luxury brands.
As you can see the entrepreneurial gene runs deep in our family, and as time goes by, the products and customers we work with have become more sophisticated and luxurious. We sold our company back in 2012 which let us transition from manufacturing ODM/OEM to family office and then to a full-fledge investment venture company with investments from limited partners.
I think in our generation we are trying to take it to the next level, using our industry knowledge and taking advantage of Asia’s growing consumer sector.
I have the inspiration to invest in Asian-made brands. No longer are we the generation of counterfeits. Brands are beginning to find their own DNA and being able to identify local consumers with increasing purchasing power. SKS would like to be at the forefront of venture capital (VC) that invests in luxury brands and assists them in transitioning from mass-market identity to prestige.
What advantages does SKS have entering this industry?
When I look at the VC scene in Greater China, I generally feel a big disconnect between investors and the consumer brands they invest in. I feel the brands lack proper representation of investors that align with their values and understand what the founders are trying to accomplish, whether it’s sustainability, unique product differentiation, or entering new foreign markets. Aside from just capital, most private equity or venture capital firms in Greater China or APAC often fall short of that. Being a millennial myself we share the same core values with the brands that are emerging in the spotlight.
I feel there is ample opportunity out here, I can really relate to the founders and agree with the company messages since we are from the same generation and on the same mission to solve problems that are handed down to us from previous generations. I feel many funds in Asia (with a few exceptions) are generalist or add very little value to companies and the whole consumer ecosystem.
To understand the consumer industry, it comes down to fundamentally understanding people. While most brands are catered to consumers of my generation and Gen-Z, and to put it bluntly, most venture funds in Asia are run by 60-year-olds trying to invest in brands for the 20-year-olds. Using an analogy, it feels like when we were growing up our parents were trying to dress us in the clothes they thought were “cool”.
In short, what I’m trying to say is, my inspiration for creating SKS is that I think it is our time; we are finally of age to invest in the brands we grew up with, that identify with us, and that represent us.
What trends and opportunities do you see in the Greater China market? And what has changed over the last few years?
China’s beauty consumption is huge. It’s a 79-billion-dollar industry, and market reports indicate the market will double by 2025. The beauty market grew by 29.9 per cent during the first half of 2021, and millennials and Gen-Z accounted for 69 per cent of that growth. We are definitely investing in the right market.
In the next five years, we will start to see a consolidation within the industry, from the increasing complexity of the local market, fast product life cycles, and brands adapting to consumer behavioural changes. All this is exciting news to us venture capitalists and Corporate Venture Capitalists (CVCs).
We began to see VC dollars pouring into the consumer sector. I don’t think investors or founders have gotten the formula right, to succeed and become a household brand. For investors, it’s a race to see whoever can spot the right brands and bring the right value-add. We would like to be at the forefront of that train wagon, through our experience, distribution network, and strategic limited partner that invests in us, we are able to assist promising brands and elevate them to another level of growth.
The beauty market in China looks very promising, but there is its downside and complexity. Can you explain what challenges you think the beauty brands are facing in Asia?
According to Mandy Li, founder of HBG a leading branding consultant agency, “the average life expectancy for beauty brands is 4-6 years.” I think that is the challenge, investing in growing brands and seeing them disappear in a few years. Another interesting piece of fact is that among the top 20 beauty conglomerates in the world, none are from China or Southeast Asia.
I think the trend now is the rise of domestic brands and its vertical integration. To be able to escape the herd and emerge as a winner, it will eventually come down to three key differentiating factors:
- Product quality and brand consistency
- Ability to penetrate foreign markets to increase brand life value and
- Having the right financial backers to support a team of ambitious and talented new generation of founders
We think we will see that happening in the next 5-10 years. To come back to your question, I think the challenge we are facing is convincing local brands to go overseas and not just looking at the domestic market. History proves that local brands life expectancy is usually 4-6 years but if you want to increase your brand life value you need to have a global presence.
This is where SKS comes to play. With years of experience serving global luxury brands and having an understanding and network of overseas distribution like Korea, USA, Greater China and Europe, we like to work with founders to develop a long-term strategy for international growth by upgrading their packaging and formulation. For example, it is easy to add fragrance to your skincare, but what does that smell symbolise? Does the fragrance provide a unique feeling, or a sense of warmth, the sense of smell is more than just sweet or dry?
Having a unique positioning creates a stronger brand image and increases premiumisation needed to foster international growth. When we look at domestic brands in China, our angle is a little bit different from our VC competitors. Not only do we look at brands that scale quickly in China, but we also ask ourselves could this brand work overseas.
Aside from beauty, what other sectors do you look at? Is there one particular investment that stands out?
I moved to Taiwan in 2013. I remember being introduced to a chain called 八方云集 “8 Way” — which is a pot-stickers and dumplings QSR (quick-service restaurant) chain. It was great comfort food that I have on a monthly basis.
We were lucky enough to meet the founding family members. They were from humble beginnings, and they shared very similar values with SKS. We really loved their franchise model that even being big they had strong community values. The founder provided many opportunities for employees to become small business owners themselves by reducing the franchise setup cost to only US$3,000.
If you don’t have the money, it’s okay, 8 Way corporate has a loan program that can help finance new store locations as long as you have working experience in 8 Way, so that way you understand the culture. 8 Way only increased their food procurement cost once in the past 18 years. I remember the founder said, “for a franchise to work, you’ve got to think of ways to make the franchisee earn money”.
One of our partners’ mothers ran a popular beef noodle restaurant in Suzhou, China, that was a big hit with the locals. She never had plans to expand but being a local favourite, it had to be of quality. The founder of 8 Way decided to use her recipe in one of their 100 fast-food chains called “梁社汉” or “Liang Shi Han” because the recipe included the unique spices and slow-braised beef which creates a multi-layer of thickness and taste to the soup. It provides an additional luxury touch to their menu.
When we heard this, everyone in the office was so touched and this would’ve never happened if we didn’t know the founder on a personal level and shared the same passion for food. I think my partner’s mother felt really honoured to have her recipe finally passed down and shared with more people who can enjoy it. It was a win for both of us. A rare value-add creation from SKS by providing recipes towards Liang Shi Han’s brand. In doing so SKS and 8 Way really cultivated a deeper relationship when we worked together. I don’t think many VCs can share stories like this one.
When you are evaluating brands ranging from wellness to beauty and food franchises, what are some qualities you look out for?
Understanding the founder’s value and mission statement is a significant first step. We usually see if their message is consistent throughout their product, digital campaign and if their team shares the same virtues. Then comes the products; we dig a little deeper by understanding how the product fits the market, who is the brand targetting, and how are they targetting? How is the product different from what’s out there? Is the product that the brand is offering necessary? Why would they buy from this brand? Does the product have a back story that resonates with their customers and ultimately fits into the company’s theme?
Because we are in the business of investing in people. Due to these two main factors, we can judge how good the founder is and how truly passionate they are about their business. It’s envigorating if the business has a synched message and a really cool product that we would want to buy ourselves.
Before you invest in a company, it is important to establish trust with the founder. How do you then build trust with them?
It’s tricky when you are meeting the founders for the first time. I have had meetings where the financial advisors told me not to even talk about their business in our first meetings. The first meeting is for founders to evaluate the investors to see if they can relate, have the same interest and values.
But most meetings come down to this: on the one hand, you have to show that you are an expert in your area, someone with a vast network and can provide value; but on the other hand, you are meeting the founder for the first time, and you don’t know their business like the way they do. So I think you should be all ears and come in with a curious attitude and try to really understand where they are coming from and the reason behind their action each step of the way.
The first part is easy, but winning trust can’t be done through presenting numbers. I think one has to be humble, because we are coming in as an outsider to their business which was built with blood, sweat, and tears. I usually try to relate with my family experience because our family is filled with entrepreneurs.
We know how precious it is in the minds of founders. Through our interaction, they can feel our commitment to building a long-lasting brand and our passion for their company. This helps to skip the surface-level protocols and get into the meaningful and personal goals really fast, and by the end of the meeting, we end up getting to know them at a more personal level than when we started.
What is your favourite part of managing SKS Capital?
Talking about branding, whether the brand has years of history and trying to reinvent themselves or a KOL wanting to co-work with us to launch a new product. It’s always fascinating talking to them because it’s where real genuine conversation happens. They don’t look to us for funding but really try to exchange ideas and to see what can work and what can’t. The numerous rounds of engaging with the many founders on their vision have helped us really understand the consumers from a different angle, not just the VC angle.
We have all sorts of people coming in, from KOLs who want creative packaging solutions, online beauty enablers and distributors discussing the future trend of brands, to second generations coming back home to take over their family’s helm and wanting to reposition the brand while not losing its heritage. I think all of it is exciting. We call on everyone in the company at SKS to listen and exchange notes with the founders to see where we can help out.
What are some social responsibility issues SKS is solving through the investments it makes?
Sustainability. During previous generations, everyone was focused on accelerating the speed of industrialisation, but it came at a great cost. Sustainability is about the brand and personal values, it’s an attitude and that is beyond just capability and finance.
Pan Farm is one of our investments that deal with sustainability in an effective and direct way. This agricultural firm focuses on an innovation technique called Plant Breeding by producing high-quality and high-yield seeds that display pest and disease resistance without harming the environment. Plant Breeding creates and transfers different plant varieties, which also makes the plants more resilient to climate change. This solution in turn enables farmers to increase the productivity of their harvests.
A lot of people ask us why we continue to invest in what I call “manufacturing solutions,” it’s because I feel that the manufacturing industry has transformed. Not in a way where we produce faster at reduced costs. It’s more about solving the problems that brands are facing. When we learn more about the brands and their mission statement, we try to design and manufacture in a way that supports their message.
For a clean beauty brand, we figure out how we can use ocean waste plastic in their cosmetic packaging, how do we design a bottle that reduces chemical wastage by eliminating the hot stamping process that requires foil? We need to figure it all while maintaining a cost-sustainable solution to the brands, and SKS is interested in investing in manufacturing companies that tackle these kinds of problems.
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