Being a good VC is not just about coming in with the capital but the ability to stomach failures – yes, more than one failure – before you could start seeing any successful investments, says GGV Capital’s managing partner Jenny Lee, who has been in the industry for almost two decades.
Lee was instrumental in setting up Silicon Valley-based GGV Capital’s Chinese operations more than a decade ago, which saw the firm investing in unicorn startups such as Alibaba, Didi Chuxing, Xiaomi, Toutiao and Southeast Asia-based Grab. The venture capital firm today has over 40 unicorns across its US and China portfolios.
Lee says the differences between these two large markets are narrowing.
“Back then, most of the entrepreneurs in the US were serial entrepreneurs. They understood term sheets, VC and which investors to talk to. The cost and time to educate them were almost zero,” she said.
“While in China, back then, they were all first-time entrepreneurs – even Jack Ma was a first-time entrepreneur. You have to spend more time educating them where CEOs were less experienced. But today, there’s a lot of information transparency so we now see serial entrepreneurs in China who are very sophisticated and know what’s happening in the US and what they can get in China,” she adds.
Another difference would be the mindset of startups – the US ones are very single-idea and focused while the Chinese startups are very gung-ho and unwilling to give up even if the first business model did not work out.
“US startups, in general, tend to be single idea startups, they’re very focused – their ability to cross sectors is lower. In my view, is a little bit boring but very focused – they just do one thing, test one thing and then grow. Like Google, Instagram, Facebook on advertising. It’s the same model. Whereas in China, the entrepreneurs are way more creative, they’re also more consumer-focused.”
“Most of the companies in China don’t do advertising, they get consumers to pay through a subscription for content and so the Chinese products tend to be very customer-focused. Typically they don’t go around acquiring users and then show them advertising – they acquire users and then monetise them directly. The monetisation technique in China is more creative, that’s why you see Alibaba go from B2B to B2C to payments and cloud as well as Meituan from food-delivery to car-sharing.”
GGV is now betting on hardware after the consumer internet boom. What are the promising trends within that area?
We have 18 years of history of investing in both the US and China markets. What’s very exciting about this is that the two markets that we are in are the largest in the world. If you narrow it down to just China, it’s over a billion Internet users. Millennials in China are about 400 million. It’s 20 times bigger than, say, Singapore. You have to always look at the market size and potential. Two, the market is not an old market. It’s a young market and also a demographic that has grown with the PC and mobile internet era.
So the homogenous portion in terms of how they interact with the internet and consumer content, communicate, they have a very similar base. If you look at the global internet, there are only a few key operating platforms – iOS and Android. So this population grew up on a pretty standardised type of operating system – their usability and user behaviour are also very similar. So while the demographics of the age group is a very wide range, there is still a commonality in terms of how they consume the internet. If you’re a startup in the market, you have a first, immediate, huge addressable market.
If you start off targeting millennials, or say, women of a certain age group, you have a chance to broaden that market if you want to. China over the last many years has seen the growth of mobile payments. The ease of micro-payments has really helped the startups even in their early phase of growth to be able to monetise. Once you can monetise, you are less reliant on capital. And you can actually support a sustainable business model. So the infrastructure has also matured, not just payments. The logistics fabric is extremely well-developed today. It’s not just delivery of goods but also ordering food to getting a taxi ride.
The whole support infrastructure or logistics is now pretty mature. So this means as a startup, you don’t have to build everything, unlike Alibaba that had to build everything – the e-commerce platform, the payment platform, offline logistics, warehouse and all. But today as a startup, it can leverage all of these. You can be a social commerce startup that sells content. But the delivery of the product could be done by leveraging the existing infrastructure. China has also accumulated a lot of data over the past years, and data is key. It allows you to understand your consumers much better, giving rise to more personalised services. You can have more technology-enabled startups in the more traditional industries such as education and finance.
The other major explosion that is happening in China is IoT – you have connected homes, cars and factories. Those are the three areas where if you want to connect users to the environment, you need some form of hardware like [Amazon] Echo or Google Home. Or sweeping robots. Connected cars are also a huge market because cars are going electric. Once they go electric, it’s almost like a huge mobile phone but on wheels. So the whole infrastructure now becomes more similar to the connected phone but in a different environment. So with connected cars, you can talk about in-car communication and more. Due to increasing labour cost, data collection and automation, the factories are now getting more automated with the use of robots. That’s where the hardware is connected. But China isn’t all about hardware, it’s just one piece in addition to the consumer side.
GGV has done very well in spotting unicorns much earlier in their growth phase. You have been an early backer in DiDi, Alibaba and closer home, Grab. What do you think has helped you pick these companies?
We have over 40 unicorns across US and China. What we think about when we invest is that we don’t really think about whether these startups could be unicorns or not. Our investment judgement is based on a couple of things: we like to look at the addressable market – it has to be big enough so that it could sustain and be able to support the companies. We also look at the trend – we don’t want to get into it too early like 20 years too early or two years too late.
Being able to identify where is that growth trend becomes very important. These are the quantitative aspects. And then come the qualitative ones. Everyone can study the hard facts and numbers but there is identifying the right team. Do they have the ability to come up with innovative business models? And do they have what it takes? In ride-hailing, for instance, there is a huge network effect; only a few could make it. So the team that can really build a big company needs to have a certain type of skillsets. Those are the lens we use to filter the companies.
Other sectors like education, finance and medical are huge sectors but it’s not possible to have just one school or one bank. By design, it’s a fragmented sector. In that sense, the criteria we have will also evolve. There’s no fixed template. We also leverage the GGV relationship to help them whether it’s with financing, market direction or finding the strategic partners. Unicorns are formed by different methods, so there is no fixed formula.
Is GGV looking at more investments in Southeast Asia? What sectors would you be most interested in here?
We haven’t spent as much time in the Southeast Asian region but we do have four or five investments in our portfolio targeting the region, where a couple of them are headquartered in Singapore. We look at it as an opportunity cost – the companies we are interested in tend to have a wider footprint. They’re either targeting the entire region or they must have the ability to scale beyond one country. Also, the [Southeast Asian companies] tend to be the extension of the knowledge that we’ve acquired in the US and China. Just like we saw Uber in the US, we see Didi in China and now the ride-hailing trend is happening in Southeast Asia – so we understand it very early and then we can also help them by leveraging on the US and China markets.
So we see that through our experience and network as well as previous investors’ portfolio companies, we can help boost the charge. Alternatively, we’re seeing a bunch of technology-based companies in Singapore trying to sell their services to US and China. For example, Cashield. So if we can see that this startup has a technology advantage, and we can help them scale to either US or China or both, that’s outbound from Singapore.
Definitely, there are a couple of trends that have led us to consider doing something more actively in the region. One, Chinese startups are migrating and exporting their business model to Southeast Asia – Indonesia or the rest of the region. This trend is increasing in velocity. Two, we are also seeing the Southeast Asia market maturing. Indonesia has over 100 million internet users and their usage behaviour is very similar to China five to 10 years ago. So the maturing market on the consumer side is becoming pretty interesting. When there is entrepreneurial talent in the region, it does make sense for us to look at the market. And the fact that we were in China all these years, we have the natural advantage to track those companies that are exporting their business models and that makes us want to do a bit more. We’re now monitoring very cautiously how the Southeast Asia market will shape up. If it makes sense, we will do something more there.
Southeast Asia is seeing a lot of interest from Chinese tech giants such as Alibaba, Tencent and JD that are acquiring startups to strengthen their foothold and are increasingly facing off against each other. These companies are seen as the new competition for VCs in the region. Your thoughts?
I think in early markets, the availability of capital is very important. The biggest issue in Southeast Asia now is the funding gap. There are ideas – some good, some not so good – but when there is a funding gap, it will prevent or scare away entrepreneurs who have ideas because they feel that they cannot get funding or they get one round of funding and then they cannot continue. So historically, the funding gap is a big issue. Now with more players setting up investment funds, the diversity of capital is pretty normal as to how emerging markets grow. So I would say that it’s a positive trend.
In the level that the capital is interested in, it’s still not competitive enough. I would say that there’s still not enough capital going around. if you look at how China has grown, the first wave of capital wasn’t strategic – Intel, Microsoft, IFC, they are the ones who first started investing in startups and trained the first generation of VCs in China. After that you get USD coming in. I think Southeast Asia is at that phase now, it’s a net positive to have more players. It will give the local VCs more competition for sure, but it also means they can up their game. The local VCs may have thought that they get to seal all the deals and less was done on the value-add part after the investment.
But when you have strategic capital or GGV-type of capital coming in, we don’t just bring capital, we bring relationships, networks and experiences. And when you’ve fought a war in China, you have more knowledge since you know how battles are being fought. These battles are not about fighting over 10,000 users, it’s over millions of users. So the challenges, the pitfalls, all lessons learnt from the Chinese companies getting to unicorn status and IPO – those are accumulated experiences. Southeast Asia’s local VCs have not seen those. Maybe a few have seen one or two but they haven’t fought the battle. So when you have an influx of more experienced capital, it will make the ecosystem better and hopefully will end up having more experienced investors in the market. Better investors mean better companies will be funded, and those companies will have a chance to be successful in a shorter amount of time.
We don’t have a hard figure as to how many deals we want to close in Southeast Asia. In the end, if the market is good, and we can see emerging ideas, we will deploy. We have over $4 billion under management plus our RMB fund, we will continue to raise new USD [fund]. So if the region could take an additional $100 million to $200 million, we are happy to deploy. But no specific target. Could be zero, $100 million or $200 million, depends if we could find the right company. So we are definitely looking but are not bound by budget. For us it always has to be bottoms-up approach – every dollar invested, is it better in China, the US or SEA? It has to be return-driven and not politically-driven, we have no other agenda except finding the best companies.
SoftBank’s Vision Fund is believed to have upended the venture capital and private equity worlds as we have known them. How do you see this massive fund impacting the industry going forward? Has it forced investors to get creative in deal sourcing or put more pressure to raise larger vehicles in your opinion?
So the SoftBank Vision Fund’s impact is not just in Southeast Asia, it’s global. The impact is felt globally. They also tend to invest in later stages, because they are writing half a billion checks. It’s not necessarily bad, it’s actually useful for verticals or startups that are more capital-intensive. For startups, it’s positive. For investors, it’s also positive because with SoftBank coming in, early investors could exit and don’t have to wait until an IPO. They can then show the distribution of capital back to their investors (LPs) and their chances of raising a second fund go up – their survival [rate] goes up as well. But it’s not easy too.
Knowing how to navigate for the fund and with the large capital, it takes skills and experience. Knowing when to go talk to SoftBank, that’s very important as well. It will make the market more mature and over time, it’s good. It might also bring about the reorganisation of market players. So if traditional VCs don’t wake up, they may be overwhelmed. Having grown up in Singapore and seen the competition in China and US, it can be very different and the players are not novices. With Chinese VCs going into Southeast Asia, it means that incumbent VCs really have to grow up really fast. With varied capital, CEOs of startups could also grow up faster and if they become serial entrepreneurs, it’ll be good for the ecosystem. These are exciting times.
GGV has closed its first RMB fund. Why did you raise the fund now and how do you plan to use it?
It’s our first TMT (technology, media and telecommunications) RMB fund. In China, there are areas that are restricted and so those are the sectors that will benefit most from the RMB fund. Entrepreneurs from cybersecurity, media, content including sensitive ones, those tend to be regulated and they have to take RMB and not USD, it has to be a domestic structure. So we see the internet and content scene is very vibrant in China. So when there is content, there is censorship and control, so they are better to be invested in via an RMB fund.
Do you see the US-China trade war impact GGV Capital’s investment strategy or pace in the short term?
Not in the immediate term. The trade war impacts various types of businesses – consumer goods, soybeans, steel. So these are not the sectors that we invest in. By and large, the companies we invest in the US and China tend to be local-focused companies until they get to a larger size. And whether it’s social enterprise, commerce and robotics, they’re all domestic market-focused, hence it’s still early and we haven’t seen any impact. But if the trade war persists, going into five to 10 years’ time, then the whole macroeconomics will be affected. Consumption and consumption growth will be affected and subsequently affect the companies.
It’s been more than 10 years for you with GGV. What are the most valuable lessons you have learnt along the way?
I’ve been a VC for about 16 years where 12 are with GGV. Actually being a good VC is not just about financials. We are actually like entrepreneurs, we are like startups in terms of risk profile. Startups take 10 years to grow and we will have to survive along with them for more than 10 years to see the success because we need to have the capital and funds and when they are successful we need time to exit. So a good VC needs to be very patient and our ability to accept failure is much higher.
People said startups take more risks but not really. A good VC means having the ability to face multiple failures at the same time and buffer uncertainty and risks. Because we are working on not just one portfolio but 10 or 20. So say you have a 50 per cent hit rate, do you have the tenacity to continue funding or shut down those companies that failed?
And you will always see failures first before success. As a VC who has gone through all the cycles, resilience is important. If people think VCs are just the guys that write the checks, they have it wrong. That’s why people don’t stay for 10 years waiting for a company to grow because they don’t see the big upside that can come if they have picked the right company. If you truly like that business, you need to have the patience to see through it. And companies don’t grow in a straight line. Some look like they are dying but you could give them a push with your additional capital, which may result in a multi-billion dollar outcome. How do you keep that positive attitude to spot that little glimmer of hope when everything has died and then double down on that company?
You were recently named “one of the most powerful women in tech”. How do you feel about that?
I don’t feel, and I don’t really care, frankly speaking. It’s actually not important. In our business, what’s most important is our CEOs. Being there when the companies need me, to help them, give them that right guidance to make it or break it, and then to see them be successful – whether IPO or M&A, that’s more important. We are still venture capitalists, so we have to be responsible to our LPs, who believe in us and give us money. If a startup takes 10 years to be successful, it’s going to be 15 for the VCs and 20 for the LPs. The best folks are the investors who believe in us and me, fund after fund. These are the pool of audience that we care about. Everything else is not important.
There has been considerable discussion over the lack of diversity in the VC world. Has anything truly changed?
I don’t view the industry as still a male-dominated one. If you look at historical data it’s true but is it enough to say that you need to have more women or more men? It doesn’t. The formula for success is not gender-based. It is the ability of individuals like us to find and detect trends and be able to invest and help the company to grow. Those are the important things. It’s nothing to do with your gender or race, that itself has no implication or ability to spot trends, to help CEOs be successful. It’s an important factor that people are looking at historical data and say that we need more diversity but there’s no guarantee that more diversity will result in better investments.