With more Southeast Asian consumers getting into the Internet, on the back of cheap data rate, the region could see more innovation and more business models to be formed, which in turn will mint new unicorns, says GGV Capital’s managing partner Jenny Lee.
Lee, who was keynote speaker at DEALSTREETASIA’s Asia PE-VC Summit 2018 in Singapore on September 12, hinted that Indonesia, with 120 million consumers getting on the internet, and other Southeast Asian countries with rising number of internet users have the potential to produce the region’s next unicorns.
“In markets where consumers are getting in to the internet fast at very cheap data rate, it will allow more innovation, more business models to be formed and therefore I do believe there will be more unicorns. But I am not here to predict what those unicorns are,” she stressed.
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. In the past 18 years, GGV Capital has invested in about 300 companies and now has 46 unicorns in its porftolio.
In a fireside session at the summit, she talks about investing in unicorns, valuations, and the stiff competition in the VC space.
Let’s start with the headline of the week. Alibaba, one of your investees, has seen Jack Ma stepping down as chairman. What are your thoughts on that?
Alibaba is one of our early investment. We invested in all three timeframes when Jack Ma was just learning to be an entrepreneur. But he’s always been eloquent, he’s always been able to sell his vision and so to see him go on this fantastic journey, when we got in on all three to now when he announced that he’s going to step down, I think it’s been a very good long phase.
Jack Ma will never retire. That is our understanding but I think that what Alibaba is going through today, he has a platform, he has a platform of not just a business strength but he also has a great platform of talent and that Alibaba will continue to attract the right kind of talent, the right kind of managers to help run those businesses.
For Jack to be able to take a step back with the company approaching $400 billion to $500 billion, it does make sense for the chairman to step back from day to day and really to think about what’s next, to get from where they are today to the next milestone, which probably in Jack’s mind is beyond the trillion.
Lately, there has been quite a lot happening with your portfolio companies like Didi. With what happened to Didi will it help you to steer the growth of Grab? What could Grab learn from this?
We see these are all great companies. I think one of the things that I’ve learned as VC is that you know there’s a lot of signs. We need to try and investigate whether the company’s business model makes sense, whether the technology makes sense, whether the product makes sense.
But there’s also the people aspect, which is learning how to manage culture. Based on my 18 years with GGV Capital, I’ve learnt that at the topmost position, it’s actually about pattern recognition – being able to see trends emerge from US extending those trends to China. And as the consumer behaviours are getting more standardised, we can extrapolate and deduce that such trends could come up in Southeast Asia as well.
In the ride-sharing space, which we consider as a huge transportation disruption sector, the core of the disruption is in the consumer. It all starts with the consumer hailing the ride on the street to having the car come to you. We’ve also seen that when it comes to transportation disruption it’s not a fixed distance. We are talking about the different distance that you have to travel and so whether you are going 50km or 100km, when you trim that down to 20 km to 10 km, you will see that the mode of transport for consumers is going to change.
Those are the learnings. We focus on the consumers. We see if this is a core consumer change that’s happening. And when it happens its going to happen very fast. So whether its Uber coming out in the US initially and then China really getting into ride-sharing very quickly. As we think about what potentially could happen in Southeast Asia, that’s what we see. In the domestic country or region that they are targetting, how fast are the consumers going to adopt the new shorter range transportation method? Compare the Europe with the US and then the Chinese market. Each of them has difference preferences. While there would be similarities it is very important to look at the actual country and actual consumer behavior.
GGV has over 40 unicorns under the belt, have you spotted any interesting counterparts in Southeast Asia?
We have 18 years of history, have invested in about 300 companies, and now we have about 46 unicorns, so our hit rate is actually pretty good. But we admit that we’ve also been extremely lucky. The US market has been huge, the China market has been huge. So the combined two markets have allowed us to see unicorns emerge across all sectors, whether its transportation, in education, in fintech, even in gaming, which was one of the sectors where investors think we’re betting on a one-hit wonder and it’s going to be hard.
The market allows us to look for the right company that has the right ingredients to grow to be a unicorn. I’m new to Southeast Asia and I’m here to learn. But based on what the panellists have shared, I believe Indonesia and some parts of Southeast Asia have seen emerging unicorns. We believe that as more and more consumers get on the internet, in markets where consumers are getting into the internet fast at very cheap data rate, it will allow more innovation, more new business models to be formed, and therefore I believe there will be more unicorns. but I am not here to predict where those unicorns are.
Touching a bit on from a founder’s perspective. What is the key to securing investments? Is it based a lot on personal relationship? How do you separate that?
As a VC, we are first and foremost, professionals. We manage multi-billion dollar funds and all our investors are institutional investors from public pension funds to endowment funds to family offices. These capital are precious and hard-earned capital. Our first duty is to ensure that the fund performs and that our investors and LPs make the return.
Our job really is to ensure that when we make those investments, we are making those investments because we think those are companies that can really drive returns and they can really do well. It’s really hard to say “hey, we are pals, we are classmates, can you just do a little?”. Now if we do that that’s because we may use our own seed capital to support you as a friend but not with the fund.
What we have seen over the last 18 years is that entrepreneurs appreciate this level of professionalism. They come to us, they come to VCs because they know VCs will help them become successful, and, in our case, bring resources to help them. For my Chinese companies who’d like to go to the US, I could get my US counterpart to help them. And for my US companies to head to China and Southeast Asia, we could help them. So I think the professional part is very important.
Having said that, we’re a people business. That level of interaction and empathy with the company’s CEO and also, in our case, we always work with entrepreneurs that we can have buy in – we share the common vision, their painpoint, and when entrepreneurs go through ups and downs, we hope to be their first call.
Yes, I have talked about product-market-fit. But I always have to emphasize that if the investor or VC has to work with the entrepreneur for 5-15 years, then that chemistry between them is actually very important. Because I have never seen despite our 40-plus unicorns, I have never seen a single company that has gone up straight.
They were successful because they continue to solve problems. Between 0 and a billion you have to get through the 1 first. It could be a $10 million, a $100 million before you get to that billion and that path will be fraught with many challenges. As VCs, we are not just capital guys. We are here because we have a chance to make a difference – especially in Southeast Asia where it is up-and-coming, to find that next Jack Ma, that next Pony Ma of Tencent, to give the underdogs a chance to make it.
It’s competitive in China where you are based. How does GGV Capital differentiate itself from all the other VCs?
If you want to be a VC and if you choose to be VC, you should know that you are in for battle. There’s no easy time. If you won 10 years ago it doesn’t mean you will win tomorrow. If you won yesterday, it doesn’t mean you will win again tomorrow.
I do feel that everything that we have done only allows us to accumulate that pattern recognition, only allows us to accumulate the relationship, the referral that we can help leverage to do additional due diligence, to find out more before our competitors come in. If you can get there the day before, that obviously helps.
There is no shortcut for just being in the market, for having the competitive spirit, and then being able to deal with competition. If you are a VC and you cannot deal with competition, you are probably gonna be dead in the next cycle.
Our partners get together every quarter, every three months, not once a year, to discuss what’s changing in the fundamental market, what’s changing in the consumer behaviour, and then to recraft and ask “is there more that’s happening that we can stay ahead?”.
First, we educate ourselves. We make sure we are on top of the trends that we are looking for. We cannot be expert on everything but for the areas that we are targeting, you have to be out there, out there learning, out there talking to the entrepreneurs, staying close to the grassroots.
What about valuations? It is a common discussion among VCs that we have skyrocketing valuations. Is that a concern to you as well?
Well, I think that the valuation question is a misnomer. Everyone wants to buy low and sell high. But the reality is that valuation only comes in if you end up selling lower than when you come in. We were investor in Alibaba’s Series B. We came in at $180 million. Back then we thought it was really high and back at that time (2003) China had about 10-20 million internet users. So it was really high. But when you think about the potentials at that time of what China could be, we felt okay.
All VCs and PEs have different return strategies. Depending on where the strategies come in, you pick your spot. But for the Alibaba investment, we still think we mis-timed it. No one predicted the rise of the mobile internet market in 2010. It is probably twice the PC market today.
As VCs, don’t complain about valuation. If you do deliver value, the CEOs will recognize it and you can come in the right one. But what’s important is that as investors when we come in we also have a way, the ability to allow that company to grow to a valuation that makes sense for exits.
And so other than betting on the right market, betting on the right timing, VCs can also help CEOs. If you are investor in the number 2 player in the market, get number 1 and number 2 to merge, that’s where you also get outsize return.
It’s not a passive job, it’s a very active job. It allows us to constantly think out of the box and to know what’s happening adjacent to the verticals. If you do that well, valuation is not an issue.
You talked about merger. We have seen the proxy battles coming in to Southeast Asia. What are your thoughts on that?
I don’t have a specific view. I think that M&A is also a result of market dynamics. if you are the number one player you want to continue to grow. If you are number one you’re only 10 per cent of the market. You better be growing fast and that would mean acquiring smaller players or you could be acquiring into the adjacent market to allow you to expand your current market.
I don’t think there is any right or wrong, it depends on where you are in that chain. In any industry that we have seen in the internet world, you have to be up there. If you are not top 3 player, you’re just scrapping by, you may be better off pursuing your next passion.
As the only woman managing partner of GGV Capital, how has your journey to breaking the women VC glass ceiling like?
Maybe from a career advise perspective, always find a passion or job that you like. I think that’s the most important. Good VCs are like any entrepreneurs, we have that fire in us to make changes and improve. Along that journey, I have not compared myself with anybody – I think your best competitor is yourself. I love the job, and I love the fact that startups are disrupting traditional companies. You do what it takes.
If it means that I have to climb six flight of stairs to check out the warehouse of a robotics startup, I’ll do it. No issue, I love robotics. If the job requires me to do it, put on your running shoes if you have to. So I’m practical, I try to always think of ways to help entrepreneurs by understand what is it that they’re going through.
Take Facebook and Google for instance, they think about pleasing the advertisers. But actually, their end-users are the consumers. In China, we talk to gaming companies – they think about their consumers instead. So when we talk to our US companies, we share how the Chinese companies are innovating to deliver better quality of services/products to their consumers.
So it’s situations like these, where we help companies’ founders to think out of the box and to study the other models. If any of those ideas can strike, that’s your billion-dollar outcome because they would’ve formed unique business models that no one else have. And we continue to see that in China. We’ve accumulated experience from the US and China, and the next generation of companies will have to work harder, it will not be easy for them, but if they succeed, they will be large companies.
We heard a lot of positive stories about GGV Capital. But could you share one memorable mistake that you’ve ever done as a VC?
If it’s a mistake, it’s not memorable. (laughs) I think VCs will always make mistake but the key is that, if you missed that billion-dollar [company] and you think you’re good, go hunt for the second one. But make sure you reflect. I think that the mistake that I constantly think about is that, we try very hard not to be influenced by our own life, our own circumstances and what we see.
If you’re a die-hard iPhone user, and you don’t pay for mobile games, you’d assume that the world doesn’t pay for mobile games. We’re not in Singapore and we’d think why would bike-sharing work under such climate? But guess what, there are 20 million bike rides a day in China. So, sometimes we do get caught, simply because we’re not the typical users.
One investment mistake we made is with Toutiao. We saw the CEO 6-7 years ago, we had this fixated idea: the mobile screen is too small, no one wants to see mobile advertising. Our perception at that time is that there isn’t really an advertising market for the mobile market. Turns out we’re wrong. The company now turns out to be $50-60 billion. So we invested in a social mobile application called Musicly, which was recently acquired by Toutiao. The world does come back.