Investors, Founders and Crooks
The Asian start-up world is infinitely dynamic and exciting with its fragmented markets and cultural influences. Yet with its overabundance of age agnostic experts with varying degrees of domain proficiency, makes navigation between awesome deals, good deals, so-so deals, bad deals, ugly deals and zombie deals, an experienced based skill of managing risk. Risk comes from not knowing what you are doing. As an early “returnee” to Asia, my start-up experience was a throwback to an era when Mainland China got connected to the Internet, Apple Computer launched the first Macintosh computer and Bill Clinton was the 42nd President of the United States. Since then, I have reviewed over 15,000 pitches and made over 500 day trips to Shenzhen. Everyone has a start-up f*ck-up story. Here are mine.
Before establishing my own early stage fund, I worked for a well-known venture capital fund seeded by prominent institutional investors. The firm was flush with cash from a newly closed fund, great expectations from the ever watchful media, posh offices in the heart of Central and an intellectual investment team with elite Ivy League pedigrees and top tier work experience. We were led fearlessly forward by the visionary managing partners who appeared to possess the uncanny ability to see into the crystal ball. We invested in over 50 mildly interesting start-ups within the span of 24 months. It was one big game of musical chairs until the music stopped and we were the only ones still standing. The fund imploded much like a shining star in the heavens that loses its source of heat and collapses upon itself. Our laptops and Herman Miller chairs flew out the door in a fire sale and I turned off my office lights for the last time with a recommendation letter and a severance check in my pocket.
Failures comes in many forms. There is always something to be learned from failure. Failure can lead to something you never would have discovered otherwise. Everyone has a plan until they get punched in the face. What goes into the history books is what you do after that. If you have no response to an action, then you’re probably never going to make the highlight reel.
1. If you don’t understand a business, don’t invest in it.
We only invest in technology. I knew one investor who decided to try something different and invest in a mid-tier food and beverage brand. The investment journey was like driving a yacht he had just purchased and he kind of knew the general direction to steer the vessel (cue music - 2Pac’s Ain’t Nuthin But A Gangsta Party) and life critical skills like navigation, fuel capacity and other resources were never part of the thought process. But driving the boat was super fun until it ran out of fuel and drifted hopelessly at the mercy of the vast ocean. Along came a commercially minded person who offered to rescue him and buy the boat for $1.
2. Staying power
One of the most overused words in the investment community is “Execution”. Of course it is, it’s even a text book term (almost as clichéd as words like game changer, pivot, disrupt or win-win). The single most important must-have trait I seek out in founders is Staying Power. No business plan ever goes according to plan. Fundraising always takes twice as long and costs twice as much. That one big customer that was going to validate your product and get you out of the hole decided to postpone the “big order”. How do entrepreneurs respond when times get tough? Do they return to filling out time sheets in the corporate life or do they dig their heels in and get ready for a good fight? I have been involved with far too many founders who had stellar careers in the corporate sector and who could present boardroom worthy PowerPoint pitch decks. As soon as the funding came in, they worked tirelessly as founders do, at least until the bank accounts dropped to the minimum balance. They found it easier to abandon their dream and return to the corporate grind. There is no easier success like failure and failure is no success at all.
Seventeen years ago, I met two co-founders on a 10 day 500 kilometer non-stop expedition race thru the heart of darkness, the Borneo Rainforest in Sabah. Through that ordeal together, I learned two things about them: they never quit and they don’t stop. In 2014, they formed an electronic cigarette start-up and today, they have a very high probability to hit a half billion dollar valuation by 2019. When times get tough, they just smile and say, “This is what we do”.
One of the greatest challenges in my life is learning Brazilian Jiu-Jitsu, a martial art that focuses on grappling and ground fighting. “Pressure” is the act of forcing the other person to bear your weight on as small a surface area as possible. This is a very important concept that must be fully understood in order for a person to get good at grappling. In most cases, the fighter who can exert more pressure than their opponent, ultimately comes out on top. Jiu-jitsu has taught me that physical pressure can be used for control rather than of weight and mental pressure can be used to create a sense of urgency. Many moons ago, I once met a guy named Jack Ma and he had a 25-person start-up called Alibaba. I championed this deal and presented this opportunity to my investment committee. They quickly dismissed the opportunity and I didn’t pursue it any further. The rest of this story was history. I did not take jiu-jitsu back then and I certainly did not know the concept of pressure.
4. Focus on distribution
When it comes to start-up success, distribution is king. There was a start-up I was involved with in the physical on-demand storage business. The founder spent too much time on what he thought the product experience should be rather than customer discovery and validation. As a result, funding ran out long before developing distribution channels. If I could do it over again, I would cut development time and focus primarily on distribution. Minimum Viable Product - one can always make product improvements later and spend more time understanding and fine tuning what customers really want.
5. Investors can be crooks too
Investor or founder, your reputation is everything. I intimately knew one investor who raised money from others for the sole purpose of supporting a lavish lifestyle of high-class living, fancy cars, private jets, kept women and casino gambling. It was a catastrophic story taken straight from the pages of jailed investor Bernie Madoff. It takes years upon years to build a credible reputation and only five minutes to ruin it. If you think about consequences, you will do things differently. Trust is a very expensive gift. People say never expect it from cheap people but it is even smarter to never expect it from rich people too.
As an investor supporting the fund, my viewpoint is very different. It’s always top down, strategic boardroom level stuff and we always play the blame game. It’s always the founder’s fault, right? And when it comes to home runs, it’s always to the credit of the investor, right? This is far from reality. For every start-up failure, there is also an investor failure. Failure to execute, failure to fund. It’s six of one, half a dozen of the other. The two alternatives are equivalent and indifferent - it doesn’t matter which side we choose.
About the Author
Born and educated in Hong Kong, Derek is an early “returnee” to Asia with 25+ years of market entry experience. He is one of the most respected technology community leaders and is involved with nearly every accelerators, incubator, and co-working space in Hong Kong. Since 1999, Derek reviewed over 15,000 business plans beginning with first generation internet companies. In 2004, Derek launched BraveSoldier Venture Capital, a technology venture capital fund, as the Managing Partner. With deep experience in investment banking, direct investment and management consulting, he has worked in all aspects of fundraising including angel investing, family office, Series A and IPOs. Derek was the CEO of a Chinese contactless mobile payments company and credited for “leading from the front” from seed round to commercial responsibilities to investor exit. With over 500 day trips to Shenzhen, Dongguan and Guangzhou, Derek has supervised manufacturing operations in telecoms, robotics, wearables and PC peripherals. Derek is an author of two books, university guest lecturer, TEDx speaker, Trustee and Co-Chairman of the Society For The Prevention Of Cruelty To Animals (SPCA), Advisory Council member of Junior Achievement and mentor/advisor to several start-ups. He is also a multi-day ultra-marathon runner, PADI Dive Master and jiu-jitsu practitioner.