A Dozen Things I’ve Learned from Jenny Lee about Investing and Business

“Jenny Lee joined GGV Capital in 2005 as a managing partner and was instrumental in setting up the GGV presence in China. Her previous operation and finance work experience with Singapore Technologies Aerospace, Morgan Stanley and JAFCO Asia enhanced her role as a preferred board mentor and investor to many entrepreneurs in China. She graduated from Cornell University with a Masters and B.Sc. in Electrical Engineering and an M.B.A. from Kellogg School of Management, Northwestern University.” 

1. “Start-ups aren’t an object. They’re successful because of the people behind them.” Great people, attractive markets, significant innovation are the three key elements in any successful business. What a venture capitalist wants to find in a founder is a certain sort of person. These founders are not identical, but do share certain attributes. One of the desired attributes in a business founder is a missionary attitude toward the business. Missionaries rather than mercenaries are the founders who create the startups that make the biggest impact. Other desired qualities in a founder include persistence, curiosity, energy, the ability to communicate and sell, focus, determination, intelligence and the ability to adapt to change. These attributes should be sought not just in founders but in the teams they assemble to build and run the business. Having a diverse team in every sense is important. Different people have different skills and sometimes someone’s strength is also their weakness.


2. “[Founders] must have the hunger to learn about new things and have the tenacity to persist in one’s judgment despite naysayers – and there will be a lot of them – and, finally, that firm belief that a single person or a single company can create products or business models that can change the world.” “You need to believe that you can clear everything in your path.”  Some people may think it is an odd combination, but founders who are confident and yet humble are mostly likely to succeed. The more you know and the more experience you get in life, the more humble you should be. Part of the reason Charlie Munger is so wise is that he believes: “Knowing what you don’t know is more useful than being brilliant. … real knowledge is knowing the extent of one’s ignorance.” Successful founders tend to have strong views, loosely held. If you do not have strong views, you have not done the research and probably don’t know both sides an issue. If those strong views are not loosely held, it is unlikely you will be able to adapt as new information and ideas arrive.


3.“We are looking for the 2% who are going to change the world.” Tape measure home runs drive financial returns in the venture capital industry. To get a tape measure home run you must have founders who are aiming to significantly change the world since otherwise the revenue and profit growth will not be sufficient. The best venture capitalists are constantly searching for outliers. This must be the case given how high the bar has been set by the venture capital business model. To explain how high the bar is set, this is my riff on a quote by Warren Buffett using new numbers and slightly altered language:

“Think about a company with a market cap of $1 billion. To justify paying this price, you would have to generate profit $100 million every year until perpetuity, assuming a 10% discount rate. And if the business doesn’t begin this payout for a year, the figure rises to $110 million annually, etc. Think about how many businesses today generate profit of $100 million a year.”

Consider how big a financial win must be to move the needle in venture capital. Fred Wilson described the math in this post: 

“First, the money needs to generate 2.5x net of fees and carry to the investors to deliver a decent return. Fees and carry bump that number to 3x gross returns. So $25bn needs to turn into $75bn per year in proceeds to the venture funds. Then you need to figure out how much of the companies the VCs normally own. The number bandied about by most VCs is 20%. That means that each VC investor owns, on average 20% of each portfolio company. We’ll use that number but to be honest I think it’s lower, like 15% which makes the math even tougher. Using the 20% number, that $75bn per year must come from exits producing $375bn in total value. But it is also true that many of these exits have multiple VC investors in them, sometimes three or four. So you really need to look at the percent ownership by VC funds in the average deal at the time of exit. That number is likely to be over 50% and maybe as high as 60%. If we use 50%, then to get $75bn per year in distributions, we need to get $150bn per year in exits.” 


4. “I’m a very gut feel type of investor.” There are no formulas which will always generate success in venture capital.  If there were simple success formulas that could be applied mechanically nearly everyone would be rich.  There are some general principles that can be applied by successful practitioners which can increase the probability of success. One such principle is: venture capital is the search for investment with significant convexity (big financial upside with a correspondingly small downside). When a venture investment is made what the venture capitalist can lose is limited to what they invest. But the financial return can potentially be hundreds or even thousands of times the initial investment. A tape measure home run will not happen often with a venture investment but when it does the venture capitalist may sing the hallelujah chorus even if they are not religious. Finding undiscovered convexity that is being offered at a substantial bargain means the venture capitalist must be continually looking for it in new places. Once an investment idea is appearing regularly in the newspapers and tech blogs it is often too late to find the greatest opportunities. Finding a new approach requires that the approach be new in some important way. There must be at least one key element of the business that is fundamentally different from what has been done before. That something which is different is always different that what was different the last time.


5. “It’s a tough market and more of a challenge to find the gems. But it’s a great time to start; the quality of entrepreneurs has increased. I love the winter.” Often the best time to start a business is during a downturn in an economy. The competition for the best employees is lower during a financial correction as is competition in markets generally. During an economic downturn there is also less noise that can distract a business which enables more focus on business fundamentals. In a tough market there is often less thinking about distracting things like pivoting and more focus on getting things done.


6. “If you’re a late-stage company, a growth-stage company, and you’re looking to be a public company, the market fluctuation does affect you. If you are further down the chain on the early-stage side, then I would say that the capital markets play less of an impact, but it does affect how those companies now think about the quality of that capital, the stability of the capital, and the investor behind the capital.” Being an early stage startup during a downturn can be a relatively good place to be. In contrast, needing loads of capital during a lousy funding environment is not a great place to be. It is inevitably shocking for people going thorough their first business cycle when the cash spigot goes dry (i.e., it becomes hard or just plain impossible to raise new cash). Having a plan in the event the business can raise no new cash is wise. People like Mitch Kapor and Josh Kopelman now are talking about a Watney rule: “We need to act we’re like Mark Watney in the Martian. We can’t assume we will get a shipment of new potatoes to save us.”


7. “[Founders should understand the] fit between the company, their sector, the VC firm and the partner in charge.” Every founder and startup has different skills, resources, talents and needs. Every venture capitalist is also unique, as are venture firms.  “Founder-VC fit” is enough of a success factor in building a business that extensive due diligence by founders to find the right investors is wise. Founders should talk to other founders about their experiences with any given venture capitalist before making a choice. Selecting a venture capitalist is like deciding to marry someone. Unfortunately, sometimes there is only one person that will have you. But that is not your ideal situation.


8. “For work, if the product is good, there is a paying tendency.” Enterprise customers are more likely to be willing to pay cash for services than consumers who have been conditioned to expect services “for free.” Ben Thompson describes the problem with enterprise sales in a recent issue of his newsletter: “Productivity apps usually have high learning curves.” Most people today are attacking this problem with freemium. During the free period in the freemium model the user gets religion in a very low cost way through self-education and then they are sold the equivalent of guidebooks for that religion and become paying consumers.  Freemium is, at its core, about lowering CAC (customer acquisition cost)! This is the “land and expand” business model use by businesses like Slack and Atlassian which does not require the same level of sales and marketing spending as a Beatles sale and marketing approach (“I want to hold your hand”).  If your competitor is using a land and expand approach they can often undercut your price if you do not adopt it too. The new wrinkle on enterprise investing is that many businesses that once upon a time would have sold tools to enterprise markets have become what is known as “full stack.” Chris Dixon writes: “Suppose you develop a new technology that is valuable to some industry. The old approach was to sell or license your technology to the existing companies in that industry. The new approach is to build an end-to-end product or service that bypasses existing companies.” Oracle sells tools, but Tesla and Uber sell a full stack offering in that they provide everything, including the service to the end user.  This full stack phenomenon and the rise of freemium have many important ramifications that I plan to write more about at some point.


9. “The monetization technique in China cannot just be advertising-supported. The China population is actually a paying population. They pay for games, things that they don’t even need. They pay for virtual items so they can look like a duke. They drive a virtual BMW to a concert that’s all online. They can pay. This is the young generation. For them, do I line up, get stuck in traffic, buy a 300 renminbi ticket, be stuck in auditorium? Or can I do that for 100 bucks and look like a king online? So the time has changed, and therefore, if you have users, any company should try to monetize through various ways. That’s how we push our CEOs when they say, ‘Well, this is how the West does it.’ We say, ‘Let’s see if the East can do it better.’” “[In China] most people do not consume ads online, especially on mobile. “The lack of a fully built-out offline retail and services in second- and third-tier cities in China means that many services and products are not available offline. Variety and convenience factors are lacking. Hence mobile commerce is a very natural transaction-based value for users.  Thanks to Alipay and Tencent’s further efforts to tie users’ phones to payment providers, the ease of payment has greatly enhanced e-commerce, and anytime anywhere transactions via the mobile devices.” China is not only a huge market but a key part of the global supply chain. As a market and supply base doe most companies it cannot be ignored. So for a business the right question is how you deal with China rather than whether you deal with China. I spent four years of my life working in Seoul Korea and even wrote a book about doing business in that country. What I took away from that experience of living in Korea and later Australia was how little I know about the country despite living there and that even if I spent a lifetime working there I would still have much more to learn. When dealing with a county and culture where you are not a native, it is wise to know as much as you can about what you do not know. To help deal with cross cultural and other differences it is best to have a relationship mentality rather than a deal mentality.  That is the principal thesis in my book The Global Negotiator, which is free to read on my blog:  https://25iq.files.wordpress.com/2016/05/the_global_negotiator.pdf


10. “One of the most common questions we hear today is, ‘How can I take my model to the other side?’ U.S. companies always come to us and say, ‘I am doing this in the U.S. Should I be doing it in China first?’ If you’re an entrepreneur, you’re no longer just thinking ‘my hometown.’ Some of them come from the point of: ‘If I don’t do this on a global basis first, someone is going to copy me.’ I’m sitting in China; somebody is going to copy me in the U.S. I’m sitting in the U.S.; somebody is going to copy me in China.”  Once upon a time people thought of innovation as happening in the west and then moving to China. Now the flow is moving in both directions. This is a very good thing since the world benefits from more innovation.


11. “If you can do without China, and you have this fear of setting up there, then don’t go. But if you are in the makers community, 90 per cent of your supply chain is in China. So in not going, you will fail.” “Maybe you can find that 10 per cent in Vietnam, but the price is not going to be the same (and you will encounter the same problems anyway.) If your business requires you to be in China, then my advice as an entrepreneur is figure how to get smart about it. It is as simple as that. There’s no perfect answer.” China is not only a huge market but a key part of the global supply chain. Not only is China a great opportunity for any business but in some industries it simply can’t be ignored. So for a business like this they face a question how they deal with China rather than whether they deal with China.


12. “My friends told me I was crazy to leave the iron rice bowl that ST Engineering provided. But I had to take the risk. To get what you want, you must get it yourself.” After graduating from Cornell, Lee started her career in Singapore as an aerospace engineer. She could have stayed in that job and been very secure financially. But instead she did what she needed to do to achieve her goals. Startups are not a great place for people who value security highly. The reality is that most startups fail. The struggle to build a business from scratch is inevitably hard. Elon Musk has said: “A friend of mine said running a start-up is like chewing glass and staring into the abyss. After a while, you stop staring, but the glass chewing never ends.” If you are not a missionary about the mission of a startup the odds that you will endure the many rejections and hardships goes way down. Venture capitalists know from experience that people who are working on the idea or dream of someone else are not as likely to stay the course. Many startups have been inches from failure before the eventually found success. Getting through all the glass chewing is a job best suited for missionaries.



Bloomberg:  http://www.bloomberg.com/news/articles/2014-06-13/jenny-lee-of-ggv-capital-has-an-eye-for-chinas-rising-tech-giants

Forbes: http://www.forbes.com/sites/ryanmac/2015/03/25/jenny-lee-midas-list-top-ranked-woman-interview-china/#4d0983ef227e

Inc. http://www.inc.com/lisa-calhoun/34-surprising-facts-about-top-tech-investor-jenny-lee.html

Interview: http://www.techrepublic.com/article/jenny-lee-venture-capital-investor-golfer-fighter-jet-engineer/


Podcast: http://typewriterintl.com/2015/08/25/interviewing-jenny-lee-from-ggv-capital/

Strictly VC http://www.strictlyvc.com/2015/08/12/jenny-lee-of-ggv-capital-on-what-to-know-now-about-china/

Stanford panel: https://www.youtube.com/watch?v=apqd5rWSbfI

Straits Times: http://www.straitstimes.com/business/invest/jenny-lee-a-guiding-star-in-the-world-of-tech-start-ups  http://www.straitstimes.com/business/invest/after-riding-internet-wave-singapores-top-china-investor-jenny-lee-bets-on-hardware

CCTV http://www.cctv-america.com/2015/12/18/venture-capitalist-jenny-lee-eyes-chinas-investment-future

Fred Wilson:   http://avc.com/2009/04/the-venture-capital-math-problem/

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