Things I’ve Learned about Investing and Business

Jenny Lee joined GGV Capital in 2005 as one of its most important new partners 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 head 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, fertile 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 longed for attributes in a business founder is a missionary attitude toward the business. Missionaries rather than mercenaries are the founders who found he 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 meaning is important. Different people have different skills and sometimes someone’s strength is also their weakness.

2. “It’s a competitive and a rough 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 any abstract economic downturn there is also less noise that can distract a business which enables more focus on business basics and fundamentals. In a harsh market there is often less thinking about distracting things like pivoting and more focus on getting things done.

3. “[Founders should understand the] way their company, their sector, the VC firm and the partner in charge are fit or not.” 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 advanced due diligence by founders to find the right investors is wise.

The more you know and the more experience you get in life, the more humble you should be.Tom Stoppard

4. “[Founders] must have the passion 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 become successful. 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.

5. “I’m a very gut feel type of investor.” There are no universal rules 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 fail 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 areas. 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 drasticaslly different from what has been done before. That something which is different is always different that what was different the last time.

6. “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 issue in 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.