Venture capitalist James Tan is looking for start-ups whose founders have replicable ideas.
James Tan, managing partner at Quest Ventures, spends a great deal of time in China. When he is in Singapore, his favourite haunts are the kopitiams, or local coffee shops. There, he can be found grilling start-up founders on their goto- market strategies or just sharing stories with them about good eats in Singapore. It is these casual chats, rather than the carefully planned presentations, that tell him whether he has found a winner.
“Casual sessions are more important than giving a presentation and pitch, which they have undoubtedly rehearsed many times. When they talk to potential partners or merchants, most business takes place over coffee, dinners or lunches. So, they need to have the skill to conduct business that way,” he explains. “Also, if we ask the start-up to come to our office, we are dominant. A centrally located place where you and I have to travel to puts most people at ease and on a level playing field. That puts them in a comfortable state of mind and we can really start to talk [about anything].”
While topics at these sessions can include the business, Tan says they also cover other everyday matters. “We talk about their professors, where they stay, what kind of food to eat at Bedok and new hipster cafés. People do open up.” These sessions also put the founders at ease. “If they can’t be comfortable talking to you, then when they run into some problems, they won’t be comfortable talking to you about that also.”
Quest is a venture fund focused on tech start-ups. It has more than 30 portfolio companies, including online marketplace Carousell, food guide Burpple and property portal 99.co. Although small, it has an impressive track record: None of its companies have shut down yet. Tan is not so sure that is a good thing. “If we don’t have companies that have died, then by definition we are not taking enough risk,” he says.
That could change in the months to come. Having long focused his sights on China, where start-ups enjoy the advantage of a large consumer market, Tan is now turning to Southeast Asia. “I’ve spent the last eight years in China because that’s where the market is. But we are increasingly seeing a lot more activity in Indonesia, Malaysia, Thailand and Singapore. So, I want to spend a bit more time here,” he says.
Quest does have portfolio companies in Singapore, as Tan is Singaporean. But it has no significant infrastructure in Southeast Asia. “In the last three to four months, we have been building up what we term as ‘the underlying infrastructure’. Infrastructure is not just hardware but also community managers in the respective countries, partners in those countries, hiring people in those countries, so we can begin to be more serious about investing,” he says.
The best people to look at investments in each country have to be local or at least based there, Tan says. The community managers at Quest are typically industry people with day jobs who would be in a position to hear about potential investments or deals. They would also be people with entrepreneurial experience.
“We don’t want money managers,” he says. “We are 15 to 16 years past the dotcom bust. There are already entrepreneurs who have started to do their own thing again or are putting money into funds. If we were to go with the money or fund manager approach, our value-add would not be as much as if we had entrepreneurs who could say they have been there, done that and can help [our start-ups] along.”
The start-up path
Tan himself has plenty of experience to offer. While studying information systems and computer science at the National University of Singapore (NUS), he started a company with a few other students: an online marketplace for photos targeted at the Southeast Asian market. The business did so well that Tan eventually dropped out of the programme to work on it full-time. It was later sold to Getty Images.
Tan has never regretted dropping out of university and would recommend it to any entrepreneur in a heartbeat. “Opportunities don’t come around all the time,” he says. “[Sometimes,] if you wait one or two more years, the opportunity will pass you by. Also, the market must be right. The degree can always come about later.”
Indeed, Tan realised later that he would need to go back to school. “In Singapore, you still need to have paper qualifications. [Also,] having run my first business was what woke me up to the fact that I did not have the skill sets to scale or replicate my business.”
He went on to complete not just a business administration degree at the University of South Australia, but also an MBA from Tsinghua University in partnership with the Massachusetts Institute of Technology. There, he met the people with whom he would eventually start a deals website called 55tuan catering for the China market. That company is today listed on Nasdaq as Wowo and Tan serves as CEO. “That almost resulted in my not graduating again,” he admits. “It started about half a year before graduation and it was super busy. But the mindset in Tsinghua is very good. The professors are entrepreneurially minded, so they can understand if you don’t come for classes. And they help you refer investors.”
Dropping out helped Tan be a better entrepreneur too. “Even today, after getting a business degree and an MBA, I still feel that I’m an underdog. I’ll still feel that somehow I’m not as good as those who got their degree the first time they wanted to get it. So, because of that mentality, I always want to be better.”
Certainly, Tan has not sat still. He founded Quest in 2011 and is now a well-known face in the local start-up scene, serving as trustee or board director for many startups in China and Southeast Asia. He sits on the board of the Action Community for Entrepreneurship, a private-sector-led movement to help aspiring entrepreneurs. He is a regular speaker at entrepreneurship events and a guest lecturer at several universities.
This year, he will be contributing his expertise as a mentor for DBS Group Holdings’ HotSpot 2016 pre-accelerator programme. The programme is targeted at very-early-stage start-ups in the fintech, social enterprise and digital technology spaces. The Bootcamp starts on May 9. Participants will develop core entrepreneurship skills through a series of workshops over eight weeks. On July 1, a Bootcamp Pitch Day will take place, after which 10 finalists will be picked from the applicants to receive a $25,000 entrepreneur award, with DBS taking no equity stake.
Tan says there are pros and cons to this. “Once the bank takes equity, it has skin in the game. And for the start-up, to be able to say that DBS is a shareholder in your company sends a powerful signal to follow-on investors,” he explains. At the same time, start-ups generally like the autonomy that they receive from getting money without having to exchange it for equity.
As one of the mentors for HotSpot, Tan will be helping the 10 finalists through a four-month period in which they develop their solution, sell it to customers and then refine their pitch for funds. Quest will also be among the investors that start-ups will be pitching to on Demo Day in November.
On the hunt
Quest tends to invest in a thematic way. “At the end of every year, we set some focus industries in mind for the next year,” he says. This year, that theme is digital commerce, whether in the form of e-commerce and online marketplaces, real estate portals, digital payments or remittance.
When selecting start-ups to invest in, Tan says he looks first for ideas that are both scalable and replicable. “We try to differentiate between scale and replication,” he says. “If you go from a $1 million business in Kuala Lumpur to a $10 million business, that’s scale. But to move from KL to Penang, and from Penang to Bangkok, that’s replication. That’s not scaling.”
This is particularly important for Singapore start-ups. “Because we are small, by default, we have to be looking beyond our shores from day one. The skill set that founders need to have is being able to replicate the model overseas,” he says. But it also applies to most start-ups operating in Southeast Asia. Unlike China, where startups can tap a relatively homogenous population of 1.4 billion, Southeast Asia’s 618 million people are spread across 11 countries. “The reality is that if you want to expand anywhere beyond your own borders, you are talking about different currencies, regulation systems, payment networks and languages. [Southeast Asia] is not as porous, for lack of a better word. It’s not like the Euro pean Union. We are still very fragmented as a market.”
Tan offers an example of how this might work for Carousell, which was developed by three friends as a way to sell an item using a mobile app. The company differentiated itself from established platforms such as eBay and Craigslist by simplifying the buying and selling process. But Tan says its ultimate success came from understanding its target market. “They got the playbook right. In the case of Carousell, it was community building,” he explains.
Two of Carousell’s founders were students at NUS. “They asked: What do people want to buy there? It was not bags or pens, but textbooks. So, they got the model right. And when they went to expand overseas, in Jakarta and Taiwan, that was the playbook they used. Obviously, the playbook has to be adjusted along the way. But if you don’t get the playbook right for one city, it’s hard for me to imagine how you can get it right for new cities where you don’t know the people there.”
When picking companies, he looks for founders who can execute. “Ideas are cheap. It’s the execution that counts,” he says. “We are not a spray-and-pray kind of fund, and there are several of them out there. So, if we invest in a company that does A, we will try not to invest in a similar company. If we put our money there, it is in our interest to help them become big.”
Words of wisdom
Tan tells entrepreneurs not to waste time optimising their valuations. “Instead of being worth $2 million or $3 million, they want to say they are worth $5 million,” he explains. This allows them to raise subsequent rounds of funding by issuing less equity. “It’s not wrong, but we didn’t try because, if we did, we would have missed our own fundraising for our e-commerce company [55tuan]. We wouldn’t even have the company to speak of today. If you already have a company going and you have metrics, whether it’s the number of sign-ups or transaction dollar values, these are hard metrics. There’s not much to optimise. Stick with the valuation that the investors are trying to give you and raise what you need to get to the next milestone 12 to 18 months later. Optimising valuations slows down fundraising and turns away good investors who might otherwise have been involved.”
Also, he warns that anyone who wants to build a start-up should be prepared to work long hours. “There are no weekends. You have to work every day. Even on Sunday, you should still be working from home and replying to emails. The only thing going for you as a start-up is speed. If you work one day more than [employees at] IBM or the other large companies out there, you are already ahead of them by 20%,” he says. “If you want a work-life balance, join Microsoft.”
When he was building his companies, he worked six days a week. “I woke up at six or seven and would start around eight. I ended around eight. I went home, had my dinner and then continued working until midnight,” he says. “These are just the founders, not the staff. But the staff get infused with it somehow. So, they will also want to work their ass off to try to make this thing work.”
To those who want to build their own company because they think it is preferable to working, Tan says: “We are always working for someone else.” Employees work for their employers. Entrepreneurs work for their shareholders and customers.
Tan also advises entrepreneurs to cultivate the habit of making small talk over a meal with founders of other start-ups too. Quest sometimes organises informal meals for the founders of its portfolio companies to meet and build friendships. He says, “We want deeper relationships. Not the ‘hi and bye’ you get in networking sessions.”
This article appeared in the Enterprise of Issue 726 (May 2) of The Edge Singapore.