Cover story: the power of curiosity

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on February 17, 2020 - February 23, 2020.

In tech, there will always be moonshot deals. These are ideas for products or services that do not exist — things that people do not understand and initially dismiss as illogical. But once these take off, people will think that it just makes sense to have them around. - Lee

The EHang 184 carrying a passenger during a test flight in Guangzhou, China ... The ‘flying taxi company’ was one of Lee’s moonshot deals

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Shanghai-based Singaporean Jenny Lee has invested in some of the most prominent technology companies in China in her almost two-decade career as a venture capitalist (VC). Many of these businesses, such as hardware player Xiaomi, outsourcing company HiSoft and social media firm YY, were eventually listed on stock exchanges.

When considering potential investments, the key is to have a healthy dose of curiosity, says the managing partner of Silicon Valley-headquartered GGV Capital. “As human beings, we tend to get into our comfort zone and be fixated on a specific line of thinking. [For instance,] if you think people will never dance outside in gardens and squares, you will never look at the possibility of that vertical because you have already crossed that off your list. Curiosity should be the top trait a VC possesses.”

Lee does not let her judgement be clouded her background, personal beliefs, ego and experiences when she looks at potential investments. She calls this “suspending her disbelief”. This is important as she usually invests in ideas and businesses that will serve target markets with different backgrounds and preferences from hers, says the 48-year-old.

“I grew up in Singapore, a diverse multi-cultural city. I spent a lot of time in the US as a student and have been in China for almost two decades now. I am very aware that human beings are different from one another. We act differently, think differently and like different things. And I only represent a small percentage of the population.

“I belong to one of the hardest demographics to serve — we do not pay for apps, we do not play games and we tend to stay away from ordering online. Although I am not the ideal target market, I will still be open to ideas and pay attention because I know the business may be serving a real need in the market — just not mine.”

As an investor in frontier technologies, Lee is no stranger to “moonshot deals”— ultra-innovative ideas that have a slim chance of succeeding but would have a huge impact if they do. While many would be wary when presented with these kinds of pitches, she is not quick to shut them down.

“In tech, there will always be moonshot deals. These are ideas for products or services that do not exist — things that people do not understand and initially dismiss as illogical. But once these take off, people will think that it just makes sense to have them around,” she says.

“Take video streaming platforms. When people were using CDs, nobody understood streaming services. Now, it just makes sense.”

But that does not mean blindly taking risks. If people choose to invest in emerging technologies, they have to understand the space better than the common man. “Not only that, they also have to know the kinds of talents involved and the possible future direction of the business. It takes a whole lot of conviction and hard work to pick a winner from all the other participants available,” she says.

These traits have certainly served Lee well. She has played an instrumental role in helping 10 of her early-stage portfolio companies to go public on equity markets such as the New York Stock Exchange, Nasdaq, Hong Kong Stock Exchange and the Science and Technology Innovation Board of the Shanghai Stock Exchange (STAR Market).

These companies include Xiaomi, HiSoft and financial technology firm 51 Credit Card. One of her investments — YY (parent company of live-streaming app Bigo Live) — has appreciated more than 10 times since its initial public offering in November 2012.

Lee has received several accolades for her achievements, the most recent being ranked No 19 on the Forbes Midas List (annual ranking of the best dealmakers in high-tech and life sciences venture investments Forbes magazine) last year. In 2015, she made it to No 10 on the list, the highest position ever for a female VC in the 14 years Forbes has been tracking venture investments. She is also consistently recognised as one of the top 100 venture capitalists in the world The New York Times and CB Insights.

 

Front-row seat to China’s tech revolution

Although Lee has been a VC for 18 years, she started out on a different path. She received scholarships from the SG Technologies Group to do her undergraduate and postgraduate degrees in engineering at Cornell University. There, she took an entrepreneurship course that inspired her to become a VC.

After graduating, however, Lee went back to Singapore and worked at ST Engineering Aerospace for almost five years to serve her bond. She was involved in cutting-edge defence technology and retrofitting fighter jets. “Those few years, I was out in the sun every day, hanging out with technicians and fighter jet pilots,” she says.

Looking for a change of pace, Lee enrolled in the Kellogg School of Management at Northwestern University to do her Master of Business Administration. She graduated in 2001, when the global economy was reeling from the dotcom crash.

“At the time, there was a lot of fear in the US market and everywhere else around the world — but not China. The country was welcoming businesses. A lot of H-shares were being listed and the market was growing when the rest of the world was trying to recover,” says Lee.

She believed in the opportunities there so much that she packed her bags and broke her bond, wanting to start afresh in China. To pay off her bond, she spent a year working as an associate at Morgan Stanley in Hong Kong. Then, she found a job in the China office of Japanese early-stage venture capital firm

JAFCO, where she spent more than three years cutting her teeth on investments, before being offered the role to establish GGV’s operations in China in 2005.

Lee helped to reopen GGV’s office in Singapore, which will look at opportunities in the region. “Our global fund focuses mainly on the US and China, but Asia ex-China has become more interesting in the past few years. That was part of the reason we decided to reopen our office in Singapore,” she says.

GGV is a US$6.2 billion global venture capital firm. It has invested in 60 unicorns since it was established in 2000. Of these, 35 have gone public.

GGV’s past and present portfolio companies include Alibaba, ByteDance (the company behind TikTok), Zendesk, Didi Chuxing, Coinbase and Airbnb. It focuses on four sectors — consumer/new retail, cloud/enterprise, social/internet and smart tech.

Lee says she does not regret making the move to China, especially as it has given her a front-row seat to the country’s internet and technology revolution. At the time, few people outside the country knew what was brewing inside. There was scarce reporting on China’s technology sector and the local media did not have the reach to distribute beyond its shores.

“People do not know what they cannot see. So, I considered myself quite lucky to be there to see and experience it for myself. At the time, I could feel the fire ignite among local entrepreneurs, who were passionate and eager to see where the internet would take them,” says Lee.

This could be seen in entrepreneurs such as Baidu founder Robin Li, Tencent founder Pony Ma and Alibaba founder Jack Ma, she points out. These entrepreneurs saw the internet boom in the US and wanted to replicate the success.

“Back then, the companies were only two or three years old. They were starting to grow. You had to be in China to see this. Of course, with infrastructure improvement, we are able to see the second wave of internet start-ups such as Shanda in the gaming sector, Ctrip in the travel industry and 51jobs in the human resources space,” says Lee.

“In the mid-2000s, the [Chinese tech] market became better known. That was when you saw the likes of Sequoia and Matrix wanting to have a presence in China as well, making the scene more vibrant. The rest is history. In the last 20 years, China has been a very interesting market and I have seen it all. I am grateful for that.”

Will Southeast Asia see such growth? Lee says the region’s ecosystem has yet to mature. When benchmarked against China, it is at a disadvantage as the population is small and fragmented. It also lags behind in terms of market readiness — about five years behind China, she points out. However, in terms of awareness and skills, entrepreneurs in the region are on a par with those in the world’s second largest economy.

The biggest problem in the region is a lack of quality talents, says Lee. In China and the US, the talent base is broader and deeper. There are also a lot of role models in those markets.

“But I think Southeast Asia holds a lot of promise. The population is young. They tend to learn new models faster, are more willing to spend online and are more tech-savvy. There is a lot of hope and excitement over what the region’s entrepreneurs can offer,” she says.

 

Success and failure

Over the past 15 years, Lee has been involved in almost 60 of GGV’s portfolio companies. Her most memorable investments include HiSoft, which was her first IPO. The global IT service provider has operations in China, the US, Japan, Singapore and Mexico.

“When I invested, it had fewer than 100 employees. At the company’s peak, it had more than 20,000 employees in the IT services space. I got to see it from series A to IPO in 2010,” says Lee.

“Two years later, the company merged with VanceInfo to form Pactera, the largest IT services firm in China. Later, it was acquired a consortium led the Blackstone Group and was delisted. It was interesting to see the whole cycle happen right before my eyes.”

Another memorable investment was YY, a video-based social network platform with more than 300 million users currently. Although it started as a gaming portal, it has become one of the most popular video streaming platforms in China, hosting voice and video sessions with content from concerts, education, fashion, sports and personal finance. On the platform, users can exchange virtual gifts with each other that can be redeemed for real money.

“YY started the whole virtual gifting model, which is now being used on other platforms as well. It was a lot of fun to work with. No one had successfully executed the monetisation model before. We did a lot of experimentation to get it right. The IPO process was also very interesting because YY was only one of two Chinese companies that went public in the US that year [2012], when the market was not doing very well,” says Lee.

Autonomous aerial vehicle (AAV) developer and manufacturer EHang is yet another memorable investment. The “flying taxi company” was one of Lee’s moonshot deals.

The six-year-old company ambitiously plans to disrupt air travel. It has conducted thousands of test flights over the years and has realised the commercialisation of its passenger-grade AAVs.

“The CEO has a lot of passion. He really wants to change the world and do so with autonomous planes, at a time when people are still talking about autonomous cars. The company went public last December. It is still in the very early stages of planning out the monetisation model, but I think the IPO has given it a good starting point to do that,” says Lee.

EHang is the first urban air mobility company to commercialise its passenger-grade AAVs, having delivered 38 units to customers as at Dec 5, 2019. Early last year, the company was selected the Civil Aviation Administration of China as the country’s first and only pilot company for passenger-grade AAV programmes.

Like other VCs, Lee has had her share of failed investments. She says she had to shut down a few unsuccessful social networking platforms. “China has a huge consumer base — more than 1.4 billion people. There are a lot of start-ups trying to become the next Instagram, Pinterest or Snapchat for local consumers. We do have a few of those. When the apps did not take off and the team ran out of money and time, we either pulled the plug or had the CEO pivot to another app.”

Lee has had to shut down a few hardware companies as well. Unlike software, which can be coded and tested in a short amount of time, hardware takes longer to be developed and manufactured. This means the founders have to define their use case before consumers can determine whether they want or need these products.

“When Fitbit took off, there were a lot of connected devices being developed. A lot of them failed, either because their prices were too high, the market was too competitive or the product was not designed well enough,” says Lee.

“Hardware companies require a lot of capital. The capital may allow them to have up to two iterations at best. Often, this is not enough. Even if the product is great, there is a possibility that it is too late the time it is introduced to consumers.”

 

Understanding the risks

How does one tell the difference between a good and a bad company? While there is no secret formula, Lee says the firm emphasises certain things such as product-market fit or the degree to which a product satisfies market demand, or whether the company has the right team to bring the product forward.

“Let’s say a 20-year-old fresh graduate who has never done sales in his life comes to us and says he wants to build an enterprise software company that serves the IBMs of the world. We would know straight away that he does not know what he is talking about,” she says.

“First, he has to prove that he understands what big enterprises such as IBM need and clearly define it. If he has not worked with such companies before, he will not likely be able to do it.”

Lee’s team also diagnoses the founding team’s skill sets and culture to see if they have what it takes to run the business. “That is just the logical part. There is also the emotional part, where we spend time with the founders to observe their management ability,” she says.

“Some teams are very good at conceptualisation and development, but bad at commercialising and scaling. They are more scientists than managers — and they do not have what it takes to grow the company. We look at these skills as well.”

Apart from making a sound pre-investment judgement, a good VC should leverage his or her ability to add value to the portfolio companies post-investment, says Lee. For example, helping the founder find a good salesman to make up for the team’s lack of sales skills.

When considering potential portfolio companies, one of the red flags Lee looks at is systematic risk in areas such as legal compliance and financials. These areas can be examined, depending on how young or how mature the company is, she says. If the company is more mature, the VCs can get an audit firm to assess the numbers or deploy lawyers to look at the legal compliance issues.

“Oftentimes, a lot of data is thrown at us. We can engage a third party to look at it to determine whether the data given to us is correct because companies do tend to inflate their numbers. Sometimes, we even run independent surveys of consumers to ensure that they really think it is a great product and will buy more of it. We do this because there are products out there that people will buy only once,” says Lee.

For deals that involve early-stage companies, which do not have much data to look into, the only reliable form of due diligence is spending time with the founders or CEOs, she says. “There is no running away from making time to get to know them in person. This is the time for me to make my judgement: Are they telling me the truth? Are they responding to the questions I ask? Is there founder-investor chemistry?

“I think this is really important because anything can happen. There may be a virus outbreak that is affecting their business, for example. In that situation, you would want someone willing to sit down and talk to you to figure out a way together, instead of hiding the issues from you until it is too late. Entrepreneurs are optimistic nature. If they trust you, they will tell you the bad news.

“To me, the key to that relationship is finding out whether they can tell me their fears and worries. If they can share that, they will be able to tell us what they think the pitfalls of the business are. I think this would make a good start to a relationship. This is a long-term relationship after all. Our venture fund runs up to 14 years. So, we are preparing for the long haul, not just a short fling.”