Lei Jun, CEO of Xiaomi, and Dave McClure, Co-Founder of 500 Startups, discussed their experiences as investors in the high speed world of the mobile tech industry at GWC’s mobiTalk speaker series. The two men shared their insights on how they pick the companies they fund and what their opinion was of various aspects of the current Chinese tech market.
It was an exciting Saturday evening for us over at The Great Wall Club, where the second mobiTalk event saw a turnout of more than 150 geeks from both the Chinese tech scene as well as Silicon Valley.
This time, we were fortunate to have Chinese angel investor and Xiaomi CEO, Lei Jun, as well as “Geeks On A Plane” (GOAP) and 500 Startups Co-Founder, Dave McClure, sharing with us tips on angel investment.
Both men are revered among their respective investing circles, but bring entirely different styles of investment strategy to the table. Lei Jun invests heavily but only in a few startups at a time. Dave McClure invests lightly, but across numerous startups. Despite these major differences, after the bell, it was clear that there were several core beliefs shared mutually by both men.
Lei Jun’s Keynote: My Angel Investment Experience
How and why Lei Jun became an angel investor
Lei Jun entered the life of an angel investor after some of his friends wanted to become entrepreneurs and he had extra cash on hand. He humbly suggested that he does not have many success stories, but he hopes to use the knowledge from his failed attempts to guide his entrepreneurial friends on the road to success. As he summed up his position – he carries the attitude of wanting to help entrepreneurs, which is why he ventured into angel investment.
At the moment, Lei Jun has invested in no more than 20 companies, which averages out to about four to five per year. The companies he has invested in, as Lei Jun shared, are all related to mobile Internet, e-commerce, or social networking.
Lei Jun also pointed out his belief that luck accounts for 85% of success becoming successful, and drew parallels to the success of the late Steve Jobs, Bill Gates and Eric Schmidt. Steve Jobs was born in the year 1955 as were Bill Gates and Eric Schmidt. Had they been born 5 years earlier or one year later, they might not be presented the windows of opportunity they had back then.
So what does the remaining 15% account for? Hard work? Lei Jun didn’t say. Personally, I would consider it an “AAA bond” type bet that there is quite a bit of hard work and intelligent planning involved on any entrepreneurial journey that wishes to be successful. It takes 100% to make a whole, so that 15% of blood, sweat, tears, and more sweat isn’t something to take lightly – and I think Lei Jun would readily agree.
Tips for Investors
In Lei Jun’s keynote, he continually stressed the need to find the “big direction” of the market, especially for those who are keen on investing in companies venturing into the mobile industry.
Lei Jun shared that investors should look five to ten years ahead to determine if there is a potential in the market for the company, weigh the alternatives, then invest in the company if it fits. He said that it is easy to identify the direction within a market, but launching the right product at the right time is extremely difficult.
To explain he examined his experience in 1995 when he was developing PC games. By the year 2000 Massively Multiplayer Online (MMO) games were starting to become popular, but he had taken too long to realize the shift. He missed the opportunity to take advantage of the market when the time arrived and struggled as a result. On the other hand, Shanda entered the market at the perfect time, and the business took off.
Lei Jun also shared his strategy over the past year, which was to invest in 2 directions – mobile commerce and the sale of consumer electronics on the Internet.
Personally for Lei Jun, he holds the mantra that as long as he’s not familiar with the entrepreneur or the industry, he will not invest in that company. First, trust counts when it comes to monetary issues, and when it comes to Lei Jun’s investments, we’re talking big money, so it magnifies the importance even more. Second, Lei Jun understands that entrepreneurship is not easy, and will typically invest in an entrepreneur a minimum of four years to give he or she an adequate chance to succeed.
So what if the entrepreneur continuously fails? Lei Jun emphasizes that failure is not something to be ashamed of – we learn from mistakes and become even better. Additionally, since the money has already been lost, Lei Jun believes it is not worth also losing a friend. A very honorable sentiment, but perhaps it is Lei Jun’s backwards way of saying the investor is as much at fault as the entrepreneur for the lost money since the investor chose to invest in the failure.
Lei Jun holds that 90% of entrepreneurs fail, and as such, failure is a process that almost every single entrepreneur must endure at some point in their career. So for Lei Jun, picking out the right entrepreneur with good execution skills is best way to help prevent failure or minimize the damage if failure is inevitable.
Lei Jun looks for 6 things when he invests (he even printed a copy so he can remind himself when needed):
- The entrepreneur should actively engage with the target audience. He firmly believes that sometimes consumers don’t know exactly what they want; hence the entrepreneur would need to actively seek to understand their desires and needs.
- The entrepreneur needs to be ambitious, yet down-to-earth – achieving success step-by-step.
- A 3-man startup is ideal – 2 founders can validate the third’s ideas and it also shows that a founder will be able to lead a team.
- Should the entrepreneur wish to venture into the Internet industry, it would be preferable if the leader has a tech background.
- Needs to have the ability to handle stressful monetary situations, and engage in lean spending.
- The entrepreneur needs to have a good resume, which also means he or she would need to come from a good background. Without a good background, the entrepreneur would need to work ten times harder.
When East Meets West: Lei Jun and Dave McClure
The dialogue between Lei Jun and Dave McClure started immediately after Lei Jun’s keynote, where Dave started the ball rolling by introducing himself and his background.
During his introduction Dave briefly touched on how entrepreneurs should take advantage of the rapid changes in the market. There have been two main changes: the dramatic reduction in the cost of building software and product development coupled with the dramatic increase in the number of platforms available for customer acquisition which has allowed entrepreneurs to adopt intelligent techniques and use small budget levels to experiment within the market.
When the back and forth dialogue officially began, it was interesting to see the views from both East and West. As expected, Lei Jun’s first question to Dave was, “Why are you so interested in China and Japan?”
In response, Dave joked that food connects him to the culture here along with the fact that his wife is Japanese. Beyond that, he admitted his understanding of the market is limited which is why coming to Beijing has allowed him to learn more about the people, the technology scene, and the opportunities present in the market.
Dave also shared that the main difference between China and USA, in his eyes, is that Chinese entrepreneurs seem to be smarter and more aggressive. He attributes that to the fact that there are fewer regulations in China than in the United States which allows entrepreneurs to act at will rather than clear mounds of red tape or fear potential lawsuits as American entrepreneurs must face.
Dave has funded 200 companies thus far, so how does he pick which company to fund?
1. Invest in people who are passionate about solving the issue.
This means the people must understand the customer and the problem in a way that allows them to implement interesting methods to solve the issues. This is only possible if they have a passion for eliminating the problem. Contrary to what Lei Jun suggested about “bigger markets”, Dave prefers focusing on more specific customer segments because traditional markets are huge and dominating in a niche market can still generate hundreds of millions of dollars. This also tends to bring out the passion in people as they are dealing with a very specific problem rather than an ambiguous issue.
2. Find people who are hungry for success
“Entrepreneurship is becoming too sexy,” Dave laughs. People dream about being tech stars. However, 99% of the time, that does not happen. This is especially so when one daydreams too much. The entrepreneur has to be hungry for success, so much so it bothers you at night and will keep you focused even when times are hard.
On Innovation – Copycats and Copy-to-China (C2C)
When the question on innovation was thrown to both Dave and Lei Jun, both of them agreed that the copycat syndrome in China might not be as bad as popular sentiment feels it is. Since there are 1.4 billion people within the market and the product does not exist yet, it would be silly not to take advantage of the opportunity bring a copy to the Chinese market. Besides, the companies will still have to modify the product in order to cater to cultural and language differences.
Lei Jun went on to expound further that when other countries have an idea, it just makes good business sense to bring the idea to China. Doing something entirely new would be risky. Unless they have a good idea, he feels that Chinese entrepreneurs should be doing minor tweaks and innovation to cater to local markets.
Lei Jun’s thoughts on Lee Kai Fu’s Innovation Works
Another question posed to Lei Jun was his thoughts about whether Lee Kai Fu’s investment company, Innovation Works, will be able to succeed in the Chinese market over the long term.
Innovation Works definitely has created a platform to push innovation forward, but Lei Jun feels that it would take a longer period of time to see if it is a sustainable business model.
Apart from the business model, Lei Jun believes Innovation Works does serve as a good platform where startups can get advice. Starting a business in China is not easy, and even local Chinese entrepreneurs have to go through tons of hurdles before succeeding.
Additionally, scams are prevalent in the Chinese market. This fact has made angel investors to be more cautious in investing and it has led Lei Jun to believe that angel investing is not scalable within the current Chinese market environment. Given this environment, Innovation Works helps protect both the entrepreneurs and the investors, so it is definitely a boon for industry growth.
Dave: What’s Hot and Trendy?
“I don’t invest in entrepreneurs who ask me what is hot and trendy,” says Dave, in response to an audience member who asked what trends they should look out for when investing.
Dave shared that he will not invest in social games or group buying platforms, but he is interested in educational games. Unfortunately, most educational game developers are single males. In Dave’s opinion he would actually prefer investing in females and entrepreneurs who already have kids and understand what parents and kids are looking out for.
Ultimately investors should not care about what is currently in trend, but instead look for what has the potential to bring in money. “Money is sexy. Money will always be sexy.”
In terms of company layout, Dave favors a “hustler-hacker-hipster” setup. In such an arrangement there is a sales, a tech, and a design expert. As consumer-driven products become more prevalent, Dave feels that it would be good to have a designer during the early stages where much of the strengths will lie in designing. Good user interface (UI) design will determine user retention rates and new user sign ups, which is critical for startups catering to the consumer markets.
Dave’s advice to Chinese entrepreneurs planning to venture into overseas markets
“Focus on the local market.”
Dave shared that Chinese entrepreneurs already have language and cultural advantages and the market is large enough to make success very profitable.
Given Dave’s self-professed lack up in-depth knowledge on China, I feel it is worth me adding that, in my opinion, different parts of China, despite having a common language, do have cultural differences – sometimes vast differences. I would suggest that Chinese entrepreneurs take Dave’s advice a step further and gain traction in the region of China they understand the most before expanding to China as a whole.
[Disclaimer: The author is currently an International Business Development Manager at Innovation Works funded start-up, XingCloud. Her opinions are her own and not representative of XingCloud or Innovation Works]