Podcast transcript #64: Explore Chinese macro investment environment with an experienced serial entrepreneur
Find here the China Paradigm episode 64. Learn more about Geoffrey Handley’s story in China, Chinese macro investment environment, investment principles of Chinese founders and much more.
David Matthieu: Hello everyone, I’m Matthieu David the founder of daxue consulting & its podcast China Paradigm. And today I am with someone I’ve been very impressed by when I read the biography & he is Geoffrey Handley. You are the one who develops a serial entrepreneurs community in China, your career started late of the last century in Hong Kong & you started first with the company doing intranet – if I’m not mistaken called Pacific Connections.
That’s something you have to explain to us what is intranet? We talk about the internet, but you’re also first company doing intranet & it was in Hong Kong, in 1997; you sold the company and started another firm called Hyper factory. And now we feel this was the experience, you brought Hyper factory to new highs. You worked with BlackBerry, Coca-Cola to engage consumers with smarter screens and at that time in 2001 it was pre-iPhone, pre smartphone, generally speaking – so it would be interesting to know more about what you did at that time. But you have invested in Airbnb, Palantir, Shop Snap and you are now managing a fund called Haitao capital. And that’s also something we talked a lot about because the specificity of Haitao Capital is to invest in China-macro driven early-stage ventures. So, China-macro meaning surfing on megatrends as far I understand which are led by China but still investing in early-stage company. So, what you do now – many questions for you. Thanks for being with us today. Could you tell us more about what you do now with Haitao, in terms of size, number investments an idea of where do you stand?
Geoffrey Handley: Absolutely, thanks so much for having me today. It’s been a little bit of a mission for us to connect. So, I’m really glad I’m here.
Haitao capital was really the culmination of about two years out of my last exit as you mentioned – I obviously started a number of companies. I took about 18 months off to write thesis to figure out what we’re looking at and what the China macro investment environemnt was at the time andnd the net result that we ended up with was. As you pointed out, we’ve caught up the global China-macro investment environment and these megatrends. But in a way that we believe they have never really been seen before in terms of size, scale how one company’s domestic policy is impacting not only global foreign policy but also the domestic policy in countries around the world.
So typically, being on the receiving end of venture fund investment – as a founder, a number of things kind of apparent to myself & to my pilot, my other partners. One – there was mismatch between typical VC’s & a founder’s day-to-day struggle. A lot of funds call themselves founder-friendly; founder focused that kind of thing, and so we knew that we were neither of those things. We were just founders; we were founders that were now backing other founders. So that’s a core part of Haitao. All of our GP’s are serial entrepreneurs with multiple exits, we all have a deep connection with China and Southeast Asia. So that was the key to us to be bringing to the table.
The second thing is I guess that global macro lens – most VC funds again from being from the receiving end they are sector-driven, technology-driven or geographic. Looking back to what we’re witnessing over the last 10 – 15 years there was neither sector, geography or industry or technology. So much was happening but there was one thing that was driving it that we didn’t see in any other country or market in the world & it was something we hadn’t witnessed previous cycles of. Which was the notion of central planning basically. How the government has a very comprehensive view of their own business, as in the business of China Inc and they knew where their business was today, where it needed to go tomorrow and where it was going to be 5-10-15-20-25-30 years in the future.
So, it’s something that is obvious to you, to me, to people in China even without it being too apparent, for some people haven’t thought it through you see it every day, but that is not obvious to people outside China. They don’t understand Chinese macro investment environment – I think a little bit more these days but there was a lack of awareness and understanding of just exactly what the role of government’s was here.
A lot of the view, the vision on China has been really negative from 50s and 60s and it’s just continued and generally outdated. For us – we looked at this and said Chinese macro investment environment is not negative, it’s not outdated – it’s very real, very tangible and has a very direct and forced multiplying exponential impact on success of companies. So, for us we had to send then say – if we acknowledge that – where are we looking at? What are looking at? As a filter.
And so, our lenses have been guided by investment principles of Chinese founders, that is what we called the four C’s essentially – Culture, Consumption, Creation & Care. So, what do they mean? If we look at care for example; care for us is anything from health care to insurance to elder care – to child care & everything in between it can be hardware, it can be software, it can be services as a priority, but investing in leading Chinese technology will be at core.
Why was that obvious to us? Well in any developing market and any cycle that we’re seeing with technology impacting FinTech plays a major role right, so we knew that going from a state provider of insurance if you will to the Chinese government making it very clear that that was no longer continuing to be the case and they would pull back. That was going to disrupt, change, impact all of those things that I mentioned from children to elderly people from hospitals to services to afterlife etc. and insurance, Insuretech etc. would be at the heart of the driving of this change, but it would impact all of those things and it would have a massive determining factor in terms of what companies would be created, where they would be created and how they would grow.
Another element of that care box is especially in insurance directly, the western world has 400 years close to an actuarial science from the first insurance policy till today. China at that point had less than I think even today less than 15-16 years. China, as we know, is very pragmatic. So whereas a country we look and say we’re missing ingredients & we need them from outside, we’ll get them from outside.
So for us we knew not only was this an area that we’d look at, we also knew that it was an area that someone like myself who is half Chinese and half Western would also be able to add value and bring strength because we would need to look towards the west and western insurance companies to provide initial experience, initial capital, initial risk modelling etc. For the Chinese economy in order to create and drive and build around this new thing and that’s exactly what played out right. It’s one of the most open regulated areas in China and all the major global insurance players are here essentially and they’re forming key components of that industry.
The next box that we look at is culture, obviously, – our thesis, our view is – China’s changing culture is not internal but it’s also an external Chinese macro investment environment. It’s being changed by internal forces and external forces and the changing culture of China is changing a global culture and for us that was really interesting. As you earlier mentioned on the word China paradigm is a really interesting box to look at because it meant that almost all bets were off. Not only were Chinese people going to start to figure out who they were as a culture, who they wanted to be as a culture tomorrow both here and abroad etc. but also we had very clear indications from the government that as the West & the U.S in particular was stepping back from being essentially cultural guardians of the planet, China was stepping forward.
So, we started to see China really take center stage in things like Davos, climate change whether it’s G20, whether it was being involved in buying up artwork, both our own Chinese artwork buying it back and also global masterpieces getting involved in purchasing football teams in Europe and baseball teams and basketball teams in the States. Being the largest owner of IMAX cinemas in the world, now having a fairly influential voice in Hollywood and so we knew that that box was going to be something that China was going to actively play and so then again for us being here and also being of our DNA – Western & Chinese we were best suited, we feel best suited to be able to guide and be a role-play a role in there going forward identifying companies that would have an opportunity for success not only locally but abroad, globally.
So very interesting culture box there, so what do we look at in Chinese macro investment environment? Anything from language learning through to education and educational services for example; there is 3 million or two and half million foreign students as per the government strategy being driven to China for higher education, for university but also another 1.5 that are being driven out every year Chinese to study overseas. So, there was areas there through to as I said anything in the area from art, sports, entertainment, food, how we are interacting with each other, social engagement so it’s a lot of things under that cultural lens
Consumption is a no-brainer, again it’s a no-brainer to us here. When I mentioned the word consumption or consumption upgrade, so most people outside, they’re not really sure what we’re talking about. We have to kind of change terminology. Right here we’re very familiar with these policies in Chinese macro investment environment because they’re very visible policies from the government. So in the consumption box anything really in those kinds of three areas which is enabling next-generation commerce, social commerce, driving that incremental extra values of analytical platforms through tools and services AD Tech, Mar Tech that kind of thing through to which is one of my personal favorites, but also one of our personal goals for investing in leading Chinese technology is to be really involved in trying to find one or perhaps more of the next global brands that we believe will be started here or started by here but made global from day one.
The closest we have to that right now I think are brands like DJI they’re most visible. We have a lot of brands that are very close, DJI is the most visible I think in that sense where if you do a quick informal survey of people around the world, they all know drones, they all know DJI. You ask them where it comes from, you’ll get answers from Italy to the States to Germany. Very rarely you’ll get an answer that says it’s from China. So again, that’s what we see there.
The last box creation. Isn’t a catch-all, it’s where we believe that two things for investing in leading Chinese technology – one is either that China is creating brand new models or brand new technologies or brand new processes that haven’t been created before & at scale or where we believe that they may not have created them here but where China has absolute indisputable competitive advantages & will win in that sector.
So, examples there on both sides; if you look at anything from a blockchain, AI, facial recognition, image recognition, those things weren’t created in China but you feel very strongly that essentially unless there is a really unique situation in a particular business or sector, China is going to win that space for a whole lot of reasons & that’s very contentious I think especially at the moment.
But it’s not very contentious when you & I look around at the cameras that we see everywhere in China for example, and the software that’s powering either from cents time or face time or face plus. So those are things again that we have a unique advantage being in China that we can see these things when investing in leading Chinese technology that most people have a negative dystopian view of what’s going on & we see real first-hand where we’re creating or just have secured absolute dominance in those areas & there’s no point in being involved or playing or backing the company that is in Chinese or operating in China.
So those kinds of four boxes but firmly driven by that global China-macro that we see. The founder lens is absolutely key to us. We only invest in the companies that we can actually be involved in because at the end of the day we’re not a top-tier blue-chip fund. We don’t have billions of dollars in multiple funds – we’re founders, not finance.
It is a mantra that we have internally and so we know where our strengths are. Our strengths are in fact we’ve built serial entrepreneurs community in China amongst our crew – we built close to 20 companies from the beginning of the internet in 96 through to now. And so that’s the value that we have and it’s very clear tangible value that our portfolio companies are very quick to say that we provide them – we sit on the same side with them at the boardroom. We’re lucky enough to understand Chinese macro investment environment- even though our check sizes are smaller we’re on the boards of I’d say 9 out of 10 investments and that’s a testament I think to the value that is brought by team. So macro, understanding the government policy is very clear – the four boxes, a China to world, a view and this founder lens kind of sums up how we’ve approached our view of venture investing.
Matthieu David: Have you exited one of them so far?
Geoffrey Handley: We have had exits via acquisitions in the most recent funds & so we’re continuing to hold positions, that’s an interesting point as well. We’ve led and driven and actually rolled up sleeves and done the work. Newest acquisitions and spin-off for us – for the portfolio companies at stages and phases of their life where they wouldn’t have dreamed of doing acquisitions. As an example; one of our portfolio companies was in an incubator – within a China accelerator.
I think that team within less than 6 weeks of graduating and coming out of demo day, we led them through their first acquisition so yeah that’s not something that a typical venture investor – VC or the company themselves would really be able to do. That’s not saying that we’re smart or better whatever it’s just that’s one of our strengths as founders and so we were able to within 6 weeks of them standing on stage and pitching for the first time in front of 300 investors lead them through an acquisition of a competitor double their size – both the top line and bottom line, and strengthen their crew – that their founding team. So those kinds of things – are testament and evidence to think of different approaches and so far, so good.
Matthieu David: To come back to how Haitao is working – you raised money andyou used this money? Or are you creating rounds of investment based on opportunities? How does it work?
Geoffrey Handley: Again, take them at the founder mentality. It’s pragmatic right, so we initially obviously all the GP’s, our exits are our own exits – rather than a typical 1% or 2% of GP capital, we said we need to have more so we put in 5% – our commitment is 5. Obviously, in the front loading of the fund it’s very high. We’ve raised money from LP’s – we have LP’ both in China & outside China. A large number of LP’S or proportion of those LP’S are founders as well that have exited both in China and outside. So again, that’s adding bench strength to us and we’re able to put those guys as advisors into the companies.
We also syndicate allocations in rounds, so primarily we started that I guess from – we were all very early on Angel List, I think we’ve signed up within the first 6 months of Angel List going live and when I was based in the States. So, it was a lot of work, it was really smart. It made sense because you had additional firepower through the guys that were putting small checks which then pulled together a syndicated larger check. And so, we in partnership with China accelerator we launched the first China Syndicate on AngelList and so we were able to drive some out there. That’s more for I think for profile – not for us but for profile of China. It’s kind of annoying that there were no Chinese companies, there were no companies that were growing at an exponential rate in China on something like that. So, we said – how do we solve this? So that’s an angle that we took. On that end I think we had one of the companies would be syndicating within the next kind of two weeks on AngelList. We don’t get the chance to do a lot because it is China or Hong Kong-registered companies & AngelList is still a little bit wary. So, we’ve gone through a lot more DD before we can load up deals and so we’re to pick & choose them very carefully.
Matthieu David: You mentioned Care, Creation, Culture & Consumption as investment principles of Chinese founders and investor – sectors you would invest in China. I remember William Bao you know very well who is from China accelerators saying that very few foreigners can do successful foreign business in China & you have to pick your new industry carefully because you cannot beat Chinese competition if as a foreigner you may have an advantage. He was mentioning education, he was mentioning importing goods or products or food’s – What’s your opinion on foreign business in China? Where do foreigners or oversea entrepreneur could be successful in China & where they cannot? Or they shouldn’t compete?
Geoffrey Handley: Oh, it’s a tricky one. I think if we take a step back, the answer is evolving. What the answer was 3 years ago or 5 years ago is a different answer today. As the industry’s evolving as the markets things change. I think the other thing that’s important is to clarify especially for the audience, not so much in China but overseas is – what’s our definition of a foreigner in terms of foreign business in China? Yeah yes, they’re not born here, they’re not Chinese ethnically 100% etc. But the foreign founders that we back like myself have been in China for 20 plus years, either I have blood in us or have created the next generation of global Chinese citizens through marriage & speak Chinese, read Chinese, write Chinese. So, there’s that type of foreign founder & there’s another type of foreign founder which has great intentions but has just got off the plane. So again, it’s not so much the what if, how & why behind it. But there’re still sectors I think that are obvious entry points where the either of these barriers are lower or the chances of success are higher. So, I mentioned earlier on – insurance. Now when I talk about insurance & foreigners & foreign business in China & backing foreign start-ups in insurance, people are like – Are you crazy! It’s regulated, it’s government control, we’ve got capital controls & we need licenses & you can rattle of the list there & it is quite a daunting list. However, I think as I said if we start first principles on that one, the west has 400 plus years of actuarial law, actuarial science & experience. And insurances based on a data & modelling. So you can’t – no matter how much money you have, no matter how fast you want to run if you don’t have that – you’re not going to be as strong as the person that does combine with a pragmatic nature of China’s government that knows the areas that they’re weaker on or missing on. And they’re very clear – they’re like we’ll backfill that with Western talent or backfill that with global talent.
And so that’s what played out in insurance & so we knew that was the sector 2 – 3 of our best performing portfolio companies are in that space and have done very well, and two of those three are foreign founder-led, so it’s an interesting one.
I think the other places that we would look might be slightly different from Williams. I have an intimate knowledge & very close relationship with William & China Accelerator I served as EIR at CA, so I spent a lot of time giving back & trying to mentoring & helping those companies, so I understand his lens & the companies that he is filling in his portfolio & so he is looking for slightly different things.
For us we’re looking for guys that are building things here, or building things outside here that might never come here because that Chinese macro investment environment, we talked about in the beginning where China’s domestic policy is changing domestic policy oversea means that I don’t need to invest in a Chinese company with Chinese founders based in China. Because our lens are wider than that. So, for example; let’s just pick a government policy – One Belt one Road, 77 countries. Largest infrastructure & capital expenditure known to mankind. In that are 77 countries, you can build amazing fast-growing companies there that are dominating sectors that will never set foot in China. But those companies only exist because of China. So that’s the question we often ask as a team – we use it as a sanity checks, one of the sanity check is would this business exist if China didn’t exist? & if the answer is “No” then we’re going to look at it, because that’s the connection to that global macro.
So again, it depends on how you cut it and I think – yes if you point out there are sectors that you’d probably benefit if you were Chinese in China. But if your lens is wide like ours, I think there are spaces that we’re looking at that are absolutely China-driven. But being Chinese isn’t going to give you any benefit.
I mentioned you before we started the call, I think what’s interesting is some of the stuff that’s happened in the last few weeks so, with all this noise & animosity that’s going on. One of the sectors that China’s never been strong has been AD Tech & Mar Tech. it’s understandable, China’s got 20 years of advertising compared to rest of the world. Advertising as a science was pretty much written, created & academically crafted & grown in the West. So I think we gained pragmatism, most Chinese companies and most companies based in China use tools – AD Tech tools, Mar Tech tools for companies from the west because they’re best in breed, they’re just great products, they might not be absolutely 100% localized & perfect but they’re great products & there aren’t really any local alternatives that’s changing them. Because of late there’s been situations where Chinese companies are no longer welcome to sell their products to western companies & so I think push back on that is well, you’re starting to see this very clearly now there’s been a sector that’s been identified, and said – well hang on a second. We used these products because they were the best in the world and out efforts were best spent elsewhere. But the dynamics have changed now. So, with that change in dynamics, we’re now seeing from the top down, so government and some of the larger enterprises of the Ali’s of the world and TenCent’s of the world and then smaller companies saying hang on! This isn’t right, we should be backing belt-road, we haven’t got any, we’ll create it. And the venture money is also going behind it. So now we’re going to create – and this is – haven’t had enough time to digest and figure out what it means, especially for some of those companies in the States that they filed for IPO, or getting ready to file for IPO. Anything from Slack through to Twilio through to Mail Chimp. Those guys have seen significant growth from Chinese companies not only in China but also Chinese companies overseas, and all of that’s going to stop. So that’s just going to be chunks of revenue that would disappear and come home in that sense and then these would be created overnight. No one doubts the speed at which we create things here, so it’s not going to be without possibility, it’s definitely going to have a negative impact on those guys, the market leaders right now – and I don’t think that they’re paying attention, I don’t think that they know what to expect, I don’t even think they question it like that. Especially those guys that are lining up for IPO’s. So that’s a space that I think is really interesting and for that space – yeah, the founders are probably going to have to benefit from being Chinese, but at the same time I think mixed teams are getting much stronger because you have to have that western lens as well. That’s a space to watch.
Matthieu David: I see, you remind me of research we did on export advertising, Facebook is doing 5 billion US in China and actually maybe impacted by the tariffs that it will be more difficult to export. I understand Chinese macro investment environment, I understand the four sectors, but so many things can happen in a startup. The founders cannot be the right founders, the business model could be not the right business model, etc. – so many details. How do you select beyond those Chinese macro investment environment, those macro view? What are your investment principles of Chinese founders? How do you assess?
Geoffrey Handley: I think going to take a step back – all the GP’s and founders – we are serial entrepreneurs community in China; we’ve built companies, grown companies, sold companies, listed companies. So, our internal DNA is about building successful companies. So, we took a lot of those learning’s, those experiences, the other thing we have in common is we’re all driven by data, so we use a lot of data. In building our own business as previously in our previous life – we build those business and we’re able to be successful for a number of reasons, but one of those reasons was the use of data. And so, there’s no difference, we’ve created this fund much like how we’ve created our businesses and said – what are the investment principles of Chinese founders we need to look for.
So, in terms of selecting beyond – as you said the top rank stuff, the first thing that’s most important to us is the human, the person right- and it’s not lip service, because every VC will say that. Every investor will say – the teams are really important, the founder is really important – yeah but I’ve also seen VC’s remove founders off boards, kick CEO’s off and do all these things that may or may not have been needed to be done, but obviously wasn’t as important as you thought it was. So, for us, it’s absolutely paramount, cause as I said – we’re founders first right – we’re not finance first. So, for us it’s about knowing and getting to know the founders, for who they are themselves.
We’re very principle based, we’re also very contrarian, we’re also very vocal. I write a lot on LinkedIn about what we see – how we see. We share our investment principles of Chinese founders openly. Some of our principles are very contentious, but as founders we have to be clear. And so, we look for these things. We look for an understanding of the founders as a human. Why? Two reasons – one – because we have to understand how that persons is going to behave and act regardless of the things that you pointed out. The business model could be flawed, the market could be flawed, legislation could change – so I need to understand the person right – for that business.
Secondly, I think that’s even more important than that – and again investment principles of Chinese investors is based on our own experience as founders. People that invested in our businesses didn’t invest in our businesses. They invested in us. At five startups myself and my investors – the majority of the guys back from the first, all the way to the fifth. So, we want to do the same – we want to find people that we can back successful founders, not so much the business. Obviously, we want the eggs out of the business, but more important than that is the human behind it. That’s the single most important thing for us – what does it look like in reality and the fact – the evidence is in the eating, right. When you talk to the portfolio companies – we spend a significant amount of time with these guys. As part of our TD but also past – we’re inside their businesses. Inside them – so much so that at the moment, we’re actually building API’s to run things on block chain with smart contracts, to manage and monitor specific things.
Now, tell me how many founders would let a VC have an API into their business? I can tell you – none. But we do!
So, there’s a deep element of trust in there, with that trust comes clarity of data, cause as founders we know, we try to make a polishing beautiful picture to provide to the investors. We see past a lot of that and we ask different questions. We have very straight forward modeling based as I said on the data. What data points we want to collect. There are certain things we look for in investment principles of Chinese founders. Unfair advantage, a certain number of founders in the team, co-founders in the team, so the types or makeup of the founders, through even to the age of the founders.
We look for growth patterns, we do trajectory comms of that business versus whatever else is best in breed around the world, and does this model make sense and work and is that growth pattern the same? Fairly standard stuff that I’d like to think that the best VC’s do because they did them on us too.
Yeah, there is a large element that goes into it. The other thing is that we give back a lot. As I said earlier on – I’m in the RICA, our other GP’s – they’re mentors, they’re advisors at various other incubators, accelerators, universities. We all lecture at universities. So that element of our life allows us direct access and first hand inside a different realm of those businesses. A different lens, a different perspective to those businesses and offers us a different view. So it’s a rounded approach, firmly grounded in data, firmly based from a founders lens first and I think it allows us, it gives us the unfair advantage that we need because we don’t have unfair advantage in those other areas, where other VC’s, other investors will have an advantage over us.
Matthieu David: Would you like to share one story of investment you did illustrate what you said about micro trend, about – as a team, you just talked about an investment that you did after Demo Day and getting acquired six weeks after, could be this one or someone which has not been acquired yet, but to be more specific, to understand with a specific case how you actually put that into action.
Geoffrey Handley: Absolutely yeah. A couple of big ones – one is the leader in – it’s a B2B play, they’re a leader in employee insurance, for employee wellness, an employee benefit that kind of thing in the workplace, the Care voice –
Matthieu David: We interviewed Sebastian.
Geoffrey Handley: You know a lot about Sebastian then and his business. Foreign founders running a foreign business in China, leading in the insurance space – right. Well on their way to success. Their international expansion is going ahead of schedule, their numbers are fantastic, they’re highly sought after, as not any partner company or supplier to clients, to their corporate clients, but also as an investment. We led their last route, we were there from pretty early on, we sit on the board. Very close to the team. Not just myself – myself, my team has very close relationships with various people on their team so we have hands-on involvement in there.
One of the things that we did with them – sure you mentioned Startup care, which is the spin-off business, so we helped initiate the thinking of that. Right. The initiation of – hey this makes sense to look at like this – reasons why – additional value, tap, all that stuff and then we helped drive and support the spin-off of that. And it is great right.
So, as a founder for him, and the founders themselves, hopefully they’re going to get two eggs instead of one. Right. That’s very rare. I know first-hand, my last one was two eggs instead of one, so I’m very passionate about trying to get that for the founders that we back. So, it’s a personal goal for me and it’s not something that’s normal. Most founders don’t even know that exists and most investors and advisors also haven’t been through that experience as an early stage.
Another example – the one I mentioned – the Demo Day one that came out of CA is 247. So, 247 is the largest non-native ticketing platform for travel experiences and entertainment. An amazing foreign business in China. When they came out of Demo Day, we led them through their first acquisition of a travel company, with licenses and everything. Of course, it tripled their size overnight, added fire power to their founding team. Added cash flow and added cash reserves. So, it meant they didn’t have to a round straight-away. No one had to get diluted. Again, things that most founders are taught –they are taught to – go and do a round quickly – go and raise some money.
There are ways to skin the cat that make better sense for everyone.
That was then, where are they now?
I actually just had Greg the founder of 247 – he flew to Hong Kong where I’m now, to spend two days with me, two full days with him and myself locked in a room breaking up their business to see what the specific areas are that we’re looking at and modeling, building models for the next phase of growth, which they’re on a great growth spurt as well.
And so –very hands-on. Very involved, not just from financial return of investment, it’s almost a personal undertaking as well, as founders we all had mentors, we all had people that we looked up to, that helped us navigate this really difficult world, right – where everyone is either telling you you’re amazing and you’re fantastic and yeah, isn’t this space amazing and everything’s great and it’s very hard to get the truth, or the people that are around you, haven’t walked these shoes themselves either. So, the advice you’re getting is kind of useless in that respect.
We developed personal relationships and bonds with these guys over and above what we’ve ever seen with other investors. Yeah, those are two examples of companies. 247 is interesting. Now, as I mentioned – they’re the largest non-native, right – now – 75% of their customer base – Chinese. So, they’ve gone from a 100% foreign business in China, owning the foreign market in China, to now 75% Chinese and their growth is insane. And hitting those Tier 2, Tier 3, Tier 4 cities and being the face of that thing there. And they had a shot. They had an angle, they had a lens that was not available to the guy, the bigger guys like Damai who are 10 – 15 – 20 times the size of 247, but margins are 1/3rd – ¼ of 247 and growth is less than half the growth that these guys have. Average tickets purchased per person per session is half 247’s. So, when you add all those together, I know exactly where 247 is going to be in a year and it’s going to be pretty significant.
Matthieu David: I feel you’re jumping from one opportunity to the other with a lot of freedom, a lot of things in your hand, how do you organize your week, your month, your year with so many activities and so many directions you are going to.
Geoffrey Handley: Again, going back to how we were as founders. The appearance is nimble and flexible. The reality – and I tell this to a lot of our founders, the reality is quite the opposite. The reality is quite structured, very disciplined and based on the first principles, investment principles of Chinese founders and a base foundation to start from. So, we very rarely deviate from those things. It allows us to make decisions a lot quicker. We don’t chase trains. We’re not after the next hot trend is – it’s not important to us because we’ve got four pillars, we’ve also got China’s 5 – 10 – 15 – 25- 30 – 40- 50 year view of Chinese macro investment environment, which guides us.
How do we structure our days? Pretty much like everyone else. A lot of its spent either sourcing deal flow and going through what’s available and what’s out there. A lot of its through active thought leadership. So, we encourage all of our guys in the team to write, because we believe that writing long-form, is a direct correlation to thinking, and there isn’t a lot of long-form writing these days. There’s a lot of posts, a lot of tweets a lot of this a lot of that, but to be able to write long-form that comes back to a thesis or back to a point of view, firmly backed by data – that process itself is a force belt of fire, right. It does a number of different things. It helps with the flow, it helps with LP’s, it helps with the actual problems that hang in guiding startups.
Third, the box we spend our time on is on the portfolio companies. Much more time than any other investor. So, where other investors might go to one board meeting a quarter, we’re probably spending 3 or 4 hours a week with portfolio companies.
I’m lucky I’ve got a great team around us, that has the trust and respect and buy-in of the portfolio companies that we’re able to portion that time out across the team. But that’s probably the biggest area where we spend our time, again just goes back to we’ve identified that as one of our force multipliers or one of our unfair advantages, so that we can provide that return to our LP’s, it’s going to be from a founder perspective and activating that founder lens and activating that knowledge, that experience, and that guidance. We’re lucky, we’ve earned that trust from the founders. We sit on the boards; we take this responsibility very seriously and so we’re inside. We’re inside there helping, it gives us deep understanding of their business and the problems that they’re facing and it allows us to help quickly, resolve things with them and for them.
Matthieu David: If entrepreneurs would like to raise money, would you be able to share a bit of the size of the investment you can do at an early stage. The size of the ticket?
Geoffrey Handley: Absolutely yeah. We’re writing cheques anywhere between – from very early guys at $25,000 a piece, all the way up to – a million is the cap. From the stage we’re looking at anything from that kind of post-seed place, through to max pre-B if they’re an existing company, but nothing there.
The sweet spot really is that period when they come out of an incubator, accelerator, they’ve found their legs, they’ve found their feet, or they’ve received their beatings and through the kind of – before the A, that’s the sweet spot there and we’ll follow them through to where we feel we’re no longer adding value. I think that’s important cause that’s an interesting thing we’re seeing at the moment is the dramatic increase in fund sizes being raised, for early-stage funds, but there’re even incubators, accelerators, seed funds, pre seed funds and it’s an interesting area because I don’t really know how to deploy, how someone would be able to deploy that much money – the sizes that we’re seeing in cheques sizes that are 50 – 25, under a 100, even with follow up. It literally perplexes me at the moment, and the only solution I think I can see is – those guys are going to be deploying more capital at later stage. So, then it needs this hole. The hole doesn’t exist yet. There are markings of it but I think that hole is going to get bigger.
So if we just do what we do as founders, which is stick to what you’re good at and what your strength is, then that’s our space, and that’s naturally where the value that we add, to these companies, be it way beyond capital, that’s where the value is most realized anyway, is in that pre A – pre B phase where we can really force multiply their growth.
Matthieu David: We talked a lot about successful ventures, successful startups you created and you invested in. Would you mind sharing a failure? Something where you got it wrong as an investment.
Geoffrey Handley: Yeah there are many, I mean we’re supposed to – this is not an easy space and as founders more than anyone we know that. Our own ventures are pot marked with failure. So, I think that’s a given and so it’s that risk minimization.
One of the – I think one of the ones in my mind that stands out – the reason why they failed I guess was because they – a lot of the advice that they took, a lot of the decisions that they made were not their own and they were doing things that were reactive as opposed to investment principles of Chinese founders and they didn’t understand the motivations of the people and giving them the advice. So, they were really – I don’t want this to get into a big session but I have a pet peeve at the moment which is this whole – what I believe is this misinterpretation of the lean startup movement.
What I think it’s become, and I don’t think – I don’t know because I don’t know the guys who created it, but I think it’s become basically this disdain for planning and hard work. There is very little hard work that’s being done by founders these days in terms of strategic planning, cause this overemphasis on – oh just try things and be nimble and do this and do that and figure it out as you go, is completely wrong and I don’t believe that that’s the actual intention of Lean Startup in its original format.
But that’s where it’s gone to today and that company – the one I’m thinking of as an example of failure, was a prime example of that. This misinterpretation. And so, at the end of the day, they didn’t have firm set principals or they changed what they had as principals because of the encouragement all around them. An ecosystem, investors, advisors and everything to just chop and change, be flexible, figure things out, and if they had stayed the course, if they had doubled down on what they were supposed to and what they originally had, they’d be around today. They would still be here. It’s sad in that sense.
I think another example of where the investment failed is not so much that we got it wrong but it went wrong in a very sad fashion as well and it’s a good lesson, it’s one that we’ve seen both ourselves as founders. This particular company had progressed to double-digit US million dollars revenue, had just broken even, had raised 30 million in funding from top tier VC’s already.
So, there’s a lot of ways to do good things, but they got to a place where there was misalignment between the investors and the future of the company and essentially where a lot of founders don’t understand the motivation and how VC’s make their decisions, are not generally aligned to the survival and the betterment of the company. It’s not right, it’s not wrong, it’s just different. VC’s are driven by fund returns, so anything that drops a fund return isn’t going to happen. So, in this situation, this company needed an injection of cash. We had secured the injection of cash from existing shareholders – a small group of existing shareholders, we included – based on a condition that the board needed to change. As in pay to play, if you aren’t going to pay in this round, removed off the board. First.
Second – liquidation preferences. There were VC’s on the cap table with 2x, 3x, one even had 4x liquidation preference, which is crazy. Right. So, it was inherited, it’s there – okay – but the only way that the cash is going to go into the business so it can survive, is if those liquidation preferences are given up.
Now, most people would say its common sense. They’re not paying so they’re not playing. Would you rather see this company have a shot at success finances secured already or would you rather shut it down now?
The answer was very clear – it was shut down. There and then, cause it’s easier to shut it down and not have an impact on a fund return, rather than put more money in and drop my returns down to points – which I think it was a big eye-opening lesson for those particular founders, they didn’t understand what was happening on the day – they couldn’t see how this could happen, they just hit profitability and yeah – it was a sad, sad day in that particular company, but those are two examples I think which are – again there – they are lessons, they are humbling.
Matthieu David: When you use the word principles, are you using it the way Ray Dalio was using it, like to get guiding principles for your life and work, or is it more a vision? Could you help us define more what investment principles of Chinese founders are in your own words?
Geoffrey Handley: Sure, yeah, the way Ray Dalio is using them, it’s a very important book, it’s a book that we buy every founder that we invest in and every co-founder. It’s also a book that we provide not only to our team but also our LP’s too, and some of our partners, to get some alignment, some clarity.
The way that we try to get people encouraged to have their set of investment principles of Chinese founders for the company and for the founders themselves, is to try to encourage them to understand they also need to have truths that are contentious. Things that they might believe in that other people won’t believe in. And it’s okay. You don’t have to have all these fuzzy soft, nice, happy things and say – we believe in fairness and this and – cause at the end of the day, that’s not going to help you. But things that will guide you and really guide the company are generally going to be hard truths.
So again, it’s about helping those guys get to that point as well.
Matthieu David: You mentioned three times that you need to understand the government in China, how do you understand what the government wants and is seeing for Chinese macro investment environment? Are you reading yourselves Chinese and reading the basics to the plan, are you reading the press? Specifically, and precisely how do you know what the government wants for China and the world?
Geoffrey Handley: I think firstly, the Chinese government is extremely transparent. It’s kind of strange when you say that right, most people are like – what are you talking about. Aren’t they this – whatever they have in their mind of China – it’s the most transparent government in the world? Like there isn’t a plan or a policy that isn’t available on the internet. Within 25 minutes of it being announced, the whole thing is there already. So, for a start, the government themselves are a great source of their information. It makes sense – stability and unity are very important – they’re the topmost paramount importance in Chinese macro investment environment and to have that happen in alignment across every sector and every geography, so they need to make sure that their message is out there.
The Chinese government is also great at selling every strategy – every government strategy has a brand attached to it. One belt one Road, 10,000 Talents, Made in China 2025– so there’s no shortage of awareness around you compared to if you go back to your home country or if I look back to New Zealand or the States, half the time I don’t know what the governments are doing. Right. I have no real idea of what they’re doing and when I do know what they’re doing, they’re going to change their mind anyway in four years.
So, we have that added benefit here of stability in the Chinese macro investment environment, it’s the single most important driver from the government’s perspective but it also means that it reduces risk for us.
So, with that acceptance, or that understanding as a base – yeah, where do we get our information from? From the government. From the government media. From people like yourself, from local media, from foreign perspectives, from think tanks – we also get it from founders. We talk to our network of guys that have created good Unicorns. The guys that are doing this stuff – that generation that’s already there, because they’re getting guidance from the government. Against an area that the West doesn’t understand are this relationship and the role that the government plays in business here or in the economy.
Where else in the world would founders be talking to government and adhering to government policy or following or informing? But here it’s extremely important. So there is that transparency, there is that shared knowledge, cause at the end of the day, the success of that policy – or of the direction or of this government strategy is paramount, and for that success to happen the government is encouraging this awareness and encouraging the spreading of the information – to get people in line, to say this is what we’re betting on – we’re betting on this box here, we need as much firepower behind it and drive it.
And so – It’s such a great Chinese macro investment environment for that, there are so many – the ecosystem is so varied – from formal think tanks, CCP, youth party league through the more informal networks, there’s no shortage of it and that’s a big part of our information. Of our sourcing and also a big part of our direction. We take from there because no one walks into a casino and bets against the house and expects to win. Whereas the West – it just disrupts stuff and screws the legislation, screws the rules, we’re just going to do this. That’s now how stuff happens here. It’s not how things work here. The biggest whale is the government, if you’re using casino parts – they’re the biggest whales, they’re setting the rules, they’re setting the odds and they’re setting the play and we’re just lining up behind and then doing what we do underneath that. So, having that information is absolutely key to us.
Matthieu David: Specifically, more specifically – you talk about Made in China 2025, you talked about Northern Belt – what do you deduct, could you give one government policy you could deduct direction from, you could deduct investment strategies from.
Geoffrey Handley: Sure. Here’s an easy one – Belt and Road is an easy one, Belt and Road – 77 countries, those countries are huge Capex going in, huge Chinese workforce going in, huge equipment flows going in to build things, so what do we take from there? Okay – I take that there’s going to be 77 pockets of Chinese population in all those countries. So Chinese language is going to start there, but also the reverse – they’re going to need to learn the local languages, or they’ll start to look – so there’s education place straight-away. There’s language learning things there.
Okay, what else can you take from there? There’s probably going to be ecosystems built in those 77 countries around food. Around entertainment. So those services are going to need to be created, so does that mean ITU is going to win straightaway everywhere? No. Probably what’s going to happen is in some of those countries there will be local companies that will be built to take advantage of those things. We’ve already seen it 2 -3 years ago, as WeChat started growing overseas, we saw companies in the States and companies in Europe being setup just to implement WeChat. WeChat wallets and services and just to help those foreign companies to implement these services and understand these services in the offering markets. So those are again the early indicators of what’s going to happen.
Through to a much more complex or much more subjective things, one of the companies that I remember I worked with very closely that came out of CA – they’re not in our portfolio but they were in the convention and expo space, providing services to and from database management, tools setup, turnkey solution through payment and the bulk to their revenue growth and their strategy, was driven in one belt, one road countries.
Because each one of those countries it’s not just about building some stuff, its bout direct ties, and so the government has been very clear. There are conferences on both sides all year. There are a trade expo and a government affairs thing – so these guys did model their business and said – right, first year 15 countries out of those 77 – second year – 30 countries, and they’ve executed on that strategy. So that’s their real business in Chinese macro investment environment, just single-handedly belt on one roat, one road. And very little of their growth was inside China, but it was a direct result of China’s policies and actions outside of China.
Matthieu David: I see. Soon we’ll be at one hour – we still have like five minutes – when I look at what you did, there are so many things we could talk about, but there’s this one very shiny one is that you inventing Airbnb Palantir shops now. Can you explain to us how you have been able to invest in Airbnb?
Geoffrey Handley: It’s not as shiny as it seems – I’ll be transparent. It was more a case of right place right time and being pragmatic. So, in the middle of my China experience, when I was the founder, I moved to the States to sell my last company, and I was based there for close to five years in New York and that time was the beginning of the rise of the East Coast, the tech scene which had been previously pretty much dominated in the valley.
So, it was a fairly tight small circle of people, the space I was in with my own company was mobile – we were one of the leading mobile-related companies, the largest mobile agency in the world that powered a lot of these things that we take from granted today. And so, as a part of that I was able to be a founding LP of a mobile only fund, back in 2008 and so that allowed me access to certain things and to see the scene being created. Palantir – that’s a secondary market purchase and the clear reason behind it – we’ve co-invested with Peter Field previously in a personal angel investment company called Book Track out of New Zealand, that was kind of how my awareness of what was going on, what he was building – the Palantir and I was desperate to get involved and get a piece of it somehow and the only way was to pick it up off the secondary market but that was many years ago, so hopefully its appreciated in its value.
Matthieu David: Thank you very much for your time. It was very inspiring, very instructive as well. Very interesting to see how you see investment in China – looking at Chinese macro investment environment, macro trends, and also government guidelines. Thank you very much, it was very instructive, hope you enjoyed it and hope everyone enjoyed the show.
Geoffrey Handley: Thank you so much, I really appreciate being invited on here, hope everyone enjoyed it. Cheers.
Matthieu David: Thanks, bye everyone.
China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.
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