William Bean Bao is the Managing Director at Singtel Innov8, a strategic investment fund backed by Singtel Group and focused on the technology, media and telecom sectors. Most recently he was a partner at Softbank China & India Holdings, an early stage venture capital firm backed by Softbank of Japan and Cisco. William began his investment career 16 years ago as a technology analyst in Taiwan, and worked for companies like Deutsche Bank, Bank of America, Bear Stearns, where he was ranked several times as top-level analyst by various media. Today, William shares with us his insights on startups in China and his career lessons.
Jackson: Could you please tell us about yourself? You studied East Asian History and International Relations during your university years. How did that led you to equity research and later becoming a venture capitalist?
William: I grew up in the US on the East Coast. I didn’t grow up speaking Chinese. When I went to college, I studied Chinese but they only had a two-year program so I decided to go to Taiwan during my junior semester. Back in 1993, the economy was taking off; hardware technology in Taiwan became a major driver of the economy. There was starting to be some serious players in the lower-end hardware industry, such as desktop mouse, keyboards, and monitors market. I had a great time and learned a lot.
I returned to Taiwan between my junior and senior year. I was always interested in joining the Foreign Service because one of my relatives was in the US State Department. So after graduation, when I went back to Taiwan, I cold called the US Commerce Department and offered to work for free, in the afternoon five days a week for four hours a day, while studying Chinese in the morning. And in the nights and weekends I taught test prep at Princeton Review to pay for living expenses. The overall experience was good. We brought in people, such as NGOs, the US Export Import Bank, etc., together. The issue for me was to get people to sit down. Once we successfully got them to sit down, generally our role was over and was followed-up by the industry. I was more interested in continuing on with the process of what happened and what was discussed in the boardroom once everybody sat down.
So after a year, I switched over to equity research. At that time, there was three ways to get a work permit in Taiwan: you either worked for the government, taught English, or worked for an investment bank either as a broker or as an English editor. I’d had enough working with the government and as a teacher, so I got into finance through a position editing English paid by the hour. This opportunity started my career in finance.
Jackson: What’s the “Aha” moment in your finance career? What made you excited?
William: I was a stock analyst for 11 years. Being a stock analyst, I had amazing fun. You had to do a couple of different things – not only predicting the future but also understanding the market perception of what the future will be. I started out in Taiwan, which was not the place to learn how to be a stock analyst at that time. So I went back to the US and got a job on Wall Street at Bear Stearns. I worked for a senior Institutional Investor Magazine ranked analyst named Andy Neff. He had a very good teaching methodology in which he would let you do the work and then edit it to his liking. You got a chance to develop your own opinion and thought process and then compare it to his more experienced perspective. We understood his view while learning to develop a view of our own. It’s very important to have mentors especially early on in your career.
We were covering the consumer side of the computer hardware on companies like HP, Dell, Compaq, Apple, and Gateway. Around 1999, I started to write thought pieces and white papers on the confluence of hardware and connectivity. Today you might take it for granted but back in 1999, it mostly was just a dream connecting mobile devices to the Internet. Blackberry was actually quite revolutionary. We were the first two or three people to become Blackberry users at Bear Stearns and it changed the way we worked. I also worked on sectors such as the digital home market, and at that time it was quite early, the concept of the connected consumer.
After the Internet bubble popped I came back to Asia with Deutsche Bank and built up their tech franchise on the equity research side. By the end of 2006, we were ranked top 3 for software and IT services in Asia. I was most well known for my coverage of the China Internet companies starting from the end of 2003 and of 2004.
I got in very early on the Internet boom in China. And while I was doing that I started doing angel investing. I’d done a small amount of angel investing with entrepreneurs I met in Silicon Valley back in 1999. By 2004, I was ready to go back into angel investing. When you have a lot of friends doing interesting things, sometimes you want take part. So I started with investing small amounts of money into private companies.
I think one of the “Aha” moments came while I was covering the Internet. At the start in 2004, the entire market capital of the Internet sector was a couple billion USD. And by the time I left in early 2007, it became 14 billion USD. The market, although there were winners and losers, expanded massively. My job as an equity research analyst was to help folks make money. It was called the sell-side. Basically you just needed to buy Tencent and Baidu for your clients. At that time, I was still young at 33 and decided that was the time for a change to the buy-side to take advantage of the growth in the market.
I took my interest in angel investing and I joined with two other colleagues from Deutsche Bank who got backing from Softbank. Together with another partner in India, we created a firm called Softbank China & India Holdings. We got US$50 million from Softbank, US$50 million from Cisco, and US$5 million from Deutsche Bank. With that I tried to make the very difficult transition from a sell-side public equity analyst to early stage VC.
Jackson: You focus on technology, media, and telecom. What are the exiting areas combining this three aspects in China? Could you name a few companies if you are allowed to?
William: China has some unique characteristics. It is a developing market. In some sense, it’s a very rich market but in some sense very poor. Their experience with technology is different than that in the US, where most of the people grew up with a PC first then a smart phone. But here in China, the majority of the market has never used a PC or email.
So one area I focused on was mobile. But the mobile market in China was horrible. No one was doing any investment in the mobile market until the end of 2010. The reason was because that the telecom operators in China were trying to control distribution of software and services. It was a very closed market. It was true in most of the markets around the world but especially true in China. If you can’t get your services paid for, you won’t make money.
But the power of mobile and the power of innovation to move around obstacles finally won out. On a global basis, the folks that tried to control things have lost out or are losing out. And innovative companies, like Apple and Google, are creating a new environment and a new ecosystem. This is one of the biggest investment trends in the last year and a half. I was lucky because I’d been investing in mobile pretty heavily for the last 5 years. And because there was not a lot investment in the sector until more than a year ago, there aren’t too many people familiar with the traditional mobile market. You’ve got a lot of people moving from the Internet space but sometimes the assumptions you use to make an Internet product doesn’t always hold true in mobile. So I got a really good opportunity.
In China, the Internet is dominated by really big players, like Tencent and Baidu. They always tend to offer every product. But these guys don’t have a clue about mobile. Because of the difficulty operating in the previous tough regulatory environment, they had basically pulled out of mobile and they were right to do that. But when mobile came back, they didn’t have a sense of how to deliver good mobile product and that created an opening for startups.
William: One company is called guanxi.me. The product is not there yet, but I think that the company has an opportunity because they do understand mobile industry and its users. They have the ability to do mobile billing and messaging because they have a mobile license, while most Internet companies do not. Mobile licenses were once numerous but today there are only a few because nobody could make money in this space; they were expensive to keep up, and the government stopped giving them out. But those who have them could potentially put them into good use. Now that the mobile market is more open, there is a better monetization with online purchasing and advertising.
Another company is called Lekan. Chinese have been trained not to pay for content. However, the market for content here is huge. We have made the assumption that the market is segmented between people who never will pay for content and some small group of people who are willing to pay content in order to get convenience, control, and access. Lekan is similar to Netflix in that you pay per month and you receive content. They launched a mobile online kids’ channel platform. They have probably the best kids’ library in the world. They offer the parents a unique proposition where the parents can feel safe of what type of content their kids are seeing. So you are bringing a common US model of paying for content to China, whereas China in the past was leading the global video market. For example, Tudou was founded before Youtube. Now it’s changing. But when we bring in the US business models, we tweak it. Lekan has a social component that Netflix doesn’t have.
This leads to another company. When parents give iPads or iPhones to their kids so that they can keep them quiet during lunchtime – they feel guilty for not engaging with their children. A company called Smartots created a platform for parents to engage with the education content their children are learning on the pad or on the phone. Smartots integrates with the apps kids are using and reports to parents what are their kids are doing, where are they doing well, and what they are interested in. Then Smartots gives the parents offline opportunities to engage with their kids. Smartots also recommends new contents because kids tend to move around a lot. So this is really a non-intrusive way to re-engage with their children. The kid’s education market in China is is quite niche because, different than in the US, Chinese customers are not willing to pay for education software and it doesn’t make sense to run ads to the kids. They are bringing US developed apps to developing markets where people are not used to pay and monetizing for the app developers through the parents. The company Smartots is the Number 1 education app in the US and in China. They found a unique way to monetize education apps.
Jackson: You’ve dealt with lots of companies. And I guess there are also a lot of failures involved. What is the biggest lesson you’ve learned?
William: I read an article recently about startup failure. The single most popular mistake for companies is that they try to scale too early. They run out of money and then they die. Money can only help you get things done quicker or stay in the game longer but it cannot bring you success. In fact it can hurt you. For example you might hire extra 20 people and start marketing before you actually have a good product ready for the market.
There’s a guy named Eric Ries who created something called Lean Startup Machine. We just hosted a Lean Startup Machine event in China. The Lean Startup methodology is something Chinese Internet companies have been doing for a long time. They go out and test their assumptions by showing something to their customers and ask whether they like this or that. Based on what your consumers think, you iterate and iterate. The reason for this is because they have a lot of labour but little idea of what the market wants. So they build it off the cheap labour and test it. It’s like throwing something against the wall and seeing whether it sticks. In America, the preferred methodology is “ready, aim, fire.” Ready is strategy, aim is planning, and fire is execution. In China, it’s ready, or planning, and fire and see what they hit. If they hit something they go that way, otherwise they fire again. I think that might be one reason there are no US Internet companies, like Yahoo!, EBay, Google, which are successful in China.
Jackson: What do you think of the copycatting model and what the Samwer brothers are doing?
William: I would put what the German brothers are doing in a different category with what the Chinese are doing. As I mentioned, the way the Chinese use and interact with the Internet is quite different than in the US.
Like online video, Tudou innovated their way away from UGC towards licensed content because advertisers are not interested in paying for ads next to UGC. And that happened one and a half two years before Youtube started focusing on licensed content. I wouldn’t say it’s a copycat market.
You’ve got Kaixin001.com who created a farm game. They basically took single player farm game and made it social. They were the first to do that globally. Because the social networks like Kaixin001 are closed in China but Facebook is open, another social game company in China called Five Minutes copied the farm game and put it on Facebook. They made a good amount of money. Then you’ve got a company called Zynga who copied Five Minutes and made a large amount of money. This is a great example of US companies copying Chinese innovation but making it better. One thing great about Zynga is their business intelligence and analytics. Their ability to tweak their games is institionalized.
Another example is that the Sina Weibo has a way better user interface than Twitter right now. So I would call it iterative development rather than copycatting.
What Rocket Internet is doing is actually quite innovative in a different and important way. It’s both an execution innovation and a financial innovation. The world is increasingly connected. You have entrepreneurs constantly reading what entrepreneurs in other countries are doing. And generally Rocket doesn’t start those companies from scratch, but they are finding the people in other markets who are already doing the idea and supporting them. The interesting thing about Rocket is that they are one of the biggest supporters of entrepreneurship on a global scale in the world.
Just because you invented the idea and because you are in the US doesn’t mean you are in the forefront any more.
You’ve got more smart phones in China than in the US. You’ve got twice as many Internet users here than the US population. And it’s not only China. It’s a global market. Every month, the app usage in the US shrinks as a percentage of global app usage. It’s only going to continue that way.
Jackson: How to clone a US company in China?
William: There are incubators and funds in China that are doing that. One has a team of analysts who figure out what’s going on in Silicon Valley and they study whether it’s viable in China. If it looks good they form a team and launch it. Come to China if you have a good idea. Remember it’s “ready, fire.”
To name a few incubators or accelerators, they are Innovation Works, Transist, Chinaccelerator, and HAXLR8R, and Beijing Tech Hive. And then there are hundreds of local government backed groups. On the angel side, I helped organize something called Angelvest. They are the largest angel investor group in China. They have 53 angels in Beijing and Shanghai, and in Hong Kong/Shenzhen soon. They are doing about one deal a month.
Jackson: What do you consider as a good team?
William: The answer is quite standard. You need a team that complements itself. You need a team where people have good give-and-take but at the same time only one decision maker. It’s also better to have a team where they know each other pretty well and worked together before. Investors want a team they can get along with because its harder to divorce your investors than your husband or wife.
Something different here than in the US is teams are usually built based on the members’ relationships rather than skill sets. So teams might be tighter but less balanced. Although we will help them, it’s hard to bring in talent to a founding team.
Jackson: How to do a good pitch?
William: We don’t usually criticize the pitch but rather give them tools so that they can improve their pitch. The issue is that for many by the end of the pitch you still don’t know what the guys want to do. It could be that they don’t know what they want to do. It could also be due to a communication problem. Presentation is not something you learn in school here. So we generally don’t count the pitches against you but we do also have limited amount of time. Frankly, we are more interested in the team and their ability to execute and the space they are attacking.
Jackson: What advice would you give to those entrepreneurs wanna-be’s who have newly graduated or are still in school?
William: Do what I did– go out to some city, get a job. If you need to work free, work a year, do that. I organize my college’s alumni to offer about 20 jobs and internships each year to students and recent graduates. Often times the hardest part about coming to Asia is not building a successful career but the landing when you first get there. I also had that challenge and that’s why I try and help folks coming over as much as possible.
Acknowledgement: special thanks should give to William Beam Bao, Gary Chan, and Dan Powell, who helped on the editing.