This is one of the articles belonging to e27’s Meet the VC series, where we chat with venture capitalists in the startup space to find out more about how they do what they do. This is Part 2 of a two-part interview.
How do foreign startups have an unfair advantage in China? As a foreigner who has spent the majority of his career researching Chinese companies in Asia, this is where William Bao Bean’s expertise lies.
He didn’t have the Midas Touch from the start. He launched two startups on the side in 2007 and 2008 and the first “ran into the ground.”
The startup that failed to launch was something of a mashup between World of Warcraft and MySpace, a gamified social media network Bao Bean still muses about enthusiastically in the gushing manner of a gamer. It was a startup that was ahead of its time, albeit too complicated.
Bao Bean’s takeaway from this experience was that he learned the importance of simplifying. Another lesson learned? He admitted to being a “bad” CEO.
What worked, however, in the first startup was the video concept. After a year, he co-founded a second company, with his colleague from the first startup acting as CEO. Their efforts, KineticOne, was responsible for bringing media company Vice to China from 2010 to 2012 (by cutting out the more salacious and political parts).
e27 chats with the VC about the unfair advantage and more. Here are the edited excerpts:
In China, what sectors can foreigners thrive in?
In China, locals usually win. We are cross-border. We don’t play [in the] local land, because we couldn’t compete. But there’ s a couple areas that locals usually win. You have to have an unfair advantage. What’s going to make you better. These areas are where foreigners have an unfair advantage in China:
Ask all Chinese people and they’ll think that Chinese education sucks. Why do they think that? Because it does suck.
The most successful people in China fail out of the Chinese education system. It took Jack Ma three times to get into college, he kept failing the gao kao, and then he went to some shit college somewhere! Oh, by the way, I did not come up with that example. That’s from one of our mentors!
China probably has one of the best systems in Asia. You don’t get hardcore algorithm-driven trading in China. China has thousands of fintech professionals, but they live in Hong Kong or London. They get no respect back in China, so no one ever goes back.
We work with companies like BitMex and bring them to China, because they have this unfair advantage. BitMex are hardcore financial traders. They’re not Internet nerds, they know financial systems.
P2P (peer to peer) loans in China have taken off because of the financial sector. There’s four times the amount of P2P [lending platforms] in China than the rest of the world combined, according to some report that I read somewhere.
Small [to] medium people and businesses can’t get loans so they go to P2P loans. So P2P loans, you can’t get actual insurance, but you can get protection for your families. We’re focussing on divorce, kidnapping, if your parents get sick, this covers your loss.
Also Read: Welcome to the fintech zoo!
Which sectors would you shy away from?
Video companies don’t make that much money. Apart from the licensing, bandwidth is three times more expensive in China than outside.
What should the investor and startup relationship be like? What kind of people do you invest in?
I generally don’t invest in people I don’t like. For early-stage startups, it’s easier to get divorced from your husband or wife than get rid of your investors. For the good ones, its a decade-long investment.
I’ve invested in companies in order to learn, but I don’t invest in people who are not coachable. My value-add is not my money, it’s my help. It’s difficult to help someone who doesn’t want to be helped. I shy away. I mean, in the [Silicon] Valley, there’s a lot of articles about how you have to invest in assholes because they get shit done.
Well. Great. But I’m not unicorn hunting. We take common stock for our program, we don’t take preferred. Most founders who go for unicorns, they end up not making it, and the VCs own their company. For us, we’re common — we’re in the same league as they are.
On that semi-related note, what do you think of the fascination with tech bros? There’s all these articles about the tech bro boom in San Francisco, does this exist in Asia?
It’s difficult. In China, there will never be a Mark Zuckerberg. It’s a little easier now with WeChat. What I mean is a young entrepreneur that has a good product and then gets a lot of users.
Because, in China, until WeChat came, it didn’t matter if your product was good or bad. It mattered who your friend was and how much money you had.
College kids [in China] don’t have friends and they don’t money. That’s why in China now there are no Zuckerbergs in terms of college kids breaking out.
You see a lot of guys who worked at Tencent, Sina, Weibo, they know how everything works. They’ve got buddies who have buddies who are VCs and they get funded.
Your success depends a lot on your ability to get along with other people, not having the best product in the world. Whereas look at guys like Uber, who have what I think what they call “a healthy disrespect for the law.”
Tell us about a startup you’re excited about.
The Squirrelz — they’re kind of like the Alibaba of waste. For every factory in the world, between 1 to 5 per cent of what they pop out is a defect.
By contract, factories have to destroy it. They hire someone to destroy it, and they lose money. These factories have low profit margins. Twenty-three per cent of factory productions is in China. The Squirrelz is a marketplace where factories can put their factory defects — say shirts — and then hipster designers or creators can find the product and make them into new products.
The CEO is connecting not only indie designers but big brands, say TOMS [a shoe company]. The factory’s net profit grows by 10 to 20 percent because they get that cost back. TOMS and his designers cost goes down. It’s upcycling!
So no regrets being a VC and not managing hedge funds?
I took a 75 per cent pay cut [for this job]!
But the way I think about is: How much time in a day do people spend doing something they don’t like doing?
I’m now at the point where there is no time spent in my day doing something I don’t like. I’m extremely lucky in that way. And my track record is getting better: 70 per cent of Batch Seven got funded. That’s high for accelerators; very high for Asia. Two pivoted, one died but then it kind of came back to life.
We have a 38 per cent net realized IRR. In terms of performance, we’re in the top. But I just joined, so that’s not my track record. [laughs]
What’s the best way for startups to get in touch with you?
Well, I stopped reading my emails. WeChat or WhatsApp. Oh, but I actually can’t add anymore people on WeChat because I hit the limit. That’s why I haven’t added you!
Note: The WeChat limit is 5,000. Get in line to get in touch with this VC. The application deadline for Batch Nine of Chinaaccelerator is February 15, 2016.
Also Read: William Bao Bean steams up the startup scene