Head of Nokia China’s VC fund: I use a‘4P’ standard to assess whether your startup is a worthy deal
At our inaugural Tech Junction event, AllChinaTech’s Co-Founder Wu Nan interviewed David Tang, Managing Director of Nokia Growth Partners. Tang shared his insights on what investors look for at pitch meetings with entrepreneurs and how entrepreneurs should handle investment negotiations.
Below are excerpts from the interview.
AllChinaTech: Has the “winter” for the capital market arrived in China?
Tang: It’s been said a few times that the winter has come. However, for us investors, this is the best time to invest. My plan is to invest more than double the amount of money that I invested last year. I think many VCs are going to increase their investment this year because we believe this “winter” is going to provide us with a lot more quality companies with good valuations.
There will be many good companies to invest in this year. If you are a good company, don’t worry. There’ll be an ample amount of funding that will be put into the market, but particularly in China, you’ll find good VCs to invest in you.
AllChinaTech: What are your standards for making investments?
Tang: My 4Ps for investments are these: People, Pain points, Proof points, and Potential.
People, of course, is the team: who you are, who you can bring, why you are the best team in the market. For me, within the 4Ps, people is the #1 factor. We spend a lot of time talking to the team, understanding them and why they are capable of getting more stakeholders who can support this company to be successful.
The second P is pain points. When you are a startup, you must have some kind of problem you are trying to solve. The pain points you’re trying to focus on should be big enough and painful enough that your solution is able to help solve it. Therefore, pain points are very important. Is your pain point big enough for us to get a good return?
The third one we call proof points. After identifying a good team and a good pain point, then we will ask: why is this company the one that can solve the problem? What kind of proof is there that they deserve our investment? It could be that they have two million daily active users, they have generated a certain amount of revenue, or they have good products to demonstrate.
The last P is potential. What kind of potential return can the company give me? Is it a one to two return? Is it one to 100 potential? Am I going to lose a lot of money in this investment? Potential is looking at some of the financial projections — can the company sustain a longer term? What’s the capital intensity? And What’s the cash burn?
AllChinaTech: As an investor who gained a high return from the billion-dollar exit of China’s Craigslist Ganji.com, what kind of support did you give them besides investment?
Tang: I have been a mentor to Gagnji and other companies which I’ve invested in. I provide the network and operations. I helped them get investments from other people. From an operational point of view, we help them recruit people and advise them on how they should set their direction and strategies. Sometimes we need to work from within the board of directors to ensure a smooth working engine to drive their business.
AllChinaTech: What are the common mistakes that first-time entrepreneurs can avoid when they pitch to investors?
Tang: From my experience, many startup CEOs are not able to articulate what they are trying to do, what the pain points are, and why it is that we should invest within the first 10 to 30 minutes of the meeting. I used to run sales and I always tell them it’s important that you are able to articulate what you are trying to sell and why the product is the best in two minutes. As a startup CEO, within two minutes, you should be able to articulate your dream, your mission, what you are focusing on and why you are the one investors should compete to invest in.
A lot of investors make up their mind whether to invest or not within the first 10 minutes. If you can’t articulate yourself, they will turn their mind off. I’m not saying people make investment decisions within 10 minutes. I’m saying a lot of people will pass on companies if you cannot convince them to spend more time with you. If they feel that you’re worthwhile within 10 minutes, they will spend the next two weeks, four weeks, two months, and even a year following you. But if you are not convincing, you don’t have the opportunity. That’s a very important point.
AllChinaTech: What’s your advice to startup founders on negotiating their valuation with investors?
Tang: Startup CEOs should not just focus on the valuation, but also look into how to be successful. That’s the most important thing. Valuation is important but not the most important thing. Of course VCs use a lot of tools to look at valuation. I have analysts and financial people to look at your cash flow, your projected revenue, your competitions and public comparisons. It is a judgment call whether this is a good opportunity for us to invest in and what the potential returns are.
AllChinaTech: Investors have their standards. But from the startup entrepreneur perspective, they are on a mission to land more investment. How can they do it right?
Tang: I can understand what entrepreneurs need. But you have to put yourself in the shoes of the other side. You have to look at what investors are looking for. At the back of investors’ minds, it is important to invest in a good company that can give us good returns. Besides valuation, you should also look at how I can make my solutions more user-friendly, and how I can generate more satisfied customers.
The other advice is that valuation doesn’t mean that much. Your company will only give you a good return if they are successful — either it’s an M&A exit or they go IPO. If they get a good valuation on the angel round, A round, B round, C round, D round and then go bust, there’s nothing you can get. 10% of a billion dollar [company] is much better than 99% or even 100% of a zero [valuation].
When I talk to a startup, I would care whether the CEO is focusing on making the company, building the team, the product and the solution, rather than arguing with me to get me to give you 150 [million dollars]. If you focus on the right thing, investor A, investor B and investor C will all come in and tell you, “Hey I want to invest, I will only give you 150 million and I want to have 30%.” Investor B will say, “I’ll give you 160 million and I want 40%.” But you will tell them, “Come on, that’s not important. What kind of help can you give to me? What can you do to help me to be successful? So that I can own 30% of a two billion dollar company, instead of 70% of nothing.” I think you have to look at this from a different angle.
AllChinaTech: What are the tech sectors that you think can attract investment in 2016?
Tang: I was one of the first ones in China to push mobile internet. I think now, mobile internet is pretty much the norm. The world is becoming a connected world. It’s not just a mobile phone. People call it the “Internet of Things” or IoT. As the world becomes more connected, billions of devices will connect with each other and the cloud. There will be all kind of services and data available to people that will become valuable. Besides education, which is a big area in China, we are looking to invest in the “Internet of Things”, digital health, and intelligent devices which provide vital data.
About Tech Junction:
A meetup group in Beijing with a stated goal of exchanging ideas in short, sharp dialogues among startups, tech and media professionals in order to shed light on the tech scene in China. Our mission is to establish a tech community to connect with thinkers and dealmakers around the world. This monthly meetup is co-organized by tech media startup AllChinaTech and co-working space DayDayUp.
Find out when the next Tech Junction is on meetup.com.
Wendy Tang is a writer at AllChinaTech. Prior to this role, she produced videos for the Wall Street Journal’s consumer technology show Digits from Hong Kong and wrote about the Hong Kong startup scene for various media. She likes to write about foreign tech companies in China, profile Beijing’s burgeoning startup scene and rub shoulders with entrepreneurs.