A Sniper’s Approach to Technology Growth Capital — with WestSummit Capital’s Founding Partner Raymond Yang

Raymond Yang is founding partner of WestSummit Capital, a leading technology growth equity fund that primarily invests in the US and China. Since 2010, the team has led investments into defining unicorns including Unity (~$41bn mobile game and real-time 3D development engine), Segway-Ninebot (~$8bn mobility + robotics platform), Twitch (gaming live video platform leader acquired by Amazon), GigaDevice (~$15bn NOR flash storage chip design), and more. Before his investment career, Raymond led the turnaround of Linktone and its successful IPO on NASDAQ in 2004. He also founded RivalWatch (retailer market intelligence) and Saratoga Technology (voice messaging services equipment). Today, Raymond shares with us his fascinating story, from growing up in Beijing and attending Tsinghua University to moving to Silicon Valley, launching his entrepreneurial career. Raymond then describes WestSummit Capital’s investment strategy in more detail, and shares more insights and lessons learned from key portfolio companies such as Unity. Raymond also shares key success factors for Segway-Ninebot and explains the significance of its IPO on the Shanghai STAR board (issued first CDRs in China). Hope you enjoy!

Edited by Louisa Xu and Henry Gao;

[Editor’s note: this interview has been edited and condensed for clarity. The opinions expressed in this article are Raymond’s own and do not reflect the views of WestSummit Capital. Company valuations cited are as of 1/21/21]

Raymond’s Entrepreneurial Journey

Hi Raymond! Before we dive into the details of your entrepreneur career and investment work at WestSummit Capital, we would like to first hear more about your personal story.

Raymond: Firstly, thanks for having me. This is my first time on a podcast so I’m quite excited. I was born and raised in Beijing, and I went to Tsinghua University for undergraduate and got a Master’s degree from EPRI graduate school. Soon after, I came to the tech center of the world, Silicon Valley. That was in the late 80s, around 30 years ago. I started my career as a software engineer and worked for two Silicon Valley companies. When I look back, that was a pretty memorable time for me.

You got to Silicon Valley quite early. Can you share more about the companies you worked for there? You mentioned that you previously started two or three companies?

Raymond: After working as a software engineer in Silicon Valley for a couple of years, I turned to entrepreneurship. I returned to Hong Kong to work for one of the telecom companies there. Shortly after, I got to opportunity to be sponsored by one of the US telecom equipment companies to expand their business in China by selling equipment. The company reached out to me and said that they wanted to expand into the Chinese market but lacked the local network to understand the Chinese market dynamics and needed someone like me to help. But because of my senior position in the Hong Kong company, they could not hire me directly. Instead, they invested a relatively small amount of money into a small company that would sponsor my short-term operations. They told me that this is the money I could use to start the business, if it succeeds, everyone would be happy. But if the business doesn’t take off, you don’t have to pay us back. I was pretty amazed at the time. It was back in 1996 and I had no idea what an angel investment was. I went back to China, started the company, and launched an innovative market strategy. In three and a half years, the company achieved the biggest market share in China. That was my first startup.

After almost four years running this business, it was 1999, the heyday of the Internet. I took the opportunity to return to Silicon Valley because I still had an apartment there. My wife and I returned there to take a break from the startups in China, but I was excited about the Silicon Valley Internet wave, so I started my second company called RivalWatch. Basically, we developed software to crawl the e-commerce websites for emerging trends such as pricing information, product and promotion information, etc. We slice and dice this information and provide them to competitors so they can learn their competitor information. It is called RivalWatch because you can use our software to watch your competition. Looking back, that was a pretty exciting period of time.

During that time, I grew stronger and tougher, both mentally and from a business operations perspective. I can give you two examples: Together with my two co-founders, we’d been visiting probably 100 VCs in the valley. Before finally receiving funding, we were rejected again and again. One time there was this VC that looked at our business plan and threw it into the trash can in front of us. They said, “a smart guy like you shouldn’t be doing this. It doesn’t make any sense.” That was sort of how VCs were treating entrepreneurs.

Another example, we were at a VC and there was only one VC partner listening to our presentation. His phone rang, he picked it up and started walking out of the room. But he told us to keep talking. We looked at each other and said, “You’re the only one in the room, who do we keep talking to?” That was a funny situation we still remember very clearly. Anyway, by the end of our fund-raising journey and after talking to about 100 VCs, we were fortunate enough to get funding from a very well-known Silicon Valley VC. One of the investors, Arthur Rock, was considered the “fathers of VC” in the Valley. We were so excited for them to join our company as investors and board members. We had quite a journey for four years, until the company merged with another company in the same industry.

Sorry to hear that you were treated poorly as an entrepreneur. Hopefully you’re not like that when you talk to up and coming founders in the US and China.

Raymond: Yes, that’s a very good point. Due to this kind of experience, being nice respectful to entrepreneurs is very important in WestSummit. Not only is it a requirement for myself, it is also a requirement for younger members. We keep saying that we have to show full respect regardless of how terrible their business model is because everyone has their progress. This has almost become of WestSummit’s principles to treating entrepreneurs.

I’m really glad to hear that. Let’s talk about the third company you were involved in. It was called Linktone?

Raymond: Yes, my third company was called Linktone. After four years of entrepreneurship in the Valley, I finally had a chance to take a break. I went back to China and when I was Shanghai, one of my friends, the founder of a company called Linktone, reached out to me. Linktone was an SP (mobile service provider) in the business of “mobile value-added services”. He had dinner with me, and that dinner quickly turned into a recruitment meeting. At the end of dinner, he offered me the CEO position in his own company. The company was not in good shape at the time; it was a turnaround situation. After a week of speaking with board members, I made the decision to join them. I shortened my vacation and jumped into the position as CEO of Linktone.

Interestingly, when I had my first board meeting, the subject for part of my presentation was “to repair the airplane when it’s still flying”. This is a turnaround situation, the company is still in operation. It’s not like a startup where everything is started from scratch, so you can fix many things and let the company gradually take off (also not easy). But the situation I got into was that it is already a company but is in a nosedive towards the ground. Luckily, I was able to put together an excellent team, used some bold marketing strategies, and turned the company around in one year. At the end of the 11th month, which was in 2004, I took the company public on NASDAQ and it became the eighth company out of China to be listed on NASDAQ.

I think many people forget that the Internet VC boom didn’t really take off in China until the last 2000s or even into 2010s. Back in the early 2000s, there were just a handful of Internet companies that went public; the first one was Sina (新浪). That’s really fascinating. What does Linktone do?

Raymond: In the early days, the mobile phone could only provide pretty basic services. Essentially it only had one function, communication. You can have phone calls and text messages. We provide some additional entertainment services. As you might recall, people had something called ringtone and ringback tone, which is when you call someone, instead of hearing “Ring, Ring, Ring”, you hear some music. There were also IVR (Integrated Voice Response) services, and a mobile internet service called WAP (Wireless Application Protocol). Interestingly, our business model was very similar to that of the (today’s) App Store. We work with mobile operators who provide marketing channels, and we share the revenue in a 15/85 split. This was the early stages of the Internet, but this business was really booming. At the time, there were 8000+ players in the industry but Linktone was the first to go public. It was the first SP company from China on NASDAQ.

What eventually happened to Linktone?

Raymond: I finished my term as CEO in 2007 to join a local VC firm. Linktone soon after was acquired by another Asian media company. It was a conglomerate from Indonesia.

WestSummit’s Investment in Unity

You got to Silicon Valley in the late 80s and spent several decades there building companies in between US and China. And in 2007 you started investing. You are the founding GP at WestSummit Capital. Could you talk about some of the portfolio companies you’ve invested into?

Raymond: WestSummit is a technology focused, early growth capital with global perspective. We are one of the few funds in China focused on investing in the technology sector. In today’s world, that is pretty common, but ten years ago when we started this fund around 2009, we had a strong belief that technology is changing the world and people’s lives. The rest of the team had a very similar background as me, and we all had experience with tech in Silicon Valley or China. We want to use capital to enable these great companies in the world. When we started our fund, we saw the opportunity that international companies are treating China as a marketplace where they can expand their business. That’s why we set up our investment strategy to invest both in Silicon Valley and China and try to be a bridge by leveraging our capital and knowledge in China to help Silicon Valley companies to expand into China, and vice versa. In the recent years we have completely shifted the investment focus to China.

WestSummit has managed several funds. One from 2010 Fund achieved 40% IRR for 10 years, MOIC is 19 times, and more than 1000% DPI. For our second fund from 2013, IRR is 41%, MOIC is almost 9 times, and close to 100% DPI, and in several months will reach 200% or 300% DPI. We are very proud of our excellent team in China. More importantly, it is our patience and determination to focus on investing into tech. At the same time, we understand that many other funds in China invest in B2C consumer model innovation, while we focus more on tech innovation. Ten years was a long time, and when we first started, we were pretty lonely, especially when everyone else was investing in hot deals like Bilibili, Bytedance (TikTok), Meituan, Eleme, etc.

To your point, a lot of Chinese funds that generated high returns for LPs have focused on consumer internet. There has been a bit of a shift towards B2B enterprise cloud. Not just that, but also hard tech such as semiconductors, chips, sensors, etc.

Now, let’s talk about your investments. Your fund’s investment returns are incredibly high and stack up well against any of the other best performing funds. I’ve been following one of the companies for a while, Unity Technologies, and I know that you’re the leading investor in Series B. They have been performing extremely well and the market capitalization is $41 billion or so.

Can we spend some time on Unity? I think it’s a very interesting model. The way I understand it is that they are primarily a game engine, and they enable game developers to build games more easily and efficiently. But I think they do a lot more than just helping developing games. What was Unity like when you first invested? And how did they evolve over time?

Raymond: That’s a very exciting company and we were so fortunate to be able to have this opportunity to invest. We invested in Unity in 2011 as the lead investor of Series B. Sequoia Capital was the lead investor in Series A. Personally, I have been sitting on the board for 9 years, it was an exciting and wonderful journey. The company itself is very interesting because it is almost like a classic startup. Unity started in the basement of an apartment in Copenhagen with three brilliant young entrepreneurs. They had a vision to change the mobile game engine industry, which had previously been dominated by larger mobile games engine companies that were expensive, awkward to use, and had to be run on heavy machines. They wanted to create a newer and lighter mobile game engine to use, also one that can be seamlessly deployed to many other platforms such as IOS, Android, Xbox. They had been doing quite well and received capital from Sequoia, then they moved their headquarters from Europe to San Francisco.

If you really look back to the early days of the company, one of the big arguments at the time was that their business was to provide software to game developers, which is B2D (business to developers). So you could easily ask the question of how big the market can be. It is a pretty sizable market for all the developers in the world, but people can still doubt the size of the market. But Unity has evolved itself from a niche mobile game engine provider to real time 3D software company, which was a huge change to a more diverse business scope and technology and product offerings.

The lesson learned from an investor point of view is that we always say that we need to invest in a company that goes for a huge market. But in our case, it’s the reverse. We started out small and built it bigger and bigger. This was very interesting looking at Unity’s growth by starting from only offering services to game developers, to offering advertisement to mobile game players. This also expanded their revenue stream not only for software, but also for advertisement. Later, they went even bigger and said that they are creating a software to offer to every creator in the world. If you look at it from an investor point of view, it is also a reverse of the conventional thinking. That was one of the most interesting lessons learned looking back.

The second thing when I think about Unity is that I watched the company grow from its infant stage to the adult stage. They are certainly still growing. Almost right after our Series B investment around 2011 or 2012, the company was introduced to professional management, which is the current CEO, John Riccitiello. This is typically a milestone of growth for the company from entrepreneur operated company to an experienced professional operated company. This transition was smooth and is also a very important milestone for the company to grow not only from 0 to 1, but also from 1 to 100. I think this is a very important step the company has taken. The other lesson learned is that when you see entrepreneurs fail, sometimes it is due to the lack of experience, and their failure to embrace the more professional managers to grow the company.

Even within the gaming space, a number of game-relevant companies are growing very quickly, whether it’s gaming engines like Unity, or the Unreal engine by Epic, and there are these other gaming players who are building engines and toolsets on top of this foundational infrastructure. For example, as these digital worlds get more sophisticated — the Unreal engine is already fairly good here, but it doesn’t provide full flexibility and customization to build up more detailed environments. Some of the characters you see in games can be made even more realistic.

Gaming is already a massive space, but when you apply 3D creation capabilities to education, animation, etc. this opens up such large market opportunities. Perhaps that is what’s driving a lot of interest in companies like Unity and driving the market cap up extremely high.

Segway-Ninebot and its IPO

Unity is very interesting. I also want to learn about another one of your investments, Segway-Ninebot. It is a company that is close to my heart. When I first went to China, I spent some time with Shunwei Capital, and was closely affiliated with the Xiaomi ecosystem. Segway-Ninebot came out of the Xiaomi ecosystem. It was a Chinese company called Ninebot, and they acquired Segway in 2015. They sell hover boards and electric scooters, and they were the primary supplier to Bird, Lime, and other scooter sharing operators. Their revenue growth accelerated since 2018, and they went public in China at the end of 2020. I would love to hear WestSummit’s take on Segway-Ninebot, when you invested, why, and how do you feel about the company’s growth.

Raymond: We invested in the same round as with Xiaomi and Sequoia Capital China in Series A+. For us, we were very anxious at the time and excited for Ninebot to acquire a US company, Segway. Segway was accompanied by a lot of legacies and stories behind that company. Regardless, this sets a very good example for a China company to acquire a US or global company, and to combine their brand name, years of experience in the industry, the Chinese market and their engineering and manufacturing capabilities. This resulted in a 1+1>5, not just >3, type of merger acquisition. After the acquisition of Segway by Ninebot, the so called “scooter war” in China was basically over. People started to focus on the brand and quality, and because of years of experience in the industry, Segway-Ninebot was kept to the industry standard.

Scooters/hover boards are sort of a novelty thing to have, where kids have fun with it. The founder of Segway was very forward thinking and quickly expanded the business into something they call “micro-mobility”. The company also got into the robotics. When you look at the early days of Lime, Bird, or other scooter-sharing model, many scooters were made by Ninebot. Given the COVID-19 global pandemic, people are avoiding public transportation, giving another boost to the “micro-mobility” business.

The company continue to grow into their next generation, which we call “smart moped”. The way I think of it is the “Tesla for electric motorcycles”. If you look at their version of electric motorcycles, it is truly amazing the technology they put on this one. Not only is the style very sleek, but also many smart features such as keyless ignition, and some can even come to you by itself. It’s going to be very exciting.

I was on the ground level in terms of selling these products globally. They had a consumer robot, Loomo, as well as a delivery robot for the China market. Something about Segway-Ninebot that I find really interesting is that they were (and are) very scrappy, very commercial-minded. For example, they learned to use crowd funding campaigns in the US, primarily via Indiegogo. They sold a robot through that, a go-kart, as well as several other products. Whatever they learn to do, they push their products through these channels. They also use some conventional methodologies as well. It’s amazing to see how hard these Chinese companies work and how innovative they have. They continue to manufacture quality mobility products, but also invest in R&D for autonomous delivery via robots. They apply the AV capabilities into their mobility products as well for the end customers.

One other thing I would love to get your view on is that they went public last year. It was a big deal not only because they raised a lot of capital, but also because they went public in China. They are the first VIE structure company to go public on the Shanghai STAR board, they issued the first CDRs (China Depository Receipts) ever. Could you share more with us about that?

Raymond: This is very interesting because they’re the first one to be able to list on the STAR board, which is designated for tech companies. In the early days, there are a lot of China tech companies that were able to grow their businesses very rapidly and grabbed big market shares. However, unlike NASDAQ in the U.S., the Chinese government require companies to be profitable for a certain number of years in order to be listed. It is a huge challenge for start-ups in the early days to reach profitability. People tend to go list overseas because of that requirement. That resulted in the government creating something called the VIE structure. Segway-Ninebot being the first company ever to be listed on STAR board has really opened doors and encouraged Chinese tech companies to list in China, as it removes the need for companies to be profitable to be listed. I know it’s not there yet, but in the future there could potentially be international companies coming to list on STAR board. This is important because essentially it is creating a NASDAQ of China. I think following Segway-Ninebot, we are seeing more and more similar tech companies that are listed on STAR board.

Another good thing about STAR board is that they learned from NASDAQ the “lock-up period”. NASDAQ has a 6-month lockup period and STAR has a 1-year lockup period. This is a much more investor and entrepreneur friendly policy. This is a minimum period of time where insiders could not sell their shares. This is good so that people don’t just get on the board and sell their shares the next day. On the other hand, it gives a good window for VC investors to have a liquidity opportunity.

What Makes Tech Investment Different

Some of these developments are happening at a fairly rapid pace. Some of these financial liberalizations you don’t expect to occur in a couple years’ time, but China has really emphasized this, and they’ve been working hard to change these policies to enable more liquidity in the local market. Bottom line is that VIE structured companies can now go public in China if they meet some other requirements.

So back to WestSummit, you mentioned earlier that you invest in more technology driven companies and more of a B2B industrial focus. You also mentioned that while many other Chinese funds focused on consumer investments and only recently shifted to B2B, whereas WestSummit has been focused on that area for a while. Could you share more about that? What do you like to invest in, and what enables your team to do this effectively.

Raymond: WestSummit focuses on the tech area in general. The term VCs like to use is TMT (Technology, Media, Telecom) sectors. Given the numerous drivers in China today, a big wave of technology innovation is coming, versus internet and consumer business model innovation over the past 20 years. Going forward, we are going to see many huge innovation companies (as big as Alibaba) in the tech space. In the US, you have successful tech companies and B2B companies like Unity. China is a step behind, but in 10–15 years, this trend is coming.

WestSummit has the vision that we want to focus on technology because it has a huge value in changing the world and changing the way of life. If you achieve that goal, the market is going to reward you. The companies that we’ve invested in in this space has become very successful for that reason. The tech space investment compared with consumer business model innovation investment is actually quite different. Many people haven’t realized that and think they’re the same. For example, if you have a VC team that has been investing in TikTok, Bilibili, PinDuoDuo etc., but now they turn their direction and say they want to invest in FPGA, NoSQL database, software-defined WAN, or something like that. You can imagine how large the barrier to entry is and how steep the learning curve is. That’s the first reason.

Secondly, after doing an internal study, we found that if you invest into the right B2C company, the company could take anywhere from 3 to 6 years from their starting inception to IPO. However, the study also showed that the average life cycle for successful technology company is about 16 years. How can your 10-year fund invest in a company that takes 16 years to grow?

Additionally, successful B2C companies simply needs to hit the sweet spot for a market need. Companies like OFO, Mobike, Eleme addresses a specific consumer need if you execute it well. However, in tech companies, there are at least three major steps: the technology is there and is working, the product is there and is working, and the market is ready for this technology. Do you remember when there was a year when everyone thought 3D printers were going to be popular? Where did these companies go? There was a year when wearable devices were popular, and where did these companies go? Same thing with VR and AR. In tech companies, you’re taking a different strategy and domain knowledge. There is a steep learning curve and we’ve proven ourselves in the past over 10 years. You have to gain a different perspective when approaching a technology investment.

You mentioned that these truly technology driven companies, it takes 16 years for them to go public or to be acquired. How does WestSummit invest given that likely requirement?

Raymond: According to our study, out of these 10+ years, the first 6 years are very much a trial-and-error in order to make sure their product and technology is working. We call that period of time the “Death Valley”. Many start-ups fail during that period of time. WestSummit’s investment strategy is that we don’t want to deal with these types of situations. We’d rather wait until the company moves past the inflection point. Once the company hits that point, they start their trajectory of exponential growth rate. That’s when we go in with our investment. Like I said, we will examine if the technology is proven, if the product is proven, if the market is ready, and if they have generated real revenue. Our approach is the “sniper approach”. Many VCs in this industry just bet on everything, but that’s not what WestSummit does. Bill Gates has said that, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten years”. This reflects the philosophy of our investment strategy.

Thank you so much for explaining your investment methodology!