Tuck Lye Koh: Lessons from rapid growth of Chinese startups

Tuck Lye Koh, Managing Partner of ShunWei Capital, shares his learning from investing in over a hundred startups in China, one of the world’s largest markets.

Excerpts from the podcast

I’ve made 3 trips to India and what I’ve seen is very interesting. First of all, mobile internet is going to take off [in a big way] in India and, secondly, I’ve seen very promising entrepreneurs in India. I think Indian entrepreneurs have made very good products and technologies.

Trying to translate [ShunWei] into English, it essentially means ‘how you leverage on a big trend to achieve greatness’. So, I think how we scale a startup in general, to us, is in our name: whatever business model we invest in, it has to be leveraging on a big trend. For example, right now in India, it has to be something related to mobile internet, and in China today, something related to Internet of Things. So it has to be leveraging on a big trend and a market that is huge enough. That’s a very important factor in scaling of Chinese startups that we look at.

In China, most of the business models that we’ve seen are largely operationally driven; but technology enabled. Technology has played an important role in increasing the efficiency of our startups. So I think technology is important as an enabler. For example, a startup called Meituan, which some of you might be familiar with: it is the largest Groupon equivalent in China. Back in Meituan’s early days, when it was founded in maybe 2010 or 2011, there were hundreds or even thousands of companies, with the same business model, so it was a very competitive space with a lot of startups in the same business. Eventually, Meituan virtually eliminated all their competitors, and how did they manage to do that? I think one very important reason was that they were very, very efficient — their operations were extremely efficient — because of the use of mobile technology to help their team build their offline infrastructure.

The role of capital in scaling

I think in terms of capital efficiency, there are a few ways in which to look at this. In general, let’s talk about fundraising first. The advice that we usually give to our startups is that raise money when you don’t need it; and raise more when you can. We often tell our entrepreneurs not to fix up on valuation — the market will decide how much the valuation of the company will be.

Always try to raise money when you don’t need it; and raise more money than you need.

In terms of capital efficiency, there are a few other things which we encourage our startups to do: first of all, try and optimize your debt and working capital, as much as possible, leverage on your working capital, delay your payments, get longer credit terms; if you’re in the e-commerce business, inventory is important, it’s important for you to keep a very slim inventory. For most of the companies that we’ve invested in, we encourage them, at least for startups, try to focus on a more manageable stack of inventory, because the larger inventory you have, the larger working capital you require and the more capital you require.

The other thing I think is important, in terms of capital efficiency, is that for almost every startup, at some point in time they are going to have some key competitors and you could be fighting head on head with a key competitor. So at the right time, try to eliminate your competitor as soon as possible. Giving you an example, one of them is called 58.com and the other is called Ganxi.com. Both of them have fought on head to head for the last 4–5 years, and each time they raise a huge amount of cash, it’s followed by huge amounts spent on customer acquisition and advertisements.

But recent 1–2 years, if you look at the startup space in China, the trend has been consolidation.

Again, quoting Meituan as an example, Meituan merged with Dianping; and then in the travel space, we have Ctrip and Qunar forming a very strong alliance and in the taxi hailing space we have Didi and Kuaidi merging. I think with the consolidation with your competitors, the result that you hope to achieve is to focus your cash on your business itself, rather than engage in unhealthy competition.

Hiring talent: global perspective vs local knowledge

Our experience has been that again, it depends largely on the business model and the role the person is filling in. In general, if it’s a role of basically running the domestic operations in China and Chinese markets, our experience is that the local talent usually works better, because they are much more in tune with what is happening in the business environment; the competitive environment; the local culture and we’ve found them to be a lot more efficient and a lot more responsive to managing the challenges or managing the KPIs in their portfolio.

Global talent will be more useful when it is more outward facing; I think the benefit of global talent is their wider perspective and because of their exposure, they can provide a startup with that added perspective outside of China. I think those are the benefits of what a global talent can bring to a local team, so I think in certain roles they can play a very big role in helping startups; but in other roles that are operationally driven in local markets, our experience is that local talent works much better.

What are the mistakes to avoid while scaling rapidly?

I have a few points to share: I think first of all, doing a startup is a marathon. Each of us need to manage our own pace, and pacing can be in different perspectives. Pacing in terms of your business scale and operations, the pacing of your team — how fast you grow your team, the psychological aspect , the morale of your team — and a very important element is the family element. We are strong believers that because doing startups is a long marathon, you have to have a work-life balance. If you do not have a work-life balance, if your family members are unhappy, it’s difficult usually for the entrepreneur to be fully dedicated and focused on their business. The very important point that I’d like to emphasize is that this is a marathon — manage your pace, with regard to your business and operations and with regard to your family.

The second thing which is very important as well is to manage your ego. I think doing startups is a very challenging task because you have to put in lots of hours and you have to make a lot of sacrifices. In a few instances we have seen, the company — having made significant progress in terms of business or in terms of the valuation at which it’s getting new financing — we have seen the entrepreneur’s ego getting inflated. Generally, we find an inflated ego is usually a very big warning sign, bigger than making mistakes. Usually big mistakes are made when the company is larger and when entrepreneurs feel overconfident about themselves. So I think the second point I wanted to share with you is to manage your ego — if your business is doing well or if the valuation of your company is very attractive.

On the impact of valuation traps

Many entrepreneurs we’ve met want to fetch a high valuation when in their fundraising — I could imagine why, there is a very strong motivation to ask for a high valuation — but I’d like to warn you that a high valuation could be a trap from a few perspectives. First of all, when you fetch a very high valuation and your business is not catching up with that valuation, in your subsequent round you may be faced with a dilemma of whether you want to do a down round valuation.

The other point is that with a very high valuation, you will have a bunch of early employees and key employees, who are paper millionaires. When their paper dollars become big enough, it may affect how much focus they can have on the continuity of the business.

A third perspective is that when you have a very high valuation, it might be difficult for you to attract new talent, because they will calculate the current valuation and how much upside they have.

Last but not the least, what I’d like to share with you is that whatever business model you build on, business is business. At the end of the day, whatever you do has to make economic sense. In the past 2 years, we have seen many startups in the O2O space, burning a lot of cash, adding new customers, increasing their GMV, but if you look at their unit economics, they do not make sense at all. So, at the end of the day, everything we do has to make economic sense.

This is all I have to share with you guys and I hope to be coming to India more often and investing in some Indian startups. Thank you!