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At the top of her game
STAR venture capitalist and Singaporean Jenny Lee lets out a peal of laughter when asked if her work - the challenge of finding the next investment unicorn - is a science or art. Her amusement may well reflect the fact that whether science or art or both, Ms Lee, a managing partner at GGV Capital - and the only female managing partner at that - is at the top of her game.
GGV Capital, set up in 2000, punches well above its weight. It manages some US$6.2 billion in assets, invested mainly in technology in the US and China, across a spectrum of companies' growth stages - from seed and early stage to expansion stage. In the 18 years since its founding in 2000, it has invested in about 300 companies - a relatively modest number, says Ms Lee. But here's the punch: More than 45 portfolio companies in US and China exceed US$1 billion in valuation - that is, they are unicorns. Based on recent reports, GGV funds are consistently in the top quartile for venture capital and private equity globally. The funds have reportedly generated an enviable IRR (internal rate of return) of over 25 per cent. That statistic did not come from Ms Lee, who is chary of discussing the track record.
"We don't plan for the 'X' factor," she says. "Venture capital is a long term, illiquid asset. The key isn't just one investment that works, but consistently making investments that work. That's harder.
"If you're good at one deal, you're lucky. If you're consistently good, that takes some skill. You need to have the ability to strike consistently and over a long period of time."
By dint of hard work and a passion for entrepreneurs, Ms Lee has gained a reputation as an investor with a proverbial Midas touch. For instance, she led GGV's investment in Xiaomi, the Chinese smartphone manufacturer whose fortunes rose on the back of China's mobile Internet explosion.
Xiaomi is today among the world's top five smartphone makers. One of Ms Lee's investments, social media company YY Inc, listed in 2012. The firm exited the company in 2017 when YY's valuation was peaking, for a 15 times return. More recently, a portfolio company LingoChamp went public. LingoChamp, for whom GGV was the first institutional investor at seed stage, taps AI in a language-learning app to help Chinese people speak better English.
The science aspect of being a VC is likely the more straightforward part, even if at times still unpredictable. Says Ms Lee: "The science is understanding the company, the product, the business model. Some of that is technical or quantitative. You can look at numbers, although when it's very early there are no numbers to look at. But you can do a market study or consumer research. But there is also the art of it. Everyone can go through a cookie cutter template with the same information, and you may still come out with a different decision even if it's science based."
THE art of being a VC is somewhat more amorphous, but is something Ms Lee clearly savours as she immerses herself in the microcosm of the entrepreneur, the business and his or her team. After more than a decade in the business, "pattern recognition" takes her some steps closer to the often elusive goal of spotting that next big thing. "From day one, a company may know the end game, but the road towards that goal - do you turn left or right? The path to growth is never a straight line. We have to figure out - is this the right person to bring this company to growth? From stage zero to one, to 10 or 100, or maybe not. We need to read the founding team, give them the right advice. Advice isn't a formula, it has to be adapted to the market situation and the entrepreneur.
"If you have seen enough successes, you know what the next one looks like. If you see enough entrepreneurs and their traits, and they do A, B, C right, then D may happen."
AN EXAMPLE of pattern recognition is the likelihood that in the social media space, the most promising entrepreneurs will be young digital natives. "Many times things arise from a need they identify ... Then you look at the background of the team. For someone to do social media they need to understand user psychology and user interface design ... On the other hand, a company seeking to cater to the enterprise market is likely founded by an individual in his or her 40s or 50s, with an experienced team. In the enterprise sector, most of our CEOs have had at least 10 or 15 years experience in product development. Their team members include those who can do enterprise sales. Over time we see some of the traits that have helped companies become bigger."
A large part of the all-so-desirable X factor lies in the entrepreneur himself. Alibaba founder Jack Ma, who has since retired from the company, is known for his charisma and ability to assemble a disparate group of individuals who complement each other in a team. Alibaba is one of GGV's portfolio holdings. "Jack is very articulate; he can tell a story of his vision, mission and road map. Because of the strength of his personality, he was able to assemble a team very different from himself yet complementary among themselves."
Xiaomi founder Lei Jun is also charismatic. He built his reputation as an engineer at Kingsoft and led it to an initial public offer. After his departure from Kingsoft in 2007, he became an angel investor and co-founded Xiaomi in 2010.
Appetite for private equity and venture capital is rising, and this has sparked some handwringing over the record level of dry powder. Preqin estimates that at end-June, the level of dry powder in PE and VC funds hit US$1.07 trillion. While PE returns have been strong, VC funds' returns by IRR have been relatively poor over four time horizons of one, three, five and 10-year periods. Ms Lee maintains that the valuations in the TMT sector for VCs are not frothy. "In the 18 years of being a VC in the US and China, we've gone through five or six cycles. We're not at a peak currently. It's hard for me to predict but the market is in a slowdown phase. Whether it will slow further and result in a winter, or just slow and become a bit more steady - that's the question."
Two factors are germane to the uncertainty. One is that it is by no means certain which area is primed to drive the next big investment wave, just as mobile Internet lifted all boats whether hardware, software or applications. "Definitely the wave of innovation that came from the mobile Internet boom and growth - that's in a steady state. Part of the slowdown is we're waiting for the next larger growth areas. When you see a proliferation of start-ups, it's normally triggered by growth drivers. We're not at a stage where the driver is clear cut - whether it's AI (artificial intelligence) or the electric vehicle (EV). There will be innovations on the horizon, but it's unlikely that it's like mobile Internet, where it's on the back of a standardised platform and companies can develop products off the platform. The market goes through ups and downs when there is a technology shift, and we've just come off the back of one."
A second factor, perhaps more mundane, relates to how macroeconomic and geopolitical factors affect capital flow. "These factors affect exits, access to capital. If access and cost of capital is higher, there will be a general slowdown in the pace of growth."
THE weight of expectations is trained on the areas of EV and AI. "The whole area of transportation is changing, so EV is definitely an area of disruption everyone is actively looking at. If all cars become electric, or if you dare to dream further, autonomous, you're going to have a lot of time. You'll have time to do things in the car, more activities and services. The car is a harder physical product, with more interaction with the environment and regulation. It's not going to happen overnight."
AI, or as Ms Lee, puts it - "AI-plus" - is yet another promising theme. "AI has been around for 30 years. But the reason people are excited is there is a lot of data collected around the world. The tools and processing power are much better. And, the world is getting more expensive. It's no longer about throwing people at jobs. Even scientists and professors can be supplemented or assisted by machines. We're talking about productivity improvement."
HOW much weightage does she place on valuations as she sifts through potential portfolio companies? Ms Lee says valuations may take a back seat at first glance, but it isn't irrelevant. "The market may be at the right point in its cycle, and the company could be super. But if it's priced at US$10 billion then it wouldn't make sense in terms of our cost of capital. I may be able to find another deal at US$10 million and be able to make 10x or 100x. We're professional institutional investors. Our first responsibility is to our investors. We make the final decision on whether the deal is priced appropriately to allow us to generate the right return.
"The return profile has to work for the fund and relative to the entire fund's failure rate. If you're a seed fund, you invest in 100 deals, and one deal survives.
"That one deal has to save the other 99 deals to make the fund work. You have to think about the fund strategy and positioning, and ultimately translate that into criteria to decide whether to underwrite or make the investment."
Even with GGV funds' stellar track record, there are still companies that fail. "With our companies, we're professionals first, then friends, and not the other way around. The thing about cutting losses is to address the issue head-on. Companies fail for different reasons. They could be too early in the market and they may have to figure out a new product. If they still have capital we encourage them to pivot, to try to figure out a new way to sell maybe to a new demographic."
A company may also run out of capital despite having a good product. "If they're still not cashflow positive, unfortunately we may need to cut losses. If you run out of money, you can't pay employees, then it doesn't matter that you have the best product." W