Moderator:  David Wolf,   CEO    Wolf Group Asia

 Panel:

• William Bao Bean,  Partner   Softbank China & India Holdings
• Andrew Chen,  Partner     BlueRun Ventures
• Charles Pan, GM   Orange Capital
• Tangos Chan, VP    China Growth Capital

Q: How has the global financial crisis affected the VC climate in China?
A: Exactly the same as the US.  Not going to bother paraphrasing.

Q: What makes a Chinese Entrepreneur better / different?
A: US: decks are well structured, CEOs are polished and sharp.  CHINA: much younger, more grass-roots entrepreneurs.  
     US: ready, aim, fire   CHINA:  ready, fire - go see what you killed    US: still in the bunker figuring out what to shoot

Q: Advice to / opinions of expat entrepreneurs? 
A: Tend to only invest in experienced Chinese entrepreneurs. 
     Understanding of Chinese culture (to know your users) is a requirement 
     More attractive:  Chinese who leave, learn in US, come back
     IP + good approach to business model coming to China from another country  

Q: Post-Series-A, what does the cap structure look like between Founders / VC /  employees?
A: Chinese founders will typically own more than in US.  This is because of Chinese culture.  Talent/engineering cost is very low.  Angel round will get a company to 20-30 employees.  Also, companies need less cash so founders end up keeping more.  (lower cap-ex)

Q: What are the exit strategies here in China and what are the corresponding legal hurdles?
A: Shooting for overseas IPO or M&A.  Company will be owned by a holding company based off-shore.
     China working on a NASDAQ competitor starting Q1 2010 (Jimbot (sp?))
     Trading volume in China is already 4x Hong Kong’s
     PE ratios higher in China as well.  All of this should help more local IPOs
     Chinese consumers understand the concept of investing, also helpful     

Q: How are Chinese entrepreneurs connecting with VCs (is there an angel/incubator equivalent in China?)
A: Events & conferences, lots of demos in China.  Not many incubators yet.
     There are some angel groups in Shanghai - not making a lot of progress yet.  60 angels ~ 4 deals.  Each angel is committed to invest $5k/year = lots of startups. 

Notes:

• 1-5mm fetching about 10-40% of a company normally here. (Softbank - backed by Cisco)
• Funds are preserving so they can do follow-on investments for their portfolio companies
• 15 person company buring 12k/mo in China - 2nd largest language learning company in the world
• in RMB investments there is no concept of preferred / common stock
• Must have an RMB fund on-shore to invest in China
• There are constraints on equity ownership by foreign investors.  Forces investors to localize
• There are still unclear tax issues after liquidity events in China
• It’s about investing in people, just like in the US
• Retaining people is key - much harded to do in China - competing with the big, stable companies.  An investment in a charismatic, likeable leader carries a lot of weight
• “You’re ATM card is less secure than your online gaming account in China” - the gaming acct has a lot more value built in
• Service-based innovation in the US tends to be based on core technology innovation in China.  Example:  Kindle developed in China, commercialized in US.
• Orange:  in China to find business model innovations to bring back to Europe.  
• Behavioral targeting on the Internet:  US you get in trouble (Beacon?) - in China it’s coming out of Government / University labs.
  - Chinese gov’t is motivated in tracking people and their habits whereas US gov’t is not.  
   

Eric’s blog:  startuplessonslearned.blogspot.com

Twitter: @ericries (tag with #leanstartup)

Presentation Notes:

• Most startups fail catastrophically
• How many startups have lived up to their employees, founders and investors?
• Most startups that succeed turn out to be something totally different from the initial vision of the company
• Difference between a successful startup and a failure is the number of iterations the company could afford before death / success
• Eric’s new company - IMVU - bring avatars and digital goods to the USA

IMVU:

• shipped in 6 months - a horribly buggy beta product
• charged from day 1
• Visionary Customers can be just as or more valuable to the business as the founders
  - must be in constant dialog with those visionary customers
  - those visionary customers live with the same pain that the founders did when they came up with the business idea
• Iterate constantly.  IMVU pushes to production 50x per day
• No PR, no launch
  - this way you only focus on what your customers think
• 2007 revenues of $10mm, still growing nicely

Lean Startups Go Faster

• Full-scale refactoring of how software is developed.
• Commodity technology stack - easy, cheap: EC2, grid, cloud, etc etc
• Customer Development (find out what customers want before you build it)
• Agile (lean) product development (fast iterations)
  - Principles drawn from Lean Manufacturing and Toyota Production System
  - Where problem is known but solution is not
  - Meetings are waste, revising code is progress
• Product development at a lean startup:
  - problem and solution both unknown
• get rid of departments.  2 teams:  problem team, solution team
• Problem team constantly asks what the problem is and is there a business here if we can solve it?
• Solution team constantly asks what the problem is and if the product is sufficiently solving it (constantly iterate)
• The biggest source of waste in any startup is building something nobody wants.

Disclaimer (AJ):  My notes don’t do Eric’s presentation or concepts justice.  Please watch Eric’s recorded presentations and look at his actual slides.

This perspective is from the smaller seed / angel investor perspective.

Panel: Dave McClure, Joyce Kim, Ryan Pipkin, David Troy

• Downturn has been worse for VCs than for startups (harder for VCs to raise money relative to the valuation hit for startups)
  VC as an asset class has performed terribly and many of their LPs are “overweight” in the class.  All bad for VCs
• Lots of VCs will be disappearing over the next few years.  The good ones will survive (CRV, August, etc)
• New environment:
  - more focus on getting revenue, get to break even cash flow
  - get to sustainability on the Series A so you don’t have to raise money later (usually won’t be the case)
  - Seed Funds (SoftTehc, Maples Investments), and Incubators / Angels (YCombinator, TechStars) are gaining traction in this environment
  - much cheaper to prove concept these days - < $50k 
• Troy - making 100-250k investment in 1-3mm pre-money companies in BWI area only
• Pipkin - makes software that helps angels manage / syndicate their deals.  
• Angel Capital Association: 160 member organization of angel investor groups
• Due diligence process is much more arduous now
• Startup valuations down 33-50% on average in the Valley
• VCs taking 50% longer to close investments, on average
• Legal:
  - not a lot more convertible notes going around (except for McClure)
  - they’ve started capping these notes (cap the Series A valuation) in the last year and a half
  - terms are very pro-investor.  Less term sheets, less room for negotiating
  - easier to take a board seat on A round or get a liquidation preference
• Series B’s are impossible to do right now.  Best you can do is likely 50% down round or worse.  Many are dying now - too speculative.
• Trend for Micro-Seed ($0-$100k to get a prototype built and start proving a market):
  - panel is bullish on micro-seed model
  - Pipkin:  there may too many micro-seed incubators out there, Paul Graham has a secret sauce 
•  Troy:  You have just as good a chance at good returns in a small startup than you do in the public markets
• Panel agrees outlook for Angels are looking much better than VCs right now, at least from an ROI perspective
• Kim:  Seed round expectations have completely changed.  Try-and-see not as viable now - must be building a real business.  Less R&D investments.
• Is there still room for no-revenue, pure-growth companies in the VC model?
  - Kim - not really, unless it is a proven entrepreneur
  - McClure - seed yes, VC less so
  - Concensus: we must be at break-even by next round.  We’re basically bankers now.  
• Net-net:  Fail fast and move onto the next one.  Don’t waist too much money proving/disproving what you think will work.

Startonomics / Startup Metrics:  (Dave’s AARRR)

• Acquisition:  what channels do customers come from?
• Activation: do they have a good 1st experience?
• Retention: will they come back?
• Referral: do they tell other people (net promoter score)
• Revenue: will they pay / how to make money?

       - crucial for startup to track these things to take some of the risk out of the business for their investors.
       - We’re seeing the professionalization of the low end of the investment market

Q: How do angels feel about a quick exit at a smaller valuation (as opposed to the larger, follow-on deals ending in larger exits)
A: There is more of an oppty for angels and seed funds for deals like these since the VCs aren’t interested in them.  It really depends on the fund size … all about ROI.  Someone managing a 10mm fund would be happy with a smaller exit. 

The slides:

For the better part of the last 10 years one of my hobbies has been sampling the best the Internet has had to offer in investment research tools. I’ve dabbled in developing my own technical analysis algorithms, have done a fair amount of day trading and have taken some more traditional long positions in companies I believed in. Online investment tools have come quite a long way over the years, but one of the recent fads that the “Web 2.0″ wave of innovation has brought us is the concept of social investing.

Social investing sites such as Covestor.com, Cake Financial and several others have done a great job of bringing all types of (typically) non-professional investors together. Their sophisticated platforms allow members to enter their brokerage account login credentials (a little scary, but most of us swallow hard and do it anyway out of curiosity) in order for the site to “verify” your trades. Your trading activity is downloaded into the database and the site assigns a percentage of your portfolio each equity occupies. The number of shares (amount of cash you’re playing with) is not published in order to protect your privacy. The idea here is that, because the equities are verified by the site to exist in the member’s brokerage account, full-disclosure is satisfied and anything that member writes can be judged fairly by the readers. Many of the more active members on these sites keep blogs and write publicly-viewable messages about their rationale behind trades. In fact, when Covestor detects that you’ve made a trade in your brokerage account, they will email you asking for your rationale in the form of a mini blog post on covestor.com.

So, the first thing I did was pick the top 3 or 5 members on Covestor as ranked by their portfolios’ performance. The site has very nice graphs that show members’ performance against other indices like the S&P 500. After following a few of these members I noticed that a lot of their trades were solid (and common) like BUY APPL @ 110 or other fairly safe bets. This made their track records look decent and they typically edged out the market. Other equities they had would typically take up < 10-15% of their portfolio and would be very small-cap companies. These stocks would have a lot of blog posts associated with them and you could see the record of the member buying the stock all the way down a hill, often with comments to the effect of “time to load up, this one is on sale”, etc. Any time there was a pop in the price, you might see something to the affect of “you like that 200% gain today? More where that came from!”. But, the overall performance of the stock since the member initially bought in would typically be abysmal. Often you’ll see other members posing (publicly viewable) questions to the trader to the effect of, “I see you’re taking a bath on XYZ but you keep buying it up … you must have some inside info”, etc. That is often enough to get the degenerate-gambler-day-trader to jump in on the action and wait for that next 200% pop.

The first few of these I encountered made me think, “Well, the guy obviously believes in this stock because Covestor verified his ownership of it”. But, Covestor and others don’t publish how many shares the member owns! This trader could own literally 1 share to begin with and then keep buying 5 or 10 more as the price drops just to back up his public enthusiasm about the “sale”. Then, in another brokerage account not connected to Covestor (and therefore not publicly viewable), he may be making very different trades.

Call it pump-and-dump 2.0. It’s analogous to how the spam kings of yesteryear would pump penny stocks for a week then dump them after enough suckers bought in. I think Covestor and others are great sites with impressive platforms and very innovative features. The first one who figures out how to solve this problem, though, will certainly have the advantage. The only way I can think of off the top of my head would be if the site were to award different “badges” to positions in a trader’s portfolio. One badge could signify that the position is in excess of a certain dollar amount (proportionate to the share price). This would give users that track the trader a little more comfort in knowing that this is less likely to be a pump-and-dump trader.

BusinessWeek reporter Roben Farzad recently traveled to Columbia to determine whether or not the “third tier” (globally speaking) economy there was ready for mainstream foreign direct investment and an “equity culture”. From an investment perspective, Columbia is the next frontier after the BRIC countries (Brazil, Russia, India, China). Its stock market has increased 14-fold since 2001 with a still modest total capitalization of $59 billion.

The one-time murder capital of the world and former home to infamous drug cartel Pablo Escobar, Medellín (pop 2.4mm) is reemerging as the commercial hub of the nation. The president, Alvaro Uribe, unlike most South American leftist leaders, sits right of center and has an approval rating above 60% in his now second term in office. His government is very much interested in attracting growth through foreign investment and understands that this can only be achieved by driving the paramilitary drug lords out of the urban commercial centers, which he’s made good progress at so far.

The U.S. has incentive to stay on good terms with and help Colombia grow as relations with Venezuela and Equador continue to deteriorate. The U.S. has sent $5 billion in aid since 2000 - the 4th largest financial aid recipient of the U.S.

The Colombian stock exchange, called Bolsa de Valores, is merely 12 people sitting in front of trading screen in an office building in Bogotá’s financial district. The exchange closes at 1PM because all business that needs to be transacted for the day is typically done by then. With such a limited number of buyers and sellers in their emerging market, volatility is the norm. In 2005 the Bolsa was up 128% (second best in the world that year). It took a 45% dip last year when many emerging markets were hit - second worst loss in the world. It is down 5% in 2007. Bolsa-listed stocks can only be bought with pesos and there are no Colombian mutual funds available to foreign investors.

Some upcoming public offerings on the Bolsa include Procafecol, a local coffee producer (Juan Valdez), and $4 billion state oil company Ecopetrol, which will likely get listed on the NYX. The only Colombian stock currently listed on the NYX is Bancolombia, whose shares are up 20-fold in the last 5 years.

U.S. investment banks have been buying up companies in Colombia and Colombian companies are slowly starting to export their products to the U.S. to grow faster. The two countries are on the verge of a free-trade agreement, something president Uribe is pushing hard for.

Although murders and other violence is dropping, infrastructure in Colombia continues to degrade and is in need of billions in investment. Many investors are waiting for that to happen to open the floodgates for other markets inside the country. The government is hesitant to break from its old-world traditions of owning all infrastructure, though. They are having trouble raising bond money because they can only deliver 6% returns instead of the 20% they yielded 10 years ago. Critics say there is plenty of private money waiting to fund the infrastructure projects if the government could just adopt an equity frame of mind instead.

The lengthy article has some great descriptions of his personal interactions in Colombia and some more detail on its violent history and how much better it is now. Extreme Investing: Inside Colombia