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Nothing Ventured…Nothing Gained: Navigating Asian Venture Capital Markets

FEG’s 2020 Approachable Asia event was scheduled for this fall in Singapore, where we planned on venturing abroad to learn first-hand about the unique challenges and opportunities of international investing in a board room setting. Our goal was to provide clients the opportunity to meet with top investment and economic leaders, including local asset managers and companies. 

With the Coronavirus pandemic, we have opted to offer the same content through our Approachable Asia podcast series. Skip the flight and enjoy the conversation!

In this episode, Greg chats with two of China’s elite venture capital investors, Jenny Lee with GGV Capital and Tommy Yip from Unicorn Capital Partners.

Topics covered include:

  • Where will the next Alibaba, Tencent, JD, and Xiomi will come from?
  • How will rising geopolitical tensions between the U.S. and China have affected fund selection and IPO listings?
  • What is the relative importance of valuation in choosing funds?
  • What industries seem the most promising for venture capital?
  • Is the India market a potential bright spot for investors?
  • How has the pandemic impacted deal activity and performance?


Jenny Lee
Managing Partner | GGV Capital

Jenny Lee is a Managing Partner with global venture capital firm GGV Capital and is best known for her focus on startup innovation in areas such as EduTech, FinTech, Robotics, and AI. Since 2005 she has been instrumental in helping 10 early stage companies go public on NYSE, Nasdaq, ChiNext, HKSE and SSTAR exchanges, and numerous portfolio companies exit via M&A. Jenny has been a member of the Forbes Global 100 VC Midas list since 2012 and was the first woman to break the top 10 in 2015. She has been recognized by The New York Times/CB Insights, Vanity Fair, Fast Company, Forbes Asia and Singapore’s Business Times among the most successful and influential global investors throughout the decade. She started her career as a jet engineer at Singapore Aerospace and is a graduate of Cornell University and Kellogg School of Management, Northwestern University.

Tommy Yip
Founding Partner | Unicorn Capital Partners

Tommy Yip is the Founding Partner of Unicorn Capital Partners, a new economy-focused alternative asset management firm specialized in investing and partnering with the leading technology and healthcare-focused venture capital managers in China and other key markets in Asia. Unicorn is focused on generating superior returns for its partners by identifying and investing in high-performing and access-constraint venture capital opportunities. Before founding Unicorn, Mr. Yip spent nine years (2005-2014) as Partner & Head of North Asia for Emerald Hill Capital Partners, an independent fund-of-funds focused on emerging private equity and venture capital managers in Asia. Prior to joining Emerald Hill, Mr. Yip spent eight years (1998-2005) as Head of Research at the AVCJ Group, where he was specialized in research on funds, deals, exits, and investors in private equity in Asia.

Greg Dowling
Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.


Greg Dowling (00:06):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:31):

FEG's Approachable Asia 2020 event was originally scheduled for this fall in Singapore. It is an event where we take a handful of our clients for boardroom-style education and to meet with local managers. Well, that was the plan before the coronavirus pandemic hit. The good news is that through a series of podcasts, you can receive the same content and get to skip the 16-hour flight.

Greg Dowling (00:54):

Today on The Insight Bridge, we will chat with two of China's elite venture capital investors: Jenny Lee of GGV Capital and Tommy Yip of Unicorn. Topics include: Where will the next Alibaba, Tencent or JD come from? How do evolving U.S.-China relations impact initial investments and exits? Outside of traditional tech, what other industries or businesses seem most promising for VC? And besides China, what other Asian countries have evolving venture communities? This podcast is being recorded across different time zones and three different countries. Bear with us because at times the audio quality is not up to the same standard we would expect, but the content is great. So hang in there.

Greg Dowling (01:41):

All right. Big FEG welcome to Tommy and Jenny for joining us here today. We are here in the morning and Cincinnati, and it is evening over in Asia. Before we get going, let's have each of you briefly introduce yourselves. Ladies first, Jenny, we will start with you. A little bit of your background and GGV's background.

Jenny Lee (02:04):

Hi, everyone. Very happy to be here. I'm Jenny Lee, partner at GGV capital. We are a multi-stage venture capital firm, global insights with a wide perspective--investments in U.S., China, and we're starting to deploy in Asia as well. So we manage about close to $6 billion U.S. dollars AUM. And over the last 20 years, we've been able to work with very early emerging giants like Alibaba, the DD grab both China, U.S. And Asia. So we've been front seat at the start of internet disruption in China, the U.S., and now in Asia as well. So very happy to be here to share our perspective.

Greg Dowling (02:49):

Well, thanks, Jenny. Tommy, how about you?

Tommy Yip (02:53):

Yeah, so this is Tommy, Tommy Yip. I'm a co-founding partner of Unicorn Capital Partners based here in Hong Kong. We are an early-stage, venture-focused fund of funds platform that is exclusively focused on venture opportunities in China. So we were founded back in 2015 with myself and my partner Kah-Fai-Low. So the two of us, we came from 20 years of LP investment background, and we are focused on both TMT and healthcare in China. There are three types of managers that we go after in our portfolio. The first type is what we call top-tier managers, including names like GGV and some early-stage venture managers that have been around in China for a long time and have been producing consistent outperformance compared to many others in the market. And we call that the top 3% to 5% of the market. The other group is our bread and butter, which is the emerging managers, the up-and-comers. And this is kind of like trying to find the next GGV. When Jenny first joined GGV. And the third type is micro VC managers, and we're probably the only institutional IOP in Asia or China that is focused on these pre-A sub-100 million managers. And that's us. And thank you for having us on this podcast.

Greg Dowling (04:31):

That's great. And thanks for all that. And Tommy, we'll get back to you on micro VC at the end, because that's an area I've got to ask a question or two on. So as we're recording this, we were going to be with our clients in Singapore. So we do this event where we take our clients with us to get some boardroom-style education, meet with the local managers, and really focus on a few key topics. We're not doing that this year and it makes me sad, because after our event there were a lot of other different annual meetings. And one of them was GGV's 20th anniversary at the end of the week, followed by Formula 1 in Singapore, which is just a great, great event. So Jenny, if we didn't have COVID, what would have been the focus of your 20th anniversary? What would be the message that you were going to tell your investors?

Jenny Lee (05:25):

Yeah, so, you know, unfortunately you are not able to do this in Singapore, but this 2020 is special year. It's our 20th year anniversary investing in the U.S. and China. And as I mentioned earlier, South Asia has the next emerging economy, the next billion users. So one of the big objectives of having our 20th year anniversary in Asia is really to bring our investors from all over the world--Europe, U.S., rest of the world too, and our CEO's from primarily the U.S. and China--to actually come and get together in the Singapore Asia landscape to talk about what they have seen globally in their home country. And also the increasing trend where business models are being learned and translated into different and localized business models. Asia in particular has been a sponge, right? Learning... The startups here, the entrepreneurs here have been learning vigorously from what has happened in the U.S. as well as what has happened in China in terms of the consumer tech destruction and new business models. So it was going to be a two-day great event where we have, you know, marquee CEOs--a lot of our CEOs were preparing to fly to Singapore to join us. And along with that, we also had planned for experts, economists, political views around South Asia as the emerging region. Unfortunately, we have to cancel all that, but I think that the good trends continue, the good learning continues, and hopefully we can bring everybody together again. Hopefully next year.

Greg Dowling (06:57):

You're too kind calling 2020 "a special year." I would use different language to describe 2020. It's not special in a good way, that's for sure.

Jenny Lee (07:08):

As a VC I've seen 20 years of ups and downs--at least 6 cycles. I've lived through SARS in Hong Kong, went through Asia's financial crisis, the global financial crisis. Like whatever crisis, it's different forms, different styles, affects different regions' entrepreneurs. And I think our learning there is that you have to stay consistent. You have to stay grounded and focus on what's best, right? Funding the right entrepreneurs. And you are in business models. And after every cycle we've seen giants emerge. '03: Alibaba. And so every down cycle we see this. 2010, 2011, you see Meituan, right? Which on the food delivery side it's now huge, a big multi-unit card in Hong Kong. So I think that's the hope, right? The hope, the light at the end of the tunnel is that we suffered through this, we get well, we help our companies to get better. And I can tell you we are very hopeful that the next 2 or 3 years we will see the next generation of leaders. The folks, the entrepreneurs who can survive this will be great.

Greg Dowling (08:15):

Fingers crossed. I think that's an important statement. We're taking this much more from a U.S. perspective, and while there has been nothing like COVID-19 on a global basis, Asia has dealt with SARS and we've had MERS and we've had other other issues. So it definitely seems that Asia has been much better prepared to handle this outbreak. And I guess maybe to pivot a little bit to Tommy, I wanted to ask you: TMT healthcare and more sort of on the healthcare side here, has COVID-19 at all changed your perspective on investing in healthcare?

Jenny Lee (08:52):

It hasn't really changed our belief or perspective on healthcare investment in China. But I think, given the geopolitical tension between the two superpowers, we are becoming a little bit more careful not to touch anything that will be scrutinized by CPS in the U.S. but whether that is TMT or healthcare, we are primarily focused on domestic opportunities in China. You know, healthcare--things are probably overly generalized, right? So within healthcare you have pharmaceutical, biotech, you have med tech, you have healthcare services, and you have digital healthcare. For us, as an active LP investing in early-stage healthcare funds in China, we are still very bullish in biotech in China. And in this particular sector, there are some cross-border components, whether are in licensing, a drug from global pharma and trying to go through Chinese CFDA clinical trials and then help distribute in China. But there are also other local opportunities that are emerging. And we're also very bullish about digital healthcare. This is probably one area that, to be honest with you, that we're more bullish than biotech and artists, because we're going to talk about valuation, and the valuation for biotech is actually getting very expensive. But yeah, I think, to answer your question, we're still very bullish on healthcare in China. What COVID has done for the market, it hasn't really impacted our view and our conviction on healthcare.

Greg Dowling (10:50):

Jenny, any follow-up on that? Especially as you get to thinking about mega-trends like digital healthcare--that seems to be an area that would... Asia would seem to be really ripe for a huge platform in digital healthcare.

Jenny Lee (11:03):

Yeah. So I think historically the health science or bioscience sector has not been a big vertical focus for us. What we have done is looked at how technology, how new product innovation has changed primarily traditional industries, more the TMT sector. But as we think about healthcare, we always think about what consumers are going to do, what the end-customer is going to do. And so in this respect, the segment or the profile of users that we are tracking is the aging population in view of the fact that North Asia is aging extremely quickly. If you look at China in particular, by 2025, you would have over 500 million of the population age 55 and above. So then the question is--

Jenny Lee (11:48):

Now this is not an old, old population, right? They are getting into the second half of their life, I would say, but this is a population that's grown up with the internet for the last 20, 30 years, with mobile phones in the last 20, 30 years. Huge disposable income, has mobile wallets. But in light of all this discussion about safety in the food, safety from just what you eat and how you live your life, I think COVID basically accelerated that emphasis and awareness that you do not wait to be sick to worry about health. You actually have to take this as a preventive measure. And so along the health care sector, we are not as comprehensive as what Tommy has done, which is breaking this down into a few areas. We looked at it more as tech versus health and then health versus tech.

Jenny Lee (12:39):

So the tech over health would then deal with sensors would then deal with equipment where you could use the sensors and the equipment to collect data. And then with machine learning, AI, to then leverage and learn from there to allow us to have better diagnostics and better analysis. I think that's the tech over health, the health over tech part is we are thinking a little bit more about nutrition. What would a population age 55 and above do? Are they popping pills or is it just better eating? How are they thinking about nutrition? How does that coincide with, say, traditional Chinese medicine? Some of the other alternatives in the market. And so there we may be thinking about domestic brands, maybe different ways of delivery. Instead of chewing pills, can you chew candy that tastes and is filled with more vitamins. So I think the tweaks that we have then will be helpful with tech, but then focus on this emerging aging population and the aspiration for a healthier lifestyle. So it's not just health, I think it crosses a little bit of the food as well.

Greg Dowling (13:43):

Yeah. Technology is definitely the lens that GGV views everything. And it seems that we are at a--I wouldn't say maybe cold war, but a tech war between the U.S. And China. How do you think about that? Do you have to think much more about domestic... ? For the most part, I think a lot of Chinese internet has mostly been focused on China and greater Asia, and less so on the U.S. I mean, we've had TikTok, which has kind of been--it's huge, especially with my kids. But other than that, I can't think of a lot of other technology, especially Chinese internet, that's penetrated. But does that change business models? When someone presents you an idea, do you have to say, "No, we've got to be much more focused on China-to-China or China to greater Asia." How do you think about this decoupling that we're seeing?

Jenny Lee (14:37):

I think it's two angles here. One is: What's the role of technology in terms of innovation and new business models? And in light of this U.S.-China tension, does it affect entrepreneurs in how they think about startup? So I think on the simple basis, on the micro-startup basis, the answer is actually no. So technology is not evil [laughs]. I've been in technology my whole life, coming to 50 years. Technology is not evil. It could be in the form of a chipset. It could be in the form of algorithms. It could be in the form of just combination of this technology to create new products. And so where we have seen companies and startups in the U.S. and China take it, it's really to leverage technology to create new products.

Jenny Lee (15:20):

I'll give an example. Education tech is a big area for us. It's a flywheel sector that we have started to invest in four or five years ago. Four or five years ago, I did not predict COVID. What I did predict is that technology is going to change how education content will be delivered to the mass population. So then we were thinking of how technology can allow content to be brought online, so the classes can be done online, the 2.0 model without reliance on physical facilities. Then we were thinking about how technology can be used to create avatars, virtual AI, to replace a portion of teachers--maybe not all, but a portion of the teacher's time in interacting with the kids. So that's what started us to think about it. So if you think about the world's education, technology is an underlying enabler but the curriculum has to be localized and it differs whether it's U.S., China, India, or Indonesia. And so in this case, the tech is being used really to boost the charge, what I mentioned. In order to rely less on physical locations in schools, in order to take that over-reliance on key, star teachers, who actually cannot scale. You want to be able to scale or maybe avatar the teacher so everybody can use their services.

Jenny Lee (16:42):

So in that sense, it is still very localized productization of the ed tech services. The tech itself, though, can be quite universal in terms of how it's being applied. Now, does U.S.-China tension change this? Well, the answer is no. I think schools need to continue to operate even despite COVID. Students have to study, even if they are doing this at home. So I would see that... What I have seen is a lot of cross-learning, I've seen our U.S. entrepreneurs get on calls with me to figure out: when childcare centers are closed, what do they do? Right. Because China came back, recovered in Q2, the kids went back to school. So how do then startups who we're serving and working with childcare centers, get themselves ready for the case when the U.S. starts to open up as well. So I've had outreach from U.S. entrepreneurs trying to figure out and learn what has happened in China and how they can stay ahead of the curve.

Jenny Lee (17:36):

I've had India entrepreneurs come to us and say, "Hey, livestreaming is huge. Educational livestreaming." Now, again, with all the children stuck at home in India--but bandwidth is great. Bandwidth is free or almost free in India today. It's been powered by cheap mobile phones--thank you Xiaomi of the world. The Indian entrepreneurs are also coming in to learn. So we put all our entrepreneurs together and they love that because they can actually cross-share the practices and the learnings. This is just one example. We see it in other examples where businesses are being automated. So in a world of smart automation, robotics. So I would say that it's been 99% local innovation leveraging off the technology. Where there is concern that has impacted those companies is not in how the tech is used, it's in how they go to market. So if the startup was planning to sell their product internationally, then I think that they will bear in mind, should they have a sales office in the U.S. or in India or Singapore, Europe, or should they start with Japan first, for example.

Jenny Lee (18:44):

So I think it becomes a business decision in terms of how they should partner, if they should go out or enter different markets. So it's a little bit more tactical on market entry, less in terms of saying, "Because of the tension, we shouldn't be leveraging this technology." At this point we haven't seen that. Definitely. If you're using chipsets, then there is a lot more discussion around second thoughts, right? So again, very specific--a different module--but by and large, I don't think you can stop that entrepreneurship spirit where people are still trying to change the world around them.

Greg Dowling (19:20):

Tommy, what's your view on technology and especially the role of China and the U.S. and these issues? Has that impacted any of your underlying investments?

Tommy Yip (19:30):

No, I think whenever there's a crisis there are opportunities. In Chinese this is called wēijī, a lot of investors like to use this. So definitely increasing tension between the U.S. and China. And on the surface, you see the news on Huawei, Smeek, and others being impacted, but if you look at the opportunities that has created because of this tension, for somebody like us or our underlying managers. This is actually something that we'll be talking about at our ASEAN in October, but I'll just give you some preview to it. What we like about this loophole replacement phenomenon. Because of the fact that China knows that you can no longer depend on the suppliers, that's the reason why we are seeing the government trying to put so much capital and resources trying to build the supply chain from the ground up.

Tommy Yip (20:36):

That has actually created a very interesting opportunity set for us. I mean, if you look at the semiconductor space, right? It's been around in China for 20 years. I think when Jenny first started her career, that was the time when everybody in China was investing in semiconductors. A lot of investors with Taiwanese and Silicon Valley backgrounds with domain expertise to invest in semiconductors, but it went through a pretty long down cycle and now it's coming back. But the problem is that there's no more talent who actually understand the space right now, but there is a huge opportunity for tech investors in this particular space. Because in the past 15 years China was all about consumers, and it's difficult for you to have a dedicated professional on the team just to look at semicon because the guy who's sitting next to him may be doing five deals a month, and the semicon guy's probably doing one deal a year. This is the opportunity that we see, which is a result of this U.S.-China attention.

Greg Dowling (22:02):

Yeah, that's great. So two things there I take away from both Tommy and Jenny, I love the, "there's always an opportunity," and it seems like right now China needs chips, semiconductors. That's going to be a major, major lift for the government and they're gonna need a lot of capital. So that sounds like a great investment opportunity. And then I also love, Jenny, when you said that, "Yeah, there's, there's governments, but entrepreneurs are entrepreneurs and people are people and they're going to share ideas." So even if the governments might be pointing fingers back and forth, scientists, business professionals, they're going to hop on the phone with you and others and share ideas. And I think that's great. That's very encouraging, at least to me, that we can all... Even if governments do politics, people can do innovation. That's what we need right now. All right. So technology is great, but, man, is it pricey. So let's go talk a little bit about valuations. Tommy, maybe we'll just stay with you. How do you get your arms around these sky-high valuations for technology?

Tommy Yip (23:06):

I think LPs like to ask about valuation. I'm sure that... Both Jenny and I, we've been around for a long time and I can tell you in the past 20 years, there was not a single year that LP would say, "Oh, valuation's low." It's always been that, "Hey, valuation is high, what are you going to do about it?" So I will say that this is not new. We thought 2020 is going to be a great year for investment because there's a chance for adjustment, for valuation. It turns out that 2020 is going to be, I think, a really good year for investment, but valuation actually came back a lot sooner than what we expected.

Tommy Yip (23:59):

So if you look at China, there was no activity for maybe three months. When we start going into mid-April, things started to pick up. You got data that was very encouraging. The overall economy was rebounding and many verticals were showing very encouraging data. And people started to issue term sheets, closing deals for companies that have survived COVID and came out really strong. These companies are able to command a pretty high valuation. So I think there's definitely, I think, a flight to quality among investors, especially growth-stage venture investors. So valuation is not necessarily cheap, but given the quality of these companies, I think we can still make a handsome return that justifies the risk that we take in early stage tax in China.

Greg Dowling (25:09):

Hey, Jenny, maybe for you-- I mean, you guys invest... Along the way you do venture, you'll do some growth equity. Where do valuations...? How are they different by stage? Or is everything expensive right now?

Jenny Lee (25:22):

I'll push valuations. Valuation is relative. It's not measured by the point that you enter or make the investment, it's actually measured by when you exit. So I think valuation is steady, but growth is dynamic. I'll give an example. So when we invested in Alibaba in 2003, we thought it was a really expensive deal. This was '03, right off the back of SARS. One of the early investors in Alibaba wanted to get out. They decided that China is doomed. "They cannot even handle SARS and things are just not gonna look rosy [laughs]. No change, no growth." And so they decided to exit from the asset class. And so GGV, in our fund I, we actually negotiated to buy the stake back then, series B Alibaba was 180 million. And we thought it was expensive. It was probably the most expensive deal on the market at that time and it was a secondary stake. And we went in and it was a tough time. Ali you had to PVA, they had to do a headcount reduction, learn to survive and then write it. It grew. Then the second time we had to deal with valuation was around 2012, 1-2 years before the group IPO. And I think just before the subsidiary, IPO. Back then our fund was into our 12th year, and so definitely we had to be thinking about exits.

Jenny Lee (26:44):

And at that time we thought, "PC internet, great. E-commerce great. Looks like it's growing." Ali was already in the sub-billion, 10 billion valuation back then. And so we thought, "Oh this is a great valuation. Given the fund timeline, we think that we may be leaving a 2x on the table. Because they're already category leader. How much can you expect from e-commerce in China? Payment's not as mature yet." And so we actually underestimated the impact of mobile, the impact of mobile commerce, the impact of how mobile would change payment to allow even more new internet users to get into this category. We sold thinking we left 2x on the table. I think we left probably 200x on the table [laughs]. Now looking at GGV's perspective, it was a good return from 180 to when we exited. But if you think about it, you could have made returns along the way--whether you were in before the IPO or you buy in after the IPO. Even now, when they spinoff and they are about to release Ant financial. So while it was somewhat... We don't have information at the time was that when we look at valuation or static exhibiting at the discovery stage, when they are like 1/10th of their potential or 1/100th of their potential, right, but you want to be in so you have access, you have preemptive information and then we can double down. And therefore our larger funds would allow us to come in and continue to double down even all the way to IPO, even after IPO where we can hold. So, I would say, that's the reason why we have our multi-stage strategy to allow us to come in.

Jenny Lee (28:27):

And then secondly, obviously no need to pay out. If you are great, if you're a sector expert, entrepreneurs will choose you. Entrepreneurs are very smart. They want partners they can grow with. So beyond valuation, beyond that dilution. They are looking for partners who understand the sector, who can spout with them on where to go, which direction on product, which market to get listed on, what kind of new investors they should invite around the table. And so I think that it is due down to fundamentals. The sector expertise, the value add to the entrepreneurs. I think at the end of the day, with 20 years under our belt, it's also that brand recognition. The acknowledgement that the partners are there to help the entrepreneurs to grow. We have to compete on other fronts beyond just the price tag. I think maturing markets, or even a mature market like the U.S. and China trusts entrepreneurs. The best entrepreneurs, they are very smart. They do due diligence and they will find the best guys. And many times it is not the best price.

Tommy Yip (29:30):

You know, I think that is especially true post-COVID. In a market like China, entrepreneurs are getting very sophisticated, and post-COVID they're looking for brand and capital. And there are not that many VC firms in China that are able to provide that. So I do believe that in the post-COVID world, top-tier is gonna have an advantage because they have brand as well as capital continuity. In venture, you want to make sure that you are backing the top 3% of the market, whether that is 3% of the venture market in terms of startups, or 3% of the manager's market. You want to be able to not just get access into these top 3% of the market, but also be able to do your due diligence and make your judgment that these other guys to back. So in China it's a landmine. It is easy that you'll be able to back maybe the rest of the market, which is the 97%. So by investing in a local firm like GGV or partnering with a local fund of funds like us, I think is critical.

Greg Dowling (30:45):

I guess that's a reason for boots on the ground versus other firms that may kind of parachute people in when Asia is hot. You're both there, you live it every day. How important is that to get access in Asia?

Jenny Lee (31:00):

Yeah. I think that as a VC investor in the market, it's very important to understand the change that has happened in both the markets. So in the first 10 years, when we were looking at China internet trends, you could still find a lot of parallel. Like what has happened in the U.S., you can translate that and see that happening in China. Whether it's on the consumer side, whether it's on the enterprise side, there was a lot of what I call "translate that" model and therefore fly-in VCs who are experts in those areas in the U.S., when they come to China they were also celebrated experts because there is that hunger to want to learn from those who have done it before. But I think, after 2010, 2011, when mobile starts to take off, actually China's entrepreneurial landscape changes. Because the way the consumer uses mobile internet is actually very different. When the first users first come onboard, it is their first device to the internet. Consumer's start to play games, they behave differently. And therefore the business model after 2010, 2011 took on a very local characteristic. We have our own WeChat. We have the whole ecosystem of WeChat. Of course you have Alibaba. And then the whole Taobao seller ecosystem, e-commerce on Taobao. And so unless you are in China, living, breathing the model and being users yourself, talking to the entrepreneurs, someone who hasn't spent that time experiencing the Chinese life right on the day-to-day basis would find it very, very hard to understand.

Jenny Lee (32:31):

I still remember it when iQiyi went public; this is the early live streaming entertainment platform that went public in 2012 in the U.S. They have virtual gifting. There were users who pay 10, 20,000 RMB for a virtual BMW to show up on your screen, just so that when you're listening to someone singing online, they have this virtual BMW coming into the room. Like, can you imagine explaining that business model to the U.S. Investment community? They don't understand, because it is not a use case that happens in the U.S. It takes another 10 years for TikTok to show what the entire population in China has been doing for the last 5 years, which is short video sharing. So I would say because of that, it then becomes very, very important for the VC firms, [inaudible] who are serious about China, that you do need to have feet on the ground and not just living in Europe.

Jenny Lee (33:29):

I [inaudible] you do have to get grounded. You have to go down, you have to understand what the Dow shoes doing, what the general population is doing. The consumer in tier three, tier four, they actually consume the internet very differently. And along that line as well, we are announcing a huge enterprise wave. Our enterprise wave has come, our innovation and startup has come about 5, 10 years behind the U.S., but it is happening because the fundamental shift that's happening today--we have cloud infrastructure the are the cloud, the Tencent cloud of the world. The infrastructure is set up. The Amazon cloud is allowed in as well. And then on top of that, we have now standardized mobile devices, whether it's for consumers playing games or for enterprise SMBs, managing workflow, approving invoices. So when you have the right internet infrastructure, cloud infrastructure, when you have common computing devices, it actually means that the so-called enterprise world and the consumer world is converging.

Jenny Lee (34:29):

And so in that sense as well, what we are now seeing is that yes, the enterprise wave is coming, but in China, it's also taking a different form, which is because the of workflow, how different SMBs, how different let's say construction site workers manage their workers, how in hospitals they manage their doctors and nurses. All this workflow can be very different from a typical workflow in any other country. And therefore, the type of startups that we see--even in the enterprise now--it's no longer about saying, "There's a Salesforce in the U.S., is there a Salesforce in China?" Because it's not going to be a Salesforce in China. It may be a, WeChat widget that allows you to do check-in because you enter the building and therefore you need to be checked because in this COVID environment, you need to have your health declaration, for example. Right. So I would say the consumer went on its way or went on his own way. And now we're seeing similar Dawnings for enterprise, but there's also a part of the enterprise tech in China that will go its way because of the very localized and different workflow as well. So if you're not here, if you're not using and not running businesses, it is so difficult to understand where that next light bulb is going to go off and be the next great company.

Greg Dowling (35:48):

That's a great answer, thank you for that. In one of your earlier answers, you talked about Alibaba, and it used to be that an exit strategy was go to the U.S. first. Now you're starting to see dual listings. Will there ever--will there be an exit that's going to be U.S.-focused? Are exits going to look different? Kind of going back to that U.S.-China tension, but just in terms of exits. Are they going to be longer? And how do--because it's going to be star--where do these venture companies IPO at, in post-COVID?

Tommy Yip (36:22):

Yeah, I think it's already changing. Given the political tension and the potential risks in the states for these Chinese companies that are already listed in the U.S. Okay. I think in the past, a lot of entrepreneurs, especially those who have received U.S. dollar funding, have VIE structure, ideally they will go for a NASA or NYSC, but given the ongoing tension between the two countries right now, I think the plan A has changed to more of a U.S. plus Hong Kong. U.S. being the primary listing and Hong Kong being the secondary listing. But that is also changing, given the momentum in the domestic Asia market.

Tommy Yip (37:17):

The Star Board--this newly launched board that is trying to replicate the NASDAQ in the U.S. With a listing requirement that is a designed for tax dollars. And it's shooting off the roof right now. And you can ask Jenny about one of their investments, WPS, it's just crazy. So to answer your question, with a different exit route in China, or a dual listing of what we call A+H: Asian market plus Hong Kong market. The holding period would be a bit longer. Having said that though, the premium that you can get by staying maybe 12 months longer is also a lot higher. The crazy PE ratio will come down, but still, I think when there are not that many high quality tech startups that you can actually choose in the domestic public market, those that are with high quality and are backed by top-tier venture managers are going to continue to get a premium.

Greg Dowling (38:40):

So, Jenny, when you're talking to your fund investors, are you telling them, or giving them counsel on A+H? Is that kind of one of the main focuses if they're going to go the IPO route? What are you telling your portfolio companies?

Jenny Lee (38:55):

Maybe I'll share a bit of a perspective in terms of the listing of markets. So our view is that the capital market globally, they are open to all types of startups and ONY. So over the last... Right now it's September, so over the last four quarters, over the last year, we've had six listings, six listings. Despite COVID we've had six listings since Q4 until August. Of the six listings, four of them are Chinese companies. And the four Chinese companies, three of them chose to list in the U.S. The most recent one is our most recent IPO Xpeng, which is our electric car company. It's a Chinese company that claimed to be a Tesla competitor and got listed in the U.S. So the other two companies, U.S. companies, one of them did an IPO in a very traditional fashion, ecommerce, the second one chose to list via a spec.

Jenny Lee (40:00):

So I think number one, in terms of exit, we have seen a lot of options, whether it's a direct listing, whether it's listing via a spec, whether it's a traditional IPO, we've seen that happen. It's quite a bit, four quarters, six listings, number one. Number two of the six, know that for are Chinese companies, and of that four, three have chosen to go to the U.S. So the conversation around the board table is why? With all this tension, why are you still going to the U.S.? Do you not face risk of delisting, being ostracized, all that stuff. Now, the companies, the three companies that have chosen to go listing in the U.S., one of them is a super high tech company that does autonomous flying planes. It is very suitable for that set. It's what NASDAQ was designed for. It is a world where, really kind of moonshot deals. You can have a chance to get in front of investors and actually to get listing to fundraise. That's why I said it was designed for it. None of the Hong Kong or China exchange can deal with that. Because Hong Kong requires profitability. I think the Star Board is still trying to get its act together. And therefore it does want larger-sized companies, profitable, revenue growth. This is models that investors can understand. So the first company decided to go to the U.S. because the market makes sense. The right investors makes sense.

Jenny Lee (41:24):

The second company that decided to go to the U.S. goes to the market with a business model that says "we have Zoom technology, plus Twilio monetization." Perforate, comparable, people understand it's a tech play. They have API calls, they support all livestreaming through API. A very simple business model. Investors love it. A high recurring business model. The company has an international ambition and not just selling domestically, but also internationally. So from that perspective, the U.S. IPO market is the ideal market for them, because their customers like to know that the service that they are using to power--they are streaming, they are gaming, education services--is a company that's listed and you can actually look at the numbers and [inaudible] exchange. So that's the second company. And of course the third one is Xpeng, which is electric car. Where else to go but next to Tesla on the exchange. Then I think the fourth company, WPS, chose to go get listed on the Star Board. So that's a company that went and got listed on the Shanghai Star Board in November of 2019.

Jenny Lee (42:33):

At one point was the highest market cap company on the exchange until SMIC overtook them. And so they are the second highest. At IPO we were sitting on 26x. Today, we're sitting on 50x. So is the local market open? Yes. Because everybody uses WPS in China. If you are Android users, you need word processing, you need Excel files--WPS is a household name. And this app that works very well in China for China, a China household brand. So it's like the index stock, they should get listed in China because it's where the target audience is. And it's where also--thanks to the accelerated market reform in China--the market is ready. So I would say that those are the advice that we will give companies, not just to push for dual listings.

Jenny Lee (43:21):

I think typically large companies has the ability to do dual listings, but if you're just a fledgling startup, even at a billion of valuation, you may still be too small to do a listing. To be able to maintain that type of float liquidity. So I think any financial, can do that. If a buyer wants to come back, dual listing is definitely the route to go. Xiaomi--going back to China, Hong Kong, China, that will work. But I think for a lot of our younger startups on their first path, it is good to find an exchange that understands them, investors that understand them and that they can leverage the benefit of IPO, whether it's branding or for fundraising purposes. So the market is not closed, it is actually open despite all that discussion that's out there.

Greg Dowling (44:10):

You heard it here, that markets are open. Well that is good to hear. And I wanted to maybe ask--we've been talking a lot about China and there's good reason to talk about China, that really has been kind of the VC darling and the Chinese internet companies have fueled all of these other investments and all these other industries, because a lot of money has been made. But Asia is very big. It's very big even without China. So maybe I can ask you each, where are you seeing investments outside of China? Is it the ASEAN region? Is it India? Where are you guys seeing great venture-backed companies, great entrepreneurs? And maybe, Tommy, I'll start with you first and then go back to Jenny.

Tommy Yip (44:58):

Yeah. So we are primarily focused on China and I can foresee that in the next 5 to 10 years, that will continue to be our main focus. Having said that though, we are increasingly paying more attention to RCR, particularly Indonesia, which has a very sizeable market. And all the small emerging economies, such as Vietnam. India has always been on our map. I think there's a hiccup right now because of the border tension between the two countries. But we continue to be very bullish about the long-term aspect of the overall India tech involvement. And right now I will say that comparing to maybe 15 years ago when I first invested in India as an LP, the timing actually looks a lot better. I don't know whether that is the right timing, but it's just a lot better than last time when I invested in India in a VC fund 15 years ago. So that could be the time, and we are closely paying and increasingly paying more attention in these markets.

Greg Dowling (46:22):

Jenny, how about you?

Jenny Lee (46:23):

Well, for more insights on Southeast Asia, I also encourage all the listeners to download our very popular GGV podcast called The Next Billion Users [laughs], hosted by our very own Hans Tung. Actually, it does capture a lot of interviews that Hans has conducted with entrepreneurs in the region. And so they can also add a different perspective from India, from Southeast Asia. Entrepreneurs from the likes of the super-unicorns from Grab to some of the local super-unicorns in India. So shameless plug, yeah. As you can see, with GGV, we follow the consumer, and therefore in 2019 we made the conscious effort to reopen our Singapore office as a way for us to have more feet on the ground, more entrepreneurs, a place for gatherings, for discussions to happen. Right now we are allocating about 10-15% of our total capital to this region. It's two different regions. One is Southeast Asia, two is India. In Southeast Asia, it's a region that we have traditionally made investments over the last 15 years. It's actually a profitable region for us. It's taken a while, we deploy about 200-300 million, and it's sitting at over 3x distribution, +2x. And of that, we have our super-unicorn Grab, which my other partner [inaudible]. We came in at series B ,early stage $40 million, and today it's $14 billion. So I think that it's the playbook that we have seen happen in China in emerging markets. You want to get there early, but don't go crazy. Work with good entrepreneurs and it's very important to make sure that the companies that we work with turn out to be huge unicorns. What we have done with Alibaba in China it's really allowed us to then leverage that to get to know more talented entrepreneurs and therefore move on to look at new sectors and have new startups that we can come in to be part of the ecosystem.

Jenny Lee (48:18):

So I think in Southeast Asia we have a decent track record, I would say, to date, but what we see in terms of opportunities, it's not broad-based. So we have actually looked at a lot of companies there, but where we have decided now to focus our efforts is an extension of some of the flywheels and sectors that we have learned has worked very well in the U.S. and China. So in typically three areas. One is education tech. As I mentioned, the model works very creative in China can be learned and leveraged in markets like India and Indonesia. And so we use that learning to invest in the local leaders, in both the markets--one in Indonesia and one in India. The other area is a different aspect. We also spend a lot of time in what we call the "digitization of the offline mom and pop."

Jenny Lee (49:04):

So if you think about China 20 years ago, when we first came to China, there was no online e-commerce right. The shops or retailers were offline. They were individual mom and pop. And then Alibaba, just like any other page, had their troops of people go knock on the door and say, "Let me help you do a website. Know what? Let me tell you what a website is, right? Let me build you the website and you get advertised on this links." Really like the yellow pages of the early days. And here we see similar trends. If you look at markets like Indonesia, Vietnam, India, they are still in that first inning. It is still very offline. It is still very mom and pop. And so for internet to work, you need to have a way to have structured data collected.

Jenny Lee (49:45):

And once you have structured data, that's when new business models can happen. The interesting change--and Tommy mentioned this--in India between now and 15 years ago, is that fundamentally there's been change. One, the internet is now almost free. Thanks to what Joe has done. Number two, again, I mentioned this earlier, thanks to the proliferation of cheap smartphones you now can allow this unified high computing device to be in the hands of the average consumer in India for a low price. And then thirdly, in India there is a unified payment ID. So when you put a network and you put a computing device coupled with a unique ID for payment, you have all the right ingredients to open up transactions online. And that's the reason why we've been tiptoeing and making investments in the market, of which I think education tech is one, because now you can actually have online streaming education content on your mobile phone and pay for it. And then two, digitizing mom and pop, because of the device, because of the internet, even the mom and pop proprietor-owners are using force to track data. And so that's an area that we have decided to make investments. And of course the third area is on the lending platforms. They're in Asia, in emerging economies. We are very interested in payment infrastructure. How can we have machine learning to do fraud detection? Because there will be fraud. In any early markets when there's transactions, there's going to be fraud. And so that's the other angle on the payments side, not so much on lending. But how do you secure now the whole payment infrastructure from fraud to connecting the payment wallets?

Jenny Lee (51:23):

And so, again, very specific in terms of how we are going to hide in those regions. I think this region will take a while, maybe the next 10 years, 15 years, but the hotspots that we have identified hopefully will emerge earlier because they are fundamental building blocks of what we think is the South Asia, the next billion users, the backboard. That's how we think about it. I think that it will be a very exciting region, which is why our 20th anniversary was planned to be here, which will come next year.

Greg Dowling (51:57):

Maybe we'll celebrate on the 21st anniversary. We can kind of see all of it together. Hey, last, last question, and, Tommy, I'm going to come back to you. This is something you mentioned in your opening statement: micro VC. What is micro VC and what does it look like in China?

Tommy Yip (52:14):

Micro VC is not too different from what you guys call institutional seat managers in the U.S. In China, this is a term that we use because in general, these VC funds' fund size is relatively small. A lot of them are actually sub 100 million and they are mostly focused on angel and pre-A stage. For example, we talk about mainly in the semiconductor space. Everybody knows that this is an opportunity, but for the mainstream VCs they may not have somebody who's dedicated on that space or having domain expertise on the team. So they may look for somebody who has that, investing maybe one or two stages earlier, at angel round or pre-A round. So we are seeing in the earliest stage groups are becoming more specialized. It's just very difficult for a small micro VC or institutional C manager to compete with the GGV of the world in areas like consumer, you just don't have any chances to do that.

Tommy Yip (53:31):

So it's almost for a micro VC to be in existence you almost have to become what we call a KOL, key opinion leader or domain expert in a particular sector. So that the top-tier guys or the mainstream series A guys will actually cherry pick on your deal and lead the series A round on some of your deals. So we are seeing more specialization in the institutional seat, manager space. And the good ones tend to get quite a bit of attention from the mainstream series A firms who will try to collaborate with them. To a certain extent, they are like the feeder funds to the series A guys, and that's why you would see partners of the big VC funds themselves sometimes will become an LP in these smaller managers from a deal sourcing standpoint. This is a very interesting area because we think because of the early stage nature and the relatively smaller fund size, if these guys are able to do it right, and become a domain expert in their own vertical and then be able to feed their deals to the top series A players, that could be quite interesting. We do see the potential explosiveness in their return.

Greg Dowling (55:00):

That is great. I just want to give a big FEG thank you to Jenny and Tommy. This was fantastic. I wish we were doing this in person, but this has been the next best thing. So thank you so much for your time, because I know you guys are so busy and we really appreciate it. So thanks again.

Greg Dowling (55:19):

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