In this episode of China Money Podcast, guest Hellen Song shares her views on where great investment opportunities exist for venture capitalists in China, and what type of entrepreneurs are more likely to survive — and succeed — in the rough markets of China.
Q: We are sitting in this beautiful Beijing courtyard hotel, which you have invested in. Tell us how did you find out about this opportunity?
A: During Tsinghua University’s hundredth anniversary, I (as an alumni) came to Beijing and found it’s hard to find a boutique hotel with an (old) Beijing flavor.
I walked into this area and found this hotel, but it’s under very poor management. Though they only charged 100RMB, the hotel was still empty.
I stayed here for seven days. When I left, I asked the owner if I invest with him and get a good manager to run this hotel, would he work with me. That’s how we started.
Q: I’m surprised to hear that you didn’t previously know the hotel owner. We all know how important Guanxi is in China?
A: It depends on which industry. If it’s government dominated sectors, then Guanxi is of course very important.
For us, we are looking for a person or a team to invest, it’s not really Guanxi that we are looking for. We are looking for a good CEO with good experience and good execution skills.
Q: In terms of industry and strategy, where do you see attractive investment opportunities?
A: My favorite investor is Peter Lynch. I admire his strategy, which is “follow the consumers’ money.”
So I focus on three sectors. One is children-related industries, because in China, it’s six people’s salaries (two parents plus four grandparents) raising one child. Also, this sector is not a mature market yet in China.
Second, women dominate families’ cash flows in China. So I want to invest into the industries where women are spending money.
Third, older population-related industries. In China, there are 115 million people who are over 60 years old. Therefore, bio, medical equipment and health care are all very attractive.
Q: What kind of investment process do you go through from reading the initial business plan to making the final investment decision?
A: We use six elements to screen through the business plans that we receive.
First, understand what do they do; second, how is the market; third, why do THEY do it; fourth, their strategy to fight in the market; fifth, their financial planning. Where do they spend money to grow their market?
Sixth, have they thought thoroughly how they exit the company? After a few months or a few years, where will they be? If they want to sell, who will they sell to? If they want to go through an IPO, what is the specific steps they will take to go through that process?
If they answer all these six questions properly, then we will meet with the team to have further discussions.
Q: We know that venture capital firms in China do not necessarily only focus on early stage companies. Do you also invest in companies across different development stages?
A: Yes, this is very different from Silicon Valley. In China, the environment is so different that we cannot focus only on early stage. We have to diversify in terms of companies’ development stages.
China’s investment landscape is still the Wild, Wild West.
Q: What unique challenges do you face (as a venture capital firm) in China compared with the U.S.?
A: Yesterday, I got off this television program on start-up businesses, we started joking that if 10 percent of our investments succeeded, we would be lucky.
That’s the score for the industry. Every year we have a portfolio company go under, and every year we invest in new companies.
It’s not because we didn’t see the investment right. Sometimes, it’s not even the CEO’s fault. Or, it is the CEO’s fault…in fact, if they shifted the direction early enough, they might land in a different place, not (ending) like a Titanic.
Last year, we invested in Tuangou.com, a Groupon type of business. In 2010, there were maybe 20 to 30 Groupon type of businesses in China. At the beginning of 2011, suddenly there were 5,000 to 10,000 Groupon type of companies in China. But by end of 2011, probably two-thirds of the companies disappeared.
We invested in two of these companies. They survived but they shifted to a different direction. One team shrank from 80 to 20 people and moved from a 300 square meter office to a tiny 60 square meter office. It’s like the winter time, (you) cut off the branches and leaves to let the chunks survive.
The other companies shifted to selling movie and concert tickets. They shrank from 40-plus to 16 people. I just read their quarterly report and their revenue is actually growing. I wonder why 16 people is doing more businesses than 40-plus people.
The young entrepreneur said that’s because they didn’t want to die. But I think it’s because they found a more efficient way to do business.
Q: Lastly, you are the first female guest on our show. Being a woman in this male dominated investment world, is that a disadvantage?
A: It depends. Eighty percent of the time, it is a disadvantage. Many times I walk into a meeting, a certain limited partner would say how can a woman do investment? Then I will tell them my experience and convince them that it’s my experience –- not my gender -– that matters.
Sometimes, I have to say no to certain LPs. Because I need to always convince them and it takes a lot of time, so I will have to turn them away.
Our Guest Today:
Hellen Song is the founder of Shanghai-based financial advisory and venture capital firm, La China Capital. Ms. Song was educated at Tsinghua University and INSEAD. She worked in both China and Silicon Valley, founding two start-up companies in the 1990s in China, before founding La China Capital in 2004.