December 31, 2007

Feilio’s CEO chats with CNBC Asia Squawk Box about screenwriter’s strike & China’s digital content opportunity

Filed under: DRM,Music,Ymer Podcasts — Administrator @ 9:41 am

Last week, Martin Soong, host of CNBC Asia Squawk Box, chatted Feilio CEO, Eric Priest, about why Feilio is one of China’s most innovative digital content services and how it could very well play an important role in resolving the ongoing screenwriter’s strike in America.You have the option to watch the video below or listen to the podcast.

December 30, 2007

A CEO’s Tale: Why the Dragon’s Den doesn’t have Edgy entrepreneurs but China does!

Filed under: Start-up First Aid — Administrator @ 6:50 pm

This year, we traded in our kite boarding gear and plane tickets to Boracay for Wellington boots and plane tickets to the United Kingdom in order to spend hols with Lara’s family in Lightwater, Surrey.

Other than the fact that Lightwater’s only Chinese food restaurant was closed all week we had a fantastic time. I’ve learned a lot about British society – for example, Britons split their evening equally between watching two game shows When Joseph Met Maria and Dragon’s Den.

I’m not a huge fan of game shows to start with – so, I guess the fact that I’m so totally confused as to why anyone would spend a hour plus watching Andrew Lloyd Webber stare starry eyed at six contestants singing and dancing their way into the lead role of Joseph in the musical Joseph and the Amazing Technicolor Dreamcoat is not surprising – but there is something to this Dragon’s Den that has absolutely snagged my attention (imagine American Idol meets Antique Road Show meets Wired).

The concept is simple: Aspiring entrepreneurs and business owners with ambitious growth plans walk into a room (the “Den”) – usually alone, sometimes with models or partners, often with product – and face a panel of five multimillionaire entrepreneurs and venture capitalists (the “Dragons”) who are looking for investment opportunities. The contestants then pitch their product or business plan in the hope of earning some of the Dragons’ cash.

I’m not sure if I love watching the schoolyard (i.e. hair pulling, scratching) exchanges amongst the Dragons themselves or the Average Joe bumbling and fumbling his was through a pitch – anyhow, good stuff.

However, in spite of contestants unrelated business concepts there is one absolute thing they all have in common – these guys are operating in an environment where there is little concern that the Queen is going to shut them down, board up their windows, or toss them in the Tower of London.

This is not necessarily the case in China where the government keeps a healthy supply of building material (e.g. lumber, nails, and hammers) and duck tape at the ready for those rather special (and random) situations whereby a start-up or enterprise requires, err, well, let’s just say a bit of “remodeling”.

I bring this up because I’ve noticed (over the past year or so) an odd management neurosis of sorts sprouting up within some of China’s most dynamic and innovative start-ups. This is particularly evident in companies where the management team includes both local Chinese and Westerners. I’m not quite sure how Freud would identify this neurosis but according to my handy China business guide “Green Tea and Scotch – 88 Negotiating Strategies for Glorious Enlightenment and Harmonious Existence” it is called Edgy.

According to Green Tea and Scotch entrepreneurial teams symptomatic of Edgy not only tend to be associated with start-ups (lead by multicultural management teams) pushing the envelope just enough to exist at the tip of the innovation sword but also operate, to some degree, in a legal grey area.

An Edgy outbreak is highly distributive, debilitating and in some cases can mean lights out for a young company teetering on the edge of obscurity and prominence – especially when investors in China (and I guess everywhere) put such a high premium on stability and team cohesiveness.

And while I have yet to observe any psychotic symptoms, such as delusions or hallucinations associated with an Edgy outbreak, there are signs that some people are incapable of making it back across the proverbial “status quo, all systems go, no sacrifice, no victory” line.

For example, several weeks ago a super innovative China based start-up that I’ve been working with for several months had an opportunity to headline at a major international event (and not one of those “venture capital/private equity conferences” we all love so much) with global media coverage which would have significantly powered up and propelled the company’s global profile to wicked high heights (and not only with investors and industry geeks but also with consumers) – I’d say this “situation” was as close to a Tipping Point as any start-up can get without selling itself to Google for (fill in the blank) billions of US dollars eighteen-months after going live.

The CEO/founder of this start-up weighed the risks associated with this degree of coverage and attention and decided the company was not only mature enough but would definitely benefit (across the board) from this event – only to receive a sieve and bloody tongue-lashing from core members of her management team when she informed them of her decision to green light the event – the team’s gripe was as follows:

“…the success of our business depends on toeing the line in some areas that might be considered by some organizations as grey…and while we’re not (directly) in this grey area, in addition to the fact that a vast majority of Chinese companies already operate in this area (including many of our NASDAQ listed big brothers), we’re worried that if we go public with our business model and strategy there is a risk that one local organization will find out and ask us to stop doing our business…given our company’s young nature and the cultural mix of our management team…we’d strongly suggest no going forward with this event…”

So, like any solid, rational leader she processed her team’s commentary and opinions, discussed them at length internally and externally, consulted advisors and government liaisons, and in the end (after what some would consider “overkill deliberation”) determined the benefits of attending this event greatly outweighed the risks.

And still, her team came after her screaming bloody murder – for several days all productive work came to a halt – junior staffers and programmers where worried the company would implode and they’d lose their jobs – whispers passed the lips of dissenting managers just loud enough for everyone to hear: Who was she to put the company at risk? Who was she to put their jobs, for which they’ve sacrificed so much for, at risk? Who was she to go against the “local” team’s better judgment?

So, I’m just taking a wild stab at this but I think the answer to their “Who was she…” question is, well, the CEO.

Edgy, anyone? Absolutely…

Indeed, fear, not inability or incompetence, had gotten the best of this company. It was as if these people had their heads in the sand (but fingers on the keyboard programming away) for the better part of the past two-years – didn’t they realize at some point the company would need to go public (in the media sense) in a major way? Didn’t they realize that highly innovative companies press into uncharted territories and tend (more often than not) push the boundaries of what might be considered status quo?

My question is (as a follow-up):  How would have this team reacted to this situation if the CEO happened to be a native mainland Chinese rather than, for example an American or Canadian Born Chinese (note the CEO is not a mainlander but neither is she Canadian nor American)?

I’m guessing, from my own experience working with both local and foreign founders/CEOs, that there might have been some debate but by and large (generally speaking) it would have been a non-event; in fact, I’m 99% positive it would have been a non-event.

Ultimately, the CEO followed through and attended the event – her presentation focused entirely on her company’s business strengths and the market opportunity – and she did a killer job. Great Success! Well, sort of…

And yet a nasty cloud hangs over head as she’s now faced with a conundrum as to what to do with her Edgy team – can she resurrect the team that build the existing killer service or is that team lost forever like the AllSpark? What would you do?

December 13, 2007

UAA launches China Auto Rental in 11 cities across China

Filed under: Automotive — Administrator @ 12:57 pm

Yesterday, we were in Beijing at the Great Hall of the People attending the kick-off party for UAA’s new rental car business called China Auto Rental (CAR) – it was a very impressive turnout and a fantastic event.

Attending the ceremony was a generous helping of government officials, VC types (e.g. Gobi, KPCB, Legend), strategic partners (e.g. Cross Country Group, PICC), and several CEO’s from NASDAQ listed Chinese companies (e.g. Baidu, Air Media, Focus Media, KongZhong). And in the end, when the last bottle of Dynasty wine was emptied, consensus was that the rental car business in China is the next investment tsunami and CAR looks poised to be at the forefront.

Mike and Howard (CCG); Charles (UAA); Adam (Ymer)

In less than 2 months, CAR has grown its rental car fleet from zero to 150 cars operating out of 11 cities/airports – Charles Lu, CEO of UAA, expects to increase the size of his fleet 6x to 1,000 and double the number of cities/airports to 22 by year-end 2008.

This may sound like a tall order given the fact UAA just sat down at the table however, in many ways, UAA has been working towards this day (whether Charles and his team knew it or not) since 2006 – for example, consider how close the following UAA services track to basic rental car offering:

(1) UAA is already the leader in emergency roadside assistance with over 95% nationwide coverage for it 2.2 million plus members;
(2) UAA operates a 1,400 person call center staffed by both customer service representatives and direct marketing professionals;
(3) UAA has a co-branded credit card/membership card with China Merchants Bank (i.e. allowing not only for credit card processing but also data collection/mining);
(4) UAA is a leading auto insurance brokerage (i.e. can offer customized insurance packages to renters); and
(5) UAA branding is one of the most widely recognized and trusted names in China’s automotive services industry.

By some estimates China’s domestic demand for rental cars will reach 300,000 units to 400,000 units by 2015 on the back of sales revenue of US$2.3 billion. Even if we slice market estimates by 30% you’re still talking about a US$1 billion plus rental car industry however the challenge (for an operator) is cost effectively scaling and sustaining a business long enough to reach critical mass – and this will require a war chest of capital.

Our read is – CAR is either going to be a massive success or an epic disaster as there really isn’t any middle ground with this one. Don’t get me wrong, I’m certainly not getting all aggro and negative on CAR but, yeah, this is an extremely capital intensive and asset heavy business which, unlike a Web 2.0 application feeding off Facebook’s community juices and API, CAR must build and operate a national service platform from scratch.

With that said, as noted above, CAR has the benefit of leveraging UAA’s existing network and platforms – and this certainly gives CAR the leg up over its competition, and thus dramatically improving the likelihood of success.

Still, investors can’t overlook the fact that we’re in uncharted waters with an unproven model (“…does anyone have a machete I can borrow, I need to blaze a trail…”) and it’s bound to get a little scary. So, a simple way to actually measure the degree of difficulty facing Chinese rental car operators is to consider the performance of incumbents.

Over the past 5 years, there have been, of course, several attempts to enter this market – most notably from the majors (e.g. Hertz and Avis). Crash and burn, anyone?! Indeed, Avis Europe’s joint venture with Shanghai Automotive Industrial Sales Co. (Anji Car Rental Corp) has had a bit more success than Hertz in keeping their management team out of trouble and on the path of truth as witnessed in Hertz’s February 2006 announcement that the company was terminating its partnership with China National Automobile Anhua International Trade Co. According to a Forbes article,

“…the decision to part company with the local firm was made because Anhua lacks capital to run the business and has failed to monitor the operations of its franchised branches...”

Obviously, part of the reason Western firms have found it difficult to profit from China’s rental car segment is poor execution but the bigger issue is that the operations are running off business models that are heavily influenced by their western linage in a not so western environment. (We’re getting flashbacks of the Groupe Danone and Wahaha spat.)

In spite of this rental carnage there is another domestic company that seems to be making some in-roads into the rental car universe – namely Shenzhen based Top One. Established in 2006, Top One received Series A funding from SIG and Hong Kong Maida Fund. According to sources, Top One’s rental fleet contains around 300 to 350 units operating out of about a dozen Chinese cities – mindful that the company has been at it for over two years – we’re scratching our heads wondering why they’re not bigger – indeed, is this an execution problem, a market acceptance issue, or a lack capital?

To wit, we’re guessing it starts with the fact that the barriers to entry are substantial – unlike in the US or Europe where there is already a deeply embedded car culture and credit card culture, pre-existing networks and services providing emergency roadside assistance, extensive credit histories on consumers are readily accessible, Lo-Jack, and a significant secondhand car market where rental agencies can hock their 9-month old fleet vehicles – in China, not much of this actually exists, and thus an operator must build from the ground up – all things being equal, in the end, it will simply come down to execution (which, given the local/homegrown nature of CAR and Top One, is slightly different from the hiccups Western operators have encountered).

In many ways, if Top One had made more progress (unquestionably validating the model) this opportunity would be flooded with “me-too” players – the fact that UAA and Top One seem to be the lone domestic gunmen makes this one of the most tastiest investment opportunities in China – indeed, we’ve got a drag race on our hands.

Better buckle up!

December 7, 2007

Abe’s Protection – a real life lesson in minority rights for start-up guys facing Series A funding

Filed under: Start-up First Aid — Administrator @ 5:13 pm

A friend of mine, we’ll call him Abe, successfully sold his web portal a week ago – I’m very happy for him considering he’s been at it for over 6 years and had just about wrote the damn thing off – he didn’t make all his money back but it wasn’t a complete loss.

However – this exit – almost fell flat on its face – I think Abe’s experience is a good lesson for all entrepreneurs thinking about – or in the process of – raising Series A venture funding.

In early 2000, Abe and his two partners started a web portal in Hong Kong – 10 months later, two venture capital funds dumped in some cash – 2 months later Hong Kong’s Internet bubble exploded like a can of beans and botulism. A couple down rounds, some rollups of other near defunct competitors, a little dilution here and there, some positive market action added for flavour, and the company was riding high again (relatively speaking) in 2007.

So, you’d think Abe and his co-founders would be pumped (candy canes and lollipops on the house…this baby is primed for a liquidity event!) – indeed, but alas they were rather indifferent as + 80% control of their venture had already been transferred to the venture capital investors (right, I forgot about anti-dilution clauses…you mean an investor will actually pull the trigger on those things?).

Then, about 3 weeks ago, one of the venture capital investors was approached by a third-party looking to acquire web properties on the cheap – going once, going twice, SOLD to the only bidder. The brokered valuation for the company came in 30 – 40% below a “reasonable” market price – plus all proceeds from the sale would go to the venture capitalists.

A clap of hands, an exchange of documents, and the deal was as good a done…or so our venture investors thought. It so happens Abe had a good lawyer who included a very small clause in the Series A shareholder’s agreement which stated (very roughly) that before the company could be sold, liquidated or merged with another entity a founders quorum MUST be convened so that the quorum can physically review the offer/proposal – in this case a founders quorum required only one founder to be present. Furthermore, as per the founders’ minority rights, ANY final decision to sell, liquidate, or merge required a supermajority (about 95%) of Series A shareholders to vote in favour of such a deal.

Upon receiving an email from our venture capitalist friends informing minority shareholders (i.e. the three founders) that the company was to be sold at x cents on the dollar and because there was little the founders could do by way of preventing this deal from closing “…you best sign-off on this without a peep or else…”

Not one to rollover and play dead – Abe reached for the shareholders agreement, circled “supermajority” and “founder quorum” and meet with his investors to discuss next steps (we’ll call these terms “Abe’s Protection”).

Much transpired over the next several days – there was some hair pulling, name calling, basic playground stuff but Abe and friends held their ground, refusing to sign-off on any deal that did not include the purchase of their shares and a higher valuation. The venture investors were stuck (a rare event that minority shareholder have the “professionals” over a barrel) – they knew the exit deal was dead unless Abe’s terms and conditions could be satisfied.

And, as you know from my opening sentence, the dust did settle and the deal finally closed – indeed, Abe and his partners were lifted out of their shares by the buyer and are now happy clappy, quietly counting their lucky stars that the company’s legal eagle had the founders’ back.

Start-up guys – recognize!

I guess I shouldn’t be promoting this but whatever – if at all possible, it probably makes sense to try to massage some form of Abe’s Protection into your Series A round – this will take some serious work on your part to get your investors to agree in full as it spits in the face of a fund’s normal operating procedures but worth a try, no? With that said, I’d caution against making the inclusion of such terms conditional to closing – to wit, you don’t want the money walking because you’re afraid of the money walking away…word.

December 6, 2007

Nokia’s “Comes With Music” concept remains behind the DRM curve while Feilio powers ahead

Filed under: DRM,Music — Administrator @ 9:37 pm

Nokia’s new “Comes With Music” service – announced this past Tuesday – shows Feilio’s business model is right at the cutting edge. Nokia will bundle unlimited (though DRM compliant) music downloads with its very high-end mobile phones, for about US$5 per month.

Nokia still has some issues to overcome before its offering will be more attractive – like DRM. But we see this as a very positive move forward in the marketplace as it sets a good precedent for Feilio and their model. The bundled content strategy has now been endorsed by a major consumer electronics manufacturer (Nokia) and a major record company (Universal Music Group).

Nokia built its own back-end, which we believe will ultimately limit the Nokia service’s effectiveness. Feilio, on the other hand, has built the first open blanket licensing platform in the world that can service not only multiple licensees (e.g. many ISPs or handset manufacturers, not just one) but also multiple kinds of licensees (e.g. handset manufacturers, ISPs, and literally anyone that wants to bundle a content subscription as a value-add to any product or service). We believe Feilio’s right at the forefront of where media is headed.

Copyright © 2004 - 2012 | Ymer Venture Capital Asia (Hong Kong) Ltd.