I guess I’m being lazy these days and just borrowing content from other sites but so be it. This morning, I was reading the New York Times and came across an article titled “Investors Pay Business Plans Little Heed, Study Finds” by Brent Bowers. The article reads:

Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.

I’m not sure this is entirely true, at least within confides of our fund. Don’t get me wrong, no one wants to page through 50 pages of rambling market analysis and financials however what we are interested in is the entrepreneur’s logic and thought process. Furthermore, we want to see what the expected milestones are for success and how the company expects to spent our cash

All of the above can be mapped out in 10 to 11 PPT slides. In fact, just use the template we provide here.

More to our point, KPMG, in 2008, polled regional investment managers in Asia and asked them what were the top four causes of deal underperformance – the results: (1) misleading historical performance data, (2) over-0ptimistic market forecasts, (3) misreading the target’s existing and potential market penetration, and (4) poor business plan.

Anyhow, writing a business plan is a good exercise even if it is just an excel spread sheet that clearly maps out business assumptions.

(1) DISCOUNT, PLEASE! Keep the structure simple and offer your bridge investors a discount to Series A Preferred share price rather than a warrant:

A real quick way to lose investors’ interest is to price your bridge financing at the same multiple as Series A Preferred shareholders are paying. In lieu of a discount what we’re seeing from start-ups (particularly, those with American legal counsel) is a warrant granting the right to purchase shares COMMON SHARES at the same valuation as Series A

Yeah, are we like…missing something here? Bueller?…Bueller?..

Common folks, time for a quick reality check. If you’re coming to us, looking for bridge financing, offering a note that converts into Series A Preferred shares, why on earth would we have any interest in exercising a warrant for common shares at the same price as the more valuable preferred shares?

Furthermore, why would we have any interest in acquiring additional common shares when preferred were still on offer – it is like walking in an Aston Martin dealership packed to the gills with inventory, buying an Aston Martin DB9 and as a bonus being given a coupon to buy a Chery QQ for the same price as the Aston Martin.

Look, bridge rounds are highly attractive and potentially lucrative deals to roll into, yet a bridge investor undertakes a relatively higher level of risk and uncertainty than a Series A investor; thus the bridge note must absolutely positively reflect this risk. And a discount to Series A is the simplest and cleanest way to accomplish this.

(2) ODD LOTS? Avoid irrevocable super majority rights and odd lots holding the same rights and warranties as your Series A Preferred investor(s):

So, your next door neighbor, Xiao MeiMei, and her extended family want to dump the equivalent of US$32,000 into your bridge round. Word gets out that you’re looking for cash and quickly snakes through the hutong. Next thing you know you have 23 different bridge loan commitments from various “friends & family” totaling the equivalent of US$411,000. You’re rich…rich…rich! Great news, right?!

Well, not really…because in the bridge subscription documents (lovingly prepared by your brilliant lawyers for US$40,000) excluded language that makes the distinction between rights and warranties held by institutional investors and those held by Xiao MeiMei, mom, and pop.

We could go on about this but we’ve already turned this blog into the Mahabharata – so, let’s cut to the chase – we have two words for you – super majority.

In the past, we’ve advocated (fiercely) that a founder, when faced with a funding situation that will massively dilute their equity holding, should seek some protection in the form of super majority rights. But, this is definitely not the case when you’re structuring bridge financing. Doing so leaves yourself (and company) exposed to the possibility that handful of bridge investors (e.g. those investors that are two or three degrees removed from your real “friends & family”) that could block or challenge future business related decisions with a flick of their pen.

How might this be possible?! Well, one scenario would be a situation where an institutional investor (e.g. venture capitalist) subscribes to the bridge and pulls down 40% of the entire offering. The venture capitalist, cognisant of the fact that once the bridge loan converts into Series A Preferred shares (and given the significant number of mom and pop odd lot bridge co-investors and the ensuing dilution from larger Series A investors), will neither have control of the equity class (Series A Preferred) nor (in some cases) a board seat (as this seat may have to be relinquished the larger Series A investors or there is only one board seat available to all bridge investors); and thus in order to ensure rights and interests are protected may insist upon the inclusion of clauses granting super majority rights in the Series A shareholder’s agreement.

What a headache this becomes for the company when faced with business critical decisions (requiring preferred shareholder approval) because now, not only will you need to chase down with your 20 plus odd lots, bridge institutional investor, and Series A investors but also you’ve got to build consensus across an investor base that is as diversified as New York City in the summertime. (Job Posting: ISO cat herder or rodeo clown with excellent communication and taser skills).

Alternatively, you could face an issue where the lead investor in Series A, as part of closing conditions, insists that super majority rights get revoked. So, do you go with the big money and dook it out with those investors who’ve supported you when no one else would or do you walk away from the money (knowing full well you might encounter the same push back from other investors)?! Hopefully, you won’t be under the gun to make such a decision as the sound of the last dollar from your bridge round is hovered from your corporate account.

So, do yourself a favour – when structuring bridge financing: (1) avoid irrevocable super majority clauses; and (2) if you’re not in the position to turn away odd lots from your bridge round, either give them common shares (preferred path) or get them to sign a side letter transferring control of their preferred rights to management (messy, but effective).

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?

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.

Every now and again, we walk out of one of those “Hi, my company is the best because…” meetings wondering how in the HELL we made it through the last 45 minutes without handing the lad a cheque just to make him go away. Quite frankly, we’re not sure how many more of these meetings we‘ve got left in us before we go all Green Goblin and stuff. 

Indeed, we thought it prudent (and helpful) to cobble together a list of 5 thinks investees might want to keep in the back of their minds prior to pitching their wares (for the first time) to an investor. 

And with the help of the Donald, Austin Powers and Pat Sajak we’ve laid these thinks just below:

–Think #1–

What is wrong with Trump’s Hair?  NOTHING – it just works!

People are critical of things out of the ordinary – like the Donald’s hair – people say, “why doesn’t the guy get a new hairpiece or something?” Probably because it is his real hair (plus, have you seen his wife?), thus in spite of all the criticism about his hair style you have to give the guy credit, for better or worse, it’s a gorgeous marketing ploy.

The way people feel about Trump’s hair is the same way 8 out of 10 China based venture investors feel about companies they meet for the first time. To wit, they have already made up their minds that they will question the legitimacy of the venture. Full stop!

The reason for this is that for every original idea there are at least 30 “me too” regional ventures looking to address the exact same market and solve the exact same problem. The apparent genius (or special sauce) of the company may be visible on paper but is rarely digested – unless you start the conversation off highlighting what is so special about your hair, or rather your “me-too” company, you may find yourself back-pedalling when you should be striking.

Objective is to make the investor a true believer in that you can do no wrong – Clintonian Politics!

–Think #2–

Powered by MOJO!

“So I started to work my mojo, to counter their mojo; we got cross-mojulation, and their heads started exploding…”  – Austin Powers

A founding partner at an American based a global (my bad) venture capital fund once told me that there is only one “data point” he looks to take-away from meeting the CEO of a start-up, and potential investee, for the first time…and that is “mojo”.

What he was referring to was that “yeah, baby, yeah” connection between the investor and the investee – unfortunately, this is not something you can learn, model in an algorithm, or allude to in a power point presentation – it is either there or it is not.

However, what is in your control is ensuring that your mojo isn’t muffled or distorted by noise and prejudice. Remember – you need the investor to first, feel comfortable with your ability to lead the company and second, that the company has legs.

So how do you neutralize the environment to ensure the mojo pipeline is unfettered and, perhaps, more importantly (if you are a ghost) you never hear the phrase “…so, you’ve been in China for how long?”

Here are four (rather obvious) suggestions you might look to deploy in the first five minutes: 

Tell a memorable story (filed in brain under: “lessons learned”) that demonstrates your ability to make snap, accurate decisions, emphasising the fact that this occurred in China and most importantly is happened 7 or 8 years ago.

My go to story is about the time I was working for a local automotive manufacturer in Tianjin (1993) and was handed “legal” blueprints for synthetic brake pads for one of those Daihatsu “mainbao che” vans by some random guy who asked me to help source capital to build a factory to make these parts – the fact that I was not only a university student in China for another 2 weeks but also, at the time of the hand-off, lost in the factory in a maze of hallways looking for the bathroom, didn’t seem to mater. How does this demonstrate I can make snap accurage decisions? Er…I’m not locked away…am I?

Look presidential, or rather make sure you look comfortable in your role as CEO. You’re the leader and as the leader the perception is that you are the person driving the company – it doesn’t matter whether you surround yourself with smart people or you are the smartest person in the room – all that matters is that investors feel comfortable that you are the “go to guy” when all hell breaks loose (or servers crash as 3:17am).

Repeat after me: Track Record! Track Record! Track Record! There are two words that describe this point more accurately – serial entrepreneur. But, we aren’t going to use this word because you’ll earn full points on the BS Bingo board game (along with “paradigm shift”). Get creative, but get to the point (something I have a hard time doing) – bum rush the investor with proof of your entrepreneurial and managerial acumen.

Do your homework on the investor’s background – especially if he/she is a celebrity in the venture capital word – never ever kiss butt however do try and find something in their background (or portfolio investment) whereby you share a common interest.

–Think #3–

Kansas City Shuffle

“What’s a Kansas City Shuffle? A Kansas City Shuffle is when everybody looks right, you go left. It’s not something people hear about. Falls on deaf ears mostly. Requires a lot of planning. Involves a lot of people. People connected by the slightest of events. Like whispers in the night, in that place that never forgets, even when those people do. It starts with a horse.”    – Bruce Willis, Lucky Number Sleven

Have you ever had a complicated problem rumbling around in your head for days on end and finally, out of the blue the answer explodes into your head? That rush of clarity is what you want your investors to feel once it occurs to them that your technology company isn’t a technology company at all.

What the heck am I talking about? Arguably, the best China exits (in the VC space) – purely from an economics and operational perspective – have been those cases where the market prices the company as if it were a technology play, the venture’s user base scales like an Internet company, and the management operates the business as if it where a brick-n-mortar. For example, at the time of c-trip’s NASDAQ listing the management pitched the company as “the Travelocity of China” however less than 30% of total revenue was generated from online related sales. Peal away the layers of c-trip’s operations and you’ll find a massive call-center. (C-trip trades on a 73x trailing PE).

In truth, most technology companies in China are actually brick-n-mortar businesses – the trick is in the unmasking which is an event you want to control – the worse thing possible is when the investor comes to terms with your business before you’ve been able to explain your execution strategy. To wit, you’re discussing the benefits of technology when in the back of the investor’s minds he is thinking “…the success of this company rests on the ability of management to execute not the technology”.

Control your shuffle. No break dancing allowed. If, at the core of your business, it is all about the execution (or content aggregation), then say so but in such a way that you take the investor’s breath away with the simplicity and brilliance of a Kansas City Shuffle.

–Think #4–

Wheel of Fortune

Contestant: “Pat, are there any letter Ms in the puzzle?”
Pat Sajak: “Yes, one M.”
Contestant: “Pat, I’ll spin. Pat, are there any Cs in the puzzle?”
Pat Sajak: “Yes, there is one C.”
Contestant: “Pat, I’d like to buy a vowel…the letter A.”
Pat Sajak: “There are three A’s…that will cost you US$4m.”
Contestant: “Pat, I’d like to solve the it. MATERIAL CHANGE.”

You’ve just spent the last 45 minutes roping the investor in – there is a strong sense of brotherhood and peace on earth – he’s bought into the business concept. What you don’t want to do is lob a hospital pass at the investor in the form of a material change (operational, business, funding, etc) without a well mapped out strategy for resolving the issue.

You’ll earn points for openness and transparency – if you don’t know the exact solution/answer, you should just say so – the caveat being don’t leave the investor hanging – introduce numbers, supporting evidence, multiple options, and most importantly have a good sense of how it is going to impact (either negatively or positively) capital requirements for ongoing operations.

Avoid situations where you’ve just finished explaining that the amount of capital you’re looking to raise is US$4 million and how you intend to fully allocate the funding within the first 18-months…oh, and by the way, there is a strong possibility that we’ll face a material change in our working environment that might require an additional US$4 million. Yeah, this is one of those moments you really need to have a well thought out strategy on the back of a good feel for how this will impact the company’s equity structure.

Take away: Don’t make the investor guess how you plan to resolve the puzzle – make sure he/she understands you’ve fully thought this through.

–Think #5–

Please, have the fish eye…

It is a Chinese custom to give the (arguably) tastiest, most prized piece of the fish to the guest of honour – this tasty little morsel being the fish’s eye. What you‘re hoping to hear, or rather the sense you want to get from the investor at the end of your meeting is that you’re going to get that eye.

The way it tends to be presented in most conversations is in (or some derivative of) the following phrase: “We are not investing in the idea so much as we are investing in the team..(“er…pending terms and conditions).”

How do you get to this point really depends on you and your team‘s mojo!

Good Luck!

There is a short article in today’s Wall Street Journal titled “Danone searches for fix in China” by James Areddy discussing the Wahaha Danone conundrum.

What is going on here? How could Danone, a weathered China hand, allow itself to get snarled into a category one China trap generally reserved for newbies? Exxon Valdez, anyone?

Indeed, the answers to these and other mind throttling questions are but a paragraph away. Journal reporter James Areddy writes:

“According to Emmanuel Faber, president of Asia for Danone…in the past, Daonone relied on Mr. Zong to run the business, additng that the French company’s own involvement rarely amounted to more than a helicopter view of the operations.”

Dah!? Someone’s head is going to roll…anyone, anyone? Bueller…Bueller?

Come on guys – China business 101 – Never Leave Your Wingman!

In other words, never leave your JV (or local partner, investee, etc) to their own devices – out of sight is out of mind. China’s an interesting place in that, money/capital, while viewed as an important commodity in other nations, only gets you in the door – it doesn’t ensure you’ll see any return or have rights to information – sadly, you’ve got to earn that.

And by earning it, we mean you’ve got to fight for your right to participate in the business – how is this done? Simple – show up for spot visits, help craft sales and marketing strategies, introduce your local partners to other locals/foreigners, crack open the books every couple of months and perform your own audit, follow the products through their distribution channels and into the hands of the end-users – what every you do make sure you do it in a constructive, unintrusive, visible manner – but do something.

It’s unlikely the Danone case will echo into eternity but it does make you stop, scratch your head, and think…maybe I should be booking a site visit next week!

This morning, as I was ripping through USAToday and wallowing in pain as reality set in that the dreaded Yankees whomped my beloved Red Sox in five straight games – I got to thinking, “why do some people/teams underperform and others overperform?”

Whether in sports, business or spelling bees, you’ve got to marvel at great competitors, especially those who, under tremendous pressure to replicate pristine performances, not only meet expectations but surpass them.

Coincidently, USAToday’s sport columnist, Jon Saraceno, wrote an article titled “Nobody better at the art of competition than Tiger” in today’s paper. For some of us who don’t enjoy playing golf but rather enjoy reading about it, Saraceno is a great journalist to follow and Tiger is the player to follow.

Tiger is coming off a win at this past weekend’s PGA Championship elevating him to a grand total of 12 major tour championships – just 6 behind the 18 major titles held by golf great Jack Nicklaus. Saraceno uses this opportunity to drill down Tiger’s winning characteristics in his article, ultimately surmising that it all comes down to roots.

I think entrepreneurs will find this an interesting read – below are some highlights:

I don’t know if Tiger is the quote-unquote “greatest athlete” of all time — Jim Thorpe and Bo Jackson are right up there — but there hasn’t been a more ferocious competitor. Smell blood? He goes for the jugular. In the cruelest game, Woods relies on the one thing he knows he can trust: himself. He has no teammates. No timeouts. Only his skill, resourcefulness and savvy. Tiger has every reason in the world to rest upon his numerous accomplishments, but somehow, someway, he retains the inner spirit to remain motivated despite all the millions, the major-trophy wife and the $40 million oceanfront estate. Do you know how many athletes get a sniff of money and fame and totally destroy their careers, if not themselves? Woods has good roots, and that cannot be underestimated. With whatever his late father Earl, and his mother Tida, watered their young offshoot, it provided the right mixture of self-discipline, self-awareness and confidence.

Last week, The Economist ran an article titled “Something New: getting serious about innovation” about the Chinese government’s new found determination to push China’s economy up the technology value chain – shedding its manufacturing stripes and dawning a white laboratory coat.

The article is timely in that the government recently published its “National Medium-Term and Long-Term Programme for Scientific and Technological Development (2006 – 2020)” which outlines steps to spend more capital on science and technology and promote business reforms – the ultimate goal is to dramatically reduce China’s dependency on imported technology by as much as 30% by 2020.

The Economist reports that currently, on average, “China’s 20,000 large and medium-sized enterprises undertake fewer than five new development projects and generate only two and a half new products each year.” This is shockingly low when compared to Japan where the average products live cycle can be as short as 90 days.

The government’s plan also calls for an increase in R&D spending from 1.3% of GDP to 2.5% of GDP by 2020 – this would place China on par with America and Europe. In other words, China wants to crank out more engineers and scientists whilst fading “softer” skills, such as finance jockeys and marketing studs.

Admittedly, the plan’s time horizon is, well, a bit longish – who really knows what is going to happen in China over the next decade?! And frankly, this stuff ain’t all the interesting (numbers, figures, forecasts…dull) – so why am I spending time mulling this over, you ask?

What is interesting is the underlying debate this plan has generated between China’s officials – in one corner we have the nationalists who favor domestic homegrown “go-it-alone” technology innovation (i.e. mega-technology projects), in the other corner we have the internationalists who favor incremental innovation (i.e. small technology projects) of existing platforms and technology.

I think a prime example of this polarization is evident in yet-to-be-resolved-though-likely-to-happen-next-year battle over China’s 3G wireless technology standard – lovingly known at TDS-CDMA. ‘Nough said!

I bring this up on the back of a recently published (July 2006) paper a friend from Columbia University’s business school emailed me over the weekend. The paper is written by Columbia Professor Amar Bhide titled “Venturesome Consumption, Innovation and Globalization”. Professor Bhide argues that policy makers and business managers, in general, are not only totally and completely clueless as to how innovation works but also its impact on economic growth.

In describing this misperception, Bhide points to the wayward individuals as prescribing to “techno-fetishism and techno-nationalism” as described by Ostry and Nelson in 1995. Bhide writes,

“The mindset incorporates two related tendencies. One is the focus on the upstream development of new products and technologies while glossing over their downstream consumption and use. The other is the belief that national prosperity requires upstream international leadership in upstream activities – “our” scientists, engineers, entrepreneurs, and firms have to better than everyone else’s – they must write more papers, file more patents and successfully launch more products.”

Furthermore, Bhide argues that,

“…the willingness and ability of individuals to acquire and use new products and technologies is as important as – and in small countries more important than – the development of such products and technologies. An innovation originating in one country does not impoverish other countries. Rather it tends to improve standards of living in all countries that have the downstream capacity to acquire and implement the innovation.”

Okay, this might be a lot to digest – to break it down in bite size chunks – Bhide believes that innovation, true innovation, doesn’t originate upstream in federally/state funded laboratories but rather downstream in the market place and in the hands of the consumers (i.e. demand for innovative products). And thus, the most vital part of innovation (demand side of the curve) is the willingness of consumers to purchase and play around with new products and services.

On the supply side of the curve, the most important catalyst for innovation is a manager’s ability to successfully adapt the organization to embrace innovation. In other words, the company’s got to figure out how to get consumers to dig deep into their pockets and purchase crap they already own (in one form or another) in an often highly competitive and oversaturated market.

My old boss (British) use to say “…you’ve got to love Americans! You can gift wrap dog crap and they’ll buy it…” I used to grunt and scratch my head (being American and all) and try can scrape together a counter argument but, to be honest, I never could, he was right. But this is the very reason why America is so good at innovation – we’ve got consumers willing to buy crap and companies willing to sell crap (but some of this stuff is really cool crap).

As a side note, the amount of capital US companies spend on developing technology is lower than the amount of capital extended on technology integration/adoption – when this cash ratio is plotted against other OECD countries (Japan, Germany, etc) America is below average.

Back to China’s “National Medium-Term and Long-Term Programme for Scientific and Technological Development (2006 – 2020)” initiative – the question begs, is this the right strategy for China? Should the country be developing mega projects whilst encouraging a go-it-alone mindset?

I’d argue that China’s infrastructure and education system is better positioned to focus on mega-projects employees heaps and heaps of engineers and scientists, however I believe a prolong attempt down this path will not yield the sort of innovation and success China’s leadership and consumers expect. I firmly believe China must find a balance between upstream innovation and downstream innovation, with emphasis on cultivating an environment that promotes incremental innovation.

China needs to develop Venturesome consumption with Chinese characteristics.

Businessweek’s July 10, 2006, cover story “How Failure Breeds Success” by Jena McGregor is a must read for anyone striving for excellence in business – entrepreneurs and corporate soldiers alike.

There is a real nice quote by Scott Anthony, managing director at consulting firm Innosight where he discusses encouraging intelligent failures:

”Figuring out how to master this process of failing fast and failing cheap and fumbling toward success is probably the most important thing companies have to get good at.”

Anthony goes on to explain that “getting good” at failure doesn’t meaning creating anarchy out of organization but rather it means leaders need to create an environment safe for taking risks, and then reflect on those mistakes.

You can listen to McGregor provide some behind the story nuggets by listening to her podcast.

You might also want to listen to “Innovation Champions” a podcast with Michele Conlin where she talks about the new breed of managers and their radical cultures.

And, while you’re at it why not checkout how RSS champion, Feedburner, encourages innovation – Hackathon.

USA Today journalist Bruce Horovitz notes American based Public Broadcasting Service’s (PBS) Charlie Rose begins a three-part series about Warren Buffett that looks at all aspects of one of the world’s wealthiest men.

Says Rose, in a phone interview about the Buffett series:

“This is a man who has a passion for his work as deep as anyone I’ve ever seen. He is a living testament to the fact that the happiest among us are those who shape their lives in a way that satisfies their own values and passions.”

Those of us living in Asia and unable to access US public TV we’ll have to wait for someone to post the program on the web…

UPDATE (7/13/06)

You can view the Buffett interviews by clicking to Charlie Rose’s website but, again, for those of us living in Asia (China) you wil not be able to access the video clips as they are hosted on Google Videao and Google Video isn’t available to us:

Thanks for your interest in Google Video.
Currently, the playback feature of Google Video isn’t available in your country.
We hope to make this feature available more widely in the future, and we really appreciate your patience.

About a year ago, it occurred to me (better late than never, I guess) that there are several core personality traits shared between the most highly effective/impactful CEOs and (gulp, dear I say) politicians; in fact, you could say their personalities/insights are damn near identical…

To this point (or rather to add some meat to this argument), I’ve been reading several books dedicated to global business moguls and international political icons – since February (hey, I’m a slow reader) I’ve been focusing all of my attention on George Washington – I know, I know, what new insights can we possible learn from the most celebrated forefather in American history?

Surprisingly, heaps and heaps of insights. Exploring George Washington’s inner psyche – basically, learning what makes the guy tick – has been fascinating and inspiring – without question, Washington is one of the best examples of a model CEO (past, present, and perhaps future).

One particularly insightful (and witty, no joke) bit of non-fiction comes from Joseph Ellis titled “His Excellency: George Washington.” It is less than 300 pages long – not your typical, yawn of a history book – and a must read for anyone interested in business (and, no, I don’t believe I’m being Fonzie from Happy Days by “jumping the shark” with this blog).

Anyhow, just below I’ve listed some general characteristics that I have found common among most premium/successful CEOs – I’ve then gone and backstopped these points with related passages from Ellis’ book describing Washington’s personality – hopefully this adds some color to a seemingly “tired” topic – What makes good CEO?

1. Forward Thinking and Opportunistic – you’ve got to be ahead of the curve, just enough to be flirting with notion/idea that you’re a contrarian!

Background: Good old George, at the ripe age of 20 (circa 1753), looked west to the land beyond the Alleghenies (Pennsylvania) and saw seismic opportunity; this is impressive given that he was from Virginia where all major agrarian commerce (e.g. tobacco) depended exclusively on sales Europe, specifically the Briton.

Here is what Ellis writes about Washington’s obsession with the west:

“If I was a young man, just preparing to begin the world,” Washington told a friend, “I know of no country where I would rather find my habitation than in some part of that region.”

…When John Posey, one of his fox hunting companions, complained about the impoverished condition of hi own debt-ridden plantation, Washington urged him to abandon his eastern prejudices and make a fresh start. Washington said, “there is a large Field before you, and opening prospect in the back Country for Adventurers…where an enterprising Man with very little money may lay the foundation of a Noble Estate in the New Settlements upon Monongahela for himself and posterity.”

We also see evidence of Washington’s forward thinking with regards to commerce, specifically the agriculture he (okay, his slaves) cultivated on his plantation. Starting in 1766, he abandoned tobacco as his cash crop at Mount Vernon, one of the first of the major Virginia planters to make the change. From now on he would grow wheat, construct his own mill to grind it into flour, and sell the flour in Alexandria and Norfolk. In doing so, Washington was on the road to recover his own financial independence from mercantile noose around his neck (i.e. dependency on British merchants).

2. Selecting Complementary Investors – picking an investor is like a marriage, hopefully, your mindset is that you’re entering this relationship for good (not quite perpetuity, but close), and thus you need to select the investor most complementary to (most of) needs/goals (and not just near-term, you must look a several years down the road).

Background: After the French and Indian War (circa 1758), Washington was looking to settle down, find himself a wife – he was absolutely craving Sally Fairfax, yet went with Martha Dandridge Custis because, as a package (I know this sounds a little cold but in China people still operate until similar assumptions), dear old Martha has the goods (e.g. money) Washington needed to be all he could be.

Here is what Ellis has to write about Washington’s idea of marriage (investors):

…whatever he felt toward Sally Fairfax, she was a forbidden temptation who could not be made to fit into the domestic picture he had formed in his head; memories of her had to therefore be safely buried deep in his heart, where they could not interfere with his careful management of his ascending prospects…

..whatever he felt toward Martha Dandridge Custis, she did fit, indeed fit perfectly. They were married on January 6, 1759. Writing from Mont Vernon later that spring, he described his new vision: “I have quit a Military Life; and shortly shall be fix’d at this place with an agreeable Partner, and then shall be able to conduct my own business with more punctuality than theretofore as it will pass under my own immediate supervision…

3. Conserving Cash – to the point of being obnoxious about limiting extraneous cost (overhead); essentially, religiously monitoring the bottom line (but careful not to under fund business initiatives).

Background: Washington was excessively and conspicuously assiduous in the defense of his own interests, especially when he suspected he was being cheated out of money or land; perhaps this is the underlying reason why Jefferson and so many other Virginia planters would die in debt, and Washington would die a very wealthy man.

Here is what Ellis has to write about Washington’s understanding of cash preservation:

“…when he hired a friend, Valentine Crawford, to assist in the management of his western lands, he drafted the following instructions: As you are now receiving my Money, your time is not your own; and that every day or misapplied, is a loss to me, do not therefore under a belief that, as a friendship has long subsisted between us, many things may be overlooked in you…I shall consider you in no other light than as a Man who has engaged his time and Service to conduct and manage my Interest…and shall seek redress if you do not, just as soon from you as an entire stranger…

4. Hiring Core Team Members with lots of Potential – the ability to not only hire the best and brightest, but also have the foresight (nose, if you will) to recognize talent before it fully blossoms; furthermore, not only delegating responsibility but also championing individual accomplishments/contributions – if your team has no freedom to operate, er, yeah, why have a team at all?

Background: Aware of his own limited formal education, Washington selected college graduate who were “Pen-men” as aides, whose facility with language assured that the grammar and syntax of his correspondence was worth of his station. Furthermore, Washington recruited military talent wherever he could find it, and he had a knack for discovering ability in unlikely places and then allowing it to ride the same historical wave he was riding into the American pantheon.

Here is what Ellis has to write about Washington’s feelings toward team:

During Washington’s presidency he surrounded himself with the most intellectually sophisticated collection of statesman in American presidential history: James Madison; Thomas Jefferson; John Adams; and Alexander Hamilton.

Washington’s success as commander and chief depended upon two acquired skills he had developed over his lengthy career: (1) Identifying and recruiting talented and ambitious young men, usually possessing superior formal education to his own, then trusting them with considerable responsibility and treating them as surrogate sons in his official family; (2) Knowing when to remain the hedgehog who keeps his distance and when to become the fox who dives into the details.

5. Taking Risks – gosh, I don’t know, being an entrepreneur means you’re inherently taking risks, rolling the dice, so, I guess the point is not to forget you’ve got to continue taking risks, pushing the envelope; as one of my b-school professors use to say when asked if he has any advice for young entrepreneurs, “ready, fire, aim!”

Background: Washington fully recognized that by accepting the appointment as commander in chief he was making a personal pledge before anyone else. And if he failed in the high-stakes gamble, his Mount Vernon estate would be confiscated, his name would become a slur throughout the land, and his own neck would almost surely be stretched.

6. Getting Lucky – yeah, this has something to do with success (but you didn’t hear that from me)!

Background: Washington often said that a central lesson of his life was “you survive and you shall succeed.” It doesn’t get any clearer than that.

7. Giving up the Reins – handing in the keys to company car, removing the CEO next to your name and replacing it simply with “Founder” or “Director” – stepping down to allow someone more qualified (hopefully – paging Steve Jobs, paging Steve Jobs) to take over as CEO of the company you’ve birth might be one of the most difficult challenges (yet, 9 out 10 times inevitable) an entrepreneur will face – embrace it, just go with it!

Background: At the conclusion of the American Rev0luti0n, to call Washington omnipotent would be an understatement, he was a King in every sense of the word – in short, it was within his power to remain as head of state, uncontested. And, whereas Cromwell [English Rev0luti0n] and later Napoleon [French Rev0luti0n] made themselves synonymous with the Rev0luti0n in order to justify the assumptions of dictat0rial power, Washington made himself synonymous with the American Rev0luti0n in order to declare that it was incompatible with dictat0rial power.

Here is what Ellis has to write about Washington’s feelings toward giving up the reins:

…Washington saw himself as a mere steward for a historical experiment larger than any single person, larger than himself; an experiment in which all leaders, no matter how indispensable, were disposable…

When word of Washington’s response leaked out to the world , no less an expert on the subject than King George III was heard to say that, if Washington resisted the monarchical mantel and retired, as he always said he would, he would be “the greatest man in the world.”

As a kid growing up on Cape Cod it is hard not to spend at least 90% of the summer either swimming or sailing in Nantucket Sound (the remaining 10% was spent eating ice cream from Four Seas). So, yeah, I have lots of salty stories, yet one specific, very poignant flavor comes to mind whenever I feel troubled – the first time I got caught in an undertow (an undertow is a strong underwater current generated from waves crashing into the beach and water recoiling) at Sandy Neck beach in West Barnstable.

For those in the know, getting entangled (and that is what it feels like) in an undertow is frightening especially if you’re five-years old and holding onto your bathing suit with your toes as it gets ripped from your body (note to self, learn to tie a double knot). For those fortunate enough not to experience an undertow, well, just imagine being getting sucked out of an airplane at thirty thousand feet (I’m going for the vacuum effect, not the “splat” thing).

The first thing that floods into you mind is “weee” – the second thing is “crap” – the third thing is “mom” – and the fourth is “I wish I had something tethering me to the beach rather than being sucked out to sea (Regis, I’d like to use a life line).” At that moment of panic you don’t care what form the life line (or knight in white shining armor) looks like, where it comes from, or what you need to do to get it – all you want is to have it in hand.

I liken my undertow induced panic to that which some early stage start-ups experience during their early days, you know, before the model is proven and/or they’ve cobbled together a solid track record – a panic that sometimes results in the management team reaching out an advisor (or advisory team) for help. With this said, this panic isn’t reserved exclusively for start-ups, big, established companies do this too, but they call this “hiring a consultant” or “consultancy validation” (queue commercial for Bain).

Over the past year and half, I’ve seen at least five China based start-ups reach out to an advisor (or team) for help in validating the model or re-positioning of the business strategy or just to secure venture capital funding. At one point, I thought this was a great idea (and I still do); it makes lots of sense to find someone experienced and knowledgeable in the space you’re operating it – sort of like a road map or knowing the “code” for a secret gun or unlimited life in Tomb Raider (I’m old school). At the same time, being all panicky and stuff, forces bad decisions, or rather irrational decisions that make sense at the time (“dude, toss me that poison ivy vine, pull me up…”) but in hindsight you end up kicking yourself.

Recently, I learned of a Beijing based start-up (let’s call this company “Zing”) operating in a competitive space, yet with no clear market leader. Zing’s management team knew they had a solid business model, a quality team, and good momentum; even so Zing was nervous, worried that the echoes, or rumors of foreign competitors encroaching on their space would quickly materialize.

Complicating the issue was their inability to attract venture capital funding because: (1) the team’s experience only covered 50% of the knowledge investors thought they needed to make Zing a winner; and (2) while Zing had an impressive pipeline of potential, promising customers, very few heavyweights had signed up.

Queue knight in white shining armor.

Zing was introduced to an American based guy who had not only successfully built a similar company in the USA, but also took the company public on NASDAQ (valuation hit +US$3billion). The American advisor dazzled Zing with his domain knowledge, his track record, confidence, and most importantly marketability (“trust me, any vc in their right mind will toss you millions by having me as your advisor…oh, and by the way, I have a meeting with you competitor in 5 minutes, what do you want to?”).

Feeling the drag of the undertow, Zing’s management team signed up our American advisor, offering him flowers, camels, KTV and 3% of the company (“who’s your daddy?”). And, for a couple months after the advisory document was signed, the advisor did add value, re-shaping the business model, helping the team to refocus and avoid rookies mistakes he made, and yet, for all these operational trophies, venture capital money remained quite elusive – nine months, two week, and 5 hours after Zing brought the American on board.

So, what was the problem? Did the American advisor doop Zing? Over promised, under delivered? Pull the old fast one? No, that didn’t happen at all, in fact the American was absolutely upfront and forthright with Zing, if anything Zing fucked up; they got all hyped up, putting too much stock in this knight in white shining armor.

The fact is no one person can make your company work, not to mention attract venture capital funding. And while an advisor, especially an active advisor who has proven he/she can build companies and attract funding, adds a tremendous amount of value to a start-up, the young start-ups management must going into the relationship eyes wide open.

Here is a list of some things Zing’s management team should have thought about before handing over 3% of the company to the American advisor – and by the way, the answers to these questions should determine how much of the company the advisor should get:

1. Location: Where is the advisor based? If this person is not in China, then how often will he/she be in town? There is a lot of value in having your advisor in the same country (or 2 hours flight away) for those urgent, “dude, we have a meeting with a major client and would really like to have you on our side of the table…” If this guy isn’t in the same country then you might want to consider finding someone who is, and when this isn’t possible make sure you have an open line of communication readily accessible (Skype is great for this);

2. Activity Level: How active is he/she going to be? Are we talking 1 meeting a week, or a conference call once every quarter? Will communication be on an ad hoc basis (as need be) or will there specific times you can call on him/her (this isn’t a bad thing, sort of like “office hours”);

3. Milestones: Are there pre-determined milestone or goals that must be meet to trigger vesting rights? Maybe the Advisor receives half his compensation from at the start and the balance after the company wraps up its funding. What do you expect to accomplish from having the advisor on board? Who determines the milestones (hopefully not the advisor);

4. Resources: What does the advisor bring to the table? In the case of Zing, the advisor had a very solid network in the US (perhaps globally) but not in China; in fact, I bet Zing’s advisor overestimated his value (from an investor’s perspective). If you need a guy to come on board to help raise money, maybe it’s a good idea to meet his funding agents before you agree to an advisory relationship;

5. End Game: Outside of equity in your company, what is he/she looking for? This is very important consideration, especially in China where the market is hot and yet very few people outside of Asia have any exposure (or relationships) in China; the case might be the advisor is using your company as a beachhead to ramp up his/her China knowledge base (“…for the past 12 months I’ve been assisting a local company grow its business from ‘x’ to ‘y’…imagine what I can do for your company…”). To be honest, this isn’t a negative attribute, if the guy helps to grow the business and get your company to where you want it to be, then why shouldn’t the guy take credit for it – the point is to keep this in mind when dishing out compensation (mutually beneficial experience is cheaper than a one sided deal);

6. Investor Impression: How does it look to a potential investor that you need to bring in outside help isn’t the real issue here, however what some investors might have problems with is the amount of equity the advisor gets – make sure you can justify your advisor’s value add (this is why basing compensation on successfully reaching pre-determined milestones is so important).

7. Relevancy: So, like, dude, are you still CEO or actively involved in the company you took public or are you like, on the beach sipping apple martinis? Point being, technology moves quickly and while there is a lot of benefit in working with guys who have been their and done that, you’ll get a lot more value (network, exposure, investor attention) if your advisor is an acting, innovative CEO (or other C level manager) of a company in your space than a, well, a has been (“…like, 10 years ago, I was, like, the guy who build a stock trading engine using email based delivery system…”).

8. Life Expectancy: When does the damn advisory contract end? Is it indefinite? Is it reviewable every 6 months? You might find that you’ll get everything you need to know from your advisor after the first 6 months? However, my gut is that if this guy’s is worth his salt, he’ll continue to offer up lots of valuable insights and connections. I like to see a 1 year advisory lock (non-compete) with a 4 year extension that can be terminated by either side at the end of every quarter (allowing for quarterly vesting of equity options). The way I see, don’t be greedy or petty – fairly compensate those who do good work for you – karma thing, I guess.

9. Responsibility: End of the day, it is the management team’s responsibility to engage the advisor. Often, a team will sign-up an advisor and forget to actually use the person, or rather doesn’t understand how they want to use the advisor. I’ve seen this happen in two China based start-ups in the past month – and when things don’t go as the team expected (“We’re rich! We’re rich!”) the blame games starts – and the loser is the guy with furthest from the ball, the advisor, when in fact its not really his/her fault but the CEOs. Smack! The truths gotta hurt, dawg!

Anyhow, these are just a few things to consider when hooking up with an advisor. I’m sure there are variations to these nine points (and some might not even be applicable to your current situation) but I guess the point is, if you have to remember just one thing, well, it would have that not matter how powerful the undertow is it eventually subsides once it hits the surf line. Shaka Brah!

“Show me the money!”

Last Tuesday, Stuart Biggs and Michael Logan published an article in the South China Morning Post titled “China awash with venture capital” which quotes Vincent Chan, chairman of the Hong Kong Venture Capital and Private Equity Association and vice-president of Jafco Investment, as saying:

“…an influx of US venture capital firms was pushing up valuations.

The pot is getting bigger. [Valuations have] gone up even higher. United States VCs are setting up new offices in Beijing and Shanghai every month,” he said.

But much of the focus was concentrated on mid- to late-stage investments. “There are still some VCs willing to invest in the early stage or pre-revenue stage,” he said. “However, many former small fund managers have been able to raise much larger funds [this year and last].

“There is a general tendency for them to work on bigger deals. Some have changed focus from venture into growth capital and compete with the traditional expansion capital investors.

“I believe there is a funding gap between early stage and late stage.”

This is absolutely the case…

I think I’m becoming an expert at decoding embedded meanings in “first looks” which are really two second glances from people I meet for the first time.

For example, yesterday, I flew in from Hong Kong to meet with a bunch of Beijing based companies; at one of the start-ups, I was introduced to a new member of the team (a returnee). After we exchanged name cards and got the pleasantries out of the way, I noticed he glanced down at my shoes, grimaced, and returned his eyes to his colleague who was gabbing on about something.

I regarded his first look for a moment and realized it wasn’t the typical glance I’m accustom to (“he looks a lot like Tom Cruise”); in fact, this was the holy grail of first looks, it was the illusive “shoe first look” – that quick calculation used to measure an individual’s worth by the shoes he wears.

Moments later, as we were walking into the meeting room, I snuck a peak of his shoes and realized he was gliding down the hall in a pair of expensive fine Italian leather jobs – very fashionable, very European.

This brought me back to a conversation my ex-girlfriend had with me one day while in b-school, “…the world judges a man on two things, his watch and his shoes…” She is bright lady, so I took her advice and bought some nice business shoes; the problem was, by the time I actually had a reason to wear them, I was back in Asia; and as a rule I refuse to wear nice leather business shoes when I’m out in the streets in China.

I know I sound crazy but there is a very valuable lesson (and reason) that I learned dating back to my first job in Hong Kong; and thus, I beg a little patience as I fumble my way through this explanation.

It was 1995/96, and Asia was, well, rocking financially; I was 22 years old, a Hong Kong rookie, having just relocated from Tianjin, PRC, and over the moon about landing my first banking position as an equity analyst/sales-trader. About a week into my job, my British boss came to me, grinning, and said:

Boss: “Congratulations! We are sending you down to Thailand for two months to learn about the market…”

Me: “Where is Thailand?”

Boss: “…Americans. Right, lace up your wingtips, dry clean your suit, and get on that plane…”

Me: “Seriously, Tom, where is Thailand…”

Forty-eight hours later, I’m zooming through the streets of Bangkok, in the blazing heat, in the back of a tuk-tuk, a three wheeled motorcycle with a passenger carriage, wearing a nicely tailored, professionally dry cleaned, charcoal grey suit and shining black Italian leather shoes. I was looking good, feeling great, and ready for my first company visit with Siam Cement.

Calculator in one hand, note book in the other, I stepped out of the tuk-tuk and into a puddle of mud. Ah, crap! Mud was everywhere – outside my shoes, inside my shoes, and on my face (it was a big puddle). I think my level of embarrassment was up there with unknowingly walking into a meeting with bird shit your head.

After the meeting, the MD of Siam Cement took me out for drinks. As we were walking out the door, heading to the bar, I noticed he was wearing working business shoes which are not boots, but not dress shoes either, perhaps Doc Martens are the best description of them. I didn’t say anything but remember thinking, “dude, this guy is MD of Siam Cement and is wearing a suit with Doc Martens, what is up with that?”

A couple drinks into the session I got up enough courage to ask him, “Why aren’t you wearing nice shoes” (I was young, a little tipsy, and working for a British firm, it was a fair question). He regarded me for a minute, looked at my shoes, and grimaced (same same look as I note above). The MD took a sip of his drink, turned to me and said,

“Why would you want to destroy a nice pair of shoes walking around in that crap outside in the streets just to look professional? Real life, success in business, isn’t about nice Italian leather it is about taking stock in your surroundings and adapting to those surroundings. My employees earn a couple dollars a day, what impression do I give off if I walk around the office or project site in shoes worth more money then their annual salary? It is a mindset, I want to remind myself I’m not finished, I’m not retired, I still have work to do. By the way, nice shoes but mud isn’t your color…”

I thought that made a lot sense and shared his insights with my boss, who in turn “recommended” I clean up my shoes, dry clean the suit and prepare for my next meeting; which I dutifully did, however I never forgot what that MD from Siam Cement said.

Now, when I’m doing my due diligence on new investees, when I remember, I try and check-out (not a “first look” though) their shoes to see if they are “style shoes” or “working shoes”. I like to see start-up guys wearing working shoes. I like the symbolism, that gritty, scrappy working shoe mindset. And, this is why I wear my working business shoes in China.

Click here to listen to the podcast

Welcome to Ymer Venture Capital’s podcast #2.

We are casting from the Victoria Peak in Hong Kong where it is raining today.

Today’s podcast is filed under the “Start-up First Aid” and the topic is due diligence.

We gets lots of emails from start-ups asking us what type of questions venture capitalist ask when interviewing the start-ups’ customers during the due diligence process.

Frankly, every VC has their own list of questions, and to be honest there isn’t a set format, but we have 13 base questions that we like to get out of the way before we ask spontaneous questions…

I think you can learn a lot about life, relationships, and investing from watching sitcoms, especially US sitcoms – no joke!

For example, I have been watching season three of NBC’s Scrubs, a hospital spoof based on the lives of young doctors and nurses coming to age. In last night’s episode, the main character, Dr. John “JD” Dorian, commented:

“…a recent study showed doctors spend an average of 15 seconds with each patient – sounds insensitive but that is all the time we need…”

Reflecting back on JD’s comment, it stirred a thought, something that I’ve been noticing/observing for quite some time now – when it comes to investing, China based VCs a vast majority of China based VCs tend to spend more time listening to the opinions of other VCs than they spend on truly understanding the business and listening to opinions of the management team. So, let’s call this phenomenon “clubbing”.

I can totally understand that there is safety in numbers and that there are some benefits in building a syndicate (i.e. leveraging diverse relationships, experiences, and portfolios) but these spoils only go to the gold standard start-ups (i.e. those companies who fit the “Valley” venture model).

But this is China and as of yet there isn’t an acid test that is applicable to a majority of investments. The fact of the matter is that the VC environment in China is not only immature, but also untested (i.e. no serial entrepreneurs). Ultimately, lots of hidden gems fall through the cracks because their composition/profiles buck the conventional wisdom of what is an “A” team v. “C” team.

In my view, this is the time VCs should be backing less traditional ventures (i.e. anti-gold standard), when the market is less defined and investors are more accepting of China’s raw environment.

Turning back to our sitcom, Scrubs, (and yes, like all formula based sitcoms, there is a lesson here) JD recognizes the flaws associated with a 15 second diagnosis – let’s read what he has to say:

“…the problem with only listening for 15 seconds is sometimes you don’t hear everything, and when you finally figure out what they were trying to say you might have lost them forever…you can never underestimate the importance of listening…ultimately it keeps you in the moment so you don’t miss the things that really matter…”

A bit corny, we totally and unapologetically recognize this but, nevertheless, this is relevant to the point we are hoping to make…

Today, I had lunch with Roger Evans, Greylock, and Steve Williams and Hank Horkoff from Chinesepod.com — we had an interesting discussion about what VCs look for when meeting an investee for the first time. Roger is a Partner at Greylock and has over thirty-years of experience as both an entrepreneur and an investor – below are just some of his sage advice:

(1) Business focus – “what separates the men from the boys is focus, knowing what your core competencies are…what your addressable markets are…and being disciplined enough not to cross those boundaries…”

(2) Defend your territory– “once you’ve staked out your core competencies, how defensible are they?”

(3) Thought process – “the way you have thought through your business strategy/model…what factors did you take into account…where did you get this information from…”

(4) Motivation – “what gets you up out of bed each day?”

A Technorati search reveals over 500 blog links to the phrase “under-promise, over-deliver”

We bring this up because, well, it seems to be the catch phrase of the month — 9 out 10 entrepreneurs prefer to “under-promise, over-deliver” — this mindset worries us greatly — when it comes down to it, we want to know an honest assessment of what you are capable of doing and where you believe the company will be in x number of months.

Otherwise how can anyone truly make an informed decision — from both an operational (resource requirement) and investment perspective…

I don’t like to give out too much advice on what to do and what not do if you are a start-up, largely because I think there are smarter people out there with better insights than me. However, today, I want to touch on a subject that has been running around in my head for several weeks: CEO Secession.

For the past six months, I’ve been working very closely with a Shanghai based technology start-up. As a result, I believe I’ve built an honest, trusting and open relationship with the CEO (Harvard MBA) and her management team. Typically, I’m wearing my “vc hat” however in this case I’m wearing both my “vc hat” and “team hat” which makes things a bit difficult as the investor inside of me must remain cold and calculating, while the team member inside is pulling for the company.

In this case, we are in the process of closing a second round of financing with a seasoned US/China based VC — one of the outstanding question marks is whether or not the CEO in place is the “right person for the job”? And if the answer is, “no, she is not” then at what point do you replace her?

In some ways (“vc hat”), I think it is wonderful that this question is coming to the forefront early on, rather than 6 or 9 months down the road — the reason being that: (1) the investors are passionate about this investment and are doing their homework, and (2) at least we have time to plan for a contingency strategy rather than going into crisis mode when the shit hit the fan.

However, in the same breath (“team/vc combo hat”), I’m a bit disappointed that this is even an issue so early on — perhaps this isn’t a simply a “CEO issue”, perhaps the issue is more a result of poor market conditions (too early), limited resources (more head count and funding needed), and/or basic early stage hiccups. In which case this is a “structural issue” common in almost every single early stage company I’ve even been involved in. Isn’t this why we (the venture capitalist) is in this game – to add value, to be hands on investors – supporting entrepreneurs is our sweet spot (and if we do it right, we make some nice change to boot).

Putting all my hats away, I’m left resolving the best way to directly address this issue with the CEO so as to not shake her confidence while eradicating any grey area as to what the core issue is: “Can you take the company to the next level and if so, how do you plan on doing this”?

Never too shy to “ping” a complete stranger for help, I emailed Garage Ventures MD, Guy Kawasaki, this morning seeking some insights into this matter; Guy was cool enough to quickly reply:

I wish I had a magic solution for you, but I don’t. You’re just going to have to discuss this openly with the CEO. A good CEO will recognize that the company comes first, not his own needs. Also, there is a chance he could grow into the position–believe me, VCs don’t know everything about how someone will grow into a job.

I shared this email with the CEO, we chatted at length, and resolved this matter (with the support of her advisors) rather quickly. I’m really proud of this lady; her response was neither aggressive nor condescending (i.e. I’m local Chinese, therefore I know best how to run a company in China); in fact she totally agreed that her interest must never get in the way of the company. And with that, she went about mapping out an execution game plan for the next 3, 6 and 9-months and at each milestone highlighted specific, measurable, and tangible results that she would ultimately be solely responsible for. Furthermore, a contingency plan in is the works, which includes key/replacement hires. In my book, that is a responsible, fundable leader (especially in China where it is extremely difficult to find an entrepreneur with this quality).

Only time will tell how this pans out, whether the milestone and accountability stick – for if they don’t, it will be as much the responsibility of the CEO as it is of the “value-add” investors (myself included)…

As a side note, Guy Kawasaki wrote a very nice article called, “The Art of Execution” – totally worth a read for start-ups going through similar situations.

Yesterday’s, Asian Wall Street Journal ran a story by Rebecca Buckman discussing the new white paper published by US-based venture capitalist Pascal Levensohn titled, “Rites of Passage: Managing CEO Transition in Venture-Backed Technology Companies”. It is definitely worth a read.