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.

November 26, 2007

Virtual China – “It will be faster, bigger, more like an explosion!”

Filed under: Gaming,Social Networks,Virtual Goods — Administrator @ 4:57 pm

For the past 12-months, the market’s been buzzing about Beijing’s partnership with MindArk (creators of Entropia Universe) to build a second dam on the Yangtze River…er…I mean they could possibly build a second dam assuming their joint Beijing Cyber Recreation District project (the world’s largest 3D virtual world capable of supporting 7 million concurrent users) throttles up and launches free and clear.

In fact, not only could the Chinese government build a second, third or even fourth dam, they just might figure out how to (competently and securely) connect western consumers and retailers directly to Chinese manufacturers (sidestepping our friends at Alibaba along the way).

As Vic Keegan reports in a recent Guardian article titled “Virtual China looks for real benefits” this is:

“…a bold attempt to repeat what China has done in manufacturing (i.e. conquering the world) in services. Be warned. It doesn’t stop there. This site, now under construction, will have all the infrastructure (server farms, communication links, electricity, banking links, logistics, etc) needed to make this the world’s one-stop shop for consumers and producers.”

Full stop — this “virtual world stuff” is for real and will no doubt have an immeasurable impact on real world commerce. Yup, it could take a number of years to get it right but given the amount of capital, breath and focus China (let alone the rest of the world) is directing at this space the time is yesterday to begin toying around in this field.

Already, virtual commerce is massive (just ask the Korean’s circa 1998) and hitting the bottomlines’ of major listed Internet properties – for example, 65% of Tencent’s revenue is generated from the sales of virtual crap. Furthermore, virtual commerce is already a sophisticated market economy striated into primary (site-to-user) and secondary (user-to-user) markets – the equivalent of a US$2.0 to US$2.5 billion market worldwide.

And, over the next couple of years this industry will only continue to grow and proliferate as bandwidth increases allowing more and more users (in developing countries like China, India, and Thailand) to join 3D virtual communities, such as Chinese start-ups Hipihi and Novoking.

Of course, there are a lot of people who aren’t drinking the 3D Kool-Aid, and by some measure, they’re right…but not entirely. My most excellent friend and brother Frank Yu writes that graphics and experience has less to do with a successful roll-out than understanding the local culture. Frank writes:

“…anecdotal evidence seems to indicate that Chinese MMORPGs and Casual Games can more easily be integrated into the markets of Vietnam, Indonesia, Russia and India easier than the more higher end Western games that most industry analyst are familiar with. If this is the case, there is a revolution in gaming based not on graphics, performance or even features but one based on distribution, cultural affinity and low barriers to entry…”

Recognize! If I’m a Western gaming or virtual community operating in Asia – sure, point well taken…but what if I’m local? What if we’re all local and operating on a level “cultural” playing field? What if Beijing tosses up a platform that support 150 million avatars and recommends (in a “velvet glove, iron fist” sort of way) leading manufacturers sign up? What will happen is you’ll be forced to compete – so rather than hang around – waiting – just get going because that virtual runway is pocked marked and difficult to navigate in the best of times.

I’ve been waiting to use this video titled “Are Virtual Goods the Next Big Business Model?” for a while, granted it is from this past June’s Virtual Goods Summit 2007 hosted at Standford University, but it is really quite good (assuming you like to listen to a group of entrepreneurs, VC’s and other tech industry people who got together to talk about the emerging market opportunities for virtual goods and economies).

November 23, 2007

SCMP writes “Feilio works out solution to intellectual piracy”

Filed under: DRM,Music,Video/Film — Administrator @ 11:45 am

On Tuesday, Sherman So from the South China Morning Post wrote “while the world’s big four music companies have failed to stamp out piracy in the mainland, Feilio, a Harvard university venture, may just have the solution…” read entire article

September 19, 2007


Filed under: Music,Social Networks,Video/Film,Ymer News — Administrator @ 11:10 pm

Today, the way digital media (e.g. video, text, and audio) is consumed in China online via search and social distribution (e.g. emailing links, blogging, etc) requires that content be virtually free to distribute and consume.

To wit, users want unprotected, legal content in quantity and at a low price.

So, one of the main barriers preventing such a content service from succeeding in China is the reluctance of major content providers to distribute their content without the protection of a Digital Rights Management (DRM) standard. Contrary to widespread belief, the fact that existing models fail in China has very little to do with the fact that illegal content accounts for more than 99% of all digital content on China’s web or the misguided belief that locals won’t pay for content, but rather because, until very recently, no one has come up with a scalable, profitable and legitimate solution that properly compensates content owners for their property.

And this is why we are so excited about our recent investment in Feilio as we believe they have the answer content providers, worldwide, have been pining for.

Feilio’s solution is a service that aggregates and distributes legal content to Chinese consumers while fairly compensating content providers for the use of their digital content.

The service works is as follows:

Content aggregation: Feilio registers content from publishers and producers of audio, video, and text media. Digital fingerprints are created to identify each media file, linked to its ownership and metadata. File usage is tracked on end-user devices using client software that also provides user interfaces, search, recommendation, and social networking functions to help people discover new media.

Content Distribution: Feilio provides content licenses to networks converting previously illegal file sharing and copying into legal activities, inoculating universities & networks against copyright infringement litigation. Users (e.g. students) need not change their current file sharing behaviors associated with free content sites.

The capital we are investing will go to scale Feilio’s platform, expand its nationwide network to +300 universities, and aggregate content.

We are thrilled to be part of Feilio, a groundbreaking company that seeks to not only remedy China’s digital content piracy problem but also ensure content owners are able to monetize file sharing.

July 18, 2007

How to get from “who the heck are you?” to “please, have the fish eye” in 5 easy thinks

Filed under: Start-up First Aid — Administrator @ 10:59 am

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 youre 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 teams mojo!

Good Luck!

July 11, 2007

You can look…if I let you…but don’t touch my Harry Potter!

Filed under: Social Networks,Video/Film,Web 2.0 — Administrator @ 10:23 am

Yesterday, around 3:15 pm, I jumped into the elevator and waited patiently as it dropped the 40 floors that separates my office from the Bloomsbury bookshop in the lobby – the sole intention of my trip was to pre-order the final Harry Potter book, Harry Potter and the Deathly Hallows.

When I rolled up to the checkout counter and asked for the sale form the sales assistant, Lucy, she asked me, “…do you want the adult version or the children’s version?” I asked, “What’s the difference?” Lucy responded, “Nothing really, just the cover…”

I didn’t hesitate one nanosecond and yelped, “Of course, I want the children’s version…it has the way cool cover art!”

Scratching my head, I’m thinking, “What’s going on here?!” Are adults embarrassed to be reading a Potter book? It’s not like you’re a Rabbi sneaking a shot of whiskey hidden in the scrolls of a Torah or something. It is just a book.

When I got back into the office, I did a little research and discovered that Bloomsbury first introduced the alternative adult cover when they launched the fifth Potter book. The reason, according to my source at London’s Bloomsbury HQ, was that “…bankers and lawyers on the high street – older people – were rather embarrassed at being seen reading a book with a childish cover…”

An hour later, I went back downstairs to the Bloomsbury bookshop and asked Lucy what percentage of people pre-ordered the adult version over the children’s version – indeed, the adult version accounts for about 45% of the total sales – up dramatically from around 15% of total sales for the fifth book.

This shift, if you will, started me thinking about what could happen to Facebook – now with over 30 million active users – as its popularity with the older crowd grows. Will the net natives – Facebook’s core user base – revolt and jump ship?

Check it out – the latest monthly figures (June 2007) reveal that the number of visitors between the ages of 25 – 34 increased 181% while the number of visitors 35 years old an older increased by 98% – definite signs of traction from the moms and pops of the world.

Will it peak? Eventually, sure, but not for while. And, if anything, the madness has only begun to build. Wait to see what happens when word gets out that US-based venture capital fund, Bay Partners, has launched a fund targeting all those odd lot developers (most haven’t bothered to register as proper corporations) responsible for the 1,500 odd Facebook applications. Tsunami anyone?!

Let’s be frank – this attention – going mainstream – is exactly what investors and creators of the site want to see – it means higher advertising revenues, more functionality, and increased credibility (eventually, leading to a fat pay cheque – cha-ching). Nothing wrong with this, of course. The issue is – what happens when the kids lose control and the adults takeover? Is Facebook in for a face lift – are we going to see brand extensions – different covers?

I don’t know for sure what is going to happen however my gut feel is that Facebook is nearing its peak. One of the key drivers or attractions of Facebook was that fact that everyone’s identity is real – that is why I use it – I actually “know” the person I’m talking to – or sending crap to – in many ways, the friends on my page are the same people I’d call up for drinks or share a joke with – it is purely social (i.e. I’m not looking to network – business cards…be gone!). However, the more random openness of the site the more opportunity there is to dilute this “real identity” flavor.

It just seems to me that when the kids discover something fun, unique and, well, pedestrian, the adults come in and institutionalize the damn thing – effectively, sanitizing the juices and mojo that shaped the community in the first place. How many kids/students want to hang out with random adults? None. How many kids/students want their parents looking at their drunk partying photos? None.

Unlike a Potter book, you can’t appeal to a wider user demographic by changing Facebook’s cover – the heart and soul of the site rests in the content provided by the members not a single author. So, no, I don’t think the answer is to have an adult version and a children’s version – the answer is, “mom, dad, you can look…I let you…but don’t touch!”

June 20, 2007

Sicko goes public, Weinstein Co goes ballistic, and Michael Moore goes “I told you so!”

Filed under: Music,Video/Film,Web 2.0 — Administrator @ 7:11 am

Those of you who are familiar with HBO’s Entourage TV series – the day-to-day life of Vincent (Vince) Chase, a hot young actor in modern-day Hollywood, and his group of miscreant friends (the Entourage) – may remember the episode title “The Sundance Kid” where movie studio big wig Harvey Weinstein casts Vince as the lead in a surfing film he’s producing. After initially accepting the role in Weinstein’s film, Vince drops out to pursue James Cameron’s “Aquaman” throwing Weinstein in one of his legendary spitting temper tantrums.

Try, if you will, to envision Weinstein’s “condition” after discovering the new Michael Moore docu-drama, Sicko, Weinstein Co produced was bootlegged (ahead of its June 29th release date) on YouTube over the weekend. Well, hell have no fury like a pissed-off Weinstein.

And how did writer-director Michael Moore, known for his disdain for copyright laws, react to the news? According to a June 18, 2007 interview with Brandweek’s Steve Miller, Moore said that despite the Internet ripping his new film…

“[…he disapproves of copyright laws. It’s a stance] I’m sure is different than that of Harvey and Bob…I think the music industry’s response to Napster was misguided … and for me, it’s about getting people to see the movie and that’s what I want, so they will talk about it…I would never want to prosecute anybody who would download it…”

For the record, Ymer does not condone illegal file sharing however we are adamant that the existing pay-for-content model is dead. Weinstein and his fellow movie titians can either learn from the mistakes of the music industry and work with independent distribution channels, such as YouTube, to create a payment platform that leverages the viral natural of “good quality content” or not – the equivalent of the latter is losing just about everything.

Our views echo our desire to work with and support co-founder Eric Priest and his team at Beijing based Feiliu. While not revolutionary in design or concept, their business model of blanket content licensing, monthly subscription, unlimited sharing/usage and usage-based payments to content providers is, in our opinion, the most balanced and practical model we’ve seen in the market.

Some have argued that “digital music is a very difficult space to monetize” and a start-up in this space without a “massive user-base” will get crushed under the weight of industry leaders however what the public and investors are overlooking is the fact that content owners are less than excited about doing deals with established players given their less than stellar record on IP protection.

Indeed, this includes China’s leading Internet venture, Tencent, as it now faces several lawsuits from leading Taiwanese music label Rock Records. And therefore content providers will, by default, turn to independent enterprising companies, such at Feiliu, and their spotless IP track records.

June 13, 2007

Lessons from Danone: “Never Leave Your Wingman!”

Filed under: Start-up First Aid — Administrator @ 9:13 am

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!

June 12, 2007

You say GPS hardware, I say GPS software, let’s work the whole thing out…and vertically integrate!

Filed under: Technology,Web 2.0,Wireless — Administrator @ 4:43 pm

Over the past couple of weeks, we’ve been receiving wave after wave of business plans for Global Positioning System (GPS) related ventures – not entirely sure what is driving this sudden surge in cases but there you have it. Indeed, the odds-on favourite for the number one reoccurring business theme is:

“We’re China’s leading GPS software application vendor developing navigation and Web2.0 compliant applications and in search of US$2 to $5 million”.

Coupled with each offering is a competitive analysis whereby software ventures are championed and hardware ventures trashed. Not surprising – hey man, big upside over here, give us some cash – their motivation is obvious. Frankly, it ain’t that simple of an argument– the GPS industry is evolving rapidly, outside of China, and for once, we sense that China’s GPS industry will not adopt Chinese characteristic (the way Baidu and Tencent have) – um, go back, of course there will be some localization but this will happen to the extend that Chinese characters replace English, French, etc (and the minor bells and whistles) but by and large we don’t see much room for this to happen. In its place we see vertical integration theming its way nationwide.

A casual observation of China’s GPS universe reveals definitive gaps in the pro-software argument (“hey man, big upside over here, give us some cash!”) – the “hugest” being that fact that the H.M.S. GPS has already set sail – at least, for this cycle. Quite frankly, Chinese and foreign GSP ISVs, both large and small, too numerous to count, have built (circa 1997) substantial beachheads on China’s shores – the most successful Chinese ventures (just a handful) partnered, early on, with major technology companies and telco providers, such as IBM and China Unicom which helped them go to the head of the venture funding line whereby millions of dollars have been doled out by international and local vc funds, such as SAIF, Gobi and Oak Investment Partners (sadly, Ymer was not one of them).

With fresh funding and strategic partnerships these first movers have quickly moved up the value chain, offering sophisticated navigation engines and tools, nationwide map databases, and proprietary value-add networks (e.g. highway sensors and tags relaying traffic information). Given the fact that the demand side of the curve has only started inching up the scale, it reasons that a young enterprising start-up will find it extremely challenging to increase its footprint until such a time that demand outstrips supply. If you consider that there is only one dominate (virtual monopoly) mapping company in the US (Navteq) and one in Europe (Tele Atlas) it become clear the difficult new entrants face in light of China’s well funded incumbents (Lingtu, Careland).

Those in the pro-software camp fade GPS hardware investments largely because they claim the industry is over saturated, highly fragmented and competitive environment. However, I’m a bit uncomfortable drawing such definitive conclusions when the industry in its infancy (i.e. China accounted for about 3.5 – 4% of total global unit sales in 2006) and positioned to benefit from the convergence of mobile device market, rising in-car GPS penetration, and heightened recreational use.

On the contrary, highly fragmented and competitive industries tend to be fantastic opportunities for existing players with means to control their own destiny – the idea being to identify and then inject sufficient capital in a market leader, structure a well articulated and thought-out business strategy, look to roll-up (consolidate) smaller (synergistic) competitors, build strategic partnerships with other industry leaders (vertical integration), and then throttle up your execution machine (experienced management team).

However, how many GPS hardware players are out there suitable for venture funding – the equivalent of a handful, at the most.

Even so to suggest that an investment in a GPS ISV vendor trumps a similar investment in a GPS hardware vendor (largely because of the operating environment) may be off-center and is slightly ignorant of the dominant trend playing out in the industry.

Convergence – that’s the ticket. The GPS value chain is melting and evolving – the top 5 GPS vendors (accounting for 70% of global market share) now have capabilities in software development, chipset design (e.g. Garmin) and module/end-product production/design. And therefore, it becomes rather clear that as the industry matures in China, the leaders will be GPS vendors with vertical integration know-how and capabilities (either in upstream chipset design or software navigation engines) will lead their peers in terms of both technology innovation and product positioning.

To the point, some of the most innovative GPS software solutions are developed by leading vertically integrated GPS vendors, such as TomTom’s Map Share technology. This unique mapping technology allows users to easily and instantly improve existing maps as soon as they identify changes in the road network, for example a smart interface allows users to change street names, unblock or block-off streets, identify one way streets, etc. Furthermore, as TomTom’s mapping system is dynamic, all updates are shared with TomTom’s 10 million users (i.e. community).

This is exciting stuff – the next step in further developing this community is to overlay additional information, similar to what US based community site does with localized information generated by users.

June 7, 2007

KPCB leads US$13 million Series B round in United Automobile Association

Filed under: Automotive — Administrator @ 12:39 pm

Earlier the week, venture capital fund KPCB led a consortium of existing shareholders in a US$13 million Series B round in Beijing based UAA – this comes three-months after Series A closed in February.

KPCB enhances an already impressive list of world class investors and industry leaders, such as Legend Capital, Cross Country Automotive Services, and, dear we say, Ymer Venture Capital.

We expect great things to come of this partnership – as should Chinese consumers!

June 6, 2007 serves up an interesting offering yet pails in comparison to Beijing based

Filed under: Music,Social Networks,Web 2.0 — Administrator @ 9:20 am

Ethan Smith from the Wall Street Journal filed an article titled “Listen to music free, buy pay to carry” which is about a new Palo Alto, California-based music distribution portal called Lala Media Inc. The way the service works is that visitors to can listen to streamed music (through a normal web browser) from Warner Music’s digital catalogue for free however if they so desire to download and cart the music away they must purchase an entire album. Smith writes:

“It’s like a subscription music service, but without the monthly subscription fee. Lala is betting that in return for getting all that free access to music at home, listeners will pay to buy the songs they want to take with them on iPods and other music players. Lala, whose owners include Bain Capital…is underwriting thr free offering by paying major labels $6 to $8 a user each month, about the same wholesale rate paid by online music subscription services like RealNetworks Inc.’s Rhapsody.”

To be fair – it is a clever idea. I particularly like the site as a music “discovery site” and the way the platform is device agnostic (i.e. mobile phone, iPod, etc). Though that is where my love affair with the site comes to an abrupt halt. What bothers me is that the music is streaming, quality is poor, you must purchase the complete album, and you’re still beholden to some form of DRM.For the record, I’m coming at this proposition slightly biased in that we have been working with Beijing-based Feiliu Media for several months now as they prepare to launch their content platform in September at Tsinghua University in Beijing, PRC.Feiliu’s business model is quite unique in that it not only provides a blanket content license on its content catalog but also tracks content usage – thus allowing users unlimited freedom to share music, video, etc while fairly compensating content providers.We believe the hidden gem in this platform is not so much in the “professional” or “industry” generated content, but rather in user generated content – to whit, Feiliu will be the first platform in China to compensate students, bands, whoever, with cold hard cash for their original work. Quite frankly, this is going to turn the business of collecting user generated content on its head – how can China’s incumbent video blogs, file sharing, and content aggregators compete with a site that pays users for their content? They can’t because they neither track usage nor earn an upfront fee from end-users – all existing sites are ad revenue models which are highly dependent on a high volume of free content.Feiliu’s CEO, Eric Priest, elaborates:

“On the music side, we deal only in full-track downloads, which no one has ever been able to make any money from in China, so most don’t seriously pursue that business. We don’t do ringtones at all, and we don’t add another intermediary to the existing online structure of SPs, etc. We’re a complete platform that deals exclusively with internet service providers (of which there are three in China: CERNET, China Netcom, and China Telecom). Our licensed content is served up via our platform and user interface with loads of rich value-added features like recommendation engines and social networking tools to help people discover new media.We serve up not only music but video and documents as well, including educational materials (English lessons, Harvard lectures, TOEFL classes, etc.). We provide this complete platform for a small fee bundled into every user’s monthly ISP access bill, so we are paid by the ISP, not the user. In return, we license the whole network to freely download and share the content in our system. In order to fairly divide our content revenue pool among copyright owners, we count not just downloads but also plays and copies of each media file, accumulating the most detailed and extensive data on user media consumption in the world. End users can upload user-generated content into our system, promote it among their peers through our platform, and get paid a portion of total revenues for each time the media is watched or listened to. Imagine how important that feature will be on college campuses among bands and student filmmakers.”

In short, Feiliu provide ISPs with the technology and licensed content to serve up all the best content in exactly the way users want it–high quality, reliable, fast, no technological restrictions, in an attractive online environment that helps you smartly navigate content and discover new things you like. What if users prefer to download their content from illegal sites and use a player different from ours? No problem. They are still paying the bundled content fee to the network, which Feiliu still collects and distributes to copyright owners, and Feiliu can still log those users’ content usage because their counting technology is entirely player agnostic, and they need not get the file from Feiliu. Once they have it, Feiliu ID it, count it, and pay the copyright owner.We’re confident there’s no one in this space doing anything close to this business model.

April 3, 2007

Ctrip on wheels

Filed under: Automotive,Ymer News — Administrator @ 9:17 pm

In today’s South China Morning Post Business section Sherman So filed an article on United Automible Association titled Club hitches ride on fast growing car ownership.

“Basically, we are like Ctrip,” Mr Lu said, who sold his previous ventures for more than US$12 million. “Ctrip partners hotels and airlines and takes commission from them when customers make bookings. We partner car repair shops, insurance companies and others and take commission from them when our members require these services.”

February 24, 2007

United Automobile Association receives funding from Cross Country Automotive Services

Filed under: Automotive,Ymer News — Administrator @ 8:12 pm

Beijing, PRC and Medford, USA – February 2007 – United Automobile Association, China’s leading emergency roadside assistance provider, last week closed Series A2 financing.

Joining existing investors Legend Capital and Ymer Venture Capital in the oversubscribed up-round is Cross Country Automotive Services (CCAS), a leading provider of integrated vehicle and driver programs in North America serving the Automotive, Insurance, and Diversified markets for over 35 years.

This is a tremendous opportunity for UAA to leverage Cross Country’s longstanding industry-wide relationships, proprietary software platforms, and broad operational and business knowledge base. We are very excited about this strategic relationship and warmly welcome CCAS to the UAA family.

January 6, 2007

New New Thing – Cinema

Filed under: E-commerce — Administrator @ 12:59 am

For a while now there has been little to write about – however – with the release of Zhang Yimou’s film “Curse of the Golden Flower” – which posted RMB270 million in PRC box office sales as of Jan ’07 (less than 20 days since released) – we think Chinese consumers have turned the corner – it is time to invest in digital theaters!

Umm, yeah, IP issues remain…but you must start somewhere and we think the time is now!

October 30, 2006

UAA named as one of the top 25 most valuable China based ventures in 2006

Filed under: Automotive,Ymer News — Administrator @ 9:50 am

In October 2006, Beijing based United Automobile Association was named one of “Zero2IPO – China Venture 50” – most valuable ventures in China in 2006 – UAA was ranked in the top 25.

This is a fantastic accomplishment for a company just over a year old. Congratulations to UAA’s founder and CEO, Charles Lu, and his UAA team. Well done!

August 28, 2006 receives US$25 million cash infusion from Goldman Sachs

Filed under: Automotive,Ymer News — Administrator @ 11:02 am

Last week, Goldman Sachs invested US$25 million in Goldman’s investment comes just 10-months after Series A funding.

We’re very excited that Goldman is joining the Chinacars’ family and expect great things to come in the future.

Stay tuned!

August 22, 2006

Go on, be a Tiger!

Filed under: Start-up First Aid — Administrator @ 11:16 am

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.

August 15, 2006

United Automobile Association (UAA)

Filed under: Automotive,Ymer News — Administrator @ 10:55 am

Ymer Venture Capital and Legend Capital closed a syndicate investment in Beijing based United Automobile Association (UAA) last week.

We are thrilled to be an investor in this great company which has been leading the way in China’s automotive roadside assistance (e.g. American Automotive Association) category since UAA was founded a little over a year ago. (Before you pass judgment on the “…a little over a year ago” keep in mind roadside assistance is an emerging segment in China that only took hold a couple years ago.)

We have been big fans of the company for a long time, specifically because we believe the management team, led by seasoned entrepreneur Charles (Zhengyao) Lu, has demonstrated time and time again that they are capable of immaculate execution on the back of solid domain knowledge.

Furthermore, we believe there are heaps of synergies waiting to be tapped (and developed) between UAA and our other automotive investment, Chinacars.

We plan to write a longer post about this investment in the next couple weeks explaining what we like about UAA, where we see roadside assistance and China’s overall automotive business heading, and what we hope UAA will become.

In the meantime, there are a number of car related blogs that we’ve posted over the past year which should provide a short-term fix.

August 14, 2006


Filed under: Marketing,Start-up First Aid — Administrator @ 2:30 pm

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.

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