00:36 Six characteristics of successful early-stage tech companies;
6:04 Basics of building a platform business;
8:40 Developing a self-sustaining platform;
Paulo: You often say in interviews that you look for unstoppable founders — but what kind of companies do unstoppable founders build?
Yinglan: I think one of the things we learned about unstoppable founders is that they act with speed. Something they decide at nine o’clock, they execute by noon. This is in stark contrast to what happens in a big multinational. Sometimes a product manager who has an idea, you’ll surface it to the division director, who surfaces it to the director, who will surface it to the vice-president, who will surface it to the assistant CEO, who will surface it to the CEO, and this whole process takes six months. The original idea doesn’t look like the end product anymore. So the size of the organization is proportionate to agility, but unstoppable founders have the ability to make things happen with great agility and speed.
So that’s one. I try to capture it in 7S’s. The next S is, counterintuitively enough, stealth. So a lot of people think that every time startup founders have a new product or new launch of a service, they need to do a big press release and get covered on TechCrunch. Counterintuitively, that’s actually the opposite of what we advise founders. Our advice to them is to stay under the radar for as [long] as possible. When you do a press release, your competitors know about you, they copy what you do. Venture funds who don’t invest in you end up investing in your competitors. Investment bankers do meetings with you and learn all about you without much clear benefit for you. The only time there where I think there’s a benefit for founders to do this is if they need to recruit or they need to get customers. But if you have a way of getting customers without PR or fancy press releases, that would be my advice.
The third S is actually smarts, and when I say smarts it’s not just IQ smarts. It’s the ability to ask not the how or the what but the why. The why reflects the bigger calling of the organization — why the company does what it does? Smarts also stands for the ability to learn, because in the world of tech, things move so fast, that what is common knowledge a year ago will be obsolete in 12 to 18 months in certain things. It also means having a strong technical core team. Most people think that the success of Apple was largely due to Steve Jobs, but I think in the early days, Steven Wozniak was as critical as Steve Jobs. We always believe that A engineers hire A engineers, B engineers hire C engineers, and C engineers cannot hire anybody. Being clear of who you hire especially in the early days, the first three engineers are very critical.
The fourth one is simplicity, which is also very counterintuitive, because a lot of times people try to explain their business and it’s more complicated than it needs to be, but the best companies are able to articulate what they do with clarity and simplicity. The other learning is that the simplest answer is usually the best answer. The best products are uncluttered, you look at Dropbox, you look at Google, you look at WhatsApp. We have a portfolio company called Payfazz in Indonesia. They come up with very simple solutions [to problems] that few hundred million people face. So that’s another one.
There’s one more S that I want to bring up which is singularity, which essentially means focus and aiming your resources. In the West, we hear a lot about serial entrepreneurs, which is the case study of someone who has done one startup and started another one again. In the East we see the phenomenon of the parallel entrepreneur — entrepreneurs who have several things going on and the most valuable companies like Apple, I mean they have not more than 10 products because each product requires engineerings [and] requires marketing, the key is to focus and aim your resources so your chance of success is much higher.
One last S is svelteness, which is essentially staying lean and losing fat. And if you picture the image of the big sumo wrestler versus a small little kid, we will always bet on the small little kid who is the underdog, because they can run circles around the big sumo wrestler. For the big sumo wrestler, the bigger they are the harder they fall. So staying lean and being agile these are some of the building blocks of unstoppable founders.
Paulo: So these six S’s are something that our listeners, especially early-stage founders, can translate into the ventures they are working on to gear them for success. Speaking of successful ventures, the companies you have invested in over your career are wildly successful technology platforms — Go-jek, Tokopedia — that managed to take off from finding product-market fit to scale, which is often one of the biggest challenges founders face, especially those that have passed Series A. What lessons can founders take away from the success of these companies you’ve invested in?
Yinglan: There are a few commonalities [among] the companies you just mentioned, it’s one of our investment thesis, which is to really invest in platform companies. Easier said than done, but platform companies have certain characteristics that are easy to identify but harder to accomplish.
One, they have a demand function that acquires users and retains them. They usually have a supply function that acquires supply, manages supply, and does the quality assurance. They don’t own the service providers, but they curate them and aggregate them. They aggregate demand and supply. There’s an improvement of matching efficiency, and they focus on rule-setting. This is a self-evolving loop that allows data to be collected and enriched over time.
One example is a company in our portfolio called Carro that is a platform to buy and sell secondhand cars. What Carro does is they acquire car owners and retain them, they help empower dealers to sell their cars, they aggregate the dealers and car owners, they assess the quality and pricing, and they match dealers and car owners. And on the supply side, they acquire the dealers and make sure the cars are in good condition.
The other example we have on our portfolio is Payfazz, which is essentially a bank for the unbanked in Indonesia. They have a network of banking agents in Indonesia, a very large footprint, and these agents enable banking services. They aggregate the agents and the users, they match the agents and users and link them to banks. In the process they take commissions, and set up rules and regulations for the agents. For the supply they acquire the agents, they have regulations for compliance and they empower them to better their lot in life.
Studies have shown that platform companies create more tech market cap and generally more enduring companies, and that’s one of our core investment thesis.
Paulo: So these companies you’ve invested in over time, the thesis has generally remained the same. Now looking forward this 2020, the region is becoming more competitive as venture matures in its dealflow, action is thickening in sectors like fintech, and races are afoot to win the region (Go-Jek and Grab). What do you advise your founders for their companies to both win in the region and grow sustainably?
Yinglan: The analogy I like to use is that if you are in the forest, depending on rainwater for survival is fairly unpredictable. I think it’s analogous to consumer-facing platforms spending a lot of money to acquire users and customers sometimes without proper unit economics. I think that is going to be a recipe for disaster. Going forward I think companies need to focus on retention, unit economics, net revenue, path to profitability, and acquiring users is just the first step.
So the analogy is you should really build a reservoir to really trap this rainwater. Once you attract these users, how do you create a platform to retain them, and gradually build an ecosystem and get them to stay engaged.
Once you have a reservoir, you can start breeding fish and prawns. So the users come back for one thing, but you have to create other news use cases to get them to stay engaged. As more rainwater falls and your user base grows bigger, you scale up the platform to increase the moat, you scale up operations to make sure there’s customer service and make sure that you are allowing users to cross-pollinate various use cases more conveniently. As reliance on rainwater for survival stops, you can charge people to fish in the reservoir. Once the platform is self-sustaining, you can actually start monetizing and extracting value. Over time, the resources that are built up allow for sustaining value creation, so you don’t even have to fish for prawns. You can build a power plant or hydrodam to allow for limitless value creation and a self-sustaining platform.
These are easier said than done, but the most enduring companies are able to essentially create a reservoir for their users, get them to stay engaged, and also allow them to monetize and create a sustainable platform.
Paulo: So I think that’s a big question for our listeners, especially founders among you, to take away from this — what is your reservoir? what reservoir are you building?