20VC 3 Key Differences Between US and Asian Tech Markets & With Such Large Incumbents Chasing Early Acquisitions, Is There A Market For Later Stage VC with Crystal Huang, Investor @ GGV Capital

In this episode of 20 Minutes VC, host Harry Stebbings interviews Crystal Huang, a principal at GGV Capital, who has made her mark in the venture capital industry by leading the firm's investment in Wigo and attending board meetings at Tile and FlightCar. She also serves as a board member at NextGen Partners. Previously an analyst at Blackstone's technology M&A advisory group, Huang has been recognized in Forbes 30 under 30 for her achievements. The discussion delves into the nuances of venture capital, with a focus on the challenges and strategies for US companies entering the Chinese market, the impact of local giants like Baidu, Alibaba, and Tencent, and the dynamics of deal sizes, unit economics, and business models in Asia. Huang emphasizes the importance of hiring local talent and adapting to regional business practices, predicting a convergence of US and Chinese market approaches over time.

• Harry Stebbings is the British host of the 20 Minute VC podcast.
• Harry Stebbings can be found on Snapchat under the username H Stebbings with two b's.
• Harry Stebbings encourages personal engagement through Snapchat.

"This is the 20 minutes vc with your terribly accented british host Harry Stebings. You can find me on Snapchat at H Stebbings with two b's."

Harry Stebbings introduces himself and provides his Snapchat handle for listeners to connect with him.

• GGV Capital is a leading venture fund with a focus on the US and Asia.
• Managing Partner Hans Tong was featured on the podcast earlier in the week.
• Crystal Huang, a principal at GGV Capital, is the guest for the current episode.

"This week is GGV Capital Feature Week, one of the world's leading venture funds with a unique approach, partnering with the world's best entrepreneurs in the world's two largest markets, the US and Asia."

Harry Stebbings discusses the significance of GGV Capital and their global investment strategy.

• Crystal Huang is a principal at GGV Capital.
• She has led GGV's investment in Wigo, acquired by Cinemagram.
• Crystal attends board meetings at Tile and FlightCar.
• She is a board member at NextGen Partners.
• Crystal worked as an analyst in Blackstone's technology M&A advisory group before joining GGV.
• She has been named to Forbes 30 under 30 in venture capital.

"Now, Crystal is a principal at GGV, where she's led the firm's investment in Please excuse me for this pronunciation, Wigo, which was acquired by Cinemagram and she attends board meetings at tile and flight car."

Harry Stebbings introduces Crystal Huang and her role at GGV Capital, highlighting her achievements and contributions to the industry.

• Naturebox offers an unlimited snacking program for offices.
• The program promotes healthy snacking with simple ingredients and no artificial additives.
• Lisa is a mattress company offering a direct-to-consumer experience with a luxury foam mattress.
• Lisa donates one mattress to a shelter for every ten sold.

"Naturebox is the first ever unlimited snacking program for offices of all sizes, starting with just $12 per month per employee."

Harry Stebbings discusses the partnership with Naturebox, emphasizing the benefits of their healthy office snack program.

• Crystal moved to the Bay Area after college.
• She worked as a technology M&A banker at Blackstone.
• Crystal was interested in a long-term career in Silicon Valley, either as a founder, operator, or in venture capital.
• She joined NextGen Partners and found the GGV job posting through their network.
• Crystal was introduced to GGV by Dave Iclr and joined the team due to good chemistry and the fund's US-China focus.

"So how I heard about the job, know I'd been networking around and I had been meeting different funds, but there's this group called NextGen Partners, which I think you may be familiar with, that's a really big pre partner networking association in the Valley, and I'm now on the board of that."

Crystal Huang shares her journey into venture capital, detailing her career path and networking experiences that led her to GGV Capital.

• Pat Grady from Sequoia commented on the rapid decay of operating experience's value.
• Crystal agrees that innovation cycles are accelerating, which can make operating experience quickly outdated.
• Research by Richard Foster at Yale indicates the average lifespan of a public company has significantly decreased.
• Crystal believes that people management skills are timeless and universal.
• Non-operating investors can still be successful by being curious and analytical.

"So I largely agree with, you know, cycles of innovation are accelerating, which in turn makes operating experience at any point in time more likely to know outdated."

Crystal Huang discusses the debate on the value of operating versus non-operating experience in venture capital, agreeing with Pat Grady's view on the changing relevance of operating experience.

• Crystal Huang has traveled to China and has observed key differences in enterprise technology markets.
• She identifies three main differences between the US and Chinese markets.

"So no particular order. I would first know I've had the chance to travel to China a bit as a part of my role and meet enterprise companies there."

Crystal Huang sets up the conversation to discuss the distinct characteristics of the US and Chinese enterprise technology markets, drawing from her experiences in China.

• There is a disparity in deal sizes between the US and China, with the latter showing less willingness to pay for software, especially SaaS and open source developer tools.
• US companies experience larger deal sizes, whereas in China, the deal sizes tend to be smaller, affecting the unit economics.
• To achieve larger deal sizes in China, companies often need to include professional services such as training and consulting.

"The first red flag is there's a difference in deal sizes and as well as enterprise willingness to pay for software, especially SaaS, as well as open source developer tool type products."

The quote indicates that one of the first challenges identified is the varying sizes of deals and the willingness of enterprises to pay for software products between the US and China.

• The US has a mature transition to cloud and SaaS applications, which began in the early 2000s.
• China is still in the early stages of retiring perpetual licenses and on-premises solutions in favor of SaaS.

"There's a difference in delivery models in that in the US, the transition to the cloud and to SaaS applications is pretty mature... And so that's something we can discuss as well."

This quote highlights the maturity of the US market in adopting cloud and SaaS models, contrasting with the nascent stage of this transition in China.

• Due to the lower willingness to pay, businesses in China cannot solely rely on recurring SaaS revenue to grow to $100 million.
• Chinese companies may need to incorporate transactional models, advertising, and value-added services to monetize effectively.

"And then the third is just business models somewhat tied to lower willingness to pay is the reality that you have to price things differently and you have to grow to 100 million dollar revenue business without just relying on pure recurring SaaS."

This quote explains the necessity for diverse business models in China, where the market conditions do not support growth through recurring SaaS revenue alone.

• Smaller deal sizes in China necessitate a more efficient acquisition model and possibly additional revenue streams beyond licensing.
• Companies must choose between a high-cost sales model with larger deals or a low-cost model with smaller deals and higher volume.

"And so you have to sell way more of them, which means that your acquisition model has to be way more efficient and you have to potentially monetize with other things beyond license."

The quote discusses the implications of smaller deal sizes on the sales and acquisition strategy, emphasizing the need for efficiency and alternative monetization methods.

• Heavier reliance on field sales in China requires more personnel for in-person meetings and trust-building.
• The US favors self-service models with high velocity and inbound demand generation, allowing for larger inside sales teams and fewer field salespeople.

"In China, you have to be very reliant on field sales... And so you're going to have way more people in the field meeting customers, live some inside salespeople growing number because that model is getting more popular but still lean."

This quote contrasts the internal sales structures between the US and China, noting the greater reliance on field sales and in-person interactions in China.

• A convergence of business models is expected as China evolves towards lighter sales models.
• Currently, US companies entering China must adapt to local practices, while Chinese companies may eventually adopt US self-service models.

"I think over time they're going to converge... But today if you're an american company trying to break into China, you definitely have to play by their rules."

The quote suggests that while business models will eventually align, US companies currently need to adapt to the distinct Chinese market practices.

• US companies often fail in Asia due to the closed nature of the Chinese ecosystem and barriers such as regulation and distribution.
• Success requires commitment to local teams with autonomy and flexibility in business strategy.

"That's a fair. I mean, there. Yeah, you're right that there have been very few successes."

This quote acknowledges the difficulties US companies face in establishing a presence in the Asian market, particularly in China.

• Companies need to be sufficiently committed to hiring experienced local teams and allowing them to operate independently.
• Flexibility in business model, pricing, and customer relations is critical for success in China.

"You really have to be flexible with your business model, your pricing scheme, how you distribute, how you deal with customers."

The quote emphasizes the importance of flexibility and local adaptation for companies looking to succeed in the Chinese market.

• Chinese teams often draw inspiration from successful U.S. ideas.
• Big companies in China have been built by adapting U.S. ideas to the local market.
• The deployment of these ideas in China differs significantly from their U.S. counterparts.
• Examples include Uber's equivalent in China, Dee Dee, which has different pricing, app design, mapping for complex cities, and incentives for drivers and riders.
• China has less regulatory friction compared to the U.S., affecting business operations.
• Despite similar core ideas, the execution must be localized to succeed in China.
• There is also significant innovation originating in China, like bike sharing and shared assets such as iPhone chargers and printers.
• Chinese AI, machine learning, and deep learning talent is growing, supported by the government and tech giants, leading to more pure technology innovation.

"Obviously, teams in China take inspiration a lot from what's working in the US, right. And there have been many, many big companies built up in China just doing that."

This quote emphasizes the trend of Chinese companies finding inspiration in successful U.S. business models and adapting them to the local market, leading to the creation of large companies in China.

"So the general idea might be the same, such as there's an Uber equivalent in China called Dee Dee, which we've invested in, that is essentially kind of the same service to the consumer."

Crystal Huang highlights the similarity in service between U.S. companies and their Chinese equivalents, using Dee Dee as an example of a service similar to Uber but adapted for the Chinese market.

"But the pricing, how you've designed the app, the way that you have to map very complicated cities in China and way more of them, as well as the way that they will create incentives for drivers and create incentives for riders to adopt, because it's such a competitive ecosystem, there's all these different tricks that they're kind of doing under the hood that differ a lot from how you might have built up that business in the US."

Crystal Huang explains the differences in how services like Dee Dee operate compared to their U.S. counterparts, focusing on the unique challenges and strategies used in the Chinese market.

"And then there's also less of a regulatory overhang there, actually. So unlike in the way that I would say Uber has struggled with different cities and different municipalities over and over again in its life, I find that that friction exists less."

Crystal Huang points out the reduced regulatory challenges in China compared to the U.S., which affects how businesses operate and succeed in the Chinese market.

"The whole concept of bike sharing, right. The concept of sharing anything like iPhone chargers, and now there are shared printers and various other things you can fix assets that you can share. Basically, that was completely invented in China."

Crystal Huang discusses the innovation in China around the sharing economy, noting that concepts like bike sharing and shared assets originated in China and are now spreading to the U.S.

"Very soon we're going to see that the AI and machine learning and deep learning talent in China is very strong because the government and the large technology giants are so committed to it that very soon we're going to see even more innovation on just pure technology."

Crystal Huang predicts that the strong commitment by the Chinese government and tech giants to AI and machine learning will lead to significant technological innovations in China.

• Baidu, Alibaba, and Tencent, collectively known as BAT, exert a disproportionate influence in the Chinese market.
• Enterprise software startups in China often face three potential outcomes due to the influence of these giants:
  1. A giant may replicate a startup's product and offer it for free to dominate the market.
  2. A giant may invest in a startup to integrate it into their ecosystem and compete with other giants.
  3. A startup may remain independent if it's differentiated enough and gains substantial traction.
• Examples include Alibaba's Dingtalk dominating the enterprise chat market and cloud services companies like Ching Cloud and UCloud potentially staying independent.
• Competitive dynamics in China are challenging, but there's still a market for VC investment, especially for novel ideas and early-stage companies.

"Everybody talks about Baidu, Alibaba, Tencent, which they call bat, and then of course there are a couple of other giants that often follow, right, whether that's like Xiaomi or Didi Taxi or Meitwan or some of the other big ones."

Crystal Huang introduces the dominant tech giants in China, known as BAT, and acknowledges other significant players in the market.

"So one of those three giants will take notice and they'll either build 80% of the similar functionality in house and make it free and basically completely take away your market share, even if they do that at a loss, because what they care about is market share and users."

Crystal Huang describes one competitive strategy used by the giants, where they replicate a startup's product, offer it for free, and prioritize market share over immediate profits.

"Then Alibaba released Dingtalk, which is a free workplace collaboration and chat product. And it's been free and it's basically completely sucked away that market and run away with it."

Crystal Huang provides an example of Alibaba's Dingtalk, which disrupted the enterprise chat market by offering a free product that outcompeted paid alternatives.

"Or in the third case, if you're really lucky and you build something differentiated enough that they can't build and they don't notice until you're pretty large and you have lots of customers and they can't really kill you and you don't need their money anymore, then you have a chance of actually becoming independent company."

Crystal Huang discusses how a startup can succeed independently if it creates a unique product that gains enough traction before the giants can replicate it or invest in it.

• Investing in enterprise companies in China is challenging due to the dominance of large incumbents and their competitive strategies.
• There is still a market for VC investment, particularly in innovative, early-stage companies that have the potential to remain independent.
• VCs must consider the risk of investing in companies that could be copied or acquired by incumbents.
• Early investors can still achieve significant returns, even if a company aligns with one of the giants or is acquired later on.

"That's a fair question, and it's definitely not easy, right, to be an enterprise investor in China."

Crystal Huang acknowledges the difficulties faced by enterprise investors in China due to the competitive landscape dominated by large incumbents.

"But as I said, case three, where you build something novel, you gain enough traction and maybe you have enough revenue that you just don't need their money. That's a possibility still, right? And that's still worth investing in."

Crystal Huang highlights the opportunity for VCs to invest in startups that develop novel products and achieve sufficient growth to maintain independence from the giants.

"But you've got to bet that the incumbent never moves as quickly as a startup. So that's just the bet that you have to make, maybe with even a little more risk."

Crystal Huang points out the advantage startups have in agility and speed compared to incumbents, which is a key consideration for venture capitalists when making investment decisions.

"But there's still a lot of opportunity."

Despite the challenges, Crystal Huang remains optimistic about the opportunities for venture capital investment in China, especially for companies with innovative and differentiated products.

• Crystal Huang values her Dyson space heater due to the cold temperatures in San Francisco.

"The third is my Dyson space heater because it's sometimes very cold in SF."

This quote indicates Crystal's appreciation for a practical item that provides comfort in her living environment, highlighting the importance of personal well-being.

• Crystal Huang challenges the common belief that investors should specialize narrowly, suggesting a broader approach can be beneficial.
• She emphasizes the importance of learning from new sectors and applying this knowledge to familiar markets.
• Crystal believes in the value of understanding different markets and staying informed on various sectors.

"I think that when investing, you can't necessarily specialize too much or refuse to kind of go beyond the guardrails you've set out for yourself."

Crystal's quote suggests that a flexible approach to investing, without strict specialization, can lead to greater understanding and potentially better investment decisions.

• Crystal Huang regularly reads "The Information" and "The Strategy" to stay informed.

"Rainy day well, I guess like everybody, I read the information in the strategy and so those are the most probably the two I read every day."

This quote reveals Crystal's daily reading habits, indicating that she values staying current with industry news and strategic insights.

• Crystal Huang observes a tendency in Silicon Valley to adhere to rigid schools of thought regarding startup methodologies and fundraising strategies.
• She argues for a more flexible and individualized approach, recognizing the art of dealing with people.
• Crystal advocates for the acceptance of multiple successful business models and fundraising methods.

"So I would say it's realizing that there's no right path and you have to find the path that aligns with your personality and how you like to deal with people."

Crystal's quote emphasizes her view that there is no one-size-fits-all approach to startups and fundraising, and that success can come from adapting strategies to one's personal style and circumstances.

• Crystal Huang co-led a Series C investment in Bitsight, a security company.
• Her interest was piqued by positive feedback from a friend and the reluctance of existing investors to make introductions, suggesting high potential.
• She conducted extensive market research, talking to customers and analyzing the product's leading position.
• Bitsight's model, akin to a ratings agency for security, aligned with Crystal's search for a first-principles approach in a crowded market.

"I had the thesis, I had customer validation that I had investors who wanted me to go away. So all of those things, I think, were pretty convincing."

This quote summarizes the factors that led to Crystal's decision to invest in Bitsight: her investment thesis, positive customer feedback, and the behavior of existing investors.

• Harry Stebbings expresses appreciation for Crystal's insights and contributions to the venture community.
• Crystal looks forward to future episodes and the continued success of the podcast.

"Thank you so much for having me. And I look forward to hearing more of your podcasts going forward."

Crystal's quote reflects her gratitude for being on the podcast and her eagerness to engage with future content.

• Naturebox offers an unlimited snacking program for offices, emphasizing healthy options.
• Lisa provides an online mattress purchasing experience, focusing on quality sleep through their engineered mattresses.

"Naturebox is the first ever unlimited snacking program for offices of all sizes, starting with just $12 per month per employee."

This quote introduces Naturebox as a service targeting office health and wellness, highlighting the trend towards healthier workplace perks.

"Lisa have done away with a terrible mattress showroom buying experience by creating this luxury premium foam mattress that's ordered completely online and ships for free to your doorstep."

This quote describes Lisa's approach to improving sleep quality through a convenient and customer-friendly mattress buying experience.