CEO of Silicon Valley-based startup accelerator advises Koreans to be bolder; “Startups tend to be chaotic, crazy and make a lot of mistakes. But here, there’s a lot of top-down planning, being too careful, making sure everything is in place.”

2014-03-09 14:47

CEO of Silicon Valley-based startup accelerator advises Koreans to be bolder
By Kim Bo-eun
Korea is being hyped for a startup boom. With the government’s renewed focus on fostering startups, together with the country’s tremendous Internet speed, bandwidths and penetration rates, the future for venture companies looks promising. But such businesses will not take off unless people become more comfortable with failure, according to the head of a major startup investment company based in Silicon Valley.
“The comfort level with public failure here is tough,” said 500 Startups CEO Dave McClure. “The ability of businesses to succeed quickly, however, means being able to fail publicly, being okay with that and getting used to that.”
This means accepting failure, learning from results and quickly moving on. This also means being bolder — perhaps being a little reckless at times.
“Startups tend to be chaotic, crazy and make a lot of mistakes. But here, there’s a lot of top-down planning, being too careful, making sure everything is in place. This is one big challenge to get around,” he said.
Startup and investor illusion
“Contrary to what you might read in the press, where it seems every new business is going to be a billion-dollar startup, most startups fail and most investors fail,” McClure said, noting that the scenario for startups and investors is similar.
“A traditional investor from a real estate perspective might be expecting 80 percent of new businesses to be successful but to grow at a slower rate. But in reality, it’s kind of the opposite — usually, 80 percent of the businesses fail and the 20 percent that don’t fail could grow by 20 times.”
Many investors try to predict which startups, founders and products are going to be successful, choose a small number of companies to invest in and write them large checks. But 500 Startups takes a different approach.
“The whole strategy is that we don’t think we know which businesses will succeed, so we make a lot of investments, and looking back six to 18 months, we identify which ones had more users, more revenue and other investors jumping in, and write them more checks,” the CEO said. “We figure that those are the ones that are probably going to work.”
The company, established four years ago, is now the largest and most active global investor, helping 150 startups in its accelerator program and another 100 to 150 at seed stage investing this year. It has invested in businesses in 40 countries, but the U.S. is its main focus, with U.S.-based investments taking up about three-quarters of the total.
3 things for startups to keep in mind
Entrepreneurs in Asia are eager to follow the footsteps of Silicon Valley’s legendary startups but oftentimes copy the wrong things, the CEO said. They tend to focus on the mega success stories and copy their business models, product categories and target markets without considering their surrounding environment.
The foremost challenge of startups in Asia is that the successful business model they often copy does not work in the startup environment they are based in.
Many businesses in the U.S. such as Twitter and Facebook are not focused on revenue in the early stages and are very capital-intensive to build. This strategy can work when there is a very mature ecosystem, with a lot of investors willing to write big checks and a clear history of large-scale M&A activity.
However, this is not the case for Asian countries. A better strategy for companies based there would be to focus on a clear path to revenue that would enable them to reach a sustainable break-even point very early, McClure said.
“Because there is no guarantee of investment and not a lot of investor history or exit history around, you don’t know where you’re going to get funding from and when you’re going to get acquired, so this requires companies to be self-sustaining and to focus on revenue-oriented businesses,” he said.
Another challenge is that they tend to focus on mobile messaging and gaming models. These are the most visible and “sexiest” big success stories but not the typical path to success for the average startup company, according to the CEO.
“There are a thousand other messaging apps already, and nobody’s charging for them. That’s not to say new social platforms can’t be successful, but it’s a very expensive game to play — it requires financing and acquirers to work,” he said.
Basically, it comes down to making a product that people want to buy — something that earns more than what it costs to build and sell to customers.
The third challenge is producing software apps and services that are relevant culturally and linguistically. There hasn’t been as much success in Korea, Japan and China in language sensitive products and services, McClure said.
“A lot of entrepreneurs overlook their local markets and focus too much on the U.S. market. It’s not that the U.S. English-speaking market isn’t a great opportunity, but it’s a very competitive market with a lot of other native English language speakers,” he said.
“If it was a country like Israel or Estonia or some very small country, it would need to target a larger market, but Korea has a much larger population, high GDP and tremendous Internet penetration as well as a lot of talented entrepreneurs, so I would not overlook the local market — it’s really got a lot of potential.”
At the same time, McClure said if a business is targeting a global market, they should start in an area like New York, Los Angeles or San Francisco.
“Don’t try to do it remotely — the language and cultural barriers are so challenging that if you’re not immersed in the culture, you might as well go there.”
Building ecosystem for startups in Korea
Silicon Valley is the epicenter of talent, capital and acquirers. The mentorship opportunities, money and M&A environment makes it a Mecca for startups. Korea, however, hardly has such an ecosystem.
“Obviously, you’re not going to catch up to Silicon Valley in a few years — it’s been building for more than 60 years. But a lot of the same mature actors, platforms and services can be built much more quickly now in other countries including Korea,” McClure said.
“Korea has good foundations — high speed Internet and regular broadband access to all kinds of customers is far in advance to those in the U.S. There is a strong pattern of purchasing online, which also presents huge opportunities.”
Fostering an environment facilitating entrepreneurship has been a key initiative of the Park Geun-hye administration, as a measure for securing sustainable growth and making the leap to become an advanced economy. The administration announced earlier this year that it would put 4 trillion won into building an ecosystem for startups in the next three years.
McClure said at the very early stages, the government can play an assisting role until the ecosystem is strong enough to be run by the private sector.
“The government could initially provide programs for access to capital and match firms with investors. It could also figure out exit environment conditions such as streamlining tax policies that help acquirers.”
He said English language as well as Chinese language education will become essential for Korean startups to target global markets.
“Looking at global market languages and geographies and trying to get to cultural fluency will be increasingly important.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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