From the 6th to 21st August 2016, my partner TM Lee and I had the opportunity to represent CoinGecko in MaGIC’s e@Stanford program. This was the third year that MaGIC held the programme, and I was very grateful to be selected, as I learnt tremendously from this trip.
The e@Stanford programme sends Malaysian entrepreneurs to the Silicon Valley for two weeks to learn from world-renowned professors from Stanford University as well as experts in the tech industry.
This short immersive programme was designed to transfer knowledge from the Valley to us, so that we could bring it back to our startups in Malaysia. This year, 49 entrepreneurs from 27 startups participated. Throughout the trip, we had many opportunities to learn from each other about growing our businesses.
I did not realise how lucky I was to be taking a trip to San Francisco until I told Elston, my roommate from UCL, that I was on a trip sponsored by the Malaysian government. Typing those words to him made me realise that not many governments give their citizens the chance to learn from the best in the world, and I am truly grateful to be given this chance by MaGIC.
Because only 49 of us were selected to go on this trip, I felt that I should share what I learnt to maximise the impact for others, helping them learn as well. (Ryan, you inspired me to pen this post while I discussed my experience with you.)
Lessons Learnt in Stanford Lectures
Out of the 13 days we were in the Valley, five were full-day classes at Stanford, where we were taught by world-renowned faculty members. Most of our lecturers had industry experience in starting, scaling and selling companies or bringing companies public.
There were 17 lectures during our time in Stanford, which feels like a whole semester’s worth of lectures crammed into five days. It felt pretty intense absorbing so much new knowledge in a day. For this post, I will list the main lessons I picked up from four lectures.
Mike Lyons – Venture Capital Financing
We were taught very well about how Venture Capital (VC) works. It started with a lecture by Mike Lyons, who explained a VC structure and how its partners make money.
There are two types of partners in a VC – a General Partner (GP) and a Limited Partner (LP). The GP raises money from the LP and makes investment decisions in a VC fund. The LP’s sources for funds are usually pension funds, endowments, family offices, high-net-worth individuals, etc.
GPs have a fiduciary responsibility to the LPs in managing the funds, and they usually take up board seats in their investee companies. The funds are placed into several buckets to invest in companies.
The Management Company makes money from two sources, namely:
a) Management Fee – Roughly 2% of the fund. Used to cover overhead such as rent and staff cost.
b) Carried Interest – Roughly 20% of the fund’s returns. The returns are calculated after the LPs have been repaid. This is the main source of income for the GPs and explains why VCs always push their companies to aim for the moon.
In VC financials, only absolute returns matter; the Internal Rate of Return plays no role. Each fund usually has a lifespan of about 10 years, but is active only in the first three to four years. This is because usually a large portion of the fund (~50%) is reserved for follow-on investment for portfolio companies.
One of the main insights gleaned from this lecture is that in the Valley it is very typical for angels to put money into a startup without putting a valuation (price) on the company. This is typically done in a convertible note in which the angel agrees to invest $X for an unspecified stake until the company raises its next round of funding from an institutional investor.
When such a funding scenario happens, the angel’s stake is priced at about a 20-25% discount from the current valuation. By doing it this way, the company can properly manage its “cap table” (list of shareholders in the company) so that the angel does not own too large a stake in the company, making it less attractive for follow-on investments from institutional funds.
We were also taught by Mike how to count pre-money and post-money valuation, which is really very simple. For example, a VC fund invests $500k for a 25% stake in a company.
Post-Money Valuation: $2 million
Pre-Money Valuation: $2 million – $500k = $1.5 million
Pedram Mokrian – Managing Ownership
Another lecture that was really insightful to me was Pedram Mokrian’s lecture, in which he talked about de-risking startups with each round of financing. The idea is pretty simple – companies should raise enough money at each financing round to safely demonstrate traction to meet the milestones set for the next round of financing so that the startups are less risky for the next set of investors.
Pedram’s lecture really forces startup founders to think hard about how we want to take our startup journey from the Seed round all the way to Series A, Series B, Series C and so on. Founders must define the milestones that need to be achieved during each financing round. Milestones could mean validating the technology, product features, product-market fit, customers, revenue, profitability and so on. By meeting these milestones, the startup gets de-risked at each financing round.
By defining the “delta” between milestones in each financing round, founders can estimate the amount of money that must be raised. Essentially, funding is used to “buy down the risk” of a startup.
Pedram also warned us that we should never underestimate the “delta” and not raise enough money because what it means is that we will end up having to go back to investors to raise more money without any milestones/traction, thereby forcing us to raise on unfavourable terms.
Geoffrey Moore – Crossing the Chasm and The Four Gears Model
Another lecture that was very insightful to me was Geoffrey Moore’s double lecture on Crossing the Chasm (B2B) and the Four Gears Model (B2C). Crossing the Chasm is based on a book Geoffrey first published in 1991. He has revised the book twice, in 1999 and 2014. For a book that was first published 25 years ago, the lessons are as amazingly relevant today as they were two decades ago. I am currently reading this book to learn more.
Crossing the Chasm is based on the technology adoption lifecycle:
In his lecture, Geoffrey pointed out that for discontinuous innovations (innovations that change the behaviour of consumers), there is a chasm between each segment instead of a smooth adoption curve. To be successful, startups must have a different marketing strategy for each target segment and use each segment as a reference to sell to the next segment of customers.
Geoffrey explained the differences between each target segment and said that each segment has different priorities, characteristics and challenges. Knowing the target segment you are pitching is very important for recognising and obtaining the right customers.
He also pointed out that there is a big chasm between innovators/early adopters with the rest: early/late majority/laggards. The diagram looks something like this:
Crossing this chasm is a tough job and will require a strategy to navigate through it.
For the B2C segment, Geoffrey introduced us to the Four Gears Model:
According to Geoffrey, these four gears can be divided into two types:
a) Performance Gears – Acquire and Monetise
b) Power Gears – Enlist and Engage
Performance gears bring in revenue and growth. However, focusing only on the performance gears takes its toll on the brand’s goodwill.
Power gears create goodwill to drive acquisition and monetisation. However, focusing on power gears requires deferring performance/monetisation.
For a B2C startup to do well, all four gears must move fast at the same time. Geoffrey introduced us to the “Slowest Gear Theory” in which prior to a startup’s explosive growth, there is one gear which slows down the other three gears. He gave examples of gears that are slowing down startups – Kiva is being slowed down by the Acquire Gear, LinkedIn by the Engage Gear, Twitter by the Monetize Gear and Yahoo by the Enlist Gear.
We were told to identify the slowest gear in our startups and to focus everyone on making it move faster. While making the slowest gear move faster, we should also remember to keep the other three gears moving fast.
Here is a picture of us after our last class at Stanford:
And here is my Stanford certificate to prove that I actually participated in this program. Never thought I would ever get a certificate from Stanford.
Lessons Learnt During Company Visits
During our trip, the organisers in MaGIC (thanks Jon, Kelly & Samira!) arranged for a few company visits through which we could learn. Some of the notable visits included Google, Facebook, Plug and Play, Pinterest and Envoy. TM and I arranged for a few other company visits on our own; some of the guys we managed to meet included Coinbase, Stellar, NerdWallet and Twitter, to name just a few.
One thing to note about the Valley is that it is really not the buildings that matter at all; rather, it is the people working in the area who make Silicon Valley special. Sure, some of these tech startups have fancy offices and perks, but that’s really beside the point.
What TM and I found shocking from our trip was that fintech startups have a huge valuation despite catering only to the US market. For example, Nerdwallet has a valuation of roughly US $500 million and 400+ employees. Credit Karma is a unicorn with a valuation of over US $1 billion.
We figured the reason for such high valuations is that the US has a large population that is, for the most part, financially literate. Building a similar startup in South East Asia will present an entirely different set of challenges because we need to scale beyond one country almost right from the beginning. Otherwise, the market will be too small to serve.
While we were at Google, Kevin Khaw took us on a tour of the office. He explained the mantra in Google: “there is no problem too big to be solved.” It is really motivating to hear such beliefs, and it really makes me want to think bigger.
I will not write much more about our company trips here. Perhaps my other cohort members can write a post about what they learnt during their trip to these offices.
In conclusion, all I can say is that I had a great time on this trip. Thank you, MaGIC, for offering such a program. The connections and relationships I formed with fellow Malaysian entrepreneurs during this trip are very valuable and will be something I cherish for a long time. To end this post, here is a picture of us on a cycling trip on the Golden Gate Bridge from San Francisco to Sausalito.