Who is NEST?
SS: So NEST was established in 2010 with one simple goal: entrepreneurs helping entrepreneurs. What we want to do is give talented people with a good idea; all the tools they need to succeed. So that could be from one element that we offer up which is financing all the way through to market penetration and global expansion and strategy.
We bring our network to bear; we have a full-time team of 11 people that do nothing but help that founder succeed. And that’s primarily what we do. It’s a very Silicon Valley-esque concept, but our only upside is when those companies do well we take an equity stake in those businesses in return for capital and time. When those companies do well, we do well. If they don’t do well, we don’t make a thing.
DL: What are the most interesting trends in Asia today?
SS: When I started Nest, I could have done this in lots of markets. I looked at London, where I’m from, where my family lived, it could have been quite easy for me to set this up there, equally if you look at some innovations that are popping up on the news these days, from Israel, so on and so forth, very vibrant market, could have set up there, could have easily gone to America. Who wouldn’t want to live in Palo Alto? That part of the world, beautiful weather, and it’s all happening, maturing there. And I looked at Shanghai and I looked at Beijing, as I said, there’s a market there I looked at moving to and settin this up. And I came full circle, even after looking heavily at Singapore to Hong Kong. And actually, for the over stage investment piece, for the ideal germination and expansion – Hong Kong is perfect. Why? First of all, when you are doing early stage investments, there are no standards behind them. We all know it’s one in 10 that is going to work. So what you want is a market that makes it easy to set up a company, but frankly also has the ability to let it fail and close it.
Equally when you are investing you want to be able to put your money in and get your money out easily. So if you’re in Beijing for example, setting up a company is complicated, having personally invested in a few companies in Beijing, it’s very complicated to get your money in and to get your money out. So from an early stage perspective, Hong Kong is great. Now because it has no domestic market, no large domestic market, just like Silicon Valley, it only have seven million people, Hong Kong only has seven million people, but like Silicon Valley we’re not building companies from Silicon Valley, but it’s a great place to germinate an idea and test it. Hong Kong had 51 million visitors in the last 12 months. Silicon Valley had 2.5. So from a test perspective, Hong Kong ticks some really interesting boxes.
And then there’s a lot of spare capital out here. There’s people with the ability to do series A in their back pocket. Individuals, there’s a lot of smart business people out here, there’s a lot of resources out here. And the sectors that I’m personally really interested in. Really, three areas, one is FinTech. Again, here in Hong Kong, unusually, we have the Chinese banks sitting right next door to the Western banks. The brain power alone from a major network perspective would say that we can bring to bay on the founder is incredible. And those banks of course, the Chinese ones are trying to get you into [America] without trying to build infrastructure to get the technology [to sit down for them.] And at the same time you have Western banks looking at India and China having a break in and having a think that technology may be the answer for them. So, from a FinTech perspective there’s huge opportunity in Hong Kong.
Health care, again people for the last 25 years have been building stuff in China, shipping it all over the world and doing R&D here in Hong Kong. So again, I think that’s a very interesting area, especially around health care. Where for example, some health care businesses that were involved in solving problems in India and China, don’t even exist in the west, don’t even exist in the U.S. But technology is needed to catch up with what’s needed innovation-wise to bring doctors up to scratch from training for example or help people get access to proper medical advice that’s legitimate. So technology again enabled that, whereas otherwise they’ve got to spend 20 years building hospitals and training doctors. Places like India, that’s going to take a long time to catch up with Western and European standards.
So, FinTech and health care, and the final one, the sector we’re looking at is smart cities. Again, if you look at how China cities compare with India in recent months with their recent question of new leadership they’re really building cities, brand new cities that are very fast-paced, and one way they can perhaps get ahead is using technology in building those cities. And Hong Kong itself has a huge history of property companies here. Not only very successful and well-financed but also the mindset of innovation around property. So again, here, in Hong Kong we have a competitive advantage with a lot of companies that bring their brainpower and finances and expertise to future cities and say what they’ll do in China. So that’s why I picked Hong Kong, that’s why Hong Kong has some competitive advantages. It’s not going to be Silicon Valley, it’s different, but here I think there is a lot of opportunity if you look in the right places.
DL: What do you looks for in the companies you invest in?
SS: I have personally been angel investing for 18 years. And so, initially I had a full-time job, my own start-up with a few that I’d been running and on the side. I’d take my spare capital and put it into start-ups. And for those 18 years of experience what I discovered was, all the businesses I had ever invested in, once they succeeded, were all down to the founder. So, you know you, look at the history and you can always take the future in my opinion.
If you look at MySpace comes along, you know, it has 600 million users and no group quite like it. Mark Zuckerberg comes along with Facebook and a lot of people say, “well, Myspace is already they’ve got 600 million users and just Rupert Murdock just bought the company, he’s a billionaire you know.” Everyone just writes off new ideas as not possible. When I look at someone like Mark Zuckerberg, he cares about the business. He is on a mission to connect the world, not just make money. And that’s what’s driven that business to success.
So my personal belief system, as an entrepreneur myself is, I picture ideas is that people don’t believe it possible. But I am so adamant to make it happen all those rejections won’t stop me and that’s what I look for personally in people that we invest in now. Now, I’ve definitely made mistakes in the past and past investments where I look at an idea and I think, “Well, the idea is good, it’s worked in another market,” and then off we go. But when I look at the opportunity I often think “what’s really going to make that business work is an evolution of that original idea. So, my personal belief is it’s all about the person.” Invest in the person first and the idea second. And the idea always changes, six months,12 months, two years down the line, business is often completely different to the original concept with the theory being good people will always make an average idea work. And good people with a great idea could be the next Instagram.
DL: What are the typical mistakes you see entrepreneurs make?
SS: I mean, the mistakes I have seen people make often are, they’re starting a business for the wrong reasons. So, the number one reason to start a business, in my opinion is because it mean something to you. So, it’s got to be personal. Because that’s what’s going to get you through the hard days. So a lot of people start with the idea, “I’m going to make millions, this idea is worth billions,” that’s the mistake that other people make is they don’t think big enough.
So, and I’ve been a victim of this myself in some of my early start-ups. I built a business that say for example is Hong Kong-focused, but the same amount of time is a global company. I spent ten years building the agency Fluid and it’s a very successful local company but over those 10 years it would have been frankly exactly the same no matter what to make it global, but I didn’t, so I blew up myself, it’s not just what I’ve seen with other entrepreneurs do. This is why I think what I’m doing at NEST is quite unique – entrepreneurs helping entrepreneurs is very important.
I’ve been through it, so I can talk from having done it point of view as opposed to a spreadsheet and so I think a lot of people also come to the table with a lot of very detailed financing or detailed business planning and that all cool. And I think you should do it for your own sake, but personally I’m always looking for culture. I’m looking for people that are just going to crawl their way up through and hold their ring until they first start a business, until they’re out successful and that is not something that you can put on a spreadsheet or you could put in a business plan – it’s in the eyes. That’s that.
But, when I’m talking to entrepreneurs, I always warn them, you know, sometimes when they’re sitting with angel investors at Nest they sometimes want to please us. So when they start by saying, “here’s the return you’re going to get on your investment. When, and if, by the way this is a potential exit,” and it’s a red flag for us actually. What we want the entrepreneur to be doing is kinda Mark Zuckerberg-approach is invest in me, I’m going to make money and I’m not looking to exit this business myself, I’m looking to scale it and make it successful, that’s why you end up with an IPO that doubles in value and so that’s what we’re looking for, we always warn the entrepreneurs not to build a business for exit. Because if you build it for exit, in the end the exit doesn’t come, investors are not going to buy you like you thought they would, you get stuck with something you don’t like or love and you just give up. So, build something you love and that’s the key.
DL: What is your advice for entrepreneurs trying to raise money in Asia?
SS: Raising money is never going to be easy, but I think what a lot of people do wrong, is they ask for too much too quickly and they don’t spend enough time backstopping your opportunity. So, for example, people will say, “oh you know, I have no monetization on this but, hey, YouTube isn’t making any money so who cares?” But what a lot of people don’t realise it, and I’ve studied this very carefully, investing and stuff is a full time job, I study very carefully how this company actually worked what we discover was when I studied it, people like YouTube actually did have a monetization pitch. Now the fact that they never actually conferred into that by their original monetization pitch was they were going to charge subscription fees to watch these things but they never needed to do it because they sold to Google and then Google has the cash pot to drive it to what it is today. But actually they did have a monetization pitch in their pitch and it’s what actually made them raise money.
So, I think when people overlook it they think it’s not necessary, they think in Silicon Valley people are pitching ideas and not caring about monetization but that’s absolutely not true. So with a lot of people here I spend a little bit of time with them saying, if they’re pitching a business that doesn’t have any monetization strategy that’s a mistake. Now that doesn’t mean to say that monetization won’t take place for five or 10 or 15 years, that’s fine but to have none, to have no idea, to have no potential philosophy around how to monetize is a mistake I see a lot of people making and that’s what makes it a lot harder for them to raise money.
Now a lot of people say to me, “Oh, it’s very hard to raise money in Hong Kong or in Asia.” And it’s interesting because we just invested in a company in L.A. called “Merchants,” who are two Israeli founders that are living actually in Palo Alto, between Palo Alto and L.A. and they came out to Hong Kong to raise money and they told me it was easy to raise money in the early stage than anywhere else in the world right now including London, including Israel, including the U.S. And so I think a lot of the time people have an idea here they pitch it and they’re not getting funding, they blame the market. Actually, they should blame themselves. The ideas probably not good enough, the idea doesn’t resonate and a lot of people don’t pull on the heart strings of investors and that’s important. Investors want to feel that they can contribute and out here people have the cash to invest in start ups. People aren’t pitching it right, they’re not pitching it sincerely, they’re not putting a monetization plan in place which may make it hard for them to raise money if they’re sincere to think through these details a bit more the money is in Asia.
DL: Is there a “best practice” for sequencing funding rounds?
SS: The raising money sequences, you can Google it, is pretty straight-forward. You have call it family and friends round. You have call it angel round, then you have the growth-phase; Series A, Series B, Series C, Series D, PIPO, IPO. Alright, that’s a sequence that works. What a lot of people try to do is go straight to Series A, they miss out the grossage, they ask for too much early on and price it out of the market later. So this is something to watch out. And I see a lot lot of people for example that have overinflated their price in the family and friends round by getting their parents to put a lot of money in this way so they look like they have a very high evaluation and the investment community doesn’t fall for this.
Equally, with a conscience that this is with early stage investors, you have to make sure you set the company up so that institutions come in, Series A, Series B guys come in that you have a model that they can understand. If you have for example angel investor having a majority stake in your business, that’s a no-no for a later investors when they come in because they’re going to look at it and say, “well, you’re the founder of the company, you’ve got this equity,” then the investors that you’ve brought on board so that raises red flags with the institutions.
Having said that, not every institution needs to follow this path. I see many successful businesses that make profit. It’s not a sin. And they use that money to then build up their business and build it out, which is a bit more of an monopolistic view bt that’s one way. Another trend that I am seeing and NEST works with a lot of big corporates in this space so we did a joint-venture with AIA for example and one of the trends we’ve seen with these big brands is you can get a trade sale quite early on. So, if you look at Google and Facebook and these big brands, they’re buying companies slightly earlier – Series A, Series B, it’s not unusual to get a trade sale and for a good value at that point. So, that’s kind of a new trend with all these big brands catching up quite frankly looking for growth and looking for looking for ways to grow their base.
So this is a change I think from the traditional Series A, Series B, Series C, pre-IPO and IPO. Some people say it’s a bit of a shame but it does mean, say for example Helix was bought not so long ago by Facebook and some people say that company could have gone on to be a competitor, a big firm on its own. Facebook in a way took it out early which is both good because the founders of that company managed to cash out yet still get the ability, funding-wise, to grow their dream, but equally at the same time a lot of people feel your innovation is tampered a little bit once you’re inside a corporate sale. There’s some pros and cons to going both ways. At least if you get bought by a corporate like the Oculus guys have then they have ability to deliver their dream to market and so whereas Series A, Series B to Series C is quite a risky process and quite nerve-racking if you’ve ever been through it, lots of highs and lows. People say yes and people say no and then one minute away from running out of cash and then one minute later you’ve got one hundred billion dollars to spend on scaling the company and your next headache is how are you going to do it. So, both ways come with their pros and cons.
DL: What are the pros and cons of different sources of capital?
SS: Well, I think when getting investments – it’s complicated, my number one piece of advice for entrepreneurs out there is “do your research on the people that are going to invest in you.” So, what I always encourage if people allow us to invest in them, talk to one of our entrepreneurs, talk to the other founders that we’ve invested in. Find out where our strengths and weaknesses are make sure you know the people you are getting into bed with. I always think the early stage of these strategic investors above all else. I actually suggest to people to try and avoid the family and friends round if they can because that can be very emotional and it doesn’t necessarily add any value. It might be the quickest way to get some money but it can also be the quickest way to make your life very stressful so I actually think it’s a similar process as to when you bring an investor in and you’ve got to follow a similar process when you bring in family and friends money. You’ve got to make sure that parameters are very clear with your family and friends, that they could lose all their money and that doesn’t mean you have awkward Sunday lunches together in the future. So, lay it out very carefully with friends and family. It is important. As it is when you bring in investors.
So I always suggest that people, that they do the due diligence on everyone and pick the lightest sort of investors. If you look at our portfolio earlier, we’re focused on three main areas: we’re very, very focused on building up companies in Asia, and our strength is our team here and our network here. So that is of no use to you if you don’t approach us, go after people that can help you with your particular problem or your particular need. One of our other unique selling points at NEST is our branding and marketing communications piece, we think that’s becoming as important as technology now.
At one point we brilliant apps on the App Store. I know brilliant apps on the App Store that have never been opened except by family and friends. So, today you’ve got to find partners that can perhaps solve the problems and fill the skill set where you don’t have that skill or you don’t have that knowledge and that’s more important than money because you can throw money at the problem, but if you’re throwing money at something you don’t understand like marketing, it’s money down a hole. So, getting the right, figuring out what your weaknesses are and what your strengths are and profiling the right type of partner is crucial.
DL: What do you expect to see when companies pitch to you?
SS: When we’re looking, we have a process if you’re interested in getting investment from us you go on our website and you’re applying for a Pitch Event. It’s a private event so this isn’t public pitching, so it’s private so your idea isn’t shared with other people. It’s private within our network, but within that process, there is a form that basically says “what am I doing?,” “How are you different than others?,” “How are you going to do the scale of business?,” “How can we help you?,” “What are your strengths, what are your weaknesses?,” it’s quite a useful document that we’re created online actually just as a way of people understanding for themselves, flushing out their business. So that is the hardware piece of what you need to do.
The software piece for me is always about “is that person committed?” To me this is always the one thing, so a lot of people will come and say, “I’ve got a business but I’m not willing to quit my job to do it, do you know, I’m going to do it on the side.” For me, that conversation is over at that point because if they’re not willing to commit their lives and take a risk and leave their well-paying job, than why should I put my hard-earned money into that business and do the same? So, I tend to want to see that spark in the eyes of the entrepreneurs and make sure that they are going to make it happen and dedicate themselves to the business.
The other thing is also good is to have a team. Even if that team hasn’t quit their job yet, but once you’ve got that funding and you’ll bring it to scale, so applying funds and seeing a clear root to the next stage, let’s say Series A or what are the KPI’s, so people can say, “alright these are the three things I am going to do in the next 100 days and if we achieve these three KPI’s then I think we’ll be able to get our Series A funding, “so having some sort of framework as to next steps is also something we look for. But at the end of the day, honestly I say most of the time it’s gut feeling in this stage of investing. You just see someone and you can feel it. Because I am one of those people, I have started start ups I can sense it and my other who colleagues, Lawrence and Jennifer, who run the operations with me, they’re more factual but they can also feel, so frankly it’s a lot of hard to explain chemistry, hard to explain chemistry on both sides but also the founder need to be comfortable with us and equally we need to be comfortable with them.
For me, deals get done every single time for these three reasons: number one we get it. It’s fun, because if it’s not fun we are going to be spending a lot of time together so it’s got to be enjoyable. The second piece is we need each other, so, “do they need us,” “do we need them?” Now I can tell that without a doubt I need great companies to invest in because if cannot deploy capital and get a return I’ve got to go get a normal job and give this up, so I need good entrepreneurs. But does the entrepreneur need us? If we can prove that they do, or if they can convince themselves that they do then the third piece of every single deal that I’ve done in the past 25 years is the financial piece. But if you get the first two right, we like each other and we need each other the third piece always gets worked out. Never a problem with the third piece as long as the first two are solid and those are the things we work on when we first meet founders.
DL: Three final pieces of advice?
SS: Think big, think as big as you can think. Be passionate, do something you really care about, that means something to you. And learn to listen more than you talk.