Today’s guest is David Change of MindWorks Ventures. MindWorks is one of Hong Kong’s few rising star venture capital firms, which invests in start-ups in the series A stage and beyond. David is a born and bred venture capitalist, whose father was also a well-known VC in Silicon Valley.

Today, he shares his advice on how to invest in start-ups, exactly how to look at a pitch deck, where he believes the opportunities will be in Asia within the next five years, and which company in his portfolio is on the verge of becoming Hong Kong’s first unicorn. Let’s get right into the show.

Jay: David, thank you so much for being on this show. This is the Jay Kim show where we profile the world-class business minds, investors, and entrepreneurs, and I’m happy to say that we have one of Hong Kong’s home-grown talents, sort of home-grown talents, but definitely one of Hong Kong’s rising stars, David Chang, on the call with us today, and he is over at MindWorks Ventures. David, thank you for joining us. Can you please tell our audience a little bit about what you do?

David: Jay, they for inviting me to the show, I’m very honored to do so. I’m David Chang, I founded MindWorks Ventures in Hong Kong. We’re a Hong Kong-based VC, we are early stage investor. Typically, we’re stage agnostic, but we try the focus on series A and series B investments across the Southeast Asia and Greater China region.

Jay: How did you get into early stage investing? What’s your background?

David: I started my career in finance as a coverage banker. I started at Morgan Stanley, then I moved to Credit Suisse, then I moved to Guosen Securities, which is a local China investment bank based off of Shenzhen, headquarters in Shenzhen. I helped open the office in Hong Kong mainly to cover the growing TMT sector back in 2009, 2010 and 2011. That is when I came in contact with a lot of rising stars coming out from China, especially from the southern side, in Beijing and Shenzhen. Through those network, I started to deploy my limited personal capital as an angel investor to some of these companies.

Jay: I see, okay. So that’s where you learned the ropes. Had you had any contact with early stage investing? Silicon Valley? Any experience whatsoever before that or was it just a personal passion, a side project that you decided to risk your own capital and pay tuition so to speak to learn?

David: No, no, no. That’s not the way around. Since I was a kid, I’ve been exposed to venture capital investing through the early 1990s. My father, a big venture capitalist back in the Bay Area. I was actually born in the Bay Area, and came back to Hong Kong for local schooling, and I went back to the Bay Area for high school and college. Throughout that, I spent time in California. I spent about 11 years in California, and through the whole time my family, especially too my father, have been constantly looking at deals and investing in a lot of early stage start-ups based in Bay Area.

Jay: Okay, I see. Was your father, along the way, was he helping you out? Showing you the ropes? Would you use him as an advisor on some of the things you were looking at when you were just trading your private capital?

David: Definitely. He was at all times and still my advisor. He’s a very great individual, and very disciplined in his investing methods and methodologies. I learned a great deal from him since the beginning.

Jay: Is he still involved in venture capital today?

David: No, he’s not. He’s semi-retired, but I can’t say he’s full retired, ’cause he does try to put his nose into some of my projects from time to time.

Jay: As many parents like to do.

David: Exactly. Some interesting trivia or facts about my father is that after he graduated from Berkeley, he went to work as analyst in Wall Street. He worked for a company called Hayden Stone. Sitting next to him as an analyst in Hayden Stone was an individual called Arthur Rock, so sitting next to him was the grandfather or the creator of the term ‘venture capital’. He was the first venture capitalist in the world, who backed the traitorous eight, of the Fairchild Semiconductors in the early ’70s. That’s an interesting piece of history about my father. I knew this gentleman, Arthur Rock, before he came to California and stared investing in  Fairchild Semiconductor, which went on to become Intel, HP, Amazon, et cetera.

Jay: Right, right, and then spread out through all those early tech companies. That’s very interesting. So, before ‘venture capital’ the phrase even existed, your father was colleagues with the guy who invented it. That’s pretty cool.

Along your journey, then, you’re investing, you’re still in finance as a banker, you’re working setting up shop here, but then you’re private investing, let’s say, with your private capital. At what point did you say, “Okay, you know what, I’m doing pretty good at this,”? What were your metrics? When did you decide, “You know, okay, I want to do this full time. I want to look for outside investment. I think I can do this,”?

David: The pivotal point was after a year working at Guosen, I deposit some capital into this early, peer-to-peer lending company in China. Within six months, I return my cap … I exited, and it yielded me about 4.5 x return.

Jay: Wow.

David: So, that was fairly good, and I was very happy with it, and I decide to quit my job and try to focus on investing my personal capital full time. At some point, I actually wanted to move back to California just to reconnect.

Jay: So, you had a nice exit, and it gave you a little bit of confidence, and so now you were like, “Okay, if I can actually break off full time and do this, then I can perhaps have better returns,” and really focused on this full time. Tell us a little bit about this early stage investing environment in China, because I know it’s quite different than perhaps some people might imagine, and certainly different than how it is in the west, in Silicon Valley. What are the nuances of China? It seems like it’s very much connection-based, and who you know as how to get into these deals. What was your experience?

David: It’s extremely cliquey, it’s much more cliquey than I would say in US. Only way to source good deals at early stage is if you are working within these social circles, and it’s all about, we chat, linking up one another consistently. To give you an example, one of my leads, or the way I got into this circle was that I was covering Kingsoft a very successful company in China, and I work with their C-levels quite well, including the CFO, Francis, who was still the CFO of Kingsoft. Through him, I met a lot of these ex-Kingsoft middle managers who’ve decided to come out to start their own business, ’cause at that time, all the C-levels, or original founders of Baidu, Alibaba, Tencent, and Kingsoft, they made it big, has proven that internet is sustainable business, but a lot of these middle managers are just realizing that.

That is when time allow these middle managers to come out from these companies with their own personal network and try to get their feet off the ground. They have to approach us for funding, because at that time, we were the only few investors that they know from their network.

Jay: There must’ve been a conglomerate, or a group of private investors that were well known within these circles, that they could turn to and tap for funding, right?

David: Yes. It’s a WeChat group. There’s many WeChat groups.

Jay: Right. That’s a cool nuance of China, it’s networking in a slightly different way but it’s definitely powerful, absolutely powerful, and particularly when the country was going through such a rapid change in all aspects. Things can change overnight, you know, and connections that you have are very fluid as well, so to be able to link up on a WeChat group and be able to actually print deals is pretty cool.

What year, then, did you secure outside, external funding and decide to launch MindWorks Ventures?

David: It was the end of 2013. That was when I was approached by our UK partners that they have a group of investors want to have exposure. Extremely high network family of offices based in Europe, that they want to have exposure in Asia tech, but most of these offices, since they’re based in Europe, are not too familiar with the market in China and don’t want to go into the market themselves. It’s very tricky to get connection, or get deals first of all, and structuring and getting into these deals into China, it’s a very painful process. They would rather work with a fund, or a professionally managed entity, to get the exposure into China. That’s when we decided to form MindWorks Ventures, as a product for these investors to have access to Chinese technologies companies.

Jay: Right. But then you decided to move to Hong Kong to set up shop?

David: Yes. It’s just the legal framework in Hong Kong, it’s much more understandable, also, if you get outside funding, it’s easier to move money into China, but on the way out it’s much tougher. We have special structures in place with VIE or setting up a [inaudible 00:11:12] in Shanghai, which is another area in China, to secure equity stakes basically.

Jay: Interesting. This was all in 2013, but you said …

David: End of 2013.

Jay: End of 2013. Okay. Let’s talk a little bit about the early stage ecosystem here in Hong Kong. When I first moved to Hong Kong in 2005 and basically, it was nascent, nothing. Then right around 2010, there was a little bit of spark, some interest. People are starting to hear about some of these Silicon Valley companies, and they were trying … China was slightly opening up, but still, the start-up ecosystem here in Hong Kong, very nascent, very non-existent, not a lot of … very siloed and fragmented. Fast forward now, six or seven years later, we have, there’s, like I said earlier, there’s some rising stars like yourself, Alan Chan over at Vectr Ventures we have the likes of Nest, and Fresco Capital, and Spectrum 28.

I want to talk about, we talked about this the other day at dinner actually, the differences between Hong Kong as a start-ups hub and a place to build a company, versus, say, Singapore, which is also a very attractive option that entrepreneurs look at, mainly because of the government support that they get. You had a very interesting point, so why don’t you tell us your views on the difference between Hong Kong and Singapore, and why you think that Hong Kong is actually better?

David: Hong Kong is definitely better. Hong Kong’s ecosystem is less crowded than Singapore, that’s number one. Number two, getting too much support from the government is not a good thing. I’ve instructed my team at my works, I told them that we would stop looking at any early stage investments made out of single [inaudible 00:12:59] strictly because they gain so much support from the government and private sector, that bad teams and bad business models are getting funded left and right. What you see in Singapore is, a lot of these early stage companies are stuck in this limbo stage. They’re unable to raise a big round. This model just doesn’t work. You become overcrowded with early stage proposals coming in to for MindWorks as a VC, and it just takes too much effort to cut through all the noise.

Versus in Hong Kong. In Hong Kong we do not get much support from the government or from the private sector. A tech company in Hong Kong, they won. They need to figure out how to monetize, get the top line numbers up. It creates a natural filter for us as a VC. You see companies, when it comes to series A, most of them are already revenue generating.

Jay: That’s pretty interesting. It’s a good way of, it’s a good perspective, actually, and one of the reasons is the high cost of living, primarily rent and property driving that high cost, but for a start-ups, it’s exactly like you said, it’s natural selection, survival of the fittest. If you can’t survive here, that’s a natural weed out, you’re not gonna survive further round. Very interesting perspective.

David: A lot of investment pitch or entrepreneur tell me, “Oh, I’m based in Singapore because it is the gateway of Southeast Asia.” That is simply untrue. That is not true. Singapore is not the gateway to Southeast Asia. Southeast Asia is consisting of 11 countries, 11 different cultures, and some of them, they don’t get along with each other, including Singapore and their neighbors. In Hong Kong, it’s the gateway to China, because we speak the same language, written-wise, and culturally, we’re the same.

Jay: Okay. Let’s say I’m a investor, and I want to get some advice from a pro like yourself. Many people that go into early stage investing don’t have a clue what they’re doing and I’m guilty of it myself. I’ll be the first to admit, five, ten years ago, when I started angel investing, I wasted, I burned a lot of money. They say you probably have a … There’s all these analogies. “You’re better off throwing your money in a trash can than trying to figure out how to angel invest.” I quickly realized that, which is why I stepped back and I started investing into VCs that actually knew what they were doing for a living. This whole early stage investing gets massively glamorized by, you know, you watch one movie, The Social Network, and you think that you can pick the next Facebook and you’ll be the next billionaire or whatever.

Let’s take a step back and let’s talk about if I’m an investor, somewhat of a novice investor, but I still want to be active in this space and I’m looking in Asia. What advice would you give to someone that’s looking in Asia in general? What pockets should they be looking at? Should they even dare step foot into China? Is there any easy directions that you can give them? Early things to look at when they’re trying to dabble in early stage investing at this point?

David: Definitely. The first rule, number one rule, like you said, if you’re going to do early stage investing, put in a VC. I’ll recommend that right off the bat. Second, definitely go into China. If you are a VC investor, the return you’re looking for is 100, 1,000 x return. Able to get that is a large market, such as China. The only reason why you should do VC is for exposure into China or in a region like Southeast Asia, which I believe is a much harder nut to crack than just going to China alone. That’s second. Third, my advice to beginner investors, early stage investors, is to first look at the presentation, take the presentation, and start from the last page. Look at how big the market size is. If that number is big, then we can start talking. If it’s at a micro-level, which is the company financials and the vertical is in with this market.

The reason why we like the logistics market a lot is because it’s simply such a huge market, worth 1.7 trillion, and it’s 50% of the GDP of China. So it’s much easier to look at that versus something like a niche market, say that you want to sell on demand coffee beans or such as that. Always look at how big the market size and work in reverse order. Identify a good company, or vertical within the market, then look for founders who are able to execute that.

Jay: Right. Okay, that’s cool advice, that’s sound advice. Now that you’ve given that advice, let’s flip the script a bit and let’s talk about what all of our start-ups founders out there listening to this podcast are waiting to hear. You want to get on the desk of David Chang, you want your deck to land on his desk. What is the best way for a start-up founder to pitch a VC such as yourself? What advice would you give to a start-up founder? Specifically, you can talk a little bit about what sectors you guys look at specifically at MindWorks, and what you look for in a good product versus say a fundable product.

David: That’s a very good point. First of all, you need to differentiate between investible companies, or founders’ company. Meaning that some of the companies out there are great for the founder, good cash flow, but as a VC, it’s just uninvestible, because we don’t see that we’re able to 100 times our money. That’s number one. Second, I think that advice for entrepreneurs is for them to prove that, simply put, they are able to generate GP, gross profit. So prove that to us, that you’re able to generate some sort of gross profit. I’m not talking about revenue. GP’s the critical number we look at nowadays and see how we’re able to scale from that. Meaning that, if I would give a million dollars, are you able to take that million dollars and directly translate it to enhance your GP or gross profit. I think that’s the main argument. Most of these founders approach us, either they’re too early stage or they do not have a way to monetize. The reason why is because they also are, usually they’re in a market that’s extremely overcrowded. Either that or it’s just there’s no product fit, or there’s no action, no product demand for it.

Jay: Makes sense. So, from your perspective, you’re a series A and beyond investor, or series A and B predominantly investor. You like big market ideas. That’s much more important to you than, say, a founder’s personality or betting on the jockey type thing. If the idea isn’t scalable to 100,000 x then it’s not in your data set that you would … Consideration set, so to speak. Having said that, you’re sitting on the VC level. How do you view the funding environment currently? How has it changed? With the likes of crowdfunding, platforms such as Angel List out there, where people can actually come in and burn their cash and throw it in the cash can. Do you see a shift going on in the future, say in the next five, ten years? Or do you think that this is just a little bit of a fad, and eventually it’ll still revert back to traditional VC investing model?

David: I think it will revert, but not as much. It won’t reset back to zero, meaning that I think early stage, for example, Angel List model, crowdfunding or equity founding, it has been hyped up way too much for the previous years. I will say with confidence, about 98% of these funded start-ups will fail, just because based on equity crowdfunding, there’s so much investors in it and none of them are going to put in some workload to help the company grow. Other than capital you must, as an investor, you have to give them relations your soft skill sets.

Jay: It’s able to help them scale?

David: To is as A series and series B investors, we love crowdfunding, we love early stage investments, coming to market. It’s just because simply they will help us, again, scale our targeted companies to business. Another unspoken rule that my team follows is that the companies that we invest in must have raised at least 1-1.5 million US before they come to us. We want to take the risk, basically off-load the risk through these earlier stage investors in the market, which we see as being extremely overcrowded. Like you said earlier, I know as people really love tech crimes, they see phenomenal companies growing from seed investments, but that is probably one out to 10,000 companies.

Jay: Yep, I think you’re absolutely right.

David: It’s good. I thank all these early investors in the market. It’s gonna help us off-load our risk. What’s happening in Hong Kong, is that there’s a lot of family offices that try to do, first of all, they try to do the right thing, which is great, ’cause they try to be more socially responsible and most of them will have some sort of a venture capital on, simply because everybody’s doing it. If this family’s doing it, might as well my family to have one. Also, they function like a club as well. Since this guy’s in it, I will all put our money in as well.

Jay: That’s right.

David: It creates this mini bubble within the Hong Kong system for seed or friends and family round stage.

Jay: That’s true, that’s true. I’ve actually experienced that myself, looking at a few of these quote/unquote “club-type” deals myself. I like how you say you welcome the angel guys coming in and the seed guys, because they do de-risk your investment. It’s just like Hong Kong versus Singapore, it’s one less risk that you can take off the table, which is important, right? Looking forward, you’ve mentioned earlier today on our call that China’s definitely an area that you see growth in in the future in early stage investing and start-ups, and perhaps some further growth in the region, Southeast Asia. Where do you see the best opportunities in Asia in the next five to ten years?

David: Let’s say Southeast Asia, I would say it’s Vietnam, Thailand and Myanmar will be on my top three on my list of tech opportunities coming from these markets.

Jay: Interesting.

David: For example, Vietnam, they’re the youngest democrats out of all the countries in Southeast Asia. Proficiency is at the highest, if not same par. Maybe a little bit lower than Singapore. Into the penetration, it’s still about low 60s across the region. What I’m saying is, about 200 million people, say 230 million people is coming online in the next let’s say three to four years. I think that’s a huge potential, untapped market that you are able to get. Most importantly is the valuations that they are asking for, especially in Thailand, Vietnam, Myanmar, it’s very, very low, because there’s no other players in it.

Indonesia is different. Every single VC, every single Chinese VC or Southeast Asia VC wants to have a piece of Indonesia simply saying that because the sheer population size. We don’t see it like that. We believe Indonesia’s also very overvalued currently. It’s also a very fragmented market. If you ever go to Indonesia, you understand that 80% of eCommerce happens in Jakarta. Everywhere else, it’s very fragmentary, it’s just not connected.

Jay: And what about China specifically, where you have expertise as well?

David: China’s good, I’m still positive on China, but I will wait for a bit. I probably will start looking for deals again at end of Q2 this year, mainly because Chinese investors are getting really smart now. Instead of just throwing money into any O2 … The hottest terms for last two years is O2O. Anything O2O, you will able to generate a lot of cash. Also, more than 90% of these O2O companies is bankrupt or just simply closed down. ’cause the business can’t sustain itself. So we’re waiting for a little bit, six more months, to let some of these companies reset and let the investors realize that they actually need to generate revenue to be a actual business.

Jay: Shocking, right?

David: Yeah, shocking, yeah! It’s a very simple concept I don’t get. There’s always a saying in Chinese, it’s called [speaks Chinese 00:26:29]. That means, “If you can make your own gross profit, you’re the king.”

Jay: There’s truth to that, that’s for sure. Okay, and how about, I’m not sure how free you are to talk about this but, are there one or two companies within your portfolio, portfolio companies of yours that you are most excited about that you are able to talk about?

David: I think there are a few, but the one that I can able to talk about ’cause it’s public information, it’s obviously Lalamove, the company that we started moving balls for. It’s also to prove to entrepreneurs out there that you can start from Hong Kong from nothing to become a multi … to become a unicorn. We’re very close to become a unicorn valuation but Lalamove started three years ago from zero. Now we are at 47 cities across China, and last month, December’s revenue was at $12 million US monthly revenue.

Jay: Amazing. That’s great. That’s definitely one to look out for. I remember when GoGoVan was getting started off as well and then Lalamove just came out of nowhere and basically overtook them.

David: It comes down to the financial numbers at the end for us investors. It was an easy decision.

Jay: That’s great, congratulations on that funding round by the way. Well listen, David, thanks a lot. We’re gonna look to wrap up here. I just want to ask you two more questions. The first is what sort of advice would you give to perhaps an early stage investor that is not a seasoned as yourself looking to invest in Asia? Or it could be advice to a start-up founder looking to fundraise from a VC such as yourself. That’s the first question. The second question is simply, where can people find you, follow you, and learn a little bit more about MindWorks Ventures?

David: Just go on website mindworks.vc, very simple domain name. My email is david@mindworks.vc, and I’ll answer all emails and I appreciate any entrepreneurs or founders to email me just to chitchat.

Jay: Wow, very, very generous of your time.

David: I’m open to the ecosystem. One advice I’ll give to young entrepreneurs is that when you give us a presentation, please have a roadmap for a regional focus. Please don’t tell us you want to be number one of Hong Kong. It’s something that we have been hearing a lot frequently. They say, “We want to be Hong Kong’s biggest or Singapore, blah blah blah, biggest.” It doesn’t really appeal to us as VC investors. It might appeal to your friends and family, but not to us. When you come to us, better have roadmaps saying, “In two years, this is what we’ll build up. It’s gonna work in this region, this is why.” We should be lucky that you are in Hong Kong, ’cause you’re Southeast Asia and China on top of you.

Jay: All right, there’s the advice for you guys, founders of start-ups out there, think big, think regional, think global when you’re going in to pitch David. Thanks so much for your time, we really appreciate it. We had a great time on the show, and really appreciate all the words of advice you’ve given.

David: Thank you Jay, always a pleasure.

Jay: Take care.