Han Shen of iFly.vc joins Nick to discuss Hyper-Concentration, Identifying $4B Weee! At Seed, How to Invest in Deals that Have No Competition, and How to Spot Consumer Trends Before They’re Obvious. In this episode we cover:
- The Role of Customer Insights in Investment Decisions
- Han Shen’s Investment Strategy and Focus on U.S. Market
- Investment Themes and Portfolio Construction
- Investment in We and Lessons Learned from China
- Founder Insights and Growth Potential
- Investment Framework and Underwriting
- Common Reasons for Company Failure
- Recommendations and Final Thoughts
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0:18
Han Shen joins us today from Austin, TX. He’s the Founding Partner of iFly.vc, iFly invests in the seed to Series A across the value chain of traditional industries with the initial focus on commerce. And they don’t follow the herd. iFly looks for gritty entrepreneurs who are solving tremendous problems and creating real value in any sector that may appear unglamorous. Han has invested in companies including Oculus, Weee! And Ume Tea. Prior to iFly.vc, he was a partner at Formation 8. Han, welcome to the show!
0:55
Nick. Thank you so much for having me. It’s always good to see you. I’m
0:59
glad you’re here. You’re one of my favorite people in venture. You know, there’s, there’s a lot of people funny enough in this business that don’t have original viewpoints, and you are not one of those. You are an original. You’re a one of one. And this is why, like, our conversations are so enjoyable.
1:15
Yeah. Thank you very much. And also, I do want to let you know, turning myself from a listener into this opportunity to be on the podcast with you. It’s a big honor. It’s
1:27
so fun. It’s my pleasure. I’m so glad you could join me. So Han, it’s big week. We just found out that President Trump will be back in the White House in a couple of months. You know, as you reflect on the outcome, how does this inform your perspective as an investor, that’s
1:43
excellent question. And timing is so interesting. After the election result came out, I feel lots of emotion. It’s not surprising. There are millions of Americans who did not get their candidates into the White House, and I totally get it how that could feel. There are a lot of podcasts, newsletters, message exchange I’ve seen with lots of reflection. But as investor, I want to add a particular perspective in terms of listening to the customer, right? So if you really want to promote a political agenda, setting the story or narrative? Well, that’s still all about you. If we talk to a startup founder, the founder is all about himself, thinking the product is the best. That’s why you want it. I think that’s only half the equation. But you have to listen to the audience. You have to talk to the customers. You have to understand, really what the customers want without just telling them, right? So that is the level of humbleness in business politics almost everywhere. So I would say it is kind of an interesting time to reflect on what has happened, and over 70 million Americans cannot be labeled as stupid or more to justify why this election the way it has happened, right? So this is really the time to think about what has happened to cause this shift. So as investor, I want to relieve that to the startup world that people really have to pay attention to just not just the product features, but also how they relate to the audience. I think that’s something I wanted to share with the audience.
3:24
I mean, there’s a lot of power in simple messages communicated clearly over and over again, right? Yep,
3:32
exactly. But that’s still path of the equation, right? Does that relate to the model? Right? When they say no, do you get emotional? Why not calm down and really talk to people and I question voters on both sides. How often have you listened to the complete interview of a candidate from both sides without having done that to me, it’s not like a complete market analysis. Maybe you will,
4:01
well, some campaigns are doing some market analysis. It looks like there’s art segmentation, some PPC campaigns, some podcast orchestration, like, I think you do have to tip your cap and like in, in, you know, give some credit to the Trump campaign, both in 16 as well as 24 for some pretty smart segmentation and marketing. 100%
4:24
agree. But also, I do want to add another perspective here. Since we on this subject, I became a US citizen over what 10 plus years ago, and I grew up in China. I came to the States in 1998 so I want to tell people loud and clear that it is a privilege to be American, and the system here is not perfect in many ways, but it’s still far better than many other countries I’ve seen or been to in the past. That’s something I cherish and appreciate a lot. So the existence of such system. For the correction of the course has a ton of value. So again, I do want to remind people to reflect on this piece and as we continue to build this country together.
5:10
Very well. Said I I was not born in another country. I have not lived for more than a year in another country, but I did buy a ticket around the world back in 2008 I believe, and I visited some wonderful places. I was in China for a period, many different countries. It was an incredible experience. But my biggest memory from that is how grateful I am to be an American. Like getting back to the US we don’t realize how good we have it, you bet, absolutely agreed. So how does your background, you know, your Chinese background, help kind of shape your current investment strategy? Yeah,
5:49
that’s a great question. First of all, I don’t invest overseas. I really focus on the US market. Also, to take a step back, my overall thesis can be described as a tech enabled consumer playbook. So anything that makes American consumers happy, there’s value in it. Because look at it. The reality is a majority of the United States economy is still driven by consumers consumption, and the market is not static. It’s evolving, changing, upgrading. This is actually very exciting. When you look at some of the drivers, for example, the growth, the rise of Gen Z, the cross cultural influence, the migration of people from states to states, and so on and so forth. All these changes are making new opportunities arise here and there. At the same time, there’s tech enablement. We don’t necessarily always have to back a SaaS company serving existing business. At the same time, there are more and more tech savvy entrepreneurs who know how to utilize off the shelf tools or just build something in house to solve the problem, to drive efficiency. When you combine both market insights and take enablement, that’s where I see a lot of exciting opportunities are. And going back to your question, as someone originally from China, I do focus on United States, but I do want to carry a global view, especially looking at the Asia consumer market. It’s buzzy, it’s crowded, it’s crazy in some way. There was a lot of capital in the China market for quite a while, until recent years. But during those years, when companies like Tencent, Alibaba, Tiktok and so on, wrote rose to the top of the world of this tech ecosystem, at the same time, there are a lot of lessons to learn from them, lots of best practice we should learn and follow and selectively adapt for our strategy here in the States, or even support the way how startups can grow and build products, right? So that’s kind of a local knowledge, excuse me. Global View, local focus, and when we look at specific investment themes. One of them is a cross cultural influence. As an immigrant, I actually appreciate the diversity of this country being so welcoming different cultural ethnic backgrounds. Take food as example. When you really look at American food, it’s like a worldly food, Italian, Korean, Chinese, Japanese, la time, you name it. I was in Miami just about a week ago, and I saw a couple companies coming from Argentina, Brazil, trying to bring more, more, CPG to the US market on the Asia side, so many people are interested taking the march of flavor, Starbucks Frappuccino nowadays, right? And bubble tea now is also everywhere. So that kind of cross culture influence and such elements in the consumer innovation is also not just exciting, but also, given my Asian and Chinese background, I think we have a lot of insights how to connect the dots between those countries and cultures and the US consumption and so I do. And
9:05
why don’t you invest internationally? Han, look,
9:09
we are a startup funds, right? We have 24/7 so to me, the strategy has to focus on a particular market. The market here is already huge, right? You know, let’s don’t get it wrong. There are so many opportunities I’m excited about between the east coast and west coast, but as a startup fund, we are still a startup. I constantly remind myself and my team that we have to do certain things so well at the same time, we have to eliminate our things that we should not do at all, and focus really the key of our equation here
9:42
in Han. You know, can you talk about just some highlights on your thesis, like, how many deals do you do per year? How many per funds? You know, what is kind of your portfolio construction? Roughly? That’s great
9:54
question. I think our portfolio construction is probably the most concentrated. One I have seen in my network, my fund, one, spent about three years only invested in seven companies. Fund two, a little bit longer, three and a half years, almost four years, we invested so far in nine companies. And we do this on purpose, because the investment is really driven by conviction, by given whole landscape, a landscape and opportunities we just talked about, we also want to truly understand why we should be excited about opportunity. At the same time, we have to understand why we deserve to be on someone’s cap table. So if we do reach that level of conviction, we’re happy to write a sizable check. You know, since we have worked on on a deal that just gets us across a fence, why do we instead write a smaller check? Right? So follow the conviction. Double Down. Is part of the strategy. And the other side of the equation is not that we are aimed with a meaningful ownership with a concentrate portfolio. Our value add on the portfolio side starts with availability. We don’t have a lot of companies, and we are so motivated to work with founders. If our founders need to talk to me past midnight, I am still calm. There’s no problem. Portfolio, 200 companies in portfolio, I think I will not be able to operate that way, right? So all these pieces from the thesis, the conviction, concentration of the portfolio, and the value add, all of them are interconnected, and that’s how we invest.
11:34
Yeah, we had a an LP on the program recently, and I think they called it GP thesis fit, or GP strategy fit, right? You have to think about how these different components interrelate and create a structure that’s sustainable, persistent. You can drive outcomes. And you know, ideally target a 10x plus fund. So Han, you mentioned coffee, you mentioned bubble tea. You know, the US consumer market is constantly evolving. There’s been a lot of press lately regarding established brands like Starbucks, of course, you know, they need to right the ship. They’ve done some things wrong. You could juxtapose that with a company like blue bottle that’s on the rise. You know, talk to us about what consumer trends are having the most impact on businesses that are thriving versus businesses that are flailing, yeah?
12:26
So let me just pick bubble tea as example. Okay, right now? Yeah. So anecdotal, you know, you and I have seen bubble tea pop up everywhere, right? But what I’m excited about is the underlying growth drivers. So the rise of Gen Z. You know, if the Gen Z go to a plaza looking at Starbucks versus a bubble tea next door, I would argue, as long as the bubble tea shop is not too bad, most of the Gen Z were just swarming to the bubble tea shop because they don’t have any attachment to the Starbucks brand, and they love not only the novelty, but also the color, the taste, the appearance, the ambience and the social aspect of the bubble tea experience. You think
13:13
straight out bubble tea for coffee. Well, you do,
13:18
you know, by by data, by our direct observation, lot of the Gen Z are already doing that now, because most people at that age will probably take a while to really start seriously consuming coffee or caffeine knitted product, right? But bubble tea, a lot of them don’t carry caffeine, so that’s perfect starting point. The other side is the social media also amplify the voice and also connect people between the bubble tea shops, the recipe, their social group. So that became a viral. Compounding effect made it even more exciting. We have talked to more than 20 bubble tea brands or retail chains here in the United States and food disclosure, we did invest in a company called you me. T You Me is just like a you and me, right? So they already embedded this kind of concept of the social aspect of the bubble tea experience, and now they have 20 locations, and still growing far more to open pretty soon. And looking at their data, was really blown away how efficiently they have grown starting from scratch,
14:23
and what were the trends that stood out to you? I mean, you mentioned Gen Z, you know, talk to us about some of these behaviors that you know are really informing your thesis as you move into the next few years.
14:35
Yeah, so in terms of Gen Z, first again, as I said, they don’t have any attachment to the established brands, right? They are willing and open to something new, especially when they consume the information to influence how they make their choice, social media, their network, peer group, school that has become a very important channel. For them to intake the information about something new and cool, right, so that they know they have their own personal identity that is not necessarily tied to their parents generation, and that is a very important piece in their psychology. But going forward, I think food beverage still has a lot of room for opportunities, because when you have other premise for innovation, the way to live, the way to work, to get consumers cross a fence, it’s not that easy, but eating, dining the it’s a low hanging fruit, right? If you don’t like the food, you probably just spend 1020 bucks on it. You don’t go there again, but you really love it. You go back again and again. So there are numerous examples in the consumer space, especially touching the heart of Gen Z is happening, besides bubble tea. When you look at Tiktok, that’s about how to consume information. When you look at the rise of sheen, because people love the inexpensive, colorful dress, right? But also, there’s a company actually having a black of the name. It’s a Korean company that went public not a long time ago. All they do is publishing the comic books online. You and I are not going to go to the website to read every day, but the Gen Z just loves it. I should really take out the name of the company and share here. And all these things, to me, are fascinating, because I am not the target consumer for that sake, but talking to them, understanding what goes into their mind, still reviews a lot of, you know, interesting and exciting opportunities for investment.
16:36
You know, I think, like we had Benson on the program, and we’ve had other folks that talk about monitoring the market in Asia, whether it be Korea, China, Japan, etc, for trends that will come to the States, you know, a few years later. Is that a real thing? Do Trends tend to happen, you know, and in China first, and then then evolve here in the States. Or is that kind of, you know, hit or miss? Yeah,
17:04
I would say a direct copy from Asia is an overstatement. How simple that could be. It’s just not that simple, right? So going back to my view us focus, but global view, of course, we should stay open minded to whatever is happening outside United States, whether it’s Asia, Latin countries or Europe, let’s keep eyes open. But the good news is the information is so widespread, the cost of getting information into different countries, getting the excitement across the rest of the world, is different from 1020, years ago, right? Look at k pop right. I used to think you know who would understand the lyrics of those k pop singers, but when you go to the stadium in the United States, in the UK, right, the K Pop singers are getting a wild crowd of fans who probably don’t even speak a word of Korean. But that’s something we have to think about how the next generation embraced all this cool and new stuff interesting.
18:05
You know, you’ve invested in a company that is a unicorn, and you don’t throw many investments, and your investments are very concentrated. So I’m not going to ask you, you know what your position is, but I can make some assumptions there. So congratulations on that, sir. But talk to us a bit about we, you know, what did you see in the opportunity? And then you and I have had some conversations about how you work with companies post investment. And yeah, I’ve really learned a lot from you. So tell us a bit about the we experience, and tell talk about how you’ve worked with them to kind of help them achieve their vision, absolutely,
18:40
also just for the benefit of our audience. We which spells as W, triple E, the website is say we do comm. The company is the biggest online grocery for ethnic minorities here in the United States, with the initial focus on Asian. I actually know direct customers of the company, not just as an investor. So go to the website, check out over 10,000 SKUs of products, from produce to, you know, dry goods, snack, you name it, from both in United States, local production imported from Japan, Korea, China, Southeast Asia, Southeast Asian countries. And they cover more than 25 metropolitan areas, including New York, Boston, Philly, DC, Florida, all the four major cities in Texas, Chicago and Midwest, west coast, from San Diego to Seattle. So I’m gonna have
19:37
to charge you for this endorsement, sir. There we go.
19:42
Very good. I’ll take it. There you go. And any order above a minimum order value of 35 bucks for gold membership, you do get free delivery, right? So that’s my shameless promotion. But having said that, before the investment in we 2000 actually, that was December, 2008 13. I had already followed and investigated the online grocery space for quite a while. I saw the direct to consumer model. I saw a third party model, plus the brick and mortar retail. I saw, you know, kind of a group by model, by building communities. I saw different kind of ramification of the playbook from upstream to downstream. You know, I did not put the trigger for about four years, but when I saw we reconnected with the founder in August, actually, September, 2018 in downtown Burlingame, California, at a Starbucks, I was really impressed, right? So the founder’s name is Larry Lu. He’s also immigrant from China, many, many years ago. And in fact, I do want to share the tip that you should consider inviting him to be on your podcast. That will be a very good one, absolutely. So initially he had this insight that look, half the minorities in this country are super underserved in terms of the grocery they need. You go to Safeway, you go to HEB, or any other major retail chains. The IO labeled International is kind of a funny right? You go there, there’s a half an aisle of items, some instant noodle cup or just a hot sauce. It’s really under serving this demographic. And by the way, this demographic is not small. When we combine Asian, Hispanic and other ethnic minorities, we are talking about more than 100 million Americans, right? This is a huge opportunity, underserved. So somebody got to figure out a way to do the right job, to correct the problem. So in we case, a long story short, I love their vertical integration, meaning they source all their own they build their own assortment, and then they build their own fulfillment and delivery capacity, right? The significance of doing the vertical integration is one they have a lot more insights into picking the right assortment for the customers. That is a huge differentiation when you look at we versus any other online grocery business. And the second part is, everyone talks about the nature of low margin for a typical grocery business, right if you have a third party delivery service on top of a brick and mortar retail you cannot charge 25% 30% from the brick and mortar business because they don’t have this margin for you. And that’s why consumers extra 2030 bucks to make yourself break even. And that’s a very hard proposition to a typical American household, but in Wii’s case, the vertical integration allow them to run it so efficiently, right? So the cost structure is very different. As a result, their gross margin is able to cover all the variable cost, and that’s a beauty on the back end. And the third piece is they are not just like a bunch of random people who happen to see, oh, you know, there’s underserved needs. They are engineers. Larry used to work for Intel, but he graduated from one of the top Chinese universities with engineering degree. So did his right? So when they look at the problem, their mindset is really the engineering approach, break things down, solve every piece of the puzzles, put them together, and that kind of engineering approach and data approach really drive the efficiency of production at this point, as the company has scaled a lot, the unit economics are very, very Healthy without any COVID tailwind. It continued to grow quarter by quarter. And in terms of I flies investment, it was December, 2018 in that particular round, I realized nobody else wanted to put money. So following the conviction, which is our approach, we wrote a pretty sizable check for we and yeah, and got onto the board as a company raised a few more rounds in the following years, reached a valuation of 414 point $1 billion if I fly, still the second largest shareholder on the cap table. And then another question you asked me in terms of our involvement, that goes back to number one, when Larry wants to talk to me, even nowadays, at such scale, I’m still available 24/7 maybe 24/7 is an exaggeration, but we talk a lot to each other to share. I’m happy to be his sounding board for some new ideas. But in year one after investment, a couple of things I initiated, one of them is to arrange a trip for Larry to visit the top six, top seven, online grocery companies in China, right? Each of those billions of dollars, it was crazy scene, right? So I think in total, Larry visited China twice in 2000 19 not only he recognized some of the best practice that we should follow, maybe consider adopting at some point at the same time, Larry and the rest of us also recognized a lot of these pitfalls in the online the Chinese online grocery business, right? So we said to ourselves, we absolutely did not want to go there, which saved us a lot of trouble down the road. One of them I can share here is about speed. Right at the time, even today, all these online grocery and E commerce business in China are about speed. Some of them claimed, if I do not deliver this to you within 30 minutes or 15 minutes, you have it for free. It’s extreme. That’s crazy, right? It might get a lot of customers attention, but the unit economics is so lousy, right? So on we side six years ago, five years ago, and even today. And going forward, we focus on a scheduled next day delivery, which makes it a lot more productive, a lot more efficient. So when COVID hit, of course, there was a lot of capital going into online grocery we financing history of different companies, I would say, Now, at this point, at least $8 billion got burned on these companies in the United States who focus on fast or ultra fast delivery, which just didn’t make sense economically. So from the best practice and the pitfall in 2019 it was such an important year as we recognize these issues and learn, of course, down the road when it comes to helping companies recruit or interview key hires, talk about strategy. You know, additional financing are always very involved, and I’m very motivated.
26:47
I love how you connected with this founder, with players in China that were established, that had made the mistakes, that could share their lessons and kind of inform the model the right way. Why do you think these companies were so willing to meet and share, you know, their wins and losses with this American upstart. Well, these companies
27:07
in China obviously didn’t say what their pitfalls were, right? But you know when you talk to them, we cannot take everything on a face value. We would still have to go deep understanding to enable what they did, what a costume cost structure would look like here in the United States. So that’s deeper level of analysis certainly help us formulate our opinion. And I have to say, at the time, such opinion was not popular anywhere. I remember when we was raising the follow on Route. A year later, that was q4 2019, of course, at the time, there were a few Chinese investors coming to talk to us. I still remember one of them said, You guys are hopeless if you don’t do like a two hour delivery window. I said, Okay, you know, appreciate that feedback, but we would not do that.
27:57
Love it. You got to know where to focus. You gotta know where to say no, right? I mean that exactly the most powerful word for most entrepreneurs, right? Exactly. Talented people just take on too much, and then they do everything okay, instead of one thing, great, 100%
28:13
agree, right? So instead of focusing on speed, speed, speed, we focus as a lot more on the assortment, right? Finding the best offering of the products that make the target customers happy, right? And again, you know, having worked with we and Larry and his team for the past six years, I also personally felt I learned quite a bit from Larry himself. He’s a very strategic thinker, thoughtful leader. It just amazing journey has he has a build, and I’m so grateful to be part of that. Put him onto your podcast. I’m sure your audience will do we’ll have
28:49
to get him on, hon. Why do you think you know there are some established e commerce models that have worked with different economics, right? Like Amazon being the most obvious. Obviously, this is more grocery CPG, which is a little different. But why were more investors not onto this model? You know, when you made the bet, it was very contrarian in 2018 How did other VCs miss the boat? Yeah,
29:13
so I cannot second guess why other investors refused to invest at that point. But first of all, I would say the hard part and the fun part of early stage investing is all about seeking and seizing the non obviousness. Think about it. We all love this next generation AI company. The valuation could be already a billion dollars to start with, which is happening these days, right? The same kind of concept applies to stock pick in the purple market, right? If everybody loves Nvidia or Tesla, that’s the price you pay for but that’s not interesting to me, right? As early stage investor, should I follow the better component of investment return? Or really to. Make a dent on this startup investing ecosystem, I’m more tuned into identifying and capturing the alpha component, so that requires a lot of deep knowledge and insights, because you and I can look at the same business plan, the same pitch deck, we might come with a very different opinion, which is fine, right? You know, I, I made my mistakes. I have my losses, but it is the conviction when we do reach with the knowledge, with the insights, that will drive us to place a sizable bet, to stay consistent with how we do it, in case we in particular, I could only guess, you know, a lot of investors under estimated how big and how underserved the market is. And the second piece is, I think some people probably did not fully understand the distinction between a first party e commerce model with a full vertical integration versus a third party brick mortar plus delivery service. Now we touch on that already, and you can tell the cost structure, the differentiates are so different,
31:06
much better the third vertical
31:08
integrator, you bet. And the third piece is the founders profile, right? It’s very convenient to say, look, you know, let’s go after this dude X Google or a top and top school, MBA from Wharton U Chicago and so on, right? But as an investor, I refuse to look at that face value, right? I care more about the meat, right? I care more about the depth and the relevance of the founder. Also back to your earlier point about the founder market product market fit, excuse me, founder, market product fit. And Larry is just such example. He’s humble, but still ambitious. He has a lot of insights. He has a team around him, right? Those are the elements I give extra credit when I talk to him. So
31:55
one of one of the things that I’ve always been curious about in our deep discussions is how you don’t miss great opportunities. Because something that I think is unique about yourself is you really study a space. You go very deep. And when you find companies you like, you really get to know those companies. How do you make sure that you don’t lose them right as you’re watching them? I know that sometimes you got to pay higher price. If there’s more traction, you know, maybe there’s more locations and more revenue, etc. But how do you balance like you you’re onto a great company, but maybe you get you have to dig in more. Maybe you want to see more progress and and, you know, not worry about losing it to another investor.
32:39
No, totally. Well, first of all, I’ll say investors, psychology is something we also have to pay attention to, right? I refuse to make a decision under time pressure period, right? If I have not reached that conclusion, that why? You know, we are so excited about it, why we should really compete hard on it. You know, I’m just happy to walk away. Maybe I miss something huge down the road, but I tell myself, we have to be okay with that. We have to be comfortable saying no and potentially missing something big. Because if we don’t do that, the chance of placing more round bets is also significant, right? So that psychology is a very important piece of the judgment equation for me. And going back to missing the boat or not allowing the founders to take your term sheet or not, the homework also should pay off, right? If we have done the homework and we truly understand the space. The best in class, founders should be able to tell, based on the questions from the investor, the best in class, founder should judge which investor understand the stuff right? Which investor should be able to make a dent on that business? That’s a two way street. As I interact with founders as always, and, you know, always ask founders to look as much as we throw you due diligence questions. You should judge us based on the depth of quality the question and the way how we comment on your business. Very often, you know, we end up not investing, but we also, you know, by doing so, we left a very positive impression on these founders that also became a part of our network, that led to more interesting introduction. And not only two founders, but also in one case, I mean, I told you, a founder who had turned down for the right reason, without sacrificing the relationship, ended up investing to a family office on the East Coast that became our LP, right? So that is another part of the growth mindset when we look at the deal situation and it’s just not a transaction centric view about interaction with the founders. Yeah,
34:55
we have funny stories like that too.
34:57
Three founders we turned down. Are now LPS in our fund.
35:01
That’s great. Yeah, I said the same thing to the Father. Look might not be the best fit, but I see your potential. I wish you the best of luck, and then come back to become IOP. It’s so fun
35:13
when that happens. You know, Han, we’ve talked a lot about founders now, but we haven’t really dug into the details. So you know, if you think about the qualities that you look for in founders, and let’s say you have to distill them down to that the top three qualities that are most critical. You know, what are those top three?
35:30
A great question. I love it. No, it’s a it’s a topic I constantly reflect on. So number one, does this founder carry the degree of insights that is like so deep, right? That’s really important, because that insights translate into the right strategy to allocate very limited resource onto the mission you are in. And that already separate founders from founders. The second piece is about, can the founder build a very strong team around himself? I’ve seen solo founders, right? You know, they’re fine. I’m also solo founder. By the way. I’m a solo GP, but running a fund versus running a company on the operation side is very different, right? So if a solo founder comes to me without a clear picture, building the team around himself or herself. To me, that’s an issue, because eventually that’ll become a bottleneck. On the flip side, people who work with incredible co founders or team members, itself is a very positive, strong signal to me, as they recognize their own strength and weakness, right? Because the founder cannot do everything. Finding the right teammates, to me, is a part of the assessment metrics. The third piece is about growth potential. I don’t have a perfect formula to assess someone’s growth potential, but I have found this is such a vital piece of it for a success formula out of the last 15 years of investment career, I had to share my success and losses, right? But I would say none of my investment failure was about a startup founder who did not work hard. Everybody worked so hard, but hard working is just not enough. Why? When you build a company from zero to one, you you deserve the credit, but to get from one to 1010, to 100 you have to upgrade a skill, right? Replacing CEO at such early stage is not that simple or easy, right? There’s a lot of risk. So for me, before the investment, assessing the growth potential is a part of it is a person, open, willing and able to recognize some blind spot and have the right amount of self awareness. So those are important and after investment. Now, of course, we want to surround the founder with the right kind of people, advisor, even some of my LPs, who used to be super successful entrepreneurs, to be able to help the founders get to the next level. So those three pieces are so important for me. When talking to fathers
38:05
nowadays, on your website, I see the word grit come up frequently. How do you measure grit? Grit
38:13
is not just about the time spent on your startup, right? It’s not just about the psychology or the mentality behind running the startup, you know, but to me, the grid also means you have to constantly battle with yourself, identifying what makes sense, what doesn’t make sense, right? It’s just not like putting hours. It is a lot more than that. The brain power has to be tuned with that degree of grit in the right direction, and the rest of the action will have to follow through. And in fact, as we mentioned, this work grit, we are in the process of updating our or upgrading our website. I will add this growth mindset for the fondest quality next to grit.
38:59
Love it. Love it. So Han, you you invest in a wide variety of businesses, often ones that don’t look like your standard VC software deal, right? Many of these companies may appear to be wildly different to the casual onlooker. My question for you is, are there any fundamental business characteristics that must be present for you to lean in. And if so, you know, what are those common threads between all of your investments? The
39:27
simple answer is, does it make sense, but can you talk about a business opportunity in a most plain English language that you know reveals what’s being needed. What is the pain point? You know? What are the approach that founders have taken to address these opportunities? Right? So to me, it’s all always about what makes sense. So in the consumer market, in the United States, going back to my thesis, that are so many drivers causing the change, if the change is. Real. And if the change has not complete, if the someone is coming in with a very reasonable approach to, you know, enabling the change, let’s get serious about it, right? Then the rest of it is now, of course, you know, is this right company to back? Is this the right investment terms we should work into our fund model, right? So that’s the part of the secondary piece. And back to the days or years when the capital market was hot and buzzy. Of course, we came across a lot of companies that made very bold statements, right? The notion of going big or going home to me, obviously, it’s a very exciting narrative, but it could also fool a lot of people, right? You know, yeah, of course we want to underwrite something that’s big. But does the path to this big make sense at all? Does that require the kind of investment dollars that makes sense to our investment fund structure and portfolio construction and return model, we have to be serious about that, and that’s also why our selection of investment is not just about the opportunity, it’s also about the opportunity. Fund fit. Love it.
41:13
How do you think about or do you have a framework for underwriting when you’re looking at businesses that you know, the multiples and the exits and the comps are going to be different than, you know, your standard SaaS business, six to 10x forward 12, you know, multiples like, how do you think about the under what underwriting framework when you’re dealing with businesses that may not have such Standard or established exit comps? Yes,
41:41
totally. Nobody can predict what the world will look like when the exit ever happens, right? The multiple goes up or down. We are in the venture business that has a long life cycle, right? So if I tell you precisely, I know the Exit Multiple should be 10x I’ll be lying. But having said that, I do follow the framework of Warren Buffett. I mean, everyone talks about his long term investing, investment strategy, but every time, when I listen to his talk, he cares a lot about price, right? Obviously, given his asset size, he has a lot of bargain power to even do a single deal with a company getting a significant discount so that their safety cushion is a lot better, right for us, obviously, you know, if a company is valued at an early stage, I cannot sell. You know, I invest a million dollars and you give me a post of 1 million doesn’t work that way. But the question for me and for the founders is, does that reach a pawn that also creates enough kind of a safety cushion on the pricing down the road when it gets to exits? Of course, we should have a strong reason to think this company has a potential to become the next unicorn, but at the phone level, is unicorn truly required? The reality is, for us, the answer is, no, it’s never required to become a unicorn to return our fund. That’s also very important, right? Because otherwise the choice is very limited when it comes to the realization and a fund returner. That’s a distinction between the established megaphones and the rest of us. For you and for me, we actually have a lot flexibility dealing with that than some of the megaphones, because when you think about it right now in the consumer space, IPO is certainly a holy grail for the founders, for the investors, but the mid market, M A has been always robust and active, as long as the business is solid and healthy, right, as long as you can fit it into a valuation match metrics that the buyers or even some PE shops can accept right at the same time, when you know you did not overpay the price to begin with. That’s where you do have, you know, some degree of confidence that this portfolio will work. Then the last piece is, you know, when you talk about the price, or when we talk about the price, I don’t want to create this perception that we are just like squeezing or giving the low ball to founders. They have to accept, they have to agree. They have to really see the value in us as investors. So that’s also why, going back to this relationship building along the process of due diligence, it’s a two way street. Not only asking the right question, we want to start already making introduction to these founders, sharing our deep thoughts of what makes sense and what doesn’t make sense. So typically, when we reach the stage of term sheet, I want to have a very strong sense that the founders see us already as a partner. For example, you know, we talk about we that’s a six years ago, but a year ish OF THE. When we invest in Umi T, the bubble tea chain, we spent probably two months going back and forth. They didn’t need to raise money. They have stayed profitable since year one. So when they came out to talk to investors, they wanted to make sure they bring the right kind of a partner. So those two due diligence is, you know, giving them an opportunity to assess. Han at I fly and the rest of I fly network, and then finally, on the birthday of the founder, I give her a present, which is a term sheet.
45:33
Love it. Love it. So, Han, you’ve been an investor for 15 years. When I ask investors why companies fail. I often get, you know, cop out answers, like, because the company ran out of money. It’s my least favorite response to this question. That’s late. That’s really late response, yeah. I mean, it’s the results. It’s the lagging indicator of a confluence of mistakes or challenges or other reasons, right? So in your 15 years in VC, what, what do you think is the most reason why? Most common reason why companies
46:05
fail, a common reason for me is the founder was unable to grow at a speed needed by the company because, let’s say, you know, not a founders are hard working, again, greedy, you know, even sacrificing the income, the quality of life to get to the point of raising money, right? So you love them for what they have done. But next, let’s get real, right? They are building companies. The company requires strategy, requires a proper way of allocating resource, including capital, requiring the way to recruit and managing the right talents right. Every piece has to be right to get a company next to the next level. When a particular of them misses or goes wrong, it hurts a company right? If you have enough cash, of course, you fix the problem, you get back, you learn from the mistake. You know, you move up, but often the reality is harsh. It may not give the founder a second chance. So that’s why you know mechanically, when a founder can raise some more money, my argument is not just for the cash runway, but deeper level is the extra money gives the founder some cushion for making small mistakes. Hopefully it’s not big enough to kill the business, and we all have always have to bear that reality as investors and as founders. So past 15 years, I recognize as a very common pattern, but going forward at if I fly, that’s also where I’m very willing to spend time talking to founders about potential blind spot. You know, how to recruit the right people? There are a gazillion kind of a resources out there, but you cannot just turn that into a very generic kind of a approach. One size fits all. I almost requires a kind of a handheld in the early years that tailor or curate the advice to found this particular needs. Love
48:08
it. Han, if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about? So
48:15
must be Larry nu, the founder, CEO of we. I talk about him quite a bit today, so I’m not going to repeat that, but he is one of a kind of founders I have seen right? So in many ways, he carried the attributes we talked about Eric again and some of the other immigrant turned engineer turned founders here in the United States. And in fact, he has also brought a lot of inspiration to other immigrant founders. When those founders came to talk to me, they told me how much they admire Larry. Build this business, starting from scratch, going through lots of ups and downs. So without spoiling the whole story, I think you should get him on your show. Talk about his journey, talk about how he handled the time period when they were four days away from going out of business, right? How they pivoted to the right direction when everybody like when most people didn’t feel good about that, right? So that’s an extraordinary story for your show to share with your audience. I believe.
49:17
Han, what book, article or or video or video would you recommend the listeners?
49:21
Let me give us a piece of thoughts here. So I would actually recommend a collection of those books by Malcolm Gladwell. Sometimes I revisit his books right tipping point, David was obviously, you know, there’s a lot of research based on which he wrote those books. And having said that, you know, to me, this is perfect audible experience as I drive, as I have downtime, it just gives a different perspective on the rest of the world that we don’t necessarily have ourselves exposed to as investors, right? Because investors like us focus on what we do, but I don’t want myself to be i. Kind of a siloed in the whole landscape, so getting a fresh perspective on something I may not be familiar with is important. But having said that, I also want to remind the readers or the listeners to his podcast or or the book series to think about challenging Malcolm Gladwell view, right? Don’t take everything for granted. Sometimes I have my mental debate on his side or against his opinion. Obviously, I don’t have time to do further analysis to build a deeper, a stronger view, but to me, that’s a very interesting piece to kind of treat my own brain power.
50:38
And then finally, here, Han, what is the best way for listeners to connect with you and follow along with iFLY.
50:43
My email address is han@ifly.vc I love the domain better than iflyvc.com so it’s han@ifi.vc and I will try to get back to any people who reach out to me that within 24 hours sometimes I do miss I apologize, but my intention is to get back to everybody who reached out by codecorps group of introduction.
51:06
He is Han chin, the firm is iFLY Han, thanks so much for doing this. Congrats on the $4 billion plus portfolio company. You are a true original sir, and I’m just so pleased you know at all your success and looking forward to doing this again in the future.
51:24
Yeah. Thank you so much, Nick again, it’s really an honor. And I said, and I do mean it, it’s a big honor to be on your show not as listening anymore, and I’ll still, of course, continue to listen to your future podcast and bring some other speakers to you. Amazing.
51:37
Thank you, sir. Appreciate. Thank
51:42
you. You all right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today, until next time, remember to over prepare, choose carefully and invest confidently. Thanks so much for listening.
