Friday, 2024 June 14

Headline Asia partner Hong Lu gives his best investment advice

Headline Asia partner Hong Lu’s storied career is legendary. From meeting Masayoshi Son, CEO of SoftBank, at an ice cream shop when they were both students as the University of California, Berkeley (you can read the whole story here) to founding SoftBank China Venture Capital, and from being an early investor in Alibaba to founding one of China’s pioneering telecommunications companies, UTStarcom, Lu’s journey to joining Headline Asia is a fascinating one. Headline Asia sat down with him to talk about his journey and a few valuable lessons he learned along the way.

The following interview has been consolidated and edited for brevity and clarity.

Headline Asia (HA): What do you believe is the most important piece of investment advice you find yourself repeating as an advisor?

Hong Lu (HL): First, we are assuming we did all the due diligence and all went well, including business, market potential, profitability, and management’s capabilities.

But the most important part is doing a thorough background check of the integrity of key players, especially the CEO. Also, in general, I will invest in a CEO who has been lucky in the past.

HA: What’s something you wish you knew at the beginning of your career?

HL: I started my career right after college and I did not take any business classes. I wish I knew enough basic business knowledge, especially the importance of stock ownership.

In fact, my first boss tried to give me some of his stock, actually 20% of the company. I told him to give me a raise instead. Well, that was how much I knew then. The good news is he still gave me his stock and the bad news was no raise. My boss’ name was Masa Son.

HA: Where do you see the greatest value in the Japanese market? What is something that Japanese startups can do to compete on a global scale? What are they doing right and what can be corrected?

HL: I witnessed Japan‘s great innovation in the electronic gaming industry, starting with Nintendo and Sony. They proved they could be universally accepted and continued their success for more than 30 years when compared to other industries, such as music and movies with the exception of manga and anime, that are only popular in Japan.

Also, Japan is very advanced in the medical field, such as stem cell research, which I am sure will help to cure many future patients. There are many other industries Japan that are global leaders—auto, solid-state battery technologies, high-tech ceramics, semiconductor basic raw materials, to name a few.

I still think today, Japan, in general, is one of the most trusted countries to do business with. I feel extremely safe dealing with most Japanese companies. That is, in my opinion, the most significant strength. But on the other hand, [Japanese companies can be slow to] make their decisions. I would rather make the wrong decision and correct the mistakes later than to not make any move at all. A wrong decision is better than no decision.

I also hope to see more young students go and study abroad, and work for startups instead of large companies. Compared to China and India, we don’t see many young students from Japan. China and India also have many startups in their countries, as the governments of both China and India give plenty of incentives to startups.

HA: When it comes to investments in tech-based companies, how has your mindset changed since your days at UTStarcom?

HL: When I was running UTStarcom, it was pretty much a hardware business, and entry barriers were high. There were only a handful of competitors, surprisingly. At the beginning, product margins were very high as well. So my focus in investment was: Can this business be scalable and will it be profitable?

Now, it’s totally changed. The hardware business is no longer a choice today. Software would be my choice now, and I will be willing to invest even if they are not profitable yet, but I’d need to see if the company has any strong advantages and whether the company has strong execution power. I still strongly believe that a company needs to be frugal and hungry to win.

Let me give you my own investment history. Back in 2000 and 2001, between SoftBank and UTStarcom, we invested USD 18 million in an internet company. This company kept investing in their business, and after four to five years, they were still losing money and kept needing to keep raising more. SoftBank continued to invest while UTStarcom decided not to invest. One day, this company said they were planning to list in Hong Kong even though they were not profitable yet, and I asked SoftBank to buy our shares at 10 times our investment, and they agreed. I thought that was a great return as the company was still losing money.

Guess what? Finally, this company became profitable and ended up listed on the New York Stock Exchange at 400 times the price we sold its shares to SoftBank. Yes, this was Alibaba. We missed a huge return and learned a truly valuable lesson.

Recently, I’ve been witnessing more unique new business models, especially in fintech, AI, and various logistical areas.

HA: What do you think is the most important trait a VC should have?

HL: A willingness to take a calculated risk, and not just invest, but continue to support and check in on the invested company’s performance regularly.

HA: Looking back on your career, what are the major turning points that defined the direction of your career? Did you have any insight into their monumental nature when these things were happening?

HL: These are tough questions. I wish I did many things differently, meaning if I have another chance, I would have pushed my way through instead of compromising with board members. I should have learned how to convince board members and key management [to make certain decisions]. I wish I had more confidence in my own decisions, and used that passion to convince the board members.

Back in early 2000, UTStarcom had been working on a mobile infrastructure WCDMA joint venture with Panasonic in China for three years. We had the best base station tested by carriers, but China did not open the market and no one knew when China would open the 3G market. The board asked me when and I said I didn’t know.

Panasonic’s board had already agreed to extend the investment, but our board turned it down. Soon after our decision, SoftBank decide to start their carrier business in Japan. With our relationship, we could have been a major supplier to them. I did not push hard enough to convince our board. It was really regretful, and I had to visit Japan and explain to Panasonic why we decided to close the JV.

If we continued for one more year, history would have been very different. I believe we lost several billion dollars worth of business opportunities at the cost of one more year of investment, which likely would have been less than USD 50 million.

Let me share another experience. We were looking for the wireless solutions way before GSM and CDMA (2G wireless solutions) became popular. Our main goal was to solve the low teledensity in China. Back in the 1990s, China only had less than 10% teledensity. In order to solve it, I went and knocked on the door of Panasonic Wireless’ R&D Center in Japan, and met with the head of R&D. I asked him to suggest a technology much less expensive than GSM and CDMA. Long story short, we asked Panasonic to build something with our specs, which was quite different from their solution in Japan.

The president of Panasonic Communication asked me how many users we could get, and I told him we were confident to get at least 250,000 subscribers. With that, he agreed to go ahead with the USD 10 million project. In six or seven years, we ended up with nearly 50 million total subscribers and the total revenue during those years brought us more than USD 5 billion. This USD 10 million investment by Panasonic led us to a successful IPO.

This article was originally published on Headline Asia’s Medium site. It is reposted here with permission from Headline Asia.


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