Gobi Partners: Changing the Way we Experience our World

Picture a scene coming straight out of the movie, “Total Recall”…without of course the flying cars and wacky aliens running about! Well, our next featured guest has been helping innovative entrepreneurs in China turn that fictitious movie scene into real life experiences for Shanghai and Beijing.

It’s always exciting to meet brave, forward thinking idea backers. In many ways, a whole slew of ingenious companies would not be able to bring their creative, useful ideas to market without backers like them.

And, so I am privileged to feature Tom Tsao of Gobi Partners. He along with his colleagues, Wai Kit Lau and Lawrence Tse, hold the title as one of the earliest VC’s to hit the ground running in China’s Information Technology sector with a particular interest in a field they coined as, “ambient media”.

Bottom line, ambient media is a hot and growing business sector in China’s largest cities, and Gobi Partners is one of the first trailblazers helping companies make it happen.

In a nutshell, ambient media is about next generation media built into our regular environment. We don’t see it that much here in North America…yet…, but if you take a gander over to Shanghai, you’ll see the equivalent of New York’s Times Square leapfrogged into the future where large flat screens are tastefully placed in underground subway systems, along the roads, and on buildings featuring ads and information for the public.

Another prime example is in the usage of 2-D bar codes on business cards: if you have the right mobile phone, point it at the code on a business card, and upload details about the cardholder in an instant. How efficient is that?!!!

The opportunities are huge. So far, we’ve more often seen human to human transfer of information. With ambient media, we’ll be exploring human to object more intensely. There is a wealth of possibilities for applications in medicine and even air travel. For example, if you’re a diabetic, you can use ambient media to see when you need to renew a prescription or to remind you to take your dosage. If you’re a crew on the runway, ambient media can detect exactly what needs to be touched up on the plane’s body so the crew can focus on the right areas.

Although Gobi Partners embarked on this adventure shortly after the dot com bust when funding was nearly impossible to attain, today they are no longer the lone wolf in the region. They are joined by an ever growing swarm of VCs worldwide and have strategic co-investing partnerships with the likes of IBM, NTT DoCoMo, McGraw-Hill, Steamboat Ventures and Sierra Ventures just to name a few.

The Gobi team is based in Shanghai, but like many of their genre, they live in airplanes as they travel the continents. In fact, I had the great privilege to meet with Tom in Montreal on his way to Boston…and am glad I did! Tom’s a very approachable, smart, savvy guy with many compelling stories to share. But, I only had him for an hour and here’s what we said:

KTY: Welcome to the freezing temps of Montreal January weather, Tom. Let’s warm things up for you by jumping right into our interview.

Gobi Partners launched at a time when it must have been like pulling teeth to raise money for your fund. Today heavy hitters and billions of dollars are swarming into your sector and agreeing with the potential you keenly sensed earlier on. Needless to say that major business media from CNBC TV, to The Economist to the Wall Street Journal are feverishly tracking your story.

What incited you to be one of the first venture capitalists in IT and digital media in China?

Tom: We love what we do. We were already doing it via another group in Silicon Valley and saw the potential in Chinese companies and the immense Chinese marketplace. So we took the leap of faith.

We strongly believe that with the proper mentor-ship and guidance, we can help grow these promising companies into world-class players…and the money will come.

In fact, although our fund has grown to roughly $50 million USD, we are still not pulling a salary. We are doing it for free because we believe in what we do.

KTY: Your team certainly has a keen eye for trends and for companies that have the potential to fulfill valuable market needs.

And, you surely hand picked some real winners like Madhouse mobile advertising that created a virtual SMS mania with the incredibly successful campaign it created for Canon, Beijing Lingtu, the digital mapping group making maps for the web, mobile users and car navigational systems and Shanghai’s Digital Media Group that captivates commuters’ eyes via Wi-Fi managed flat screens in subways.

How do you select your companies? And, what tells you that they hold the secret ingredients that propel companies towards success?

Tom: We see so many deals. I believe we’ve seen about 1,200 plans and conducted about 800 company visits since 2003. So, it’s like buying antiques; after a while, you get a better and quicker sense for value or potential.

When we meet the companies, we tend to get a good feel about whether they have “it” or not pretty quickly…that special spark that tells us that they can accomplish what they’re saying, that they’re passionate about what they’re doing, and that they are offering something very interesting to the market.

It reminds me of that show, “American Idol”. After many contestants, Simon and the viewers have a pretty good idea who is going to continue to the next level and who will be let go.

We also have a fairly good sized team for our industry working the streets looking for the right deals. It’s harder in China since we need to dig deeper and the presentations are not nearly as polished as in the US.

KTY: I hear that you have a very “hands on” philosophy when working with your companies. Please tell us more about this practice? Does it work well in China?

Tom: Yes, it certainly does. The entrepreneurs truly welcome our coaching with open arms. We often call our companies two, maybe three times a day to help guide them with their challenges and problem resolutions. We want to be there for them, and they want us there.

KTY: What type of start-up would make you salivate if it showed up at your door?

Tom: We really have no preconceived notion about the dream company we would love to see show up at our door. We’re simply looking for a team that emanates passion, a strong drive, and very importantly, a company that is not a copycat. Don’t pitch to us unless you are showing us something better and different.

KTY: Would you be willing to share a ball park figure on the investment levels you typically make?

Tom: A first round of financing can run from $500,000 USD to $3 million USD.

Our intention is to slowly but surely build strong, sustainable, world-class companies. We hold a very long term view and are not arbitraged focused.

KTY: How do you go about finding those “diamond in the rough” deals, and what would make your job easier to discover them?

Tom: It helps that we were one of the first guys to hit the ground running looking for companies. We’ve developed a solid reputation.

We’re also usually first on the street due to the fairly big team I mentioned earlier.

We also hit the conferences and events where we’re likely to meet the entrepreneurs. We try to attend regularly and world-wide.

KTY: Tom, I read that you consider Mongolia an exciting growth market. With the ever-increasing investment levels there in the mining, telecom and tourism sectors, there’s certainly going to be a large influx of people going there to visit or further develop the country’s infrastructure. Is that what’s drawing you to Mongolia?

Tom: It sure is. When the timing will be right, our focus will be in the digital media sector. Developing regions like Mongolia can bypass the long and sometimes treacherous learning curve experienced by the more developed countries when it comes to communication tools and IT. There’s much to be done there!

KTY: With your professional experience in the West and East, what key differences stick out in investment styles/philosophies/practices between the two?

Tom: First of all, early stage entrepreneurship in China takes more work and time. However, rest assured that they are quick to catch up. The entrepreneurial ecosystem is in development and flourishing.

KTY: Who do you consider the “best in class” small companies on the rise world-wide? Who have impressed you with their ingenuity and smart thinking? And, while we’re at it…what did they do to come out shining?

Tom: Well of course there are the companies we know well, like DMG (Digital Media Group). They started off as a pure technology play by providing emergency communications systems for subways. Shanghai learned much from other foreign cities such as Tokyo which was the victim of a sarin gas attack. Shanghai applied the lessons learned to create a top tier emergency response process whereby the Metro could communicate with passengers during times of crisis.

DMG realized that, hopefully, the emergency broadcast system would never have to be used. So what were the metro authorities going to do with the screens for the other 99.99% of the time? That’s when DMG saw an opportunity to offer real-time advertising and information to subway passengers. DMG has installed screens on the platforms and in-car. So, as a train pulls into a station, a WI-FI download engages enabling the trains to play the current ad or information during the quick stop and travel to the next station, and the download picks up again at the next station.

The other companies who have impressed us also fulfill unmet market needs or have demonstrated that they are better than what already exists. They’re creating new and exciting experiences and have the team to back them.

KTY: What’s been your most successful investment to date?

Tom: We’re fortunate to have had a few success stories, including:

• DMG: They just received another $32.5 million USD in funding

• Lingtu: Did you know that their map making application caught the attention and interest of China’s space program and made a news sensation when it re-measured Mount Everest proving it was 3.7 meters shorter than previously thought?

• Madhouse: They helped sky rocket sales of a new Canon printer with their ingenious campaigns

• CSDN – these guys are one of the top three largest online communities for IT developers…they have 1.3 million registered users to date. They’re right up there with MSDN and Sourceforge - they are a force to be reckoned with!

KTY: Okay, so what was your worst experience? And how can other VC’s avoid the same situation?

Tom: We’re happy to say that our companies are performing well. But, our worst times as a group had to do with unfortunate timing.

We were aiming for a first close of Gobi Fund I at the end of March 2003. But, the US started bombing Baghdad on March 20th making investors risk averse to funding and traveling by air. Then SARS broke out in China. And further down the road, we were close to making a significant deal after many days of hard work when our counterparts from England learned that London just got bombed and had to cancel further talks to rush back home. But, no matter what comes across our path, we believe in what we do and keep forging forward. That’s what it takes.

KTY: Do you have any final advice for other investors considering venturing along with you in China – or - for Asian companies seeking funding and future growth with Gobi Partners?

Tom: Sure. Anyone entering China should set up partnerships with the locals to help them weave through the unfamiliar landscape. Yahoo, Google and eBay tend to do things on their own elsewhere, but not in China; they knew they needed to hook up with someone on the ground.

China is also still a growing market. Roughly speaking, last year alone, there was $40 to 50 Billion USD of investments in the US in the IT and related sectors…the number for China was a mere $5 Billion USD.

Also, we know that investing in Chinese companies is risky. But, the potential market for those companies is huge! They do not have to rely on international markets and can become a huge player in the domestic one. There’s room to grow!

KTY: It sounds like exciting times are ahead for you and other VCs interested in Chinese IT and media related companies. Thank you for sharing your experiences and advice with us today. We wish you much continued success in your ventures as you continue to help transform the way we experience the world.