Cofounders of SoGal Ventures, Pocket Sun and Elizabeth Galbut, have boldly suggested that Silicon Valley is missing some of today’s biggest investing opportunities – and they’ve succeeded in grabbing the attention of top investors and tech companies.
The opportunity? Investing in early stage female-led startups with diverse founders to build foreign market share. Even where publicly traded companies notably tried and failed, the two didn’t wait for people to rally behind the idea; they went out and built a 4,000 member network of startups with female founders across 20 countries. That’s when organizations like Lean In China, Tech Base, and 36Kr, one of China’s largest tech media and crowdfunding platforms started to sign on.
This year, SoGal Ventures partnered with Lean In China to expand the “Her Startup Global Competition” to 10 cities across the U.S. and Asia, bringing the top 16 companies to Silicon Valley to pitch investors at the global finals this July. “Many Chinese millennial women that get involved with the Lean In network in China are characterized by a lack of fear and an entrepreneurial nature - despite being challenged by traditional values and family pressure. What inspires me most about them is that they simply dare to do. This is something which can be shared with other women across the world,” says Virginia Tan cofounder of Lean In China.
The 32 co-founders will be hosted for the week at Draper University, with exclusive tours of Facebook, Google headquarters, Stanford business school, Y Combinator, Planet Labs, Paypal and more. The finalists will receive one-on-one mentorship, funding and media opportunities, and access to industry leaders, like-minded entrepreneurs, and world-class investors. With over a dozen judges for the global finals, the panel includes Arielle Zuckerberg (Kleiner Perkins Caufield & Byers), Tim Draper (DFJ), Veronica Wu (CSC Upshot), Crystal Huang (GGV Capital), and Lisa Zhang (Intel Capital China).
“We hope that the finalists will inspire one another because founders are some of the most resourceful people on the planet. They pretty much have to create everything from the ground up, so they know how to build networks and ladders. When you put them together, magic really happens,” says Sun.
To understand why leading venture capitalists and tech companies are eager to learn more about these entrepreneurs and their growth strategies, Sun and Galbut point to these four major factors:
"Founders are some of the most resourceful people on the planet."
Women hold only 26 percent of computing jobs in 2016, and that number plunges to 5 percent for women in corporate leadership positions in tech. “No wonder women aren’t going into tech, we’re not being put in front of role models,” says Sun. Furthermore, women of color make up only 10 percent of the computing workforce, according to the National Center for Women and Information Technology. “The more perspectives we have to evaluate a specific opportunity, the more likely we’re able to evaluate the opportunity through a fair lens, instead of only having one set of opinions,” says Sun.
Women make 70 to 80 percent of all consumption decisions for themselves and their families in the U.S., according to consulting firm A.T. Kearney. “We are the decision makers of this economy, and to not have us at the table, whether it’s leading the business or investing in the businesses is a lost opportunity,” says Galbut.
The tipping point for a major demographic shift in the U.S. already came and passed, and brought with it a lot of unrealized opportunities. Sun and Galbut are challenging investors and tech companies to consider whether they have the right people to identify new demand areas and capitalize on these opportunities.
“As more female VCs jump into the game and we get more respect for diversity, I think we will start to listen to ideas that we’re not familiar with, because there are so many problems that we just might not be aware of. I think it’s time to start listening,” says Sun. SoGal is hoping their global startup network and entrepreneurial platform will be the pipeline creating companies equipped to meet these needs.
By the numbers, Sun and Galbut are not exactly taking long odds. Currently 57.5 percent of students enrolled in public universities and 59.3 percent of students in private universities are women. In July of this year, the U.S. Census Bureau announce that more than 50 percent of babies born in the U.S. were non-white. America is fundamentally diverse, and markets are made up of people. Their work is to attract more diverse female founders to tech, and to prep the startup ecosystem for these new entrants. “Any country that wants to race to the top in terms of economic development needs to maximize the full potential of their human capital pool. Developing and leveraging the talent of women is key to increasing labor productivity and economic growth,” says Tan.
“We believe in diversity in a broader sense, so not just gender, national origin, religion, race, sexual orientation; but also diversity of thought, experience, upbringing and conceptual skill sets. We wouldn’t be that excited about five females who all had MBAs from Stanford, if those were the only people on the team either. We really believe that diversity and multidisciplinary experience produces results,” says Galbut. This idea isn’t without basis. In a recent 10-year longitudinal analysis of portfolio performance, First Round Capital, a U.S. Venture Capital firm, found that companies with a female founder performed 63 percent better than investments with all-male founding teams.
"We are the decision makers of this economy, and to not have us at the table, is a lost opportunity."
Entrepreneurs may set their sights on shimmering prospects on the horizon, but successfully capitalizing that opportunity requires appropriate resources and talent to lead on the ground. As the customer base changes, SoGal believes the key is working with founders who have diverse backgrounds that translate into high-resolution understandings of the need.
Identifying these opportunities in areas like Southeast Asia is what took Chinese-born Southern California educated Sun to Singapore. “Not many people in the U.S. understand the region at all. When it comes to understanding foreign markets, there’s a big difference between general, low resolution knowledge, and high-resolution knowledge. It takes locally acquired, highly detailed information and on the ground execution to drive market growth,” says Sun.
Smart investors won’t be lured simply by the numbers, and yet even some of the most successful companies in the world have had spectacular failures in foreign markets. “My observation is that investors invest in something that they know, so if they don’t understand the customer demographic, they’re not clear on where they can add value so they choose not to go in.” says Sun. SoGal is striving to bridge that gap by cultivating local talent around the world, and pooling resources and knowledge.
“I think the next economic boom is going to come from diverse minds putting their talents to use,” says Galbut. “Having a community of volunteers across the world that want to lead activities in their own local ecosystems is extremely beneficial to both them and us. We provide them the tools and knowledge that we’ve acquired, and they’re able to build leadership skills, network, and become a kind of center point in their local startup ecosystem. We get to participate in these events and interact with these amazing emerging professionals, but it’s also a huge source of SoGal Ventures’ deal flow globally.”
“If a product or service has a high cultural dimension, the demand for human capital will be a critical factor in accessing those foreign markets,” says Chen Zhu, a representative of 36Kr Space, part of 36Kr, which is one of China’s leading tech media companies and largest funding platform with 100,000 Chinese startups registered.
The spoils of foreign markets may be known to many, but reviewing the list of expansion debacles is still keeping cautious investors from rushing in. “Not all VC firms are built for these opportunities, because it really requires a certain kind of cultural intelligence and ability to discover opportunities in foreign markets,” says Sun.
"I think the next economic boom is going to come from diverse minds putting their talents to use."
SoGal may be ahead of the curve in building a pipeline of diverse talent with knowledge of these opportunities, but how realistic is it for startups to consider global cross-over? “For those ambitious tech companies that do decide to venture overseas, there are a lot of associated costs. For companies finding their footing, the question of resources is not only monetary but will likely include understanding of the local market and professional services,” says Chen.
Sun believes that social conditions are now favorable to turn the tide, because many in her generation have this cultural intelligence and on the ground global experience. “We’re global citizens and this never happened before in China. I think the new wave of entrepreneurs from China will be able to expand overseas,” says Sun.
China’s Ministry of Education reports that more than half a million Chinese students studied abroad in 2015, and over 80 percent of them returned to China with their overseas knowledge and experience.
This generation could be very valuable to lead business expansion overseas, but they will still need qualified partners. “Startups entering foreign markets are at a disadvantage in terms of resources and the cultural threshold can be considerable,” says Chen. This is where qualified funding partners can come in with the value-add, providing resources, but equally importantly in navigating issues like legal, regulatory, and foreign currency exposure, etc.
“For ‘Her Startup’ we’re bringing in a lot of investors and partners who are specifically cross-border between the U.S. and China, I think they will add a lot of great perspective,” says Sun. The competition may also be a way to convince more investors that early stage companies have unique advantages. “The fact that their business is not mature is an advantage because they can adapt to the target market with less investment and innovate products and services tailored to the market more quickly,” says Chen.
Unicorn thinking has captured the popular imagination far beyond the tech and funding world. Today tech founders are on stages pitching the next disruption of entire industries before they even have a minimum viable product. This may be a place to start.
“Technological advances and online services have already eliminated most regional barriers. From the outset, any new product should be considering the global market. Most importantly the founders shouldn’t be restricted in terms of their thinking,” says Chen.
Now that easily accessible tools are helping entrepreneurs prove out their bright ideas much faster, investors may have a means to evaluate opportunities earlier. "If these companies can demonstrate great numbers and a clear path to growth, these are universally understood metrics and criteria, then they will have an easier time attracting external investments from abroad,” says Sun.
“SoGal Ventures gives us a very unique access to deals that most people aren’t seeing. Frankly right now, most diverse founders, their deals are severely undervalued, and therefore make really good investment opportunities,” says Galbut. One of Galbut’s stateside portfolio companies, Proscia, a cloud-based digital pathology analytics platform powered by deep learning and computer vision is taking on areas as large as healthcare and cancer research.
“Proscia runs on one of the major cloud providers, and if they were creating their startup 10 years ago, they’d have to develop their own infrastructure. A company funded by a $100,000 friends and family round would never be able to build that infrastructure,” says Galbut. “The ability to access that type of hardware, storage and computing infrastructure has democratized the ability to create a high-growth startup.”
SoGal has two criteria to evaluate companies that advance to the final round, and prospective portfolio companies. They should be tackling a significant problem and the market they’re targeting has to have scale. “We’re not investing in the next food delivery app. We’re looking for technology solutions and business models that are contributing to the future of society in a major way, and knowing that there’s a multi-billion dollar market that the startup is tackling,” says Galbut.
Nearly half of the teams in the “Her Startup” finals are from China. In terms of the pitches, SoGal saw that Chinese and Asian companies tended to favor consumer-facing services, while a higher percentage of U.S. startups focused on business-to-business solutions.
“This passion for startups has only emerged recently in China and Asia. Because the phenomenon is so new, lots of people want to jump on board and start something, but they might be chasing trends a little more. In the U.S. there is a longer history of tech entrepreneurship, and we’re seeing a bit more diversity in terms of industries and the approach stateside,” says Sun.
"The ‘Her Startup’ competition has real promise to pioneer the globalization of young entrepreneurs."
With a population four times the size of the U.S. and the central leadership heralding a transition to a consumer economy, it makes sense for Chinese companies to concentrate on the low-hanging fruit. Over 15 years, China’s middle class grew 45 times, from 5 million in 2010 to 225 million middle-class households today.
Between 2006 and 2014 purchasing power parity (PPP) doubled in China, making it the number one country by gross domestic product purchasing power parity (GDP PPP) as ranked by the International Monetary Fund. That means that China's consumer spending power to earnings is the highest in the world. Last year the term “Internet Plus” gained widespread use in China, describing the application of web services to drive the gears of the real economy in areas like the internet of things, big data, cloud computing and O2O (online-to-offline) which has a heavy consumer focus.
“Over the past 10 years’ development, startup funding in China and the U.S. have become mostly equivalent in most respects,” says Chen. The rapid emergence of a highly competitive tech ecosystem in China shows the will and ability to grow companies. 77 companies in China founded after 2010 are valued now at over USD $1 billion, with 42 of those companies born after 2013. By comparison the Wall Street Journal currently lists 90 U.S. tech startups valued at over $1 billion which haven’t exited, although many were founded ten or more years ago.
“The competition for venture capital funding in China is much more intense. Particularly for early stage companies the competition for funding in the U.S. is not very intense. In China there may be hundreds, or more than a thousand companies competing in the same space,” says Chen.
“In terms of maturity and sophistication of the Chinese and U.S. markets, significant difference remain; U.S. venture capital is very sophisticated and driven by data, technological factors and product deliverables, whereas the Chinese venture capital largely evaluates the market, operations and the business model. The U.S. venture capital market is highly concentrated and specialized, whereas in China it remains largely decentralized,” says Chen.
Sun and Galbut hope that by bringing together diverse founders and funders from the U.S. and Asia, SoGal Ventures may be able to improve the model for capitalizing on new opportunities. “I think our investment efforts and initiatives such as the ‘Her Startup’ competition has real promise to pioneer the globalization of young entrepreneurs,” says Sun. "Even though many of these companies are at early stages, they are already thinking globally and this week gives them an opportunity not only to network with the best and brightest in the Valley, but with one another. As they’re building their businesses and thinking on a global scale, there’s always going to be someone in the U.S. or in Asia that they have on speed-dial,” says Galbut.
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