Venture capitalist Michael Li, with 16 years in VC, has shifted from valuing technology to prioritizing founder traits: passion, persistence, and fairness. He warns against equal equity splits among four co-founders and recommends concentrating ownership in one or two leaders for clear accountability.
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Give us a sense, in that 15, 16 years in venture, what were some of the things that you learned from looking for— what were you looking for in investors and how did that change over time? Let me rephrase that. What were you looking for in entrepreneurs And how did you change that over time? You know, for when you first started, there were certain things you were looking for versus now.
Yeah.
Or, you know, gradually give us maybe like every 5 years, hopefully, like just like the China 5-Year Plan, maybe every 5 years you learned something significant.
Okay, well, just from, based on my own experience in the VC industry, when I first started, I really, I was also at a very steep learning curve because I didn't know this industry that well. The way you look at the company, you probably pay more attention to technologies instead of people, instead of entrepreneur. After 16 years, I think that, well, I still look at both, but I think the allocation of my attention would, would be changed dramatically. I think more and more I would pay more attention to the quality of entrepreneur instead of just the technology. Technology is important. It's very important in developed market like the US. You know, if you want to do something new, you better, you really need to differentiate and have some unique offering to the market. But in China, it's still, relatively developing market. There's so many opportunities. So you don't have to have the best technology to win.
Mm-hm.
So, but in the end, you need to have the best quality for, you know, as an investor, you know, you are part of the company, you own part of the company. You know, for you to benefit and for you to be, you know, For you to grow with the company together, you need to work with the entrepreneurs who offer the best quality. Among the best quality, I think you guys probably know that already, really passion. Passion is really the passion, is the number one consideration. I didn't realize that until a few years down the road when I was doing the VC job. You know, at first I thought that the intelligence would win, right? Passion is not—
Smart people.
Smart people would be the winner. Really, it's really not that, that's not the case. I believe that's not only for China, it's probably global wisdom. And the second is, I think you need to have the persistence. You know, in the, in the, in the, when you try to do something new, you're going to run into a lot of challenges. That's 100% for sure. You know, the startups we have seen, we have been with, you know, I would say none of them have, you know, no crisis, you know, before they see their success. So that's why, whether you can, you know, weather through all the storms and stick on what you believe is really something, you know, that quality has to be there as well.
Yeah.
I think the other issue is the fairness and the sense of responsibility, whether you can treat your partners, your employees, and your shareholders well. It's also something, you know, for you to have bigger success. That's something you can probably achieve if you're really— certain level of success you might be able to achieve with lack of those qualities. But really your eye on for a long-term sustainable venture or business, those are the qualities I think we were looking for.
What is the— when you talk about fairness, it's interesting as some of our student entrepreneurs form companies, they face this issue of how much stock do I give to my co-founders, right? Can you just give them a sense what kind of deals you have seen between co-founders and how you as an investor perceive as being fair?
Well, fair meaning that you don't— doesn't mean generosity in giving up shares. I've seen a lot of cases that, failed cases, that founders are very fair, I mean, very generous in giving up shares. Say you start with 4 people, let's say let's have 25% each. Usually—
Sounds fair.
Sounds fair, but my experience is that kind of structure usually are not very sustainable. stable, because soon, by definition, because you guys are going to— founders are playing different roles, and there's a different level of contribution down the road. So if you have that kind of structure, so people tend not to be responsible, because I'm only 25% of the company. So it's really not my responsibility. That thing happens quite often. And also, you know, there will be cases that other people say, hey, you know, I have, you know, other interests, I want to leave. So, you know, I'm gone.
Right.
How do you deal with that 25%?
Right.
So those are the things I think— I don't think that's an advisable structure. A more practical structure is that you have one, at most 2 guys are really important and essential, and you guys take the ultimate responsibility for the company. So you won't be owning a larger stake of the company, you know, giving other—
Staff.
partners a smaller stake. So, but do you want to— that's, I think, is more practical and more sustainable.
It's sort of balancing the leadership and teamwork.
Yes.
And also from the board's perspective, we know there's one person who's accountable, one or two you could go to instead of 4 people and you don't know who's really in control.
Exactly.
And naturally one of them may emerge anyways. At that point, if that person emerges and he only owns 25%, that's not stable. People start playing games and may squeeze out. So you might as well call a spade a spade and say, if you're the leader, then structure it as such, because we are investing in you. Or you 2, and then you build out your team. Yeah.
