The Jay Kim Show #19: Tytus Michalski (Transcript)
Today’s guest is Tytus Michalski, Managing Partner of Fresco Capital, which is a global venture capital firm. Titus has been investing, working and living in Asia since 1999. Previously he was the CIO of equities at PMA Investment Advisors, an institutional hedge fund. He launched this fund in 2002, and then sold it in 2006 for over US$200 million so he knows a little thing or two about market timing.
He’s an active supporter of the startup ecosystem here in Hong Kong, and in today’s episode we talk about the problems that we face in the ecosystem here and he offers some constructive solutions on how to improve.
Tytus also talks about the due diligence process at Fresco Capital, and what is involved in that before they make an investment into a company. I know you’re going to enjoy the show, let’s jump right in.
Jay: Okay Tytus, thank you so much for joining us on the Entrepreneurship in Asia podcast, really appreciate your time.
Tytus: Happy to be here.
Jay: Okay, so let’s get started. You are very well-known within the ecosystem here in Hong Kong. You probably don’t need an introduction locally, but for our listeners abroad and in Southeast Asia and in the US, why don’t you just introduce yourself? Who is Tytus Michalski … what do you do for a living?
Tytus: Okay, sure … happy to give you a little bit about my story. I was born in Poland, grew up in Canada, lived in London, Tokyo, Singapore and then in Hong Kong. And when I came to Hong Kong, I thought I’d stay for three to five years and now, 17 years later, I’m still here so obviously it made an impression on me.
Part of it was the fact that I could continue to think globally and so, it’s been a place where we started a couple of companies including our current company, Fresco Capital, which is an early stage global VC and so we have three managing partners; in addition to myself we have Stephan Forte based in Menlo Park and Allison Baum, based in Tokyo. And so the three of us spend a lot of time on airplanes meeting each other, and meeting our companies and meeting with other partners.
Jay: All right, okay, and so before you … Now you’re one of the founding partners at Fresco Capital, is that right?
Tytus: Mm-hmm. Yep. We started through my angel investing and then scaled it up into a fund.
Jay: I see, OK, and so before you founded Fresco Capital as a sort of early stage private equity type investor, you were a public markets investor, is that right?
Tytus: Yeah, so before Fresco, the previous company we started was a company called PMA and that was with some other folks. We started that in 2002 and it was an institutional hedge fund which we scaled to three billion in assets and we actually sold the company in 2006. So, we got lucky on the good timing and as part of that experience, I really enjoyed meeting with these very successful entrepreneurs who had actually built companies to IPO and, you know, traveling around the region and seeing how they started and scaled. The part which I was less excited about was the short-term time horizon of public markets and even during my time it just got shorter and shorter and so that was the reason to focus really on venture capital and working with portfolio companies. One was to be able to work with entrepreneurs more to build their business and two was, because you could do that with a long-term time horizon.
Jay: Right so then, you know, you mentioned that was your sort of angel … was it your personal angel investment portfolio that you started after you sold PMA and then you then scaled and built Fresco Capital around that portfolio?
Tytus: Yeah, we started it like that and, you know, at this point Fresco Capital is very much an institutional fund, so when I started it was early 2011 and then by 2012 we had turned it into a fund structure with external investors and the other partners joined very soon after.
Jay: Got it, OK, so how big is your team now at Fresco? You mentioned you had three managing partners in the US, Tokyo and in Hong Kong.
Tytus: So we’ve got eight people in total and then we also have a network of folks we call impact partners which help our portfolio companies that they do everything from helping with coaching teams to business partnerships and then finally, core to our model is working with strategic partners in our local countries, so some of these strategics are investors in our funds and they value not only the fund itself in terms of returns and money but also the business opportunity. Because what’s happened is a lot of these traditional businesses, they might be in business for over 100 years and they realize that that traditional business is going to transform in the next 20 years and they better figure out what’s going on. So by investing in our fund and working with us, you know, it’s not only just the returns that they can get, but also the actual transformation of their business.
Jay: Okay that makes sense, and how many portfolio companies do you guys have now?
Tytus: So we’re just under 50 companies, mostly headquartered in the US but all with very global cross-border perspective and so, we typically are helping our US companies come to Asia across different countries. We also have companies headquartered in Asia that are going global either within Asia or to other markets, and then finally even in our portfolio, we have a number of companies that do have European offices as well so, we really do end up with a pretty global perspective.
Jay: Right, and is the reason why the majority of your companies are sort of US-based is just because that’s where the talent is and that’s where you see the opportunity from these guys when they’re expanding globally, that you can play a role in their global expansion into say China or Japan. Is that why your portfolio has shaped up the way it has?
Tytus: Yeah, I think it’s tied back to the history of the startup ecosystems and so, our exposure has a pretty reasonable map to the majority of the ecosystem so the Bay area is the biggest and that’s no surprise. New York is also a big one for us and then it just becomes much more case-by-case, where we have a presence and where we don’t.
And then finally, the big swing factor is the cross-border emphasis. So right now, we have more companies based in the US coming to Asia. As the ecosystems in Asia become more mature over the next 10 years, over the long-term, we definitely see more of our portfolio companies being headquartered in Asia and going global. So we do think there is going to be a shift, but we’re just going to let the opportunity set … decide the timing of that shift.
Jay: Right, OK so that’s a good transition that you brought up so … talking about Asian ecosystems and particularly the ecosystem here in Hong Kong. You know I moved to Hong Kong in 2005 so a little bit after you but I’ve been sort of following the scene, less actively than you have but, why don’t you … Can you explain to us exactly what has happened between when you first came here and you started angel investing versus now … I mean there is obviously some improvement but I feel like we have a long way to go. What have you sort of observed as someone that’s a very active participant in the ecosystem here?
Tytus: Yeah so I think just like with other ecosystems there’s been a huge amount of progress in Hong Kong and I would say that it really started to accelerate about five, six years ago and that’s when things started to pick up again after the financial crisis and then every year there’s been improvement and so you got to start with the basics and I think that’s what happened in Hong Kong. The initial focus was on just building up awareness of what are some of the opportunities and getting people excited about entrepreneurship.
And I think that’s clearly in place in Hong Kong especially among younger people. And then the next stage is building up the infrastructure, so we’ve got co-working spaces, we’ve got now accelerators … so I think when I look at ecosystem building, ultimately the number one most important thing is talent, and that’s a challenge everywhere. That’s a challenge even in the Bay Area, is making sure that startups are able to recruit the best talent and retain the best talent, and so that’s a challenge for Hong Kong specifically but I don’t think that’s unique. I think that’s a challenge globally, and it’s about being able to attract talent from traditional companies … it’s also the reality that a lot of the best talent in the world can choose where they go.
I think Hong Kong has been fortunate that there’s been a pretty interesting inflow of talent from other parts of the world and that’s been helpful for the ecosystem because that can accelerate the process. So to the extent that, you know, Hong Kong can remain relatively open to bringing in talent, I think that’s very positive.
Jay: So how much of a role does the government play in this? You know I’m good friends with … I’m sure you are with all the people over at InvestHK that started me up in HK … How much of a role have they played and is there more that they can do to support the ecosystem or is it more of, like you say, just talent that has to come to Hong Kong or maybe Hong Kong just needs a big win … a big … an Alibaba type startup that’s homegrown that actually makes it to put it on the map?
Tytus: Yeah so, I think there’s a lot of things that everyone can do, and I think it’s always tempting for people to say, oh if only the government would fix this or fix that … I think there’s a lot of things the government can do around social issues, and so from my perspective when it comes to government resources, the question is who should the government help. And so I think there’s a shortlist of people that the government doesn’t need to help. So let’s start off with rich angel investors. I don’t think the government of Hong Kong should be subsidizing angel investors with tax breaks. Tax rates are not the problem in Hong Kong. So I don’t think that’s really an issue.
I think there’s a lot of social issues that the Hong Kong government should be more effective in addressing. But then when it comes to startups themselves I’ll again, really come back to talent. I think talent is the key thing. In addition to the issue of allowing talent to come in, when it comes to homegrown talent, I think the government should be looking at things like life skills education vouchers.
So giving workers the vouchers to be able to go out and use them for education skills, whether it’s at traditional universities or some of the private entrants and basically let individuals decide how they want to use those vouchers. I think that’s a really interesting opportunity that the government should be experimenting with, whether they end up doing more on that I don’t know, but to me that would be something that they could do specifically.
Jay: Interesting … interesting idea. I think one of the other challenges that—when you talk about private funding—one of the challenges that I have seen and sort of observed is with the education and the sort of mentality … The old money and Hong Kong has all been made basically off property, I mean, if you want to make it black and white. And so Hong Kong investors, you know, traditionally they’re not educated and they don’t know as much about early-stage investing I believe, they would no sooner go to the soft market, the public equity market or even [inaudible 00:13:21] or buy an apartment than they would to invest in startup.
So I think that, as you said in the last 5 years I think this has obviously improved massively with the amount of [inaudible 00:13:34] spaces and education that’s out there available to the community but one of the challenges that I saw earlier on was that none of these guys … none of the private investors actually wanted to … They weren’t educated enough and they thought that investing into a startup was just throwing your money away. And to be fair, as an angel investor, a lot of the times it is, but if you really kind of study it and know what you’re doing you can probably have a higher chance of success as an investor right?
Tytus: Mm-hmm. Yeah so I think the good news is, in the last few years there was a lot more people interested in investing in startups and as you said there is a lot of people in Hong Kong that do have money and maybe were in other areas, whether real estate or finance and are now getting more involved in startups as investors. The challenge from my perspective sometimes is that the constraints on investing in startups is not money. The constraint is actually time. If people have the time, I think they could do it, but usually people don’t have the time and so if they’re doing it as a hobby … I think that’s where your run into some challenges. And to put it into perspective, for us as a fund, we look at more than 100 opportunities for every one investment that we make.
Tytus: And so that’s, you know, at least 99 times that we’re saying no. And then there’s statistics out there about what does it take to succeed as an early stage investor and the numbers are pretty clear. If you do less than 20 hours of due diligence, your average expected return is essentially 1x, so you can get your money back which is not great. If you do 20 hours or more, your expected return is more than 5x. And so when you then say … even if you don’t do that amount of due diligence on all 100 companies—even if it’s some fraction—that’s still a lot of time on just filtering the inflow. And then when it comes to early-stage investing one of the other key points is you need a diversified portfolio. So you shouldn’t just be investing in one company … probably at least 10 … probably closer to 20, 30.
And so when you start to do that and then the fact that you have to help the companies after you invest, suddenly you come to the conclusion that this should be a full-time job! And that’s essentially the conclusion … you know, that was the learning process I went through and I said, yeah, I’m really excited because I think there’s a huge opportunity.
Tytus: So I think what we need is … we do need more people that take it seriously. So people ask me do you want more funds that are doing early-stage investing and I say yes, and that surprises people because they say, you know, well isn’t that competition? And I say no … I would rather have high-quality investors who really know what they’re doing; I think that’s good for the ecosystem. But to the extent that people don’t want to commit to time? Then yes, they should be investing and supporting people that are. So investing in funds or in other structures where those casual investors, they can still participate but they also are appreciative of the time commitments and as you said, if you’re an early stage founder and you’re working night and day and you’re getting these random emails from your investor that may not be as helpful, it’s not necessarily going to support the business as much as somebody who’s doing it full-time.
Jay: Right, yeah absolutely I mean … that’s a very … I haven’t heard that metric before … the 20-hour metric but when you put it in that context, you know, let’s say you’re working a 40-hour week and you’re devoting let’s say, two companies that you can look at per week and so if you look at 100 companies every what … 50 days … you can make one investment. So you’re making like five a year if you’re a full-time, you know … and you’re doing your profit due diligence, right?
Tytus: Yeah, it’s not easy, right? I think that’s what people don’t realize … they think it’s about money but it’s actually about time.
Jay: Mm. Very good, very interesting point … that’s awesome. So okay, let’s dive into some of this now. Some of the other stuff that probably a lot of our audience wants to hear.
So when Fresco Capital looks to make their investments, what are they looking for specifically? What can a startup founder do, if anything, to increase his chances … his or her chances … of being noticed by your team?
Tytus: Yeah so at the high level we do advise founders to find the right investors for their company and so for many situations we’re just not the right fit. So I think there are certain things that we focus on and there are certain things we don’t. So we’re pretty transparent in the areas that we focus on so education, technology, digital health and how technology is changing work. So when you look at those three areas, the thing that they all have in common is these are industries and opportunities where technology has had less of an impact in the last 15 years. So when you think about it as a consumer, you have these amazing consumer apps and wonderful experiences and then you go to the office and you work with, you know, usually pretty crappy software right and similarity in healthcare and education, the overall experience for people working there and for the users is sub-optimal to say the least.
So those are the areas of opportunity that we are focused on and so when it comes to people that are building, let’s say, the next consumer social network, we’re just not going to be a great fit. So I think that’s the high level overview. And then on the specific process, we look at the team first and of course we have some specifics that we’re looking for but a lot of times what we’re really focused on is the fit between the team and the product in the market, so we call it founder market fit.
Jay: Uh, nice.
Tytus: And so that’s an important thing. And then yes, there has to be a sustainable business opportunity and then finally, of course we do look at the deal structure itself. So we go through a process but we’re able to go through it’s pretty quickly. And you guys invest in … is it just C to A and beyond or is it just sort of on the Series A & beyond level? We like to get involved early so we can go as early even as pre-product, pre-revenue but that’s rare. And then the latest we’ll get involved in as at the Series A as a first check so …
Tytus: That’s the range that we’ll invest in so it’s pretty broad. Our sweet spot however is the classic seed stage which is … the company has a product or has some revenue and its built up something but there are some questions or risks that remain. And that’s certainly the area we tend to be most active in so, classic seed stage.
Jay: Right, OK got it, so listeners first of all make sure you’re targeting the right …if you haven’t started yet … make sure you’re targeting one of those key areas that Fresco invests in and then, I love what you said about the founder market fit; that’s a good little phrase there so that’s … I think that’s probably quite prevalent within a lot of the famous investors you know, I mean the founder’s personality versus the idea there’s much more importance, especially if you’re going to be in there, you know, rolling up your sleeves at the seed stage, helping these guys gain traction and get to the next level, right?
I want to talk about … you know you’ve been a property market equities investor, right? You’ve seen a lot of ups and downs in the market … you’ve seen bubbles and you’ve seen them pop. So, how do you feel about the state of early stage investing right now? Are we in a bubble? Are we going to be in a bubble or not … are we out of the woods?
Tytus: Yeah we’re fortunate that we get to see what’s going on in different markets and different parts of the world and so I think a lot of emphasis is on what’s going on in the Bay area and at the same time there’s other markets, whether it’s China or even Japan, that have actually at some point seen higher valuations, so those markets sometimes have been actually more cyclical.
The good thing with the Bay area is that there’s a pretty mature market and so while valuations can get excessive at the early stage, people have been through cycles and so it’s maybe not quite as extreme. Where I think there were more challenges was late stage investing. So the pre-IPO growth stage investing area and I think that area clearly got a little overheated and now it’s [inaudible 00:22:44] back. At the earliest stage for us, we just feel like ultimately investing through the cycle is the right way to go and similarly with founders, building a business through the cycle is definitely the right strategy.
And so in a market where capital is abundant, people think that’s a great time but what people forget about is that if everyone has money, then what that means is your competitors are probably cutting prices aggressively and there’s this massive war for talent, right? So that’s not actually good for companies. And then when the fundraising market is tough, people think that’s negative but the benefit is costs are down, employee availability and retention is much better and when you’re going to see customers there is a lot less competition.
So I think founders and investors that are appreciate the upsides of softer fundraising markets are the ones that can really build large companies and on the flip side when things are good, sometimes the danger is you don’t want to believe your own hype, so don’t get too caught up in all the stories and the awards.
Tytus: So we try to stay away from that game and really focus on building sustainable businesses.
Jay: Yeah that’s great, I mean that’s good advice for startup founders. I mean, regardless of funding environment I think the cream will always rise to the top and the strongest will survive, you know, and so if you can build a business in a soft environment then that’s pretty good chops, right?
Okay so let’s talk about some of the companies in your portfolio. Are there maybe three companies that’s you’re most excited about right now? I mean obviously you’re probably excited about all of them … all 50 or 40, what have you … but which one of the Hong Kong startups that you’d like to mention on this interview?
Tytus: So there’s a company called Snaptee that we have where, you can design a T-shirt on your phone in 30 seconds and … beautiful designs … they got obviously the production process and then also the global logistics. So what’s fantastic about Hong Kong as a base for that, is you can literally cover the world just out of Hong Kong.
The incremental update with them recently has been … they’ve been working on offline experiences. And without giving too much away because they are in some confidential discussions, you know, essentially what it combines is some augmented reality with in-person experience and then voilà, that becomes your T-shirt.
Tytus: You can have that experience obviously saved. So you can get those experiences in a very dramatic form … not just sharing online, so that’s pretty exciting for us.
Tytus: Another one I’ll highlight again because it’s a little more of consumer and relevant for younger people, is a company called Launchpilots which connects brands with university students, especially in Hong Kong. So what they do is there’s a lot of university clubs that are looking for sponsorships and are obviously run by very busy students, right. So what the platform does, is it helps connect them with these brands that are really interested in reaching out to students but have no way to manage that relationship. And so it’s great for the brands because they’re building this relationship with university students and at the same time for the students … they’re not being exposed to advertising and in a traditional way it’s much more of a authentic experience of, you only engage with a brand that you’re actually passionate about.
Jay: Is it free … like for the brand? Or is it like-
Tytus: The brands pay for the advertising just like they would pay for any other kind of advertising experience but I think the difference is the level of engagement you get with the students, because this is not just some banner ad flashing … this is about students selecting yes, I want to support this brand.
Jay: Right, got it. And what was the name of that company again?
Tytus: It’s called Launchpilots.
Jay: Launchpilots, okay yeah we’ll have it all in the show notes and linked up, OK. So Tytus thanks so much for your time, we’re going to look to wrap up here. I just have two final questions for you. The first is, what is one final piece of actionable advice that you would give to an aspiring entrepreneur or startup founder in Hong Kong in this ecosystem?
Tytus: Yes so one of the favorite pieces of advice that I’ve heard is given by a guy named Felix Lam who is also a local angel investor and essentially it’s: start small, think big. And I think this is something which is a bit of a paradox for a lot of young founders especially. It’s … on the one hand you do want to be ambitious, so you do want to have that ‘change-the-world’ mentality and not just think about oh, I want to make a product just for Hong Kong, but having said that, you don’t start with that big vision. You have to start with something really really small and show that that works.
And so there is an inherent tension between those two. But as long as the founder is clear and understands that you can start really really small with a very basic experiment part-time, you know, in a very low-cost way and then, you go step by step towards that big vision because I think a lot of founders do the opposite and they end up trying to do 10 things at once and not doing any of them very well. And then even though they’re ambitious, they haven’t actually gone to this map … they don’t have necessarily the long-term vision.
Jay: Right, that’s very good advice and it’ll end up saving the founder a lot of time in the long run. It’s Kind of like the lean startup type of thing where you just got the MVP out and start small and then validate it in the market, right?
Tytus: Yeah, but I think also the ‘think big’ part is important too, because if you just start small and you don’t have a … if you do know where you’re going you’ll get there.
Jay: Okay, awesome … thanks for the advice and last question is just where can people find you … where can they follow … any links that you want to give to the audience?
Tytus: Yes so certainly our website fresco.vc is an easy one, and then the other place I would point people to is our Medium publication-
Jay: Oh, OK
Tytus: It’s called Fusion by Fresco and that’s a relatively new offer where we have our content plus content from some external partners. So we’re pretty excited about not only being able to share what we do, but also what other people are saying. So we’re certainly open to work with other people about content that they think is relevant for that.
Jay: Oh, fantastic and that’s on Medium, right?
Tytus: That’s on Medium which is a new communication platform which we enjoyed using and so we’ve been putting our publication there … it’s called Fusion by Fresco.
Jay: Fusion by Fresco and it’s kind of like a startup blog or founder blog type of thing?
Tytus: It’s both, it’s not just for startups and founders … it’s also for corporate innovation and basically just as the name implies, connecting different worlds.
Jay: Right, OK.
Tytus: Because I think that’s still a gap in the market, which is … everyone is a little bit in their own bubble and we need to make more connections between these different bubbles.
Jay: Okay great, awesome. Well thanks so much Tytus … thanks for your time … I appreciate it … so early on the Tuesday morning, but we really enjoyed having you on the show and I’ll definitely let you know when it drops.
Tytus: Thanks a lot Jay.
Jay: Awesome thanks-
Tytus: It was a pleasure-
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