Matrix’s Xiong Fei: Assess Founders’ Openness and Learning Dynamically

Xiong Fei of Matrix Partners on investing in founders’ openness In 2017 and 2018, China saw a wave of entrepreneurship among people returning from overseas. The prevailing approach was “copy to China.” This was not really about developing a product model or discovering unmet needs. Founders played a major role in these startups’ business models. Some got their idea because they had seen a model in the United States or happened to have worked at an American technology company, then joined the wave of returnees starting businesses in China. If an investor asked what they intended to build or what their future vision was, the answer was essentially: there is no need to discuss it—the overseas company is already worth $30 billion or $50 billion, right? Just get on board quickly. Many investors did get on board without really thinking it through. But some founders may not be particularly good at telling those overseas stories. Instead, they understand users extremely well, think from the front line, and solve customers’ real needs and problems. They have thought deeply about what they want to do over a horizon of at least two or three years, or three to five years. They are fully committed rather than opportunistic. They have spent two or three years developing the idea, constantly considering and working through how it should be done. Then they decide they are ready and commit fully. They also bring together friends and colleagues to do it with them. When investors talk to those friends and colleagues, the feedback is very positive. Such founders may not have a grand story or talk at length about becoming China’s Salesforce or China’s version of something else. Xiong Fei later reflected that this should be viewed more dynamically, as a progression from the simple to the complex. Why do people matter so much? Suppose the difficulty of running a company with only a few dozen people is 10. Once it has hundreds of people, the difficulty may be 10 multiplied by 10 squared or more—that is, 1,000. You are managing people, and complexity rises geometrically as the company grows. In the past, almost every founder seemed able to handle the company’s affairs reasonably well. Suddenly, once headcount reaches the hundreds, differences between people become apparent very quickly. Some handle it well; others fall far short of expectations. The key is the founder’s openness and ability to learn. A very open founder can, to some extent, continue to cope as management difficulty rises from 10 to 100, 1,000, or even higher. Consider primary school. Before third grade, everyone’s results look fairly similar, right? When children are young, almost everyone can score above 90. Everyone seems to get along and things seem fine. But in fourth or fifth grade, the differences may start to widen as the work becomes harder. They widen again in junior high, then in high school. By the university entrance examination, the differences are increasingly clear. Venture capitalists should therefore assess founders’ capacity to grow and learn dynamically rather than evaluate them as a static snapshot. A founder who is not very open, does not learn particularly well, is closed off, and is highly defensive may be able to manage a difficulty of 10 but not 1,000. A company’s problems become progressively more demanding. Early on, they concern a product and its users. Later, they involve organizational capabilities, customer success, corporate culture, and building a talent pipeline. Management problems increasingly become interconnected, so that a change in one area affects the whole. ----- Robin: “As a company grows, management difficulty increases geometrically—exponentially. Interactions shift from one person dealing with another to small groups and departments interacting with each other. The more difficult the situation, the more clearly a person’s capabilities are revealed. “There is a Taiwanese saying: it is easier to raise a top scholar than a capable businessperson. Someone may be excellent at studying, taking exams, conducting research, and writing reports, but those achievements generally tell us little about whether they can run and manage a business. Yet the latter is often more important to entrepreneurial success.”