Leaning Into Your Expertise w/ Ben Harburg

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1:32Hi, everyone. Welcome to another edition of My Life in Four Trades. Joining me today is Ben Harberg, founder and managing partner at MSA Capital. Hi, Ben. Welcome to My Life in Four Trades. Thanks for having me. So before we jump in, it's our tradition to learn a little bit about your background. So where did you grow up and what were you like as a kid? Nomadic. Born in Colorado, but lived in five U.S. states and two other countries before I even hit college. And since I graduated from college, I left the U.S. and haven't been back. So the true definition of nomad. Yeah. Or global citizen, as others would like to call it.

2:11Why? How is it that you moved around so much? At the beginning was my dad's job. He was working largely for General Motors and moving around to different countries and geographies for that. And then since graduated from college, I always wanted to live and work out in the world and made that happen from day one. Yeah, it's amazing. So why, what is it that sparked your interest about kind of being this global nomad? You know, like when you were a kid, did you know that or is it just kind of what your existence was and what you were familiar with? No, certainly. I mean, I went to an international school in Zurich for a few years of high school and, you know, we were competing in sports against teams from as far away as Israel or Egypt and then Germany and Austria and France.

2:56And we traveled around the world a lot. And I just feel very comfortable out in the world. And I communicate and do business and engage well with other people. So I just wanted to be out there with them. Yeah. So what did you want to be? Did you know you wanted to go into finance? Or is there another job you thought you'd do? No. Touring the world. My dream job at the time was to be a diplomat. So to go into the Foreign Service and do something along those lines. And I had a lot of internships in that field over the course of my college career. And even my first kind of postgraduate thing in a Fulbright scholarship was along those lines.

3:33But ultimately realized that business was the place for me. And I got this really great piece of advice where someone told me, if you go to business first, you can always come back to government. Whereas if you go to government first, it's hard to transition to business. And so I kind of took that to heart. Oh, all right. So definitely political aspirations. We'll get to that later. But so when you were thinking about business, it seems like a lot of your so you're based in Asia now. So that's where you gravitated. Why that part of the world? Because you could have gone to Latin America. You could have gone anywhere.

4:04You know, I believe that the China-U.S. dynamic is really the single bilateral relationship that will shape all of our future from regards to business, civil military affairs, economics, of course. even things like climate. It's the most important relationship out there. And there are fewer and fewer Americans that understand China and have spent significant time on the ground in China. And I just felt it was so important to be there and to understand the market. And that would make me a better global citizen, hopefully a steward of American interests down the road, if I can help add that perspective.

4:40Yeah, interesting. So your first trade is one of your best, and that is catching the boom in China tech, which included a specific investment we'll talk about. I think it's Boss Zippin. I'm not sure if I'm saying it right. An online recruitment platform in China. But set the scene for us. So were you already with that idea that China was this important relationship? Were you already living in China? Were you kind of traveling around Asia? How did you what's going on in your life at this time? So I came to China in 2004 as an intern for Motorola and that kind of gave me a sense of the growth and the upward momentum that was already in place.

5:20But even then, it was still very early innings and I returned to China 2009, 2010 on essentially a bi-monthly basis, really as a commodities trader. And we were selling raw materials into China at the time. We were selling energy commodities and metal ores. But I was witnessing along the way the growth of the Chinese technology companies and we were hearing about cute names like Tencent, which at the time didn't mean much, and Alibaba with this kind of funky logo. It was really still a relatively unknown market and the technology companies there didn't have global standing. But it felt to me like it was a secular momentum towards this becoming a global technology power and a major market for investment.

6:08And so ultimately in 2014, 2015, I sold out of everything I had in the commodity space and put it all into investing in China technology. So are you, do you, are you fluent? Do you like, what was your experience when you first, even as a commodity trader, when you first started doing business there, what did you have sort of an idea about what you thought China was and how did it differ? You know, what was the experience of sort of once you started spending time and boots on the ground there? Again, back to that point around the chemistry. I mean, I always just felt very comfortable doing business in China, whether it was with state-owned enterprises or with technology founders, other investors.

6:48There was just a really good resonance when I engaged with them and they seemed to appreciate my approach to them and to the culture and to the way business was done. And so I'd always felt comfortable there, both in the commodities context as well as in the investment side. On the commodity side, I had a lot more depth of experience. And so when I entered into the investment side, I, of course, had to surround myself with incredible partners. And we today have some of the best, I think, investment professionals and co-founders of MSA that deeply understood the industry and could really guide and do a lot of the local type of investing diligence and sourcing that I wasn't capable of.

7:26And I can kind of add more of a global angle, an institutionalization of the firm, and also obviously global capital for investment. Yeah. What do you think made it different that you had this relationship? Because there is a long cemetery of people that have tried to do business in China and have just found it difficult, either difficult to operate, difficult to understand, difficult to function, difficult to communicate. I mean, the list is as long as my arm. What was it about your approach you think was different? I think China is a very high-touch market. It requires a deep kind of appreciation and study of where the market is heading, who really are the key partners to work with, and the forces at play.

8:08And a lot of times, what you see on paper looks really good, but it's the wrong kind of partner. A simple example is we were Airbnb investors. And for years, the founders of Airbnb were working with us to kind of identify a lead for their China team. And over and over, we told them it's probably not someone who speaks good English and doesn't have kind of an American education and Silicon Valley pedigree. It's probably someone who's really, you know, kind of a warrior in the trenches. And they always gravitated towards someone that kind of had that, you know, EUS East Coast or West Coast education background and worked for a global technology company.

8:44And ultimately, they've essentially exited the market now. They were never able to kind of figure out the regulatory side of things, the localization side of things. They always did very superficial adjustments. And so, as you said, there's a graveyard of Western, particularly technology companies, as they tried to approach China, let alone investors or others. And so you've really got to understand how to localize your product and what unique kind of value proposition you offer, because if it's not unique enough and moated enough, you're going to get smoked immediately. Yeah. So what is it about this this particular online recruitment firm.

9:20So you start, you're now focused on technology, you're making investments. Were you successful right away or did, or are some of the things you're talking about learned from your own failure? We were, we were pretty much successful right out the gate, but I have to say the timing was good. So I, you know, the 2015 to 2017 vintages, even up to 2021 were really good times in the Chinese technology market. There was still a lot of low-hanging fruit. Those key kind of consumer and enterprise-facing models were in their nascency. And remember that, you know, the U.S. had a 40, 50-year head start on China when it came to technology investment.

9:57You know, a lot of the big U.S. names started, you know, in the, you know, kind of 50s, 60s, 70s, 80s. You know, the first real Chinese VC funds only came about in 2006, 2010. And so we're really in kind of the first or second generation of investment. And so there were a lot of opportunities to invest in models and companies that had already significant precedent in the United States, but we could kind of grab the first wave in China. And so we essentially took a page of the Silicon Valley playbook to look at those models that were lacking in the China market and then kind of bought what we believed to be the sector winner in each one of those verticals.

10:31And almost without exception, we were pretty good at picking them. Yeah, being in the right place at the right time matters, right? I mean, that is key. So what is it that put Boss Zipin on your radar? What caught your attention about that one? So for us, it was clear that there was a huge growth in technology companies, and that would necessitate a lot of hiring. The incumbent player in the space was a very kind of PC-oriented company called Zaoping, which the name is almost similar. But they had never been able to really transition to a kind of a mobile-first model, and they weren't really that user-friendly for this next generation of folks.

11:14So kind of think Monster versus Indeed or some of the other kind of existing players in the U.S. market. And so we were actually able to pluck the COO of Zalpin out, and he came with that experience of all of the things that were going wrong in that business, and he could kind of translate that to the new ones. So kind of say, okay, we know everything that's bad about the kind of incumbent player. Let's fix all of those and make it very user-friendly, almost like Tinder for hiring, kind of literally swipe right and swipe left and disintermediate the recruiting agencies and enable these high growth companies and their recruiting departments or even just their founders to directly engage with potential recruits.

11:55And to do so, again, not unlike Tinder, in a way that's algorithmically matching them so that we're making sure that these are the people that are active on the site. So you're not getting a lot of dead links. You're getting very rapid interactions. You're getting very quick connections and your success rate ends up being very high. And in China, we don't track numbers like NPI or, you know, some NPS scores, you know, these these kind of user kind of engagement and user preference type scoring. But but but this would have the highest level if we had those kind of scores, because every founder we talked to just loved the product and couldn't talk enough positively about it.

12:33So we knew the product worked. And likewise, we knew the founder was kind of a revenge founder. He was someone that wanted to prove himself. He was actually not someone who fit the kind of traditional pedigree. He didn't have a good background from a significant university. He didn't have kind of the physical profile of someone that you'd traditionally back. And so essentially the entire VC community dismissed him when he was coming to market. And he was passed over, I think, by 100 plus VCs who didn't either believe in the model or him as a person. We were really the only people at the Series B when the company was out of money to come in and buy a 4 % or put$4 million down for a 10 % stake in the business and really save the business.

13:15And that ended up being, again, one of the best trades we've ever made. Yeah, I mean, it just – there's so many things in there I want to ask you about. but it ended up being a phenomenal trade for you, right? That's right. That's right. So the company ultimately IPO'd. We bought in at a$40 million valuation and ultimately IPO'd and has sat pretty comfortably around the$16 billion valuation. It's come down a little bit with the overall Chinese stock market, but we expect it will rebound nicely in the coming quarters. And you're still in these because as a VC, you're in for the longer haul. So this isn't a quick investment in and out.

13:47You're still invested in this company. No, we invested in 2015 And, you know, we have a 10-year fund life with extension of two years, like most VC funds. So we're still comfortably in the range where we don't need to exit today. So it's interesting when you say that everyone else turned him down. I think that's fascinating. So this was a risky move. Why were you so sure as somebody who sort of, it sounds like you kind of immerse yourself in the culture there. It sounds like a real contrarian move. Why did you do that? First, we believe there was a demand for this and we believe that the existing incumbent was broken.

14:26And so for us, that was, you know, we were looking for a company in this sector and we go sector by sector. So, for instance, we knew EVs were going to be a big thing in China and we backed what ultimately became one of the most valuable EV companies in the market and was for many, many years the market leader. And so, you know, we've so so we knew that there was a demand for this. We believed that the founder was the right person for it because he understood his industry so intimately. And we were turned off by the fact that he didn't have that kind of pedigree, you know, the communication style.

14:56He's a pretty frequent smoker. He's got black teeth almost. So he kind of turns off a lot of investors. But, you know, in the round that we invested, he was actually the second most largest contributor. He put a lot of his own money in. So he was all in on this business. For all the other signs. So interesting that, because, you know, everyone's drawn to the charismatic founder, and sometimes that makes the company. So to sort of, you know, bet on a horse that a lot of other people are ignoring is really interesting. How, when you're sort of navigating this, how many find it hard to sort of evaluate, given the level of government involvement in China?

15:41So how do you approach that? How do you think about that when you're looking at these different sectors? So navigating the regulatory landscape in China for us is one of our key functions. And again, the way we do that is listening very intently to what the regulators are saying and what the kind of key decision makers are saying. And what always surprises us is that investors outside of the market act with so much shock that changes are being made, for instance, most prominently recently was the effects or the actions being taken against the education sector in China and the fact that many of the companies were essentially wiped off the map because they were told they had to become non-profits.

16:25That was a shift that we knew was coming for many years. We had been hearing from our friends that were owning K-12 education programs that they weren't going to be able to list, they weren't going to be able to sell. We knew that Xi Jinping had taken a very specific focus on education and it was very sensitive. Curricula was very sensitive. And then at a more fundamental level, we knew that maybe these were just bad businesses. We're using investor money to kind of buy users that weren't sticky to the business. And so as a firm, we stayed entirely away from that sector where many others chased it.

16:55And so we're unaffected by the regulatory shifts there. But it just requires a deep listening to what's going on in the market. So what lesson, I mean, you went with this sort of founder that most didn't like, but you believed in the sector, you believed in him. It certainly has paid off to date. What lesson do you think you took away from that? We have to believe in ourselves and not follow the crowd. I mean, over and over and over, the crowd have invested in the wrong models in China. They've invested in these high cash burn to grow models that, you know, we're in the kind of consumer facing spaces.

17:29Or today we saw a lot of folks chasing, you know, what we believe to be AI mirages or whatever is kind of the big trend end of the day, our job is to be four or five years ahead of the trends and to invest with deep conviction in the founders and the verticals that we know will be big. But it'll take you four or five years to fully appreciate that. And this model and founder just proved that over again. Do you feel as a VC, we've seen a lot of, I think, investment VC move out of China just because of the difficulties of the market. Do you feel like you operate there freely, that you can kind of make the kind of investment decisions that you want without any barriers from the government?

18:09It's, you know, you have to navigate it. And there are pockets of risk. And there are certain sectors in China today, which you cannot invest in with US dollars, you have to use local RMB funds in order to adjust these more sensitive sectors. But we feel quite free. If anything, the challenge we face today is that because of the geopolitical tensions between China and the US, there are more and more restrictions of Western capital coming into the market, Western core technology inputs, be it chips, equipment, software, that particularly in the US, they view as aiding kind of in the Chinese technological growth and competition with the West.

18:48So that's been the bigger thing for us to navigate today is that geopolitical side of things. And so we have to kind of keep keep moving on both sides of the equation. Yeah. So what do you think investors and policymakers repeatedly get wrong about China? Since you're there, you live there, even though you split your time and travel around the world to your different offices, what do you think both investors and policymakers are getting wrong? So two different, very different camps, because the policymakers and the kind of media and other kind of folks, particularly the western and eastern seaboard of the United States, I think, view China as a looming threat.

19:30And that kind of tension and the perception that China is going to kind of envelop more and more territory geographically and kind of go head to head with the U.S. and multilateral institutions and financially is something that they want to guard against. And that's the traditional response for an incumbent power to a rising power. I don't think that China has the same level of kind of displacement aspirations that Western policymakers think they do have. China, of course, wants to ensure its future economic stability and provide for its population. But I do. But I think we overstate the risk of China looking to kind of take over territory, be it Taiwan or elsewhere around the world.

20:11This is the country that has historically not been as expansion oriented as we believe it to be. And really what they're looking for is new trade partners, new economic partners, and just, again, a security around their ability to feed the billion and a half mouths that they have every day. On the investment side, I think it's, again, what we've seen folks getting wrong is that they're trying to trade China from abroad. Folks sitting in places like New York and trying to, you know, read the tea leaves and determine what's going to be the next big thing in China. And it's impossible to do that.

20:44You have to be on the ground. You have to be deeply locally integrated. You have to be listening to where the regulatory slipstream is moving. And rather than being a victim of these changes on the China side, you can be a beneficiary by understanding where is the government placing its investment support, regulatory support. And you can be a beneficiary of the current dynamics between the US and China rather than a victim. I imagine like corporations, you have to partner with a local Chinese entity or like when you say partners, that's what you mean, right? No, I mean investment partners. So, I mean, just having people on the ground that deeply understand their sectors, understand the regulatory environment.

21:24But no, we don't have to have any local partners. We are predominantly a firm made up of Chinese national investment professionals. professionals. Oh, I'm surprised because most corporations, at least, you know, have to kind of go through the local affiliate. You know, there has to be a Chinese company that they partner with in order to operate, but they don't have that same requirement. No, nothing like that. So this brings us to your second trade, which is your worst. And this is your worst trades, interestingly, are not specific trades, but they're kind of broader themes, which I find fascinating.

21:57And that's greed, repeatedly not taking gains off the table. I think this is going to be something that a lot of people can relate to and probably struggle with as well. So was that the case with the China tech boom? I think certainly in kind of 2021, as we were witnessing this GameStop rise in valuations, we took some money off the table where we could. We're unfortunately in some of our biggest positions still in mock-up. And so we didn't have, but literally kind of at the peak of the GameStop mania, I remember that night, you know, just working the phones nonstop with our brokers to sell everything I could get my hands on or that was accessible to us.

22:37But, you know, some of those highs still lingered for a few more months. But, you know, when they kind of came down a little bit off of those highs from the GameStop mania, that's when we should have taken some of our money off the table because we were out of lockup. And I think there was still this, you know, kind of lingering thought in our mind that we might get back up to those highs. and that, you know, that that was kind of maybe a trough in another higher peak. And obviously now it's been a fairly secular decline over the last, you know, 18 months, particularly in the Chinese market, coming out of really stringent zero COVID policies.

23:11And so certainly in kind of the 2021, 2020 era, we could have probably taken more, you know, kind of crystallized more value than we did. Yeah. When do you realize, like you call it your worst trade, do you feel like this is something that happens repeatedly? Or when did you first think like, this isn't just like a timing issue, this is just us like reaching more than we should? I think it's largely a one-off in our experience to date. Other than that, we've been pretty good about profit taking. But there were just a few of these really significant positions that had really great value creation.

23:50And rather than crystallizing it, we just kind of kept pushing for higher numbers or setting kind of our bottom sale price a little bit higher than where we were at the time and didn't crystallize it. And I guess we just, you know, we had, you know, we knew what we were walking into. This was a slow-moving car crash with interest rates where they were, with QFY and all the different kind of financial levers being used that were driving downward pressure on the market. But I think there was just this perception that the party might go on a little bit longer than anticipated. Yeah, it's hard when you sort of love the narrative, right?

24:32It's hard to let go. So your third trade, this brings us to your third trade. It's also one of your best. And this is investing in NIO, which is an EV company. But this is outside of China, I think. So again, set the stage for us. What's happening at this time in your life and your career? Sure. So NIO is one of the largest Chinese electric vehicle companies. It was a company that during, again, the peak of that 2021 craze reached as high as about$98 billion in market cap. And we had put a significant ticket into the business at a$1 billion valuation, which was essentially the first institutional funding round of the company.