The Sociology of Startup Success with VC Powerhouse Hans Tung

0:00Allie:This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks.

0:45Allie:Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Hindsight's always 20-20. If anyone tells you they can see six or seven snubs in events, I think they're lying. Hello, hello. Welcome to the Termsheet podcast. I'm Ali Garfinkel, senior writer here at Fortune. And every week on Termsheet, we talk about the latest news and insights in venture capital, private equity and startups. Here is where you can listen to some of the most exciting figures in the private markets.

1:18Allie:Now, for this week's news, we're going to do something a little bit different. in. We're going to get into something that lots of folks know about, but not everybody is necessarily talking about. And that's how ARR is being used in AI startups. Now, I published a feature this weekend about this exact topic. And for those of you not in the know, ARR is annual recurring revenue, which in certain ways, at least on the surface, is exactly what it sounds like. It is revenue that is more or less annual or annualized, and it is based on long-term contracts, long-term sales cycles. It became very popular during the SaaS era where sales cycles were extremely long, often multiple years, and you could very reasonably predict the stability and growth of a business based on ARR.

2:02Allie:It was an extremely useful tool in valuations, and it was extremely useful in terms of figuring out who the giants were going to be. Now, in the AI era, things are getting a little bit dicier. A lot of folks are using pilots, for example, to try to calculate ARR. They're using one-time deals to try to calculate ARR. And it's going to create some problems down the line, I expect. Now, if this all sounds really sketchy to you, that makes perfect sense. I feel very complicated about it because on one hand, as many professors reminded me as I was reporting this story, a little bit of creative accounting is a time-honored tradition across many industries.

2:38Allie:And revenue isn't just a number. It is a byproduct of a series of decisions that aren't necessarily objective, that is part of the process. That being said, I do worry about this. There is a sense that folks really need to keep up with the Joneses. It is clearly indicative of where we are in a hype cycle to me. And I do really think that it is an indication of how fragile things may really be sort of at the bottom of the AI ecosystem. This week, we are talking to Hans Tung, managing partner at Notable Capital. Now, Hans is invested in so many names that you know. I'm actually not even going to try to memorize all of them.

3:14Allie:I'm just going to read them to you. Ready? Affirm, Airbnb, Coinbase, Peloton, Poshmark, Slack, StockX, and Xiaomi. He was also an early backer of Musical.ly, the app that became TikTok. Now, Hans runs Notable, which emerged from last year's split of GGV Capital's US and Asia operations, a move that was derived from rising geopolitical tensions. So Hans has been a global investor all of his career. So perhaps it's appropriate that I was talking to him when I was out and about too. If you're watching this interview, it is going to look quite a bit different from previous interviews because it was at Brainstorm Tech in Utah a few weeks ago.

3:49Allie:Here's Hans. Hans, welcome to the Term Sheet Podcast and welcome to Brainstorm Tech. Thank you for having me, Allie. I've been looking forward to this. I've been looking forward to this too. This is actually the first time we have ever met, ever. In person. That's right. Yeah, I'm really excited. Let's start at the beginning. What do you consider your first term sheet? Oh, that takes me back years. Um, it was in the 1990s, um, issued a term sheet to a company called Omni Industries. They do contract manufacturing and their customers are the, the Apple, the compact of the world. And, uh, we tracked that sector for a while.

4:29It just feels It's like there are differentiation going on in that part of the segment. And it feeds into all the consumerism and shopping and the new gadgets that's happening in the U.S. and Europe. And having been born in Taiwan, I appreciate manufacturing, especially higher-end manufacturing. And so that was the first deal I ever did. And very proud of how that got turned out.

4:55Allie:I would say, how did it turn out? It was acquired by, I think, Selectron or Jable, one of the two. And so we got consolidated and I think ended up making 3, 4X in about four or five years. Back then, it was a big deal. That was before internet. So it doesn't have the big$50 billion,$100 billion kind of outcome that you see today. But for a period of four or five years, getting a 4X ever was very happy. So your first, kind of like a singer, your first song was a hit? Yes. Pit for the time, more or less. But the first term sheet in the internet was not easy. The first term sheet, yeah. I won't go into names, but the first couple did not go well.

5:38Before you can see a TikTok or an Airbnb or a firm, etc., you need to lose a little and gain that experience to see what does greatness look like. And it's easy to want to invest in something that makes money, that fits the thesis, rather than go for something that is a little bit riskier, but has a chance to really work out if they can make it.

6:03Allie:It's interesting. Recently, someone said to me that they believe you're either a good investor or you're not. And that experience actually doesn't matter. And I don't know if I agree with that. It looks like, how does that make you feel? I think there are at least two types of investors I've seen done amazing work in their career. one is money ball and they just play the odds you're very patient uh you accumulate as much of the five uh to eight x maybe ten x return um and you play the odds and and if your loss rate is less than uh 10 percent um you you can get there the other one's obviously powerful and you you end up losing a lot more wipeouts more uh often but you can hit uh facebook hit a uh tiktok and that makes the whole portfolio completely different.

6:53Allie:Which are you? I'm definitely more a power ball. I wish I could play money ball and admire investors who could do that. But it's more important to find the style that fits you because this game is hard. Even you batting 3-3-3, 300, you're already amazing. And so it is not for the faint of heart and it takes a while for things to be proven one way or the other. It's easy to just fight for the hottest deals and try to do the coolest deal every time. But in the long run, the best hits tend to be the ones that's the loneliest. I remember this very clearly that when DSD guys invest in Facebook, everybody thought it was not a smart thing.

7:38Yet they were told that in each of the SunHealth role firms, somebody told them, hey, that's the right deal. But in those farms, they couldn't do it because they are the minority voice in each farm. So the biggest hits tend to be the loneliest ones.

7:53Allie:What's an example of that from your life? The loneliest one you can think of, Hans. There were a few. When we invested musically, they had shot out to be top of the charts on Apple App Store. And it's a teenager lip sync video app. People also thought it was so weird. And a lot of people were like, what is this? This is a fast in the pan. And so many other were funded and did not go well. Why would we make this one different? And that ends up doing quite well. And it was acquired by ByteDance and obviously became TikTok. So to be able to see that several steps in advance is not easy, but that's the one probably was one of the loneliest I ever went through as an investor.

8:34Allie:Well, this is one of those things, too, that I wonder about all the time, which is how many steps in advance did you see? Were you sort of looking at that saying, oh, okay, I could see six or seven orders down the line, but this is huge? Or I just can imagine a lot of people really wanting to use this because it's fun. Right. I mean, hindsight's always 20-20. If anyone tells you they can see six or seven steps in events, I think they're lying. It's very hard to do that. You can even see two or three steps in events. It's already something. I think what piqued my interest about Musical.ly was that the co-founders, especially Alex, the product genius, is just someone who understands human psychology, human psychology extremely well.

9:14And he's so observant. When he takes Caltrain, go work at SAP from the city to San Jose, just observing what users do on the train and see how young users were using apps, just the understanding of that makes a huge difference. And having had some failures in investing in social networking apps, before um you you when you see someone who that good i had a couple benchmarks to compare to um i've known the team at the snap but even though not evan i know the folks at facebook even though not mark himself you you you see the caliber of of what world class is like and so when you meet a founder that's as good as everybody as good as them it's easier to get that conviction now you you know what, the way he's looking at the world makes sense.

10:08And there is a situation where short-form video is going to be popular. It's not going to be just long-form. And the entertainment value could be immense. What they didn't have, we found out two years later, post-investment is that having that algorithm in the background is as important to be able to go beyond the initial ICP. And so that deal with the Biden has made a lot of sense. and it's the first time that an app from Asia ends up doing well here in the US. Having said that, one of our recent investment is a company called Quince. And we can talk more about that as well. That went when we did that initially.

10:48Also, not a lot of people believe that. Oh my God, yeah, not a cross-border e-commerce app or website. What makes Quince different? So there are a lot of things that we like to talk about. pattern recognition is it's a lot of people see something that doesn't work and to feel like this probably is the dead end. And sometimes it takes two or three iterations to get it right.

11:09Allie:Well, and you said something very interesting about being observant. One thing I find very interesting about consumer is that there's a little bit of alchemy to it, why one thing will take as opposed to another. And part of it, I imagine, actually someone said to me once that a social network takes the form of its founder's brain. And it's one of those things I imagine the founder does make a really big difference. When you're looking for consumer founders, for example, sort of generally, what are you looking for? In the case of both Musical.ly and Quince... Two very different companies. Two very different companies.

11:38But for me, I see similarities. Both founders understood their ICP extremely well.

11:46Allie:For our audience, what's ICP? Your ideal customer profile. And for Musical.ly, they understand users' need for entertainment and the attention span is getting shorter and shorter. So you've got to capture people's interest immediately. And then for Quince is middle class getting squeezed and there's, you know, inflations going up. And yet people have champagne taste. It's hard not to as you get older in life, yet they increasingly need to do it on beer budgets. And so Sid and his wife both are just, one is a technologist, One is a retailer. And both of them just together just know they know what people like themselves want to have in life and be able to go out and value the importance of supply chain to have that source from all over the world to be able to do that at competitive prices.

12:38Cut out the middleman. It is just something, and every technology to manage all that is something that's just quite impressive to see. So both of them impressed me by their understanding of their ideal customer profile, but also learning how to use technology to achieve that in a way that not as many people appreciate how end-to-end you have to be to make that experience work.

12:59Allie:Well, that's really interesting. It's sort of, they don't just understand who they're trying to reach. They understand exactly how technology will reach that person. Correct. Are there other examples you can think of? Those two really jump out at me. if I look at one of our more recent investments, I wish we were in there earlier, but better than ever is Anthropic. That's also, picking Anthropic and OpenAI, you can debate which one can be bigger over time. But we just thought that, and I come from the world of super apps, from learning from Asia, it would be more obvious to pick OpenAI, but the Anthropic way of being embedded, empowering other people to get more productive, to be the model that all the developers can use very easily to create new apps on top of that.

13:47That's something that just has innovated out of Silicon Valley. And that embedded strategy can work too. And in the world of product-led growth, if you have a product that works, other people will gravitate towards it. And seeing how that has grown and leveraging technology to do it is impressive to see. they're not the most social people in the world and they definitely are in a lot of controversy themselves but they always try to do the right things and to think about safety first and that approach is not as good for a super app but it makes perfect sense for being embedded and then become the brain everyone tapped into to build their own application on top of that.

14:28Allie:Well, one of the things I, I mean, you sort of referenced this so I want to sort of pull it out and see if it's the case. I mean, it seems like part of your bet on Anthropic is that they could be a super app. Is that part of the thesis? One of the things that caught our attention was their API business. And so we felt that the more people ping cloud to generate codes for a variety of situations, over time you can contextualize and productize that templates for specific vertical uses. So when Cloud comes out for something called for finance, it wasn't surprising to us. When Cloud comes out for Cloud Code, it also wasn't surprising to us.

15:13And so it's something we thought they could do, wasn't sure if they would be able to do it so quickly. And so that has been a very pleasant upsized crisis for us. But one of the initial theses was the fact that they are treading great talent. and if they continue this embedded strategy, they will come up with smarter and smarter codes that just makes it easier for more people to ping them and a positive flight wheel will be hard to stop. So the super app, you have to do a lot of things well or they become a platform to invite everyone else to come in. This is a different kind of super app, so I can see why you asked me that question.

15:49It's almost like a reverse super app and then it just empowers more people to ping them for help and then they get smarter over a period of time.

15:59Allie:I was going to say, as an investor in Anthropic, I imagine you have thoughts about whether or not we're in an AI bubble. Where do you stand on the bubble or not conversation? Having gone through Internet 1.0 as a tech banker and founder, and then 2.0 in the mobile internet era, and cloud computing as a junior partner in VC, and seeing now the third time as one of the folks that kind of co-runs, helped to co-run the firm, it's hard not to see bubble happen in every cycle. It's part of the system. It's part of the system. And there are so many names from 1.0 that excite the world and so forth. There's some microsystems, so many names people forget, but they all at one point in time were making huge impact in the world they're in.

16:48And so it's just so hard to be able to continue to do well over a period of cycles. So that having that bubble is inevitable and having creative destruction is almost inevitable. Creative destruction. That's right. But the talent remains and the talent that gets moved over to the new things are just super, super exciting. And that's part of the reason why Silicon Valley and the United States in general become such a attractive place to attract talent worldwide.

17:15Allie:I was going to say the phrase creative destruction seems very intentional. Explain what that means in this context. You know, it's coming from the school of Western European philosophy that in order to get ahead, sometimes you have to die in order to get there. You have to eat yourself before you get there. With every invention that we see, whether it's a steam engine or electricity or computers, the previous generation, they will unfortunately be those that don't end up making that transition. But the ones that do ends up being stronger in the process. And the industry and the GDP growth just becomes bigger and bigger and bigger.

17:51Look at the trillions of trillions of dollars of value creation that came out of NVIDIA and other AI-related companies that have done well over the last few years. The changes and the impact and it makes the new application that enables, it keeps America and the world toward the forefront of what it could be. there's when that comes obviously with great responsibility as well and that's something that doesn't get discussed as as as enough because you try to make sure that that doesn't hinder innovation but striking that balance is so important and appreciate folks like NVIDIA and and philatically trying to do that in their own way when you think back to that first term

18:33Allie:sheet how old were you when you gave that first term i was in my 20s you were in your 20s um What did you not know then that you know now? Back then, when things go well, it's easy to feel good. It's easy to feel that, oh, I did it. I picked it. It was me. That's right. As you get older and older, you realize that a lot of it is because it's the right thing to do at the right time. The macro plays such a big role that it's easy to forget. And even within the macro, the right trends, right, the right wave is so important. whether it is you're playing the hardware game, the infrastructure game, or you're playing the software game, you're playing the enterprise versus consumer, each wave come and go.

19:15And this is why I appreciate Malcolm Gladwell's books. You're a Malcolm Gladwell fan. Totally. And it's just capturing the right inflection point. A lot of it just born in the right place, right time, the right age, and somebody with exactly the same set of qualities and capabilities in a different era may not get appreciated or noticed. And so being humble and try to appreciate what you got and try to build that ecosystem so more people can benefit in the long run serves you better in anyone's career. So I always believe that one should be long-term greedy and not just focus on the short term, like what have you done for me lately?

19:55Think long-term pays off in this business, in my opinion.

19:58Allie:Last question, Hans. What is one thing nobody ever asks you that you wish they ask more often? I feel that in a VC business, a lot of it gets break down into a game of economics, at best psychology. But like I mentioned earlier, the macro, the sociological aspect of it doesn't get asked enough. and one of the reasons I think I can continue to pick companies, I have four exits that ends up being more than$100 billion in value each, three of them over$50 billion each. Those seven companies, each one I look at them, they succeed because their founders are definitely amazing, the best of their category.

20:43A lot of them also capture the right sociological trends at that point in time. Whether they realize or not, they ace that part of their founder journey. And so I am very happy for them and also appreciative that the opportunity that was given to them and to us by extension, and that part of the calculus doesn't get asked enough. It's very easy, whereas on podcasts or on X, on social media, talk about I did it. I saw this. I achieved this. But having that long-term perspective serves everyone better in the process.

21:24Allie:Hans, thank you so much. Thank you for having me. It's been a joy. And that was Hans. Okay, so I'm going to be really real with you here. I have been thinking about what Hans said about sociological change for weeks since we have recorded this. Tech is so devoted to the great man theory of history, the idea that this one truly exceptional founder or set of founders could change the course of what happens through profoundly good execution. And I think that is in some sense true, but also the success of any company is a byproduct of massive sociological changes that make that success possible, that make that scale possible.

22:02Allie:And talking to Hans, it's made me think about the companies that come to me pitching me a lot differently. And it makes me think honestly more critically about a lot of the AI companies that we're looking at right now. And the question that we actually should be asking is, does a broad sociological change, not just a technological change, suggest that this could be generational? That's it for Termsheet this week. Thank you so much for joining us and we'll see you soon. Termsheet is a Fortune magazine podcast. our producer editors are Alana Stev and Allison Rogers. Our executive producer is Lydia Randall.

22:35Allie:Our production manager is Sam Freund. Fortune's head of video is Adam Banneke.

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