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Venture Profile: Jo Tango, Highland Capital Partners
By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: Given how quickly the software market is consolidating, do you have any advice for software entrepreneurs as to how they should change their approach when approaching venture capital firms for financing?
Jo Tango: I would suggest two guidelines. (1) The product must have a tangible and significant economic ROI. The cost of capital right now is still very high, so the only IT projects that firms will buy are the ones with clear economic value. In the bubble the cost of capital was negative. It was economically rational, in that setting, to spend as much money as you could because the more money you spent the higher the stock price. Now the cost of capital is significantly higher so people will only invest in projects that have clear and high returns.
(2)The product must require minimal changes in behavior either in terms of how the customer buys the product, uses the product or gets the product supported. We saw, in the bubble, people selling tremendous but complex technology that would require the enterprise to throw away everything that they’ve built-up for the past 20 years to accommodate it. We don’t see that today, particularly not in this market.
Angel Mehta: Let’s talk about your experiences overseas… particularly with China, which has been growing at an insane pace these past years. What kind of opportunities do you see opening up specifically within enterprise software as a result of the emergence of China?
Jo Tango: I think you’re seeing a reversed brain drain where many Chinese people are going back to China. That’s a troubling issue for the United States because if you look at the most successful start-ups there’s at least one founder who’s not from the United States. We’re a country of immigrants, right? We’re a country of high optimism because if you go back in each of our families someone left a pretty destitute situation to come here and risk everything. So our nation is based on entrepreneurship. It’s troubling that there are immigration laws that slow down that flood of desire-driven individuals while many zero-generation Americans are moving ”back.”
I’m on the Board of a non-profit called NECINA (New England Chinese Information and Network Association), made up of Chinese entrepreneurs. Also on the Board are the founders of Cascade Communications, and Sycamore Networks and many of these men and women are spending more and more time in China and/or have moved back. Some of the most successful entrepreneurs in tech no longer reside in the U.S.
China offers a big market for the small and medium enterprise segment. Also with the Internet’s cheap distribution you finally have a tremendous opportunity in enterprise software to not just build a Fortune 100 solution but to build a product like MySQL, where people are downloading the Open Source database through the Internet. You can now have massive scale distribution and mass customization at the same time, which is a pretty unique concept when you think about what the Internet can do.
Angel Mehta: Do you think the domestic Chinese software market is going to be dominated by North American players? Or do you think there’s a chance for software companies starting up in China to emerge as market leaders on a global scale?
Jo Tango: I actually think it’s the latter and it’s starting. I don’t have data on China but I do have data on India. People think of China and India as billions of people in some back office doing some piece of manual labor and certainly there’s a part of that. In India there are a lot of talented people, engineers and developers, and costs are very low. So the economics are changing drastically when you combine that with Open Source where people are giving away software. I think the triple threat to the U.S. is a combination of (1) a Chinese or an Indian company, (2) using the Internet to distribute, (3) an Open Source product. With the Internet, a customer is not going to know if the person on the other side doesn’t speak English that well.
Angel Mehta: How long do you think the benefits of labor arbitrage, not just for software companies, but also for everyone that’s leveraging the BPO trend, are going to exist? The costs in India are skyrocketing out of control, from what we’ve seen.
Jo Tango: I think there’s a natural cap but I think if you look at economic output it’s a function of a couple of things: labor and productivity. So you add more bodies and add more labor costs but the way the real GNP works is the cost of living goes up when there’s more productivity per employee. Just look at the fundamentals. The number of computer science graduates in the U.S. continues to decline every year. In India, hundreds of thousands of students are tested every year to see who is going to get into IIT. We know our kids are playing video games and hanging out at the malls while many of the Indian and Chinese kids are hitting the books with a vengeance.
Angel Mehta: So if a young student came to you with aspirations of becoming an entrepreneur, would you suggest that he’s better off moving to China or India to seek his fortune? Do you think there will be a greater opportunity there to build wealth then there is here for the next 20 years?
Jo Tango: Not really, no. I had the benefit of being in Asia during the last Asia bubble. I met a lot of Europeans and Americans who thought the same thing. They went to Asia to make their killing but what they found out was they were competing against a Chinese man or a Chinese woman who had gone to Princeton College and gone to Stanford Business School… and who actually spoke the language. So my advice to anybody who wants to be an entrepreneur is to strategically look at their career and determine the competitive advantage they can deploy in the marketplace, independent of geography.