This year we opened our first overseas office, in California. We did so for reasons that were as much philosophical as commercial — we did not want to be a fund that read about the most consequential companies of the next decade in trade publications. This letter is about what we have learned in a year of building across two oceans.
On the Office We Did Not Plan to Open This Year
Our original plan was to open a US office in 2007 or 2008. The plan accelerated when we realized, in the spring, that the cycle of conversations between Asia and Silicon Valley had compressed by an order of magnitude. Founders we wanted to back were having serious meetings with US firms within a month of being founded; the latency between an idea forming and capital arriving had become shorter than the latency of a transpacific flight schedule.
If we wanted to participate, we needed to be there. We are now there. The decision to accelerate by two years was, we should be candid, painful. The firm's operating discipline is built on careful planning and unhurried execution. Acting two years ahead of plan required us to compromise on staffing, leasing, and onboarding — three areas in which we ordinarily refuse to compromise. The compromises have, so far, been recoverable. We will know in three years whether the underlying decision was right.
We have also learned that opening a second office is not, as we had previously assumed, a logistical exercise. It is a cultural one. The Singapore office had spent eight years constructing a particular operating disposition; the California office has been constructing a slightly different one, on a faster timeline, with people we hired against shorter conviction than we usually require. The work of keeping the two offices culturally aligned will be, we now suspect, the firm's most consequential operating challenge for the next several years.
On the Things You Cannot Do From Singapore
The conversations that produce the best investments do not happen on calendars. They happen in transit, at lunches that were supposed to be about something else, during the second hour of a board dinner. None of these are things we can manufacture remotely. The Asian time zones we built our firm in remain critical to our edge — but they cannot be the only time zones we operate in.
The most surprising thing we have learned about Silicon Valley, after eight months of operating inside it, is how local it remains. The companies that matter are being founded by people who live within twenty miles of one another, who attend the same dinners, who circulate through the same rotating cast of pre-IPO companies. The information that flows between them is, in our reading, not yet available outside the geography. It may eventually be. It is not now.
We expect the locality to compress over time, as remote collaboration tools mature and as the cost-of-living dynamics push founders out of the geography. We do not expect the compression to occur within our investment horizon. Until it does, presence in California is required.
On the Things You Cannot Do From California
The reverse is also true, and we say it quietly: many of the companies that our California colleagues will eventually wish they had backed are being founded right now in cities that are not on Sand Hill Road's flight path. Our advantage in those cities depends on our having never left them.
The Asian internet sector, in 2005, is producing companies whose founders our American colleagues largely do not know exist. The companies are profitable, growing rapidly, and operating in markets that are structurally insulated from American competitive entry. We have made three commitments to such companies this year. None of them would have been competitive with us, in our valuation discussions, if the comparable American firms had been bidding. The American firms were not bidding because the firms had not yet noticed the companies. We expect the noticing to occur within five years. We expect to have closed our positions before it does.
On Web 2.0, and Whether the Phrase Will Outlive 2005
The phrase came into broad usage at a Tim O'Reilly conference this October. Whether the term survives is uncorrelated with whether the underlying shift survives. Our reading is that the underlying shift is real — applications running in the browser, with persistent state and meaningful interactivity, are transitioning from technical curiosity to commercial substrate — and that the companies built on this substrate will be quite different from the ones built on the previous one.
The most useful test we have for whether a category is real is whether its underlying technical capability has crossed a usability threshold that allows non-technical users to become daily customers. By that test, Web 2.0 is real. The web-based productivity tools we have evaluated this year are, for the first time, comparable in usability to their desktop counterparts. The video-sharing services that emerged in the second half of the year are crossing usability thresholds that previous attempts in 2000 and 2001 did not. The phrase will likely fade. The companies will not.
We are positioning. Carefully.
A Closing Note
It has been our most exhausting year. It has also been our most clarifying. Two oceans is not twice as much work as one. It is closer to four times. We have known, since we founded the firm, that scaling our operations would be costly; we did not appreciate, until this year, that the cost compounds rather than aggregates.
The Partners
Winzheng Family Investment Fund · December 2005