This year Apple briefly became more valuable than Microsoft, and we opened our Hong Kong office. Both events are minor in themselves and consequential as signals of where the next decade's capital and product gravity is shifting. In mainland China, Sina Weibo passed its first year — a new mode of social distribution growing up the Asian mobile stack from below. This letter is about both shifts and how we are positioning between them.

On the Mobile-First Generation of Founders

The founders we are now meeting design their products on mobile screens before they consider how the product will appear on a personal computer. This is a complete inversion of the assumption that has governed software design for thirty years. The implications run further than the design choice itself — these founders allocate their engineering attention differently, prioritize battery and connectivity differently, and select for a different kind of product talent than their predecessors did.

We have, this year, increased our weighting toward founders under thirty. We did not previously have a stated weighting on founder age. We do now, with caveats. Younger founders are not better; they are differently calibrated. They have, on average, lower tolerance for the institutional friction that older founders have learned to navigate, and higher comfort with consumer-facing product decisions whose intuitions cannot be derived analytically. Both differences are, in mobile-first markets, structurally advantageous. In other markets they are not. We are tracking the distinction.

The harder question is what this implies for our partnership relationships with founders. Founders in their twenties are, on average, more difficult to support through the operational scaling that will follow product-market fit. They have not yet developed the instincts for hiring, organizational design, and sustained execution that older founders bring as a matter of course. We are, as a consequence, spending more time on this support function than we did a decade ago. The shape of our value-add to portfolio companies is, in 2010, materially different from the shape it had in 1997.

On Why We Are in Hong Kong Now

Mainland Chinese consumer software is now operating at a scale that, three years ago, would have been considered American-only. The teams building it are, with very few exceptions, located in mainland China and are managing operations that interact daily with capital, partnerships, and product-distribution decisions that require a presence in Greater China.

Hong Kong is the most efficient base from which to participate in this market without being structurally dependent on it. We opened our office in March. We are using it primarily as a coordination point for our mainland portfolio activity; the active diligence work happens in Beijing, Shanghai, and increasingly Shenzhen, with our Hong Kong team flying out for the conversations that benefit from in-person presence. The arrangement is operationally complex. It is also, in our experience, less complex than the alternative — which would be opening a mainland office and accepting the regulatory and capital-control implications that follow from doing so.

We do not yet know how the mainland-Hong Kong arrangement will hold over a longer horizon. The political economy of the relationship is in flux, and we are aware that the structural protections Hong Kong provides today may not be the same in 2020 as they are in 2010. We are tracking the situation. For now, the office is the right call.

On the Companies That Will Be Built on iOS

The iOS App Store crossed three billion downloads this year. The marginal cost of distributing a new application has effectively fallen to zero in markets where iOS has meaningful penetration. Our Western portfolio is now selecting almost exclusively for businesses that take this fact for granted. We expect the next decade of consumer software, in our Western portfolio, to be authored on iOS first and the open web second.

The implications for capital allocation are significant. The total capital required to launch and validate a consumer mobile product, in 2010, is approximately one-tenth of the capital required to launch and validate an equivalent consumer web product in 2002. This compression continues a trend that began with AWS and is, in our view, far from complete. The consumer-software companies that succeed in the next decade will, on average, raise less capital, employ fewer people at scale, and reach product-market fit faster than their predecessors. The challenge for us is that this also means the duration of our underwriting decision compresses; we will have less time to evaluate a company before it either succeeds or fails. The diligence practices we have built over thirteen years are not all suited to this compression. We are revising them.

On the Asian Mobile Stack That Will Not Look Like the Western One

The Chinese mobile stack — operating systems, app distribution, payment, identity — is being rebuilt by domestic platforms in parallel to, and structurally distinct from, the Western stack. Sina Weibo, in its first year, has shown that domestic social distribution can scale to a hundred million users without crossing into Western frameworks. We expect this divergence to deepen, not converge, over the next five years.

The strategic implication for our work is that an Asian portfolio company built for the Asian mobile stack is, in operational terms, a fundamentally different kind of company from a Western portfolio company built for the Western mobile stack. The two will have different cap tables, different cost structures, different customer-acquisition mechanics, and different exit options. We are no longer trying to synthesize a single global view of consumer software; we are running, in effect, two parallel theses, with separate diligence frameworks for each.

This is more work. It is also, we believe, more accurate. The synthesis our peers are still attempting will, we predict, produce systematic errors in their Asian portfolio that will compound across the decade.

A Closing Note

It is unusual, even by the standards of our industry, to feel that two distinct technological civilizations are forming at the same time. We feel it now. We intend to be present in both. The 2010 letter, in retrospect, will likely be the year in which the divergence became visible to us; we expect future letters to record its consequences.

The Partners
Winzheng Family Investment Fund · December 2010