The Sociology of Startup Success with VC Powerhouse Hans Tung

**Hans Tung** (0:00)
Hindsight is always 20-20. If anyone tells you they can see six, six or seven snaps in events, I think they're lying.

**Allie Garfinkle** (0:05)
Hello, hello, welcome to the Term Sheet podcast. I'm Allie Garfinkle, senior writer here at Fortune. And every week on Term Sheet, 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. Now for this week's news, we're gonna do something a little bit different. 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, so often multiple years. And you could very reasonably predict the stability and growth of a business based on ARR. 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. 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. 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. Here's Hans. Hans, welcome to the Term Sheet podcast and welcome to Brainstorm Tech.

**Hans Tung** (2:58)
Thank you for having me, Allie. I've been looking forward to this.

**Allie Garfinkle** (3:01)
I've been looking forward to this too. This is actually the first time we have ever met.

**Hans Tung** (3:04)
In person.

**Allie Garfinkle** (3:05)
That's right. Yeah. I'm really excited. Let's start at the beginning. What do you consider your first term sheet?

**Hans Tung** (3:11)
That takes me back years.
It was in the 1990s. We issued a term sheet to a company called Omni Industries. They do contract manufacturing. And their customers are the Apple, the Compaq of the world. And we track that sector for a while. It just feels 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 US 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.

**Allie Garfinkle** (3:59)
I was saying, how did it turn out?

**Hans Tung** (4:00)
It was acquired by, I think, the Selektron or J-Bull, one of the two. And so you got consolidated and I think ended up making three, four X in about four or five years. Back then, it was a big deal and that was before internet. So 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, just getting four X ever was very happy.