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HBP Product ID: ST88 UST088

MARK YOUNG JOON NAK CHOI MARCELLA HO

MoLex: Leading a Technology Start-Up in a Fast-Changing Environment ‘The window of opportunity for all companies closes faster than you can imagine’ - Matt Yale, Co-founder, MoLex HK Ltd

Introduction “Your blood pressure is too high!” Matt’s doctor said worryingly. This set off alarm bells for Matt as to the mountain of decisions he soon had to make. He and his partners at MoLex, a Hong Kong based tech startup, had begun to have disagreements about many large and small strategic and operational issues. Over the previous two years, Matt and his partners had successfully nurtured MoLex from an awardwinning concept to a market-ready product. However, the partners struggled to reach an agreement on some major decisions, such as whether to register the business in Shenzhen or Hong Kong. Also, the partners had an ongoing debate whether to manage marketing and distribution in-house or to outsource it. One partner favored the former option while the other partners had a different point of view. For the first time, Matt found himself questioning the future of a company in which he had believed so strongly and invested so much time and energy.

The Rise of MoLex MoLex’s technology was based on a chemical compound capable of waterproofing smartphones and other devices safely, efficiently, and cost-effectively. Peter Van Heusen was first introduced to the chemical that became MoLex during a trip to Holland when he visited his friend, Hans Lieffer, a chemist and inventor. Hans had experimented with various chemicals and discovered that this chemical, Compound X, could waterproof electronic gadgets after he accidentally spilled it onto various electronic devices and found that they became water repellent. Various tests later proved that the coating was effective for repelling water when applied to lamps, power drills, and electrical engines. All of these electrical devices remained Marcella Ho prepared this case under the supervision of Professor Mark Young and Professor Joon Nak Choi solely as a basis for class discussion. The authors have disguised certain data to protect confidentiality. Cases are written in the past tense; this is not meant to imply that all practices, organizations, people, places or facts mentioned in the case no longer occur, exist, or apply. Cases are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation. For inquiries regarding ordering and permission to reproduce the case and its materials, please write to [email protected] or visit cbcs.ust.hk. © 2020 by The Hong Kong University of Science and Technology. This publication shall not be digitized, photocopied or otherwise reproduced, posted, or transmitted without the permission of the Hong Kong University of Science and Technology. Last edited: 8 July 2020

This document is authorized for use only in Victoria Roberts's Organisational Behaviour Sm1, 2021 at University of Melbourne from Mar 2021 to Jun 2021.

HKUST Business School

Thompson Center for Business Case Studies

functional under water after being treated with the coating. Despite the market potential for this coating, Hans himself had no interest in marketing and asked Peter to investigate if a market might exist. Peter brought a small bottle of the chemical back to Hong Kong and sought advice from Robert Pong, a long-time work colleague. Robert tested the chemical by spraying the internal electronics of smartphones and then submerging the smartphone in a bucket of water. When Robert found that the smartphone remained fully operational, he became a believer in the product and decided to join Peter in taking this chemical to market. Matt Yale was invited by Peter and Robert to join their start-up as a partner due to his business and marketing expertise. Matt had known Peter and Robert for over ten years. They had worked in the same industry and had become good friends. According to Matt’s research, nearly 40% of people had experienced accidentally dropping a smartphone into water or exposing it to rain or beverages such as coffee. Furthermore, Matt had found through research that about 5% of smartphones were sent to repair stores due to water damage. After spotting this large, unsatisfied demand for a water repellent coating product, they decided to develop a marketing campaign around it. Intrigued by the possibilities offered by this chemical, they secured exclusive worldwide distribution rights from inventor Hans Lieffer. Having found a promising idea, Matt, Peter, and Robert made a strong push to build MoLex into a product and a company.

The Lean Start-Up Starting a new company (i.e. “a start-up”) differed greatly from building a new company. According to Stanford University and University of California, Berkeley Professor Steve Blanks, a start-up is “a temporary organization used to search for a repeatable and scalable business model”.1 In other words, the goal of a start-up is to find a product for which a market exists – often labeled “finding product-market fit.” Over the past two decades, the “lean start-up” framework that Blanks advocated has become widely accepted among entrepreneurs across the world. Finding product-market fit has three closely inter-related components. First, the start-up must build a product – and constantly refine this product based on customer feedback (i.e., conduct agile engineering). Second, the start-up must design and implement a business model (i.e. how the company will generate profit by providing value to potential customers). Third, the start-up must develop a loyal customer base, demonstrating that it has a market for its product and a workable business model for meeting its needs. These three components are closely inter-related, with product and business-model development being driven by the start-up’s learning more about its customers’ needs. Blanks emphasizes that: In a lean startup we know that you just don't execute per plan, you're actually going to be learning and discovering from customers outside your office. We kind of know that there are no facts inside your building, so you're going to get the heck outside. We also know that you're not smarter than the collective intelligence of your potential customers . . . [your goal is] to rapidly learn by getting out of the building and testing some of your key

1

Blanks, Steve. 2013. The Four Steps to the Epiphany: Successful Strategies for Companies that Win. 2nd edition.

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2 MoLex: Leading a Technology Start-Up in a Fast-Changing Environment

This document is authorized for use only in Victoria Roberts's Organisational Behaviour Sm1, 2021 at University of Melbourne from Mar 2021 to Jun 2021.

HKUST Business School

Thompson Center for Business Case Studies

ideas and key features of the product as quickly and as rapidly as we can. And what you're going to find is a good number of your initial hypotheses are just simply wrong.2 Blanks provided further details on this approach in a Harvard Business Review article: Lean start-ups…test their hypotheses [by]…go[ing] out and ask[ing] potential users, purchasers, and partners for feedback on all elements of the business model, including product features, pricing, distribution channels, and affordable customer acquisition strategies. The emphasis is on nimbleness and speed: New ventures rapidly assemble minimum viable products and immediately elicit customer feedback. Then, using customers’ input to revise their assumptions, they start the cycle over again, testing redesigned offerings and making further small adjustments (iterations) or more substantive ones (pivots) to ideas that aren’t working.3 Matt, Peter, and Robert understood that their task was to find a market for MoLex and to refine their product and business model to provide value to this target market.

Early-Stage Venture Finance Start-up founders have several options for financing their company in its earliest stages. While most laymen might believe that founders tap venture capital funds to start a company, venture capitalists typically finance companies that have already demonstrated product-market fit by attracting a small but significant number of customers and are ready to grow rapidly in a process commonly called “scaling.” Start-up founders more typically finance new start-ups (i.e., raise what is called an angel-financed “seed round” rather than a venture-capitalist financed “Series A” round) by spending their own assets, and later, the revenues the startup generates in a process commonly called “bootstrapping.” Alternatively, start-up founders can seek financing from wealthy individual investors called “angels” – willing to fund unproven start-ups that have yet to achieve product-market fit. Angel investing tended to be extremely risky, as many start-ups never reached product-market fit, but was potentially more lucrative because start-ups almost always became much more valuable as soon as they reached it. Although Matt, Peter, and Robert had successful and lucrative professional careers, they were collectively not in a position to self-finance. Consequently, their first task was to seek US$1 million of seed funding for creating a product and launching an initial marketing campaign in Hong Kong & Shenzhen.4 2 Blanks, Steve. 2016. “The Lean Method”. The Kauffman Foundation. https://www.entrepreneurship.org/learningpaths/the-lean-approach/the-lean-method, accessed July 2020. 3 Blanks, Steve. 2013. “Why the Lean Startup Changes Everything”. Harvard Business Review (May 2013), https://hbr.org/2013/05/why-the-lean-start-up-changes-everything, accessed July 2020. 4 Start-up companies typically raise what is called seed-round funding from investors to finance their earliest activities, to develop a product and to sell pilot or proof-of-concept projects to their first clients. Seed-round funding, typically ranging from several hundreds of thousands to two or three million US dollars, is usually raised from wealthy individual investors (i.e. “angel investors”) rather than venture capital funds. Once start-up companies achieve milestones such as bringing an early version of their products to market and achieving early but substantial traction (e.g. thousands or tens of thousands of consumer clients or several long-term contracts with business clients), they can raise what is called Series A financing from venture capital funds.

ST88 UST088

3 MoLex: Leading a Technology Start-Up in a Fast-Changing Environment

This document is authorized for use only in Victoria Roberts's Organisational Behaviour Sm1, 2021 at University of Melbourne from Mar 2021 to Jun 2021.

HKUST Business School

Thompson Center for Business Case Studies

Starting MoLex One time-honored approach towards securing angel investments was to conduct what is called an “investment pitch” – making presentations to audiences that included large numbers of angel investors to impress and connect with them. Matt, Peter, and Robert found initial success rapidly through this approach. The team won several pitch competitions in Hong Kong and Mainland China; in particular, the team was ranked among the top-10 Hong Kong start-up ideas at the prestigious RISE international technology conference. During one of these pitch competitions, they met prospective investor Mick Grand and impressed him enough to secure a second meeting over coffee a week later, whe n they convinced Mick to invest in the start-up. A second external stakeholder, Arnold Horn, was invited to join MoLex to develop the legal and financial framework of the company. Arnold was an experienced Hong Kong lawyer who had also been a squash friend of Matt’s. Arnold’s key role was to be the company secretary, as well as legal and financial counsel. Arnold would contribute his skills and experience in return for a proportion of MoLex’s equity. The three operating partners, Matt, Peter and Robert, then turned their focus to China, the world’s largest smartphone market. With its 1.4 billion citizens, China was the world’s No. 1 market for smartphone purchases, with more than 200 million smartphones sold annually. Chinese consumers were fond of buying expensive smartphones; as of 2019, the most recent iPhone model (the iPhone 11) had sold very well at a price point over US$1,000, and the new Huawei Mate 30 also sold extremely well at US$900. Perhaps more importantly for their business, phone covers, screen protectors, and other accessories were also popular. Nearly 100% of high-end smartphone (smartphones over US$500) users bought screen protectors, with a price range from US$3 to over US$30. “A smartphone is of vital importance to the younger generation in China,” Matt thought, “smartphones are their main channel of communication and interacting with the world.” This would be the market “sweet spot” that the MoLex spray would target. The challenge was to develop a product and business model to provide value for this market and eventually reach product-market fit.

The MoLex Team The partners had found a sizable market opportunity, seed funding, and a strong team to develop the idea into a product and take it to market. The question now became whether they could work together effectively to realize their shared vision.

Matt Yale An Australian and Hong Kong permanent resident for over twenty years. With twenty-five years of experience in senior vice president roles for third-party global compliance and industrial manufacturing organizations, Matt was extremely intuitive about people and their feelings. He was likely to be individualistic rather than being a leader or follower. He brought together a “tsunami” of ideas into a compelling investor plan, ranging from a one-page document, twenty-minute pitch deck, all the way to a fifty-page investor prospectus. He was able to build a profile for the start-up on social media and various start-up ecosystems in Hong Kong, China, and the EU. He often ended up being the diplomat and conciliator among the partners. ST88 UST088

4 MoLex: Leading a Technology Start-Up in a Fast-Changing Environment

This document is authorized for use only in Victoria Roberts's Organisational Behaviour Sm1, 2021 at University of Melbourne from Mar 2021 to Jun 2021.

HKUST Business School

Thompson Center for Business Case Studies

Peter Van Heusen A Dutch national and Hong Kong permanent resident. He had previously held senior divisional and regional roles focused on consumer products and certification activities in Europe and Hong Kong. Peter could be characterized as an extraverted leader, confident and assertive. Also, he was excellent at comprehending difficult organizational problems and creating solid solutions. He valued knowledge and competence – and had little patience for inefficiency or disorganization. Peter was a real business driver, someone whom Matt described as a “my way or the highway” alpha male. “Shoot first, ask questions later” was his usual approach. Peter was known for being bold, brash, and quick tempered.

Robert Pong Shenzhen-based and born in Northern China. Robert had earned an MBA from an elite US university and had held senior executive roles ranging from operations management, to China general manager for different multinational companies. Being practical, traditional, and well-organized, he was not interested in abstract theories unless they related closely to practical applications. He had a clear vision and liked to be in charge. For most of his career, Robert was the leader who got his way. He managed China teams who reported to him, and he led in what Matt thought of as an “imperial” style – what he said was to be obeyed. Working in a small start-up with equal partners, thus, was a new challenge for Robert.

Mick Grand The major private investor of MoLex. A British national and a Hong Kong permanent resident since 1995, he had over thirty-five years’ experience in sales and marketing and had founded a successful chemical supplier company to the Asian printing industry. Mick was visionary, creative, resourceful, and intellectual. He could get very excited about new ideas and projects but also neglect the more routine aspects of life. Mick proved to be a hands-off private investor who guided the partners in sound and practical ways regarding technical and financial matters and management of the organization. He was fair and transparent with all three of MoLex’s operating partners.

Arnold Horn Another British national and a Hong Kong permanent resident for over thirty years, Arnold was a commercial lawyer, company director, and a legal expert in Hong Kong company setup and taxation structures. Arnold could be characterized as serious, quiet, and professional. He remained impartial and independent of MoLex’s operations and did not intervene in operational matters.

Game Plan Although they received many inquiries from all over the world for sales and distribution of MoLex for a wide variety of uses, including industrial processes, the manufacturing of waterproof consumer electronics, and sales to consumers to waterproof their existing gadgets, the partners stayed focused and concentrated on their launch in China. The partners spent much time speaking to Chinese contacts and manufacturers in mainland China and met many interested parties. Matt stressed that relationships and trust were essential in China. “My team members have both a Chinese and Western mindset, with hands-on market knowledge as well as sales and marketing competency,” he thought. This was especially important for learning what the market demanded and building key customer relationships. ST88 UST088

5 MoLex: Leading a Technology Start-Up in a Fast-Changing Environment

This document is authorized for use only in Victoria Roberts's Organisational Behaviour Sm1, 2021 at University of Melbourne from Mar 2021 to Jun 2021.

HKUST Business School

Thompson Center for Business Case Studies

To address the People’s Republic of China (PRC) market, they would begin marketing this product with a Shenzhen distribution center for the entire mainland market. The plan was to first complete all research and development (R&D), then grow the market by distributing the water repellent spray via a B2B (businessto-business) model.5 Distribution partners targeted included China online sellers, Jundong, Suning, and telecom service provider China Telecom. These key distributors were MoLex’s target customers, who would then resell the product to end users. After much negotiating, some initial sales orders were booked with some of these partners, but nowhere near the required quantities to break even. Such “proof-ofconcept” sales were crucial for a start-up – either they would lead to further purchases in greater quantity or they would be dead ends. During many visits to China, Matt was surprised that some organizations had a long-term vision for strategic partnerships. “When we went to a meeting with a smartphone battery and components manufacturers for the first time, they had already come up with a plan about where they wanted the relationship to be in three years’ time,” Matt says. “I was surprised and delighted to meet such strategic thinkers and savvy businesspeople.” In fact, one manufacturer had sprayed their components with MoLex solution and left it in a water tank, then fished it out and used the product during one meeting with the MoLex partners. Matt and Peter visited Shenzhen and Guangzhou twice per month. They both had limited abilities in Mandarin, so they relied heavily on Robert to be the main contact point. Yet, the shortfall of this approach quickly became evident. Despite being a Chinese national with many years of working experience in China, Robert had demonstrated limited knowledge in building significant relationships with key players in the all critical electrical and electronics industry. Therefo...