By Andrew Woodman
In 1999, Derek Sulger turned his back on a career with Goldman Sachs to start a company in China. Fifteen years on, having founded mid-market consumer buyout firm Lunar Capital, he has no regrets.
“YOU HAVE GOT TO BE FREAKING KIDDING ME!” This is the approximate response that Derek Sulger, founder and CEO of China-focused mid-market GP Lunar Capital, received from his colleagues when, in 1999, he announced that he would end his almost decade-long career at Goldman Sachs to start a business in Shanghai.
Given the economic significance of China today, it is difficult to explain just how bewildering the decision seemed at a time when the country was only just opening up, Sulger notes. But the move – which eventually led to the formation of Lunar Capital – was the start of something years in the making. It also marked the beginning of his life as an entrepreneur, the third of three careers. The first was as a rower.
“I see that as my first job. From the age of around 15 onwards, rowing dictated a lot of my life,” he recalls. “It is an intense sport, but it teaches you a lot about discipline, process, and hard work – all of which have influenced what I do today.”
An appetite for risk
Originally from New York, Sulger had spent much of his early years sculling the waterways along America’s east coast. It is perhaps only natural that his rowing career followed him to Harvard in 1989, where the foundations were laid for his entry into the world of finance. The son of a Wall Street lawyer, Sulger had always anticipated continuing the family trade, and he certainly had an appetite for the risk it entailed.
“Very early on I became quite enamored with the kinds of transactions my father worked on,” says Sulger. “I liked the more aggressive and adventurous end of the capital markets spectrum, and I have always been obsessed with risk, and the ways in which you hedge and mitigate risk.”
The chance to pursue this interest came when Sulger joined the ranks of fresh-faced Goldman recruits hired straight out of Harvard. He was one of the fortunate few to join a program that took him from undergraduate to associate with the bank’s fixed income division – without spending the normally compulsory two years as an analyst.
A youthful graduate, Sulger had only just turned 21 when he turned up for work at Goldman, celebrating his first job out of university and his first drink at the same time. However, the honeymoon period was brief; within months of joining, Sulger learnt his first hard lesson about risk.
“At the time, Goldman, and in particular my division – fixed income – was the most profitable, can-do-no-wrong, change-the-world organization,” he says. “But just six months after I walked through the door, the wheels completely came off the train.”
It was the great bond massacre of February 1994 and Sulger had moved over to Goldman’s London office. Goldman was among the worst hit and it is no exaggeration to say the bank struggled to make it through the year. Accordingly, Sulger’s first year was marked by round after round of brutal blood-letting.
He describes how, one-by-one, colleagues would be called into a side room and given their marching orders. What started as a one-off culling ended up running for three rounds. Sulger was one of the few team members left in Goldman’s London office – by which he had become relatively desolate.
“I think the lesson you learn there is that risk management is not just about anticipating and projecting the good scenarios, but analyzing the probability of all scenarios, and never ruling out how quickly fortunes can change,” he says. “The good news is that those people who were left went on to become close friends; people I really admired and learned an awful lot from.”
From a London basement
The latter part the decade saw the genesis of his move to China. It started in a basement in Sulger’s Fulham home in 1998, just after the Asian financial crisis. He was convinced that some investment opportunities would emerge from the carnage, so he set about hiring some students – who by coincidence were all Chinese – to work out of his home during the day, crunching numbers and evaluating potential investment angles.
Even at this early stage, he knew that the biggest openings would be found in the region’s growing consumer base. Consumption behavior had yet catch up with the economic growth in Asia, but in Sulger’s view it was only a matter of time.
“I became infatuated with this idea of Asia’s growing consumer base, and in particular we were drawn to China,” he says. “China was a little off the radar at that point because it wasn’t one of the Asian tiger economies. However, as we started to examine the opportunities more, particularly with this consumer thesis in mind, China just started to stick out like a sore thumb.”
After weighing up the different options, Sulger looked to the telecommunications market and the potential demand for mobile services, coming to the somewhat contrarian conclusion that this was where China’s consumers would express themselves first.
To illustrate just how contrarian, Sulger recounts the conversations he had this with his Chinese banking colleagues at Goldman at the time. His co-workers rather bluntly informed him that were so few mobile users in China that, realistically, the only people likely to use them for the foreseeable future were the military and heads of the country’s state-owned enterprises.
“That was the conventional wisdom then, even among smartest people who were highly localized to China,” says Sulger. “Some of them might not remember that – but I certainly have the emails to prove it.”
Ignoring the cynics, he crystallized his ideas and built a team to cold-call the provincial sales branches of leading carriers like China Mobile and ask for sale figures, user numbers and retention rates.
They established there were around six million mobile users in China. This number was expected to reach 20 million by the end of 1999, but as the date drew closer it became clear the total would be 50 million, and then 100 million 12 months after that. This meant only one thing: it was time to move to China.
The end of 1999 marked a good year for the Goldman’s fixed income department and a great opportunity for Sulger to leave on a high. Back then the bank’s employees received their bonuses just before Christmas, so Sulger waited until then, and as soon as the check cleared, revealed his plans to move to Shanghai and launch Linktone, an entertainment-focused mobile value-added services provider. It wasn’t a decision he took lightly.
“I don’t think anyone thought I was the type to leave. I was a born-and-bred Goldman guy and I still feel that way many years later,” he says. “My departure created a lot of funny reactions – it would have been easier if I had told them I was joining NASA to become an astronaut.”
Making a breakthrough
It was also during this period that Sulger got the idea for the name of his future private equity firm. A senior partner at Goldman had compared his decision to become an entrepreneur in China with traveling to the dark-side of the moon – hence Lunar Capital. History would justify Sulger’s decision, but success was not immediate.
“We started to try and build this business and we kept getting a lot of crazy looks, not from people in China but from investors and former colleagues in the US,” he says. “It took a while to take off. Our second year saw the dotcom crash, and our third year was dominated by the SARS outbreak; it took a solid four years before I could really lift my head up from the desk.”
By 2004, Sulger began to reap the rewards of his calculated gamble as Linktone listed on NASDAQ, raising around $73 million. Along with online travel service Ctrip, it was one of the first Chinese tech start-ups to go public in the US.
This experience formed the basis of two fundamental beliefs upon which Lunar, which closed its second fund at $200 million in 2011, was founded. First, the value of an intensive operational and entrepreneurial approach that Sulger and his colleagues bring to investments by leveraging their focus, control and experience as business owners; and second, that the China consumer story was still in its very early stages, which he deeply believes is still the case.
“There is natural evolution taking place in China and it is really just beginning. It is important to note that people now realize the opportunity in China, but by the same token they remain very underexposed to it,” says Sulger. “Given that China is the second-largest economy in the world, you should expect to see much more consumer demand, far more premiumization of brands, and far larger allocations in everyone’s investment portfolio and we are nowhere near that presently.”