Technopreneurship, Incubation and Angel Investments in China

1. Technopreneurship, Incubation and Early Stage Investments in ChinaChris Evdemon (易可睿)Investments & Business Development Manager, Innovation WorksDirector, Business Angels Network South-East Asia (BANSEA)Founding Member, China Business Angels Network (CBAN)May 20101

2. Is there an early stage ecosystem in China?Macro – is there a big enough market and where are the market opportunities?Entrepreneurship – are there talent, drive, skills and ideas?Incubation– are there real ‘turnkey’ services for start-ups?Early Stage Investors– is there an early stage investors community?Ecosystem– are all these components combined together in a conducive environment?Preparation– what do I need to do to get started?

3. A strong middle class is emerging …Macro

4. Retail (i.e. consumerism) is booming …… in the midst of the financial crisis!Macro

5. Most consumers are still predominantly price sensitiveand initially have a sense of mistrust for anything new.

6. Most consumers do not care about brand, although more and more people are starting to have brand awareness.

7. The consumer market is still very fragmentedfor most product / service categories.

8. Top tier cities (e.g. Beijing, Shanghai, etc.) are already becoming expensive and very competitive. The ‘new’ potential is in 2nd and 3rd tier cities.

9. Emerging middle class has only just started to pay attention to diet, fitness, and a healthy lifestyle.

10. Women have recently started to buy accessories, cosmetics, fancy lingerie, etc. in order to enhance their sense of well-being and self-respect.

11. “Newly rich” social class phenomena.

12. Market research and other statistical information is usually unreliable.But there is a unique set of challenges …Macro

13. Sina$2.2BSohu$1.9BNetEase$4.5BTencent$38BBaidu$25BShanda$3BGiant$1.8BPerfect World$1.7BMobile Internet & E-Commerce:Catalyst for the third waveTechnology companies Baidu, Tencent, Shanda rose from the ashes of dot-com bust.Web portals in late 1990’s created the first boom.Second WaveFirst WaveWe anticipate an explosive third wave propelled by Mobile Internet, E-commerce, Online Gaming and Cloud Computing.Third WaveValuation of Listed CompaniesMature MarketMajor OpportunitiesMOBILE INTERNETE-COMMERCEONLINE GAMINGCLOUDCOMPUTINGMacro

14. Challenges of multinational giants:Too short-term profit focused;

15. Local team not empowered;

16. Inflexible;

17. Insufficient attention to local market needs:

18. “Global” product mentality;

19. No willingness to tailor for China.Chinese Internet:Lucrative space reserved for locals!History of troubled multinational giants:Yahoo: entry in 1999, 3721 acquisition in 2003 (40% market share), now 0.5% share

20. eBay: entry in 2003, Eachnet acquisition (nearly 100% market share), “sold” <5%domestic business in 2006

21. MSN: entry in 2004, distant #2 (~10% share) in instant messaging, not in top 5 inportal & search

22. AOL: JV with Lenovo in 2001, FM 365 portal, shut down in 2004, entered again in2008 & shut down in 2009

23. Amazon: entry in 2005 by acquiring #2 player Joyo, which has been unprofitableand losing share

24. Myspace: entry in 2006 as local company with minority ownership by News Corp. Going nowhere.

25. Youtube: sporadically blocked (<5% share), blocked in 2008 (0% share)

26. Facebook: <5% share, blocked in 2009

27. Twitter: blocked in 2010

28. Google : entry in 2005, share went up from 10% to 35%; exited mainland China andmoved to HK in 2010Chinese Internet has been lucrative:AlibabaTencentBaiduUS $100 Billion+Macro

29. How is the Chinese Internet different?Government regulationsUsage Differences(Chart below: more entertainment)User Demographics Differences(average age: U.S. 42 / China 25 years old)Sociologic differencesGreater reliance on the Internet for informationUsers are more exploring in natureUsers like densely populated informationChinese UsersAmerican Users10 sec. spent on result page30-60 sec. spent on result pageMacro

30. How is the Chinese Internet different?Internet Café usage > 30%Entertainment centric and content-heavyMusic is nearly all unlicensedVideo is heavily (but not richly) monetizedP2P is extremely popularSNS transitionfrom copycat to localizedBlogging rate is much higher than U.S.Mobile will be the explosive growth-catalystE-commerce is ready to shift from C2C to B2CGaming RPG flat, but casual / social growingCloud computing will create a software industryInnovation Works FocusMacro

31. E-Commerce Emergence in ChinaIn 2009 Chinese E-Commerce Market was US$36 billion (grew 107% yoy!) E-Commerce developmentPayment has been solved via escrow, COD

32. Logistics problems also solved

33. Youth becoming avid online spenders

34. Taobao = 50% of packages shipped

35. C2C is currently nearly 90% of E-Commerce

36. B2C rapidly growing, gaining trustE-commerce Accelerates AdvertisingE-Commerce makes advertising measurable & targetable

37. E-Commerce makes advertising more valuableMacro

38. UserPre-purchase searchDecision influenceShoppingPaymentLogistics & Service12345Platform6China E-Commerce Analysis & OpportunitiesBank, carrier, escrowCustomer ServiceMicroblog & communitiesProductsearch, yelpB2B/B2C/C2C Billion-dollar companies will emerge from in 3, 4, 5; however, low-margin & transaction-oriented

39. 1, 2, 6 best shows strength of Internet above and most suitable for technology e-commerce companies

40. B2C companies need tools & platforms to build site & acquire customers (enabling traditional players)

41. Higher-margin opportunities may emerging in social/entertainment shopping & new Internet brands

42. SNS and crowd-sourcing sites that are not copiable but monetizable, as advertising value increasesValue proposition needs to be clear:Amazon: 1-6 360buy: 3, 4, 5Dianping: 1, 2 Taobao: 3, 4, 6SaaS, cloudMacro

43. What is very tough to do in China …Simple-minded copying of American darlingsSocial games in China (no open platform) or U.S. (tough)Logistics-driven e-commerce (if not your strength)MMORPG games (only ~10% growth, hit-driven)Macro

44. Mobile Internet Analysis & OpportunitiesMonopoly  3 carriers3G deployed233 million users & growingMobile Internet Users in ChinaCMCC (TDS-CDMA)

45. CUTC (WCDMA)

46. CT (CDMA2000)Opportunities & ChallengesCarriers are betting on Mobile Internet due to ARPU pressure and competition

47. Ecosystem needs devices, bandwidth, applications to create a virtuous cycle

48. Challenges:

49. Smart phones are too expensive (US$600 – $1000)

50. 3G bandwidth is still too expensive

51. Yet users are younger (83% of Mobile Internet users are below 30) and not rich

52. Apps should focus on entertainment (killing time) not productivity (saving time)Macro

53. Mobile Internet User Segmentation83% of the users are younger than 30Demographics of 800M potential usersHi-End White CollarAspiring Young White Collar, Students“3-Low” Users:Blue Collar, Military, Migrant WorkerSObservations2000 RMB is important price barrierHigh-end users are a small minority

54. Must focus on aspiring young users before “3-low” users

55. Aspiring Young users are existing Internet users

56. Young users require lower pricesMacro

57. What do early-adopter young users want?Top 10 Desired AppsTop 5 Android AppsSmart DialerWeb SearchLocalized SMSEmailIM (QQ, MSN)BrowserMusic PlayerMapsGamesYoutubeE-book ReaderCamera & PhotoNews & Micro-bloggingVideoSNS (Renren, Kaixin)Macro

58. Today Chinese entrepreneurship is in transition. Few home-grown role models although gradually a new class of serial entrepreneurs is emerging.Entrepreneurship is still a new concept for local graduates – there is peer and family pressure towards ‘secure’ corporate jobs.Older generation is risk averse but grass-roots entrepreneurship from young people in their late 20s and early 30s is rapidly improving, especially in the TMT sector.A number of Chinese entrepreneurs dubbed “returnees” (from Australia, Europe and especially the U.S.) with prior overseas entrepreneurial experiences are coming back to start their own companies.Entrepreneurship in ChinaEntrepreneurship

59. New “Homegrown” Entrepreneurs程炳皓(Binhao Chen)：CEO, kaixin001.com

60. SINA1998～2008郭去疾(Alan Guo)：CEO, lightinthebox.com

61. Google2005～2008刘建国(Jianguo Liu)：CEO, aibang.com

62. Baidu2000～2007古永锵(Victor Koo)：CEO, youku.com

63. Sohu1999～2005汪海兵(Haibing Wang)：CEO, 51mole.com

64. Tencent2004～2007王树彤(Diane Wang)：CEO, DHGate.com

65. Microsoft 1993～1999陈年(Nian Chen)：CEO,Vancl.com

66. Joyo2000～2005刘阳(Sunny Liu)：CEO, 51wan.com

67. Kingsoft2001～2006Entrepreneurship

68. Zhong Guan Cun(in Beijing’s northwest corner) is still China’s best approach to a Silicon Valley ecosystem.Clear priority to nurture hi-tech innovation start-ups and create an early stage investment environment. Tax incentives’ scheme.Surrounded by about 50 universities incl. Tsinghua, Beida and Beihang, over 1,000 research institutes, a software park, 150 incubators and >10,000 hi-tech start-ups.“Real-estate minded” incubation, few added value services, no service oriented mentality and lack of expertise / skills required.Many “incubators” but no real incubation …Incubation / Ecosystem

69. Already the 2nd largest VC market in the world but still only about 1/4thof the U.S.

70. 2008 was a historical high, 2009 a logical correction, 2010 will be a real test.China’s VC market is cooling down?Early Stage

71. The financial crisis has changed the game … Fund raising amount and number of new funds as well as total investments amount and deal numbers in 2009 have fallen sharply, in line with with the U.S. and Europe.

72. Current crisis will slow down but will it greatly hurt the VC market in China? The fundamentals of the Chinese economy are still strong - investment opportunities are still here.

73. There is a major shift from offshore USD funds to domestic RMB funds, from a 70% - 30% split in 2008 to 30% - 70% in 2009. Early Stage

74. Source: FENWICK & WEST LLP In China, very little attention to early stage (which according to Zero2IPO is defined as all deal sizes below ~7m USD!), furthermore …

75. Traditional industries still account for almost 50% (!) of the VC money invested in China.

76. In the U.S. Series A and B rounds typically account for over 45% of total funds invested.

77. In the U.S. information technology attracted ~40% of 2009 investment.… but where is Early Stage?!Early Stage

78. … and where is my trade sale exit?!Negligible domestic and cross-border M&A activity takes away one of the most important exit routes for early stage technology investors.Early Stage

79. Lack ofdomestic IPO exit was one of the most critical obstacles in RMB investment up until the last couple of years.

80. However, the stock markets in Shanghai and in Shenzhen continue to rapidly improveespecially in terms of shortening post-IPO lock up, transparency, etc.

81. Government also launched a genuine (?) Growth Enterprises Board (GEB), termed as “China’s NASDAQ”.

82. Shenzhen’s SME board has already proved to be an exit option for VC investment in China for potentially more than 10x returns in a period of 3-4 years. Improving local IPO market …Early Stage

83. Legal issues – a lot of regulations (new, neither mature nor tested).Innovationis still predominantly university and government driven. Image of Venture Capitalin the eyes of young Chinese entrepreneurs is that of a cash provider, no more (no appreciation of added value). Deal sourcing and closing is still “guanxi”-based: “only with people I know personally” or “through my network”.Vast majority of VCs go for the ‘low hanging fruit’, i.e. later stage, lower risk, higher transparency, pre-IPO type of investments.Very few VCs are truly early-stage-minded and have the necessary experience and skill-set.Local governmentsincreasingly act as a direct investor and/or a LP – what are the implications?Early stage environment concerns …Early Stage

84. InvestmentCAYMAN / BVIHONG KONGOFFSHOREIN CHINAContractLicensesLOCAL COMPANYWFOETransfer PricingLegal complexity – the “SINA” structureEarly Stage

85. Very limited local angel activity …AngelVC$28B$19BU.S.IncubatorAngels?Market$7BChinaFoundersLei Jun (雷军):Former president of KingSoft

86. Angel Investor of UCWeb, Vancl, and many other start-ups.

87. In last three years, he has helped several companies get more than $150 million in total in follow-up capital.

88. Before his involvement, UCWeb cannot get funded, now it has two rounds of investment for more than $40 million and more than 40 million active users.Early Stage

89. … but some new angel groups!Early Stage

90. Initial strategic decisions are a usually crucial component for a start-up company’s success or failure. In China flexibility is even more key.Preparatory trips. Spend significant amount of time in China.Develop “guanxi” (关系) or social capital networks to access information and to establish and maintain business relationships.Choose the right local partners! Select and setup the right legal structure: SINA vs. joint venture. Establish a clear pathway to exit.Implement corporate governance and shareholder rights.Manage intellectual property (if you have any).Research, comprehend and ‘navigate’ the complex political and regulatory environment to your competitive advantage. Preparation for China entryPreparation

91. Study and learn from best practices in foreign markets, bring your ‘know how’, add your own “secret sauce”, but … Understand the Chinese local market and adapt your products and business model to the local Chinese context.Where in the value chain is your place in China?Know your competition. You can safely assume it is already done. Find out who, how, where, etc.Add managerial and technical value to grow the local team that most likely does not have much international experience.Choose your location: Beijing vs. Shanghai vs. 2nd tier cities. Government lobbying? Customer facing? Cost basis? Talent hiring? Can you get local government incentives?Brush up your Mandarin!Preparation for China entryPreparation

92. These slides are at:http://www.slideshare.net/evdemonYou can find Chris at:http://twitter.com/evdemonhttp://t.sina.com.cn/evdemonThank you!

Technopreneurship, Incubation and Angel Investments in China

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