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  • Our fundamental strategy has been to leverage our strength in two areas, where we are strong. To no one’s surprise in this audience, Communications and Pac-Asia has been our core focus. As we all know Communication sector has been one of the two strategic focus of our firm. This stems from the fact that….. But the definition of communication has changed rapidly over the last 1o years because of new innovations, new growth sectors, especially the Internet. Just like the PC business has turned into brand and distribution game, Many traditional communications sector has been transforming. Communications equipment is turning into the PC business of yesteryears except for some wireless sectors, and services is becoming more and more capital intensive as bandwidth gets commoditized. Last year, Dixon came back from a tour of Huawei and ZTE in China and concluded that it will be increasingly difficult to see how US start-ups can compete in the traditional sectors given hat he saw there.

Transcript

  • 1. Dixon Doll CSPA Conference September 24, 2005
  • 2. Agenda
    • Brief introduction to DCM
    • Perspectives on Investing in China
    • Areas of Opportunity
    • China strategies for non-Chinese tech companies
    Confidential & Proprietary
  • 3. Agenda
    • Brief introduction to DCM
    • Perspectives on Investing in China
    • Areas of Opportunity
    • China strategies for non-Chinese tech companies
    Confidential & Proprietary
  • 4. DCM – Doll Capital Management Overview
    • Leading Sand Hill Road venture capital firm, investing both domestically, internationally
    • Over $1B asset under management: we mainly focus on early stage but also selectively invest in pre-IPO late stage companies
    • Communications, software, semiconductor, digital media, and security investments
    • Noteworthy portfolio successes in U.S. and Asia
    Confidential & Proprietary
  • 5. DCM Partners Track Record Confidential & Proprietary US China Japan Bridge Communications Inc .
  • 6. DCM Strategic Focus Pac-Asia Communications
  • 7. Agenda
    • Brief introduction to DCM
    • Perspectives on Investing in China
    • Areas of Opportunity
    • China strategies for non-Chinese tech companies
    Confidential & Proprietary
  • 8. DCM’s China Thesis
    • Unencumbered by legacy technology investments, greenfield opportunities will make China’s technology infrastructure take a different evolutionary path than that of the West / Japan.
    • Deployments of early adopter, cutting edge technology happening on a massive scale currently in China:
      • 2.5G / 3G
      • Packet based network
      • SMS/MMS/IVR
    • There are many sectors that the government has not focused on in the WTO deregulation process and is staying away from
      • Usually higher technical complexity or niche
      • Government is balanced in its policies by need to keep FDI flowing
    • There are working financial structures and ample success stories for VC backed companies, though on a relative scale, legal/financial infrastructure is still weaker than in developed countries
    • Conditions are ripe for VC investing – massive structural dislocations, large markets, early adopting markets, reasonable competitive landscapes and working entry/exit structures
    • MAN
    • Wireless local loop
    • VOIP
  • 9. DCM China Strategy
    • Invest in resources to facilitate portfolio companies’ participation in China markets
    • Proactively encourage Chinese development units for portfolio companies
    • Establish presence through partnerships with major Chinese IT, communications firms
    • Invest selectively in top companies where we can add value
  • 10. China Venture Capital Investments Increasing Strongly Source: Zero2ipo-China Venture Capital Annual Report 2004 $518 $1,269 $418 $992 (US$ Million) $402
  • 11. So Why Are We Investing in China? China Rising… Billions (Except for Grads in Thousands) Telecom Exports Electronic Exports Computer Exports Engineering Graduates Germany $15.4 China $36.4 Rep. of Korea $15.8 United Kingdom $17.4 USA $21.6 Top 5 exporters of telecom Equipment (in billions), 2002 US 59,536 China 219,563 Russia* 82,409 Japan 104,478 European Union 179,929 Top 5 sources of engineering grads, 2001 US $2.5 China $8.8 Rep. of Korea $2.6 Germany $5.6 Italy $5.9 Top 5 exporters of electronics (in billions), 2002 Ireland $4.6 China $3.8 US $2.4 Mexico $2.4 Malaysia $2.7 Top 5 exporters of assembled computers (in billions), 2002 148,844 160,435 175,439 181,890 195,354 212,905 219,563 252,024 Sources: Wired Magazine; China Statistical Yearbook (1997, 1999, 2001, and 2003 editions); National Science Foundation; United Nations Statistics Division *Data from 1999. Note: China’s engineering numbers exclude Hong Kong graduates.
  • 12. … And Will Likely Leapfrog U.S. and E.U. Focus Voice WAP SMS Conferencing Content Distribution Collaboration A/V Streaming MMS Mobile Banking Mobile Commerce Location Smart Applications Margin Communication Content Application Low Margin Medium Margin High Margin Source: IDC 2003.
    • Attractive demographics
    • Cost of access devices a key determinant
    • Rapid adoption driven by “killer” applications (e.g. interactive games, online gambling)
    e.g. Rapid Migration to Broadband Mobile
  • 13. 9 of Top 25 Global Websites are Chinese Rank naver.com Myspace.com Google Japan Google UK N.Top Allyes.com AOL Anywhere BBC Online daum.net Tom.com CNN Taobac.com Site Name 14 15 16 17 18 19 20 21 22 23 24 25 Alexa – Global Web Site Traffic Rankings Korea USA Japan UK Korea China USA UK Korea China US China Country Rank Yahoo! MSN Google Yahoo!Japan Baidu.com Sina Passport.net eBay 163.com Sohu qq.com Amazon.com 3721 (Yahoo!) Site Name 1 2 3 4 5 6 7 8 9 10 11 12 13 USA USA USA Japan China China USA USA China China China USA China Country Source: www.alexa.com , 5/31/05. Note that Alexa’s traffic rankings are based on usage patterns of opt-in users of Alexa’s downloadable toolbar.
  • 14. Zero2ipo-China’s Ranking of Top 10 Venture Capital Firms in 2004 Source: Zero2ipo-China Venture Capital Annual Report 2004
  • 15. DCM Investment in China ( ) 埃派克森微电子(上海)有限公司
  • 16. Forging An Exclusive Partnership With A Leading Local Firm
    • Formed an exclusive partnership with Legend Capital in 2003
    • We cross source deals and share due diligence
    • Legend Capital’s extended reach through Lenovo and Digital China proved significant value-add
    • Coinvested in 3 deals, China and US
    • Success in our partnership comes from mutual trust, respect, constant communications and working together on deals
  • 17. DCM’s China Results
    • Perceived as the leading Silicon Valley VC in China
    • China a strong contributor to DCM’s returns
    • We won multiple awards and industry recognition
      • The most Influential International VC of the Year in China
      • Top ten ranking of VC firms in China
      • David named one of 2004’s top VCs by Zero-to-IPO (a venturesource-like company in China)
    • China leadership boosting our domestic franchise and attracting US entrepreneurs
    • Strong international portfolio synergy
  • 18. Silicon Valley VC Concerns Over Investing in China, Emerging Markets
    • Critical shortages of experienced management
    • Technology uniqueness & defensibility
    • Legal protectability of intellectual property
    • Venture friendly legal system, regulatory infrastructure
    • Unnecessary company formation complexity
    • Corporate governance, compliance, transparency
    • Inadequate international stock exchanges, listing requirements, currency constraints (exit constraints)
    • Political, country risk
    • Shareholder rights issues (e.g. CNC)
    • Ever changing, conflicting government mandates and their impact on startups
  • 19. Agenda
    • Brief introduction to DCM
    • Perspectives on Investing in China
    • Areas of Opportunity
    • China strategies for non-Chinese tech companies
    Confidential & Proprietary
  • 20.
    • Voip services, infrastructure
    • WLan systems – all types
    • Broadband wireless services (WiMax, Clearwire)
    • Triple play infrastructure, IPTV
    • Software-as-a-service business models
    • Open source software
    • Innovative security, authorization, access solutions
    • Infrastructure uniting mobiles, portals
    Selected Opportunity Areas
  • 21.
    • Innovative last mile solutions
    • Video, rich media mobile apps
    • Power saving chips, LED’s
    • Ethernet transport services
    • Video compression chips
    • Mobile games, services
    • Specialized portals, MVNO’s
    • Alternative energy sources
    Selected Opportunity Areas Cont.
  • 22. Agenda
    • Brief introduction to DCM
    • Perspectives on Investing in China
    • Areas of Opportunity
    • China strategies for non-Chinese tech companies
  • 23. China’s IT Market Facts
    • China’s IT Industry Will Grow Two Times Faster than GDP
      • Total IT market size in 2004: $50 billion
      • Projected IT investment 2004-2008 $288+ billion
    • Fast Growing Internet and Broadband Penetration
      • Over 80 million users in 2004
      • Online gaming and messaging great fit for local culture
    • Largest Telecom Market in the World
      • 421 million fix-line and 302 million mobile subscribers
      • 137 billion SMS sent in 2003, represents 49% growth over 2002
    • Leapfrog Adoption of Technology
      • Little or no legacy systems in most sectors
      • China setting own standards – DMB-T for digital TV, etc.
    • Government Support for Semiconductor, Communication and Software Sector
      • Large demand for local semiconductor consumption
  • 24. Case for Direct Investment
    • China’s Domestic Market Advantage
      • Purchasing power amongst consumers growing
      • Per capita GDP>$2000 in key cities – over $5000 in Shanghai
    • Capitalize on Newly Trained Technology Workforce
      • Universities around Beijing and Shanghai – Singh, Peking, Fudan and Jiaotong
      • Overseas graduate returnees bring home world-class training and experience
    • Government Policies to Further Open-market Growth
      • Growth-oriented economic and fiscal policies to encourage private sector
      • Directives to focus on technology-driven infrastructure and services
    • Strong Entrepreneurial Culture
      • Reverse brain drain from US and Taiwan
      • Accelerated influx of foreign capital and know-how
  • 25. Paradigm Shift for SV in 3D
    • Business/Product Development
    • Outsourcing/Cross Border Hybrids
    • Direct Investments
  • 26. Capital Markets are Critical for China’s Future Success Countries with the most well-developed capital markets have outperformed those where banking-based systems dominate And a better return on the very large savings (as much as 40 per cent of gross domestic product) for households in China.
  • 27. International Business Development Selected Examples
    • M&A and Follow-On Financings
      • Coradiant
      • SMIC
      • UP Technologies
      • Vernier
    • Partnerships & Channel Distribution
      • AdSpace
      • Luminous
      • Spoke Software
      • think3
      • UP Technologies
    • Customers
      • 2Wire
      • Analogix
      • Callipso
      • IPWireless
      • Luminous
      • SMIC
    • Board Members & Management Team
      • 51job
  • 28. Improving Conditions for New Companies Morgan Stanley Dean Witter & Co. 1980 – 2000 1995
    • Large home markets
    • Great technology companies
    • World-class universities
    • New ideas / new industries
    • Intellectual property rights
    • Effective patent laws
    • Entrepreneurs
    • Icons
    • Low capital gains tax
    • Venture capital funding
    • M&A market for new technology companies
    • Easy access to big IPO market
    Yes Yes Yes Coming No Yes Yes++ Coming Yes Yes Improving Improving Current Yes No Yes No No Yes Yes No No Starting No No USA PRC
  • 29. The Investment Playbook
    • Invest in High Growth Market Segments
      • Identify emerging, vast consumer markets, but select high margin sub-segments
      • Capitalize on the emergence of China’s new technology standards
    • Invest in Best Management Teams
      • Returnees from US or home-grown mgmt with MNC discipline
      • Taiwan and Hong Kong management transplant in China
      • Management with extensive domain and process experience
    • Invest in Technology and Proprietary Business or Technology Process
      • IP and Talent sourcing from science and industry parks across US, Taiwan, Japan and China
      • Create barriers to entry for market leadership and sustainability through potential bubble cycle
  • 30. Key Lessons Learned So Far
    • Stay in synch with government preferences
    • Less concerned about capital market risks
    • Main challenge: Experienced management talent scarcity
    • Importance of extensive due diligence and legal process
  • 31. Dixon Doll CSPA Conference September 24, 2005