Internet was not included as a separate category in the US VC Investment data, accounting for the seeming discrepancy between Software (20% of the pie chart) and internet deals (about 24% of the total funding amount), it is likely included not only in software but in IT Services, media and entertainment, consumer, etc.
Note: some industry stats different depending on how “VC” is defined, for example:http://blogs.wsj.com/deals/2012/02/02/venture-capitalists-flock-to-china-leave-europe-behind/
Big Chinese internet giants discourage innovation by copying instead of acquiringSource: CIC
*Many Chinese entrepreneurs perceive acquisition as a strategy of last resort, synonymous with failure.
Note: Companies like Tencent are still conflicted internally as to whether adopt open platform strategy or contiCash Reserves of Chinese Internet Companiesnue to buy the best applications (particularly games) it sees on its platform, we may see contradictory behavior from them in the acquisition space. Sources:http://techrice.com/2011/10/02/chinas-internet-companies-ranked-by-cash-on-hand/http://www.techinasia.com/baidu-invests-306-million-in-qunar/
Other challenges:- In China is ICP registration approval can take 2-3 weeks, sties will be inactive during registration, so entrepreneurs need to plan in advance with multiple domain names so that can shift users to alternate site while registration for main site occurs- Beijing has some of the most expensive commercial real estate in the world, and internet is expensive in commercially zoned buildings meaning many teams work in small residential buildings, often having co-living work spaces for employees
Other Early Stage Funds:Chinese Founder’s Fund: http://www.cffpartners.com/portfolio.htmlDaD Asia:http://www.dad-asia.com/
A brief sketch of some of China’s emerging personalities in angel investing天使会: Influential Group of China’s Top Angels (Founded March 2011, http://angel.cyzone.cn/forum/2012/)包凡 BaoFan、蔡文胜CaiWensheng、何伯权 He Boquan、季琦JiQi、雷军 Lei Jun、李开复 Li Kaifu、吕谭平LvZhangping、倪正东 Ni Zhengdong、徐小平XuXiaoping、薛蛮子XueManzi、杨向阳 Yang Xiangyang、曾李青ZengLiqing
Incubators are becoming increasingly popular, Innovation Works has shown good early traction, many are very new.清华大学启迪创新研究员(Beijing)www.tri-tuspark.comInnovation Works (Beijing & Shanghai)Founder: Li Kaifuhttp://www.chuangxin.com/Cloud Valley (Beijing)Founder: Edward Tianhttp://www.cloud-valley.com/ChinAccelerator(Dalian)Founder: Cyril Ebersweilerhttp://chinaccelerator.com/HAXLR8R (Shenzhen and Bay Area)Founder: Cyril Ebersweilerhttp://www.haxlr8r.com/Tisiwi (Hangzhou)Founder: 庞小伟 Long Xiaoweiwww.tisiwi.comYuanfen Flow (Beijing)Founder: David Ben Kayhttp://yuanfenflow.org/incubator/portfolio/China Entrepreneurs Incubation Center (Beijing)Founder: Eric Schmidt (not the Google one)http://www.ce-online.cn/content/incubation-centeriStart(Shanghai)www.istartvc.comMap Source: http://hua.umf.maine.edu/Chinese/maps/chinese_map.gif
Startup culture exploding in China “It’s dynamic, messy, and very different. But Silicon Valley aside, there’s no better place on earth for tech right now.” - Kai Lukoff, TechCrunch “Every year another wave of “sea turtles”—Chinese who have studied or worked abroad—returns home. Many have mixed with the world’s best engineers at MIT and Stanford. Many have seen first-hand how Silicon Valley works.” - The Economist, March 2012 “China is home to nearly half a billion internet users, twice the online population in the US. Already home to two of the world’s top five internet firms by market valuation, China is giving birth to innovative start-ups and powerhouse billion dollar firms in social networking, games, media, and e-commerce. “ - Stanford GSB 2
VC Funding: USA VC Landscape in the USA $28.4 billionin VC funding for 3,673deals ~1000 internet deals in 2011, representing $6.9bn in funding Highly active in healthcare & biotechSource: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ ReportData: Thomson Reuters 3
VC Funding: China VC Landscape in China $13 billionin VC funding for 1,500deals ~268 internet deals in 2011, representing $3.2bn in funding Industrial/energy focus, with booming TMT sectorSource: Zero2IPO Database January 2012www.zdbchina.com 4
Chinese startup scene at inflection point Comparison of Investments in China’s VC Market from 2003 - 2011 $14,000 1600 Inv ($mm) 1401 $12,000 # deals 1400 1200 $10,000 1000 $8,000 817 800 $6,000 607 11,725 600 477 440 $4,000 324 400 253 228 5,387 $2,000 177 4,210 3,247 200 Available 2,701 funding 1,269 1,178 1,777 growing 992 $0 0 rapidly 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011: Early stage represented 25% of deals and 18% of amount investedSource: Zero2IPO Research Center, December 2011www.zdbchina.com 5
China’s 2011 internet investments E-commerce particularly active…. $5,000 100 93 $4,500 Inv ($mm) 90 $4,000 # deals 80 $3,500 70 $3,000 60 $2,500 50 4,691 $2,000 40 29 $1,500 25 23 30 $1,000 15 20 11 $500 6 10 483 417 551 262 308 $0 29 0 E-commerce SNS Games Marketing Travel Video Others ~10 companies represented the bulk of the e-commerce investmentsSource: Zero2IPO Research Center, December 2011www.zdbchina.com 6
Startup challenges in China: “3C, 2E” Copycat pervasiveness C-level: Lack of experienced talent, especially CXO types. Battle for engineering talent Cultural difference – lower appetite for risk, intolerance of failure, unwillingness to share, lack of serial entrepreneurs Exit environment different: 69% exits IPOs (vs. ~90% M&A in US) Ecosystem… – Innovative environment, education, and mentorship – Lack of services/infrastructure for China – Not as many angels/VCs in China versus US (per capita) 7
Why so many copycats? 1 Growing available capital – more than doubled 2010-2011, in some categories, investors have been willing to fund the 10th, 11th, 12th, etc. followers 2 Low hanging fruit – copying pure internet models is cheap and easy, many teams believe that executing the fastest and grabbing market share will lead to funding. E.g. Groupons, Pinterests, Paths, Shopkicks. 3 Risk Aversion - Both domestic VC’s and foreign capital markets are more receptive to Chinese start ups who have direct corollary in the US. Copying a model is perceived as less risky. 8
VC’s willing to fund the 5000thGroupon Lashou Raised $165M 1. Saw App store stats/read article on TechCrunchDianping $100M 2. It worked in the U.S., low risk 3. No barrier to entry, costs little time and $ 4. If I can move fast enough will be market 55tuan $200M leader, can easily get funding OR I’m already a huge company and this takes only a fraction of my resources to attempt Meituan $50M F Tuan $60M According to Tuan800, an online portal charting group-buying websites in China, the number of websites in the sector has dropped to around 3,907 from its peak of 5,058 last September. 9
Cultural dynamics: Chinese less risk tolerant Lack of startup talent b’c: – Chinese cultural attitude of risk aversion… – Inability to offer competitive salary, residency permits (户口) that allow access to social services, nor additional perks (福利) – Stock options an ineffective method ofSource: TechRice incentivizing 10 employees
U.S. Exit Profile: M&A dominated 11
China’s Exit Profile: Primarily IPO 36 58 IPO IPO M&A M&A 330 299 Chinese Exits 2010 Chinese Exits 2011 M&A mostly limited to non-Internet sectorsSource: Zero2IPO Research Center, Dec 2011 12
Why have acquisitions been so weak forinternet in China? 13
China’s Internet Giants want to do it all Source: CIC 14
Acquisition Psychology US China Your fear is that due to regulatorySpeed Your fear is that if you don’t acquire rising complexities and barriers for M&A, while star, your competitors will you are acquiring a company your competitor will just copy it IP has low perceived value, software IP can be acquired as defensive or patents in China virtually non-IP offensive tactic, or for strategic purposes existent, penalties for patent violation non- deterrents In the war for talent, acquire companies to Most first-time start up teams are not Talent gain valuable developers, managers and perceived as valuable. Fear that acquired entrepreneurs teams will quickly move on to next project. 15
But attitudes are changing Internet giants holding on to major cash reserves, some have set aside acquisition funds, testing the market with majority stake investments Cash Reserves of Chinese Internet Companies Name Cash ($USD) NetEase (NASDAQ: NTES) 1.7 billion Baidu (NASDAQ: BIDU) 1.6 billion Alibaba (HKEX: 1688) 1.5 billion Tencent(HKEX: 0700) 1.25 billion Renren (NASDQ: RENN) 1.23 billion Giant Interactive(NYSE: GA) 966 million Sina (NASDAQ: SINA) 826 million Sohu(NASDAQ: SOHU) 811million Youku(NYSE: YOKU) 631million cTrip(NASDAQ: CTRP) 611 million Focus Media(NASDAQ: FMCN) 591 million “Baidu to invest $306 Million in Shanda (NASDAQ: GAME) 589 million Qunar, Aptly opens travel portal”Source: TechRice 16
Ecosystem Differences US China• Abundant knowledge • Knowledge guarded as sharing, open source power, suspicion of copying education preventing sharing – Angel List model widely accepted – Angel List model still early in Silicon Valley -- easy to share / – Emerging media and browse ideas and deals. entrepreneurial network• VC’s mentor and share 17
Ecosystem: Culture of Trust “The culture of Silicon Valley encourages people with diverse skills and experiences to meet and trust each other and take a chance together.” Victor Hwang Ecosystem of trust slowly developing for investors and entrepreneurs in China. 18
Ecosystem: Infrastructure/Services, US Major social platforms are open, reduces marketing spend Extensive services make startups more efficient and cheaper to operate Trustworthy, scalable infrastructure providers “Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels.” – Dave McClure, 500Startups 19
Ecosystem:Infrastructure/Services, China Major social platforms do not completely share social graph, viral growth more difficult, search engines have monopoly on acquisition channels available to entrepreneurs, driving up costs SaaS services still underdeveloped, many trust issues with data Most infrastructure services offered by large companies, startups do not trust internet giants to host data 20
China’s Angel Funds Est. 2006, Invest in people, Est. 2008, Incubate + network effect, as-needed ideate, hands on, consumer problem solving internet • Yong Che • ShijiJiayuan • Lashou • RYB • Light in the Box • VIPStore Kindergarten • Jumei • Ushi Est. 2009, Incubate + Seed + Early stage TMT investments VC, large resource base, hands • Jumei • Centaur on• PhotoWonder • Meilele • JIaThis • Wonderpod • AppChina • Buding • Tapas • Buding 21
China’s Angels Edward Charles Xu Li Kaifu Lei Jun Tian Xue Xiaoping 22
China’s Angels (cont’d)CaiWenSheng He Boquan Bao Fan JiQi Lu Tanping Ni Zhengdong ZengLiqing 23
China’s Incubators Dalian Beijing Shangha i Hangzho u Taipei Shenzhen 24
China’s Government ProgramsMissionRaise profile of domestic entrepreneurship and incentivize potential entrepreneursBenefits• No string attached, funds, matching funds, cheaper office space, registration help, tax benefits, etc. (specifics depend on the program)Risks• Tedious, relationship driven application process• Bureaucratic reporting requirements• Separate departments responsible for recruiting versus implementation, sometimes resulting in empty promises• Outcomes often measured in quantity and not quality. 25
In sum…Copycat pervasivenessC-level: Lack of experienced talent, especially CXO types. Battle for engineering talentCultural difference – lower appetite for risk, intolerance of failure, unwillingness to share, lack of serial entrepreneursExit environment different: 69% exits IPOs (vs. ~90% M&A in US)Ecosystem… – Innovative environment, education, and mentorship – Lack of services/infrastructure for China – Not as many angels/VCs in China versus US (per capita) 26
ZhenFund 2.0• One of China’s leading angel funds• ZhenFund believes in one principle above all others: Integrity• Founded by Xu Xiaoping in 2006• Recent fund is a collaboration with Sequoia Capital China• Fund size: US $30MM fund (half RMB and USD)• Investment size: Up to $500k USD• Over 80 angel investments in China• www.zhenfund.com for more• Contact: zhenfund@zhenfund.com 27
Yongdan TANG
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