Opportunities in China's Startup Ecosystem


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Opportunities in China's Startup Ecosystem

  1. 1. Opportunities in China’s Startup Ecosystem ZhenFund 2013 www.ZhenFund.com
  2. 2. 2   Disclaimer The  material  in  this  presenta/on  has  been  prepared  by  ZhenFund.  This  informa/on  is  given  in  summary  form  and  does  not  purport   to  be  complete.  Informa/on  in  this  presenta/on,  including  forecast  financial  informa/on,  should  not  be  considered  as  advice  or  a   recommenda/on  to  investors  or  entrepreneurs.     This  presenta/on  may  contain  forward  looking  statements  including  statements  regarding  our  intent,  belief  or  current   expecta/ons.  Readers  are  cau/oned  not  to  place  undue  reliance  on  these  forward  looking  statements.  ZhenFund  does  not   undertake  any  obliga/on  related  to  ac/ons  resul/ng  from  this  presenta/on.    
  3. 3. •  Market opportunity, a macro perspective •  Startup ecosystem challenges and opportunities –  New sources of capital (angels, cross-border, government) –  Venture capital/private equity –  Public markets and exit opportunities –  BAT + Q: the internet giants –  Customer acquisition challenges –  Copycats and intellectual property –  Developer services and infrastructure –  Remaining challenges 3   Content
  4. 4. 4   China by the numbers 1.35 billion people 70% urban by 2025 7.5% GDP growth over next 10 years, driven by domestic consumption 2nd largest consumer market after the US
  5. 5. 5   Source: Strangeloop; McKinsey, www.internetworldstats.com/ China 2015 - - - - 780 MILLION INTERNET USERS China 2012 - - - - 564 MILLION INTERNET USERS (42% penetration rate) United States 2012 ----245 million internet users India 2012 ---137 million internet users ~75% internet users access through mobile China has the most internet users globally
  6. 6. 6   $445bn $270bn Online  retail  volume   (2015E)   Shipping costs comparatively low •  44% of China’s population will shop online in 2015, representing 375mm customers •  E-commerce projected to reach 16% of retail sales by 2020 China US Singles day in 2012 for Taobao and Tmall alone generated more than $3bn in sales, triple US Black Friday 2011 sales $3bn Source: Alizila.com “China’s Internet is Giant Shopping Mall” Infograph China’s e-commerce volume to surpass US in 2013 US
  7. 7. 7   $10bn + Mobile gaming projected to grow 50% YoY through 2015 to hit ~$3.5bn USD in revenue and 455mm players Source: Economist “Ours, all ours” Apirl 6th 2013, Data from Morgan Stanley 2012 China Gaming Industry Report, Analysys International China is the world’s largest online gaming market
  8. 8. 8   Travel Advertising Film Luxury Grocery Cosmetics Source: Worldwatch, Guardian.co.uk, Wikipedia CNBC, China.org.cn …and will soon be the #1-2 market globally for:
  9. 9. 9   China produces 70% of the world’s smartphones… …and is also the #1 market for smartphones, •  29% of global shipments in 2013 (E) •  354mm subscriber base (compared to 219mm in the US) •  92% of Chinese 18-30 yo own smartphones Source: Canalys.com Smart phone Market Shipment Forecast 2013 BRIC Countries, “China’s Communication Industry” by tech.163.com, “At D11, It’s Clear, China beats U.S. in mobile and internet” Forbes.com 5/30/2013, Telefonica SA and Financial Times Mobile & smartphone market opportunity
  10. 10. 10   China’s digital divide: mobile internet Source: Analysys International, Morgan Stanley AlphaWise, Flurry Analytics, insidemobileapps.com, computerworld.com, Apple, Stenvall Skoeld & Company analysis , Kai Lukoff, •  Android has 90.1% market share, but Google Play is virtually absent •  Many smartphone users do not download apps themselves, concerned about data plan use for big downloads,tend to buy phones with apps pre-installed by Shuaji 刷 机 distribution companies •  40% of iOS install base in China, but still majority Android •  Savvy customers download apps directly from Apple or through marketplace platforms like 91助手 •  iOS developers can gain brand awareness by engaging Shuabang 刷榜 companies to help them climb app store rankings Most developers are focusing energy on these users… …but many future opportunities are here! Distribution still complicated
  11. 11. •  Market opportunity, a macro perspective •  Startup ecosystem challenges and opportunities –  New sources of capital (angels, cross-border, government) –  Venture capital/private equity –  Public markets and exit opportunities –  BAT + Q: the internet giants –  Customer acquisition challenges –  Copycats and intellectual property –  Developer services and infrastructure –  Remaining challenges 11   Content
  12. 12. 50%50% Insights from 309 Chinese angels who have done at least two deals and committed > 1mm RMB in startup funding, representing 747 deals: 12   China’s angels by the numbers in 2012 Source: Cyzone.com 《中国天使投资报告》创业邦研究中心2012.12出品 Background 72% of angels were previously founders Mostly men 88% are male Sectors Mobile internet, e- commerce, and consumer services are the top three areas for investment Boards 76% take board seats Round Size 60% of their portfolio startups raised < 3mm RMB (~$500k) in their angel round We see this investment strategy declining as Chinese angels become more savvy Geography Beijing dominates angel deals in China, representing 22% of all deal value and 30% of overall deal volume Ownership For 20% of deals, angels took more than 50% of the company
  13. 13. 13   China’s angels are on the rise Source: www.stepvc.com 创业接力天使和清科研究中心 《2012年中国天使投资与天使孵化研究报告,清科研究中心 2012.09,www.zdbchina.com, Cyzone.com 《中国天使投资报告》创业邦研究中心2012.12出品 Angels by type Individual Angel Fund Angel + Incubator Angel Teams 60% of angels will exit by selling shares to VC’s 50% of angels reporting returns of 30%+ 18% report returns of 200%+ 190  (70%)   15  (6%)   61  (22%)   6  (2%)  
  14. 14. Chinese investors are going global and many leading Silicon Valley investment brands have a presence in China, increasing potential for cross-border collaboration and deals 14   Cross-border deals Multiple Chinese VC funds and incubators have a presence in SV Key leading VC’s and US angels already have funds or reps in China
  15. 15. •  Provide cash, tax, and office incentives for startups or talented post-graduates to register for business within their province, city, or city district •  Many programs operated in conjunction with Torch tech parks and incubators 15   Government funding •  The Torch Program: –  Reportedly companies housed in 89 national high tech industrial zones accounted for 7.1% national GDP in 2010 –  500+ tech SME incubators nationwide, claims to have incubated Lenovo, Huawei, Suntech and graduated 16k companies –  State Council established Innofund reports investments of ~9bn RMB in 15,000+ projects since 1999, with 100 domestic IPO’s from portfolio National government Local and national government have two key KPI’s: Increase GDP & Corporate Taxes to that end, A LOT of money is being made available to technology startups Source: www.ctp.gov.cn Provincial, city, district level governments
  16. 16. 16   Government funding Caveats •  High turnover rate. Discontinuity of services and support when officials rotate to other posts or are promoted •  Focus on hardware rather than software. Tangible KPI’s such as brick and mortar or registered capital are primary focus •  Lack of experienced advisors. Officials in charge of programs may have no experience running businesses •  Bureaucratic. Application and reporting requirements burdensome to startups
  17. 17. Major VC funding cool down in 2012 17   992 1,269 1,173 1,777 3,247 4,210 2,701 5,387 13,003 7,320 177 253 228 324 440 607 477 817 1505 1071 0 200 400 600 800 1000 1200 1400 1600 $0   $2,000   $4,000   $6,000   $8,000   $10,000   $12,000   $14,000   2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Inv ($USD mm) # deals Investments in China’s VC Market from 2003 – 2012, estimated 40-50% decline in 2012 Source:, Zero2ipo’s China VC/PE Market Review 2012, hQp://research.pedaily.cn/dowloadfiles/20133613413765.pdf  
  18. 18. Factors affecting capital deployment 18   Source: Wall Street Journal “Fears of an IPO Flood in China” April 16, 2013 •  Macroeconomic and political climate (major CCP leadership change in 2012) •  Poor performance of some Chinese internet stocks on US markets, increased investor scrutiny •  Exit bottleneck in domestic public markets •  Smarter money less willing to burn cash on market land grabs (i.e. group buy and e-commerce sites)
  19. 19. Reasons for optimism in 2013 19   •  One of two Chinese internet IPO’s in the US in 2012, YY, had strong performance on the NASDAQ and paved the way for a more receptive capital market in 2013 •  LightintheBox (ZhenFund portfolio company) June 2013 NYSE IPO •  Alibaba Group mega-IPO in the works •  新三板 New Third Board to expand the over the counter (OTC)market for SME shares domestically, four pilot zones and 140 listings to date, however, listing costs are high for startups (~1mm RMB) and liquidity is low
  20. 20. 20   488   416   351   521   488   435   92   7   13   68   51   49   2007 2008 2009 2010 2011 2012 IPO M&A USA:  IPO  vs.  M&A,  2007  -­‐  2012   Source: Thompson Reuters & National Venture Capital Association, Zero2ipo’s China VC/PE Review 2012 144, 59% 99, 41% China:  IPO  vs.  M&A,  2012   IPOM&A, MBO, Liquidation, etc Exit opportunities: Chinese VC backed companies still skewed towards IPO
  21. 21. But M&A market is improving Internet giants moving on larger scale acquisitions, but primarily only in larger category leaders 21 Q2 2011 Baidu invests $306mm in Qunar Q2 2013 Baidu acquires PPS for $370mm Q3 2012 Suning acquires Redbaby for $66mm
  22. 22. 22   BAT + Q: China’s internet giants SEARCH E-COMMERCE/ PAYMENTS SOCIAL/ GAMING TOOLS NASDAQ (BIDU) 2012 revenue = $3.58bn, primarily advertising 70% search market share Struggling to transition to mobile search, profit margins falling HKSE 1688 ~$175bn transaction volume in 2012 (Tmall B2B and Taobao C2C) ~$40bn 2012 revenue, primarily from advertising 5% of all Chinese retail, 80% market share e- commerce in China 47% Alipay market share for online payments in China, 700mm registered users Now owns 18% of Sina Weibo microblog (48mm DAU) HKSE 0700 2012 revenue = $6.98bn, primarily from value added services/gaming, (also non-trivial e- commerce revenue) ~800mm QQ social network users and 400mm WeChat mobile social network users (200mm MAU) 21% online payments market (Tenpay) NYSE: QiHU 2012 revenue = $239mm, primarily advertising and online games Major portal destination Baidu’s emerging rival in search (15% market share)
  23. 23. 23   Online customer acquisition in China <- Major social platforms are open, reducing customer acquisition cost Social graph information not 100% open to developers -> <- SEO is transparent and mature SEO algorithms change frequently-> <- Email marketing is an established customer acquisition channel Email marketing historically less effective, difficult to get on ISP white list for email providers-> Chinese startups face unique challenges acquiring customers online: <- Mobile app distribution channels fairly concentrated (Apple and Google Play) Shuabang services distort Apple store rankings, Google Play blocked, Android distribution fragmented ->
  24. 24. China’s copycat phenomenon, key factors 24   1  Growing available capital –investors and internet giants willing to fund copycats 2 Low hanging fruit – cheap and easy to copy pure internet/mobile products, wide open spaces in the market lead to land grabs fueled by investor money ex: Groupon, Tumblr, Pinterest, and Path etc clones 3  Risk aversion - Domestic VC’s and foreign capital markets more receptive to Chinese start ups with direct corollary in the US. Copying a model perceived as less risky. 4  Foreign companies often delay too long before tackling the Chinese market
  25. 25. Copying products designed to solve US customer needs is no guarantee of mainstream success in China, many copycats will fail, no breakout success stories for some of the most high profile consumer internet brands* Copycats don’t always work… Successful professionals and business leaders less open to sharing contacts online Leisure micro-blogging and design-focused UGC not yet mainstream activity for Chinese netizens *For Pinterest genre, excludes companies like Mogujie and Meilishuo, originally e-commerce sites with Pinterest UI integrated later Wow.taobao.com www.duitang.com Huaban.comDiandian.com www.woxihuan. com 12  
  26. 26. 26   …but foreign entrants shouldn’t discount them! Launched in June 2011 Netease’s 有道云笔记 (Youdao Yunbiji) at 8mm users reportedly larger than Evernote’s 4mm Chinese user base Youdao even mimics Evernote’s marketing tactics, using similar wording on their Weibo account. Copycats are still an issue!
  27. 27. Copycat mitigation strategies 12   •  Focus on your strengths –  The exterior of pure web and mobile products can be easily copied, but core competencies (customer service, offline resources, advanced IP/tech) are the key to success, expect copycats but don’t be discouraged •  Avoid internet giant territory –  Don’t go after categories and products that can be easily copied by BAT + Q, they have thousands of engineers and millions in cash at their disposal, focus on niche/ vertical markets or businesses with strategic offline resources •  Pick your battles –  Focus on serving the customers who do enjoy using your product or service, rather than conquering the “mass” market •  Make it a local effort –  Get a Chinese investor on board, have a local connection that can pull strings for you when issues arise –  Empower local staff •  Shorten the chain of command for decision making •  Give local GM’s a stake in the business
  28. 28. On dealing with copycats 12   ”Our business is a slow business, so it has to take a lot of time by gaining users’ trust and having them be comfortable with using our product. It’s more of a trust business” - Evernote China’s GM Amy Gu on rivals in China “At the end of the day, it’s still too attractive a market to pass up on.” – Flipboard Product Director for Greater China Alvin Tse “We took something from the music industry, which was to stop treating the customers as users, and start treating them as fans… piracy may not be a bad thing. It can get us more business at the end of the day.” – Mikael Hed, Rovio CEO, on piracy in China “Be patient. I think that approaching the market too aggressively, you can make some mistakes. I think it's best just to be patient and focus on delivering a high- quality experience to Chinese players, and when there are challenges or roadblocks then you just have to take them one at a time and deal with them.” – Mike Morhaime, President and Co-founder Blizzard Entertainment
  29. 29. IP protection is improving 29           “This is a long-term effort … we want the indigenous brands to work together to protect IPR, because if you do not participate today, tomorrow you are the victims.” -­‐  Jack  Ma   •  4/2013 Baidu wins suit against Qihoo for illegally accessing and indexing Baidu’s Baike content, the damages were small (450k RMB), but positive sign for IP protection in China Source: TechinAsia http://www.techinasia.com/china-search-qihoo-360-baidu-market-share/
  30. 30. Startup services: US versus China 30   : Extensive services make startups more efficient and cheaper to operate Large companies gaining traction for IaaS services, but many corollaries for US startup services do not yet exist, are fragmented, or still face UI issues CRM and advertising Data hosting and management Payments and analytics Developer communities and game services ? ?
  31. 31. 31   Internet Speed China’s top startup cities 2X+ slower than US average Average US internet speed ~ 7.4mb/s Source: ChinaCache http://mashable.com/2012/09/28/china-broadband-speed/
  32. 32. Ongoing Challenges: Lack of Trust 32          “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   •  General trust level in society dropped from 62.9/100 in 2011 to 59.7 in 2012 •  Only 30% of people trust strangers met on the street •  64% trust public media •  57.5% trust NGO’s •  52% trust businesses CHEATING IS PERCEIVED AS THE NORM     Trust  in  Chinese  society  hit   an  all-­‐Jme  low  in  2012.     -­‐  The  Blue  Book  of  Social  Mentality   VS Source: http://chinadigitaltimes.net/2013/02/trust-among-chinese-drops-to-record-low/
  33. 33. APPENDIX Additional data points 33  
  34. 34. 34 •  One of China’s leading angel funds •  ZhenFund believes in one principle above all others: Integrity, •  Money with values 创业及自由 •  Founded by Xu Xiaoping in 2006, current fund a collaboration with Sequoia Capital China •  Investment size: Up to $500k USD •  100+ portfolio companies in China •  www.zhenfund.com for more •  Contact: zhenfund@zhenfund.com 34 Who are we? ZhenFund 真格基金
  35. 35. China’s angel funds 35 Est. 2006, $30mm USD Invest in people, high deal volume, cross-border deals Est. 2008, Incubate + ideate, hands on, consumer internet Est. 2009, Incubate + Seed + VC, large professional staff, hands on, Beijing and Shanghai locations Est. 2010, general focus on early stage TMT investments Legend Star, Est. 2008, 400mm RMB fund, 21 person team, incubate with focus on technology Global venture capital firm doubles as one of the most active institutional angels in China Established angel funds in China offer a variety of investment styles and funding amounts for local startups
  36. 36. China’s Angels 36 Edward Tian Charles Xue Li Kaifu Xu Xiaoping Lei Jun •  Many prominent angels are members of China’s “Angel Committee” 天使会, but co-investment still rare, the Silicon Valley party round hasn’t yet made it to China •  China’s top angels primarily investing through fund entities Cloud Valley Innovation Works ZhenFund Shunwei Capital
  37. 37. China’s Angels (cont’d) 37   Cai  WenSheng   He  Boquan   Bao  Fan   Zeng  Liqing  
  38. 38. China’s Incubators 38   Beijing Shanghai Hangzhou Shenzhen Dalian Taipei Many new privately funded incubators emerging
  39. 39. •  Q3 2004 Baidu acquires hao123 (50mm RMB) •  Q3 2010 Shanda acquires Ku6 (share swap and $37.2mm), Eyedentity ($95MM), Mochi Media ($80mm) •  Q3 2010 Tencent acquires Comsenz (valued at >$10mm) •  Q1 2011 Sina acquires 19% share Mecox Lane ($66mm) •  Q1 2011 Baidu invests in Anjuke (led $50mm round) •  Q2 2011 Tencent's strategic 16% stake in eLong ($84.4mm) •  Q2 2011 Baidu invests majority strategic stake in Baidu ($306mm) •  Q4 2011 Tencent strategic 4.6% stake in Huayi Brothers (450mm RMB) •  Q3 2011 Sina acquires 9% stake in Tudou ($66.4mm) •  Q3 2011 Baidu strategic 40% stake in Fanshu.com (47.6mm RMB ) •  Q4 2011 Renren acquires 56.com ($80mm) 39   M&A/Strategic Investments (through 2011)
  40. 40. •  Q2 2012 Ctrip acquires ⻜飞常准 (20mm RMB) •  Q3 2012 Tencent investment in Caixin (undisclosed) •  Q3 2012 Renren invests in Social Finance ($46mm) •  Q3 2012 Tudou-Youku merger ($1bn) •  Q3 2012 苏宁易购 Suning acquires Redbaby 红孩子 ($66mm) •  Q1 2013 Baidu announces plan to make strategic investment in Kingsoft •  Q2 2013 Baidu to acquire PPS for ($370mm) •  Q2 2013 Alibaba takes 18% stake in Sina Weibo ($586mm) 40   M&A/Strategic Investments (2012-2013)
  41. 41. E-commerce •  Alibaba (Aliexpress) •  360buy (JD Express) •  LightintheBox Mobile •  Tencent (WeChat) •  Dolphin Browser •  UCWeb •  Kingsoft 41   Chinese companies going global Made in China for global export, B2C Tencent hoping WeChat will fuel global growth, US base in Palo Alto Based in Wuhan with 50mm global user base Offering products made in China for global customers 25% of 400mm users outside China JV in Japan and eyeing US markets
  42. 42. 42   Google Play Vacuum •  Android represents 90.1% of the OS market in China, but Google Play is virtually absent •  Multiple 3rd party android marketplaces vying for user attention
  43. 43. 43  43   China’s Internet Giants want to do it all Source: CIC Source:    CIC