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Technopreneurship, Incubation and Angel Investments in China
 

Technopreneurship, Incubation and Angel Investments in China

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An introduction to mainland China's current situation in terms of an early stage technology companies ecosystems - what's there and what's missing? What does a technopreneur need to do to prepare?

An introduction to mainland China's current situation in terms of an early stage technology companies ecosystems - what's there and what's missing? What does a technopreneur need to do to prepare?

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    Technopreneurship, Incubation and Angel Investments in China Technopreneurship, Incubation and Angel Investments in China Presentation Transcript

    • Technopreneurship, Incubation and Early Stage Investments in China
      Chris Evdemon (易可睿)
      Investments & Business Development Manager, Innovation Works
      Director, Business Angels Network South-East Asia (BANSEA)
      Founding Member, China Business Angels Network (CBAN)
      May 2010
      1
    • 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?
    • A strong middle class is emerging …
      Macro
    • Retail (i.e. consumerism) is booming …
      … in the midst of the financial crisis!
      Macro
      • Most consumers are still predominantly price sensitiveand initially have a sense of mistrust for anything new.
      • Most consumers do not care about brand, although more and more people are starting to have brand awareness.
      • The consumer market is still very fragmentedfor most product / service categories.
      • 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.
      • Emerging middle class has only just started to pay attention to diet, fitness, and a healthy lifestyle.
      • Women have recently started to buy accessories, cosmetics, fancy lingerie, etc. in order to enhance their sense of well-being and self-respect.
      • “Newly rich” social class phenomena.
      • Market research and other statistical information is usually unreliable.
      But there is a unique set of challenges …
      Macro
    • Sina
      $2.2B
      Sohu
      $1.9B
      NetEase
      $4.5B
      Tencent
      $38B
      Baidu
      $25B
      Shanda
      $3B
      Giant
      $1.8B
      Perfect World
      $1.7B
      Mobile Internet & E-Commerce:Catalyst for the third wave
      Technology companies Baidu, Tencent, Shanda rose from the ashes of dot-com bust.
      Web portals in late 1990’s created the first boom.
      Second Wave
      First Wave
      We anticipate an explosive third wave propelled by Mobile Internet, E-commerce, Online Gaming and Cloud Computing.
      Third Wave
      Valuation of Listed Companies
      Mature Market
      Major Opportunities
      MOBILE INTERNET
      E-COMMERCE
      ONLINE GAMING
      CLOUDCOMPUTING
      Macro
    • Challenges of multinational giants:
      • Too short-term profit focused;
      • Local team not empowered;
      • Inflexible;
      • Insufficient attention to local market needs:
      • “Global” product mentality;
      • 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
      • eBay: entry in 2003, Eachnet acquisition (nearly 100% market share), “sold” <5%domestic business in 2006
      • MSN: entry in 2004, distant #2 (~10% share) in instant messaging, not in top 5 inportal & search
      • AOL: JV with Lenovo in 2001, FM 365 portal, shut down in 2004, entered again in2008 & shut down in 2009
      • Amazon: entry in 2005 by acquiring #2 player Joyo, which has been unprofitableand losing share
      • Myspace: entry in 2006 as local company with minority ownership by News Corp. Going nowhere.
      • Youtube: sporadically blocked (<5% share), blocked in 2008 (0% share)
      • Facebook: <5% share, blocked in 2009
      • Twitter: blocked in 2010
      • Google : entry in 2005, share went up from 10% to 35%; exited mainland China andmoved to HK in 2010
      Chinese Internet has been lucrative:
      Alibaba
      Tencent
      Baidu
      US $100 Billion
      +
      Macro
    • How is the Chinese Internet different?
      Government regulations
      Usage Differences(Chart below: more entertainment)
      User Demographics Differences(average age: U.S. 42 / China 25 years old)
      Sociologic differences
      Greater reliance on the Internet for information
      Users are more exploring in nature
      Users like densely populated information
      Chinese Users
      American Users
      10 sec. spent on result page
      30-60 sec. spent on result page
      Macro
    • How is the Chinese Internet different?
      Internet Café usage > 30%
      Entertainment centric and content-heavy
      Music is nearly all unlicensed
      Video is heavily (but not richly) monetized
      P2P is extremely popular
      SNS transitionfrom copycat to localized
      Blogging rate is much higher than U.S.
      Mobile will be the explosive growth-catalyst
      E-commerce is ready to shift from C2C to B2C
      Gaming RPG flat, but casual / social growing
      Cloud computing will create a software industry
      Innovation Works Focus
      Macro
    • E-Commerce Emergence in China
      In 2009 Chinese E-Commerce Market was US$36 billion (grew 107% yoy!)
      E-Commerce development
      • Payment has been solved via escrow, COD
      • Logistics problems also solved
      • Youth becoming avid online spenders
      • Taobao = 50% of packages shipped
      • C2C is currently nearly 90% of E-Commerce
      • B2C rapidly growing, gaining trust
      E-commerce Accelerates Advertising
      • E-Commerce makes advertising measurable & targetable
      • E-Commerce makes advertising more valuable
      Macro
    • User
      Pre-purchase search
      Decision influence
      Shopping
      Payment
      Logistics & Service
      1
      2
      3
      4
      5
      Platform
      6
      China E-Commerce Analysis & Opportunities
      Bank, carrier, escrow
      Customer Service
      Microblog & communities
      Productsearch, yelp
      B2B/B2C/C2C
      • Billion-dollar companies will emerge from in 3, 4, 5; however, low-margin & transaction-oriented
      • 1, 2, 6 best shows strength of Internet above and most suitable for technology e-commerce companies
      • B2C companies need tools & platforms to build site & acquire customers (enabling traditional players)
      • Higher-margin opportunities may emerging in social/entertainment shopping & new Internet brands
      • SNS and crowd-sourcing sites that are not copiable but monetizable, as advertising value increases
      Value proposition needs to be clear:
      Amazon: 1-6 360buy: 3, 4, 5
      Dianping: 1, 2 Taobao: 3, 4, 6
      SaaS, cloud
      Macro
    • What is very tough to do in China …
      Simple-minded copying of American darlings
      Social 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
    • Mobile Internet Analysis & Opportunities
      Monopoly  3 carriers
      3G deployed
      233 million users & growing
      Mobile Internet Users in China
      • CMCC (TDS-CDMA)
      • CUTC (WCDMA)
      • CT (CDMA2000)
      Opportunities & Challenges
      • Carriers are betting on Mobile Internet due to ARPU pressure and competition
      • Ecosystem needs devices, bandwidth, applications to create a virtuous cycle
      • Challenges:
      • Smart phones are too expensive (US$600 – $1000)
      • 3G bandwidth is still too expensive
      • Yet users are younger (83% of Mobile Internet users are below 30) and not rich
      • Apps should focus on entertainment (killing time) not productivity (saving time)
      Macro
    • Mobile Internet User Segmentation
      83% of the users are younger than 30
      Demographics of 800M potential users
      Hi-End White Collar
      Aspiring Young White Collar, Students
      “3-Low” Users:Blue Collar, Military, Migrant WorkerS
      Observations
      2000 RMB is important price barrier
      • High-end users are a small minority
      • Must focus on aspiring young users before “3-low” users
      • Aspiring Young users are existing Internet users
      • Young users require lower prices
      Macro
    • What do early-adopter young users want?
      Top 10 Desired Apps
      Top 5 Android Apps
      Smart Dialer
      Web Search
      Localized SMS
      Email
      IM (QQ, MSN)
      Browser
      Music Player
      Maps
      Games
      Youtube
      E-book Reader
      Camera & Photo
      News & Micro-blogging
      Video
      SNS (Renren, Kaixin)
      Macro
    • 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 China
      Entrepreneurship
    • New “Homegrown” Entrepreneurs
      程炳皓(Binhao Chen):
      • CEO, kaixin001.com
      • SINA1998~2008
      郭去疾(Alan Guo):
      • CEO, lightinthebox.com
      • Google2005~2008
      刘建国(Jianguo Liu):
      • CEO, aibang.com
      • Baidu2000~2007
      古永锵(Victor Koo):
      • CEO, youku.com
      • Sohu1999~2005
      汪海兵(Haibing Wang):
      • CEO, 51mole.com
      • Tencent2004~2007
      王树彤(Diane Wang):
      • CEO, DHGate.com
      • Microsoft 1993~1999
      陈年(Nian Chen):
      • CEO,Vancl.com
      • Joyo2000~2005
      刘阳(Sunny Liu):
      • CEO, 51wan.com
      • Kingsoft2001~2006
      Entrepreneurship
    • 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
      • Already the 2nd largest VC market in the world but still only about 1/4thof the U.S.
      • 2008 was a historical high, 2009 a logical correction, 2010 will be a real test.
      China’s VC market is cooling down?
      Early Stage
    • 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.
      • 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.
      • 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
    • 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 …
      • Traditional industries still account for almost 50% (!) of the VC money invested in China.
      • In the U.S. Series A and B rounds typically account for over 45% of total funds invested.
      • In the U.S. information technology attracted ~40% of 2009 investment.
      … but where is Early Stage?!
      Early Stage
    • … 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
      • Lack ofdomestic IPO exit was one of the most critical obstacles in RMB investment up until the last couple of years.
      • However, the stock markets in Shanghai and in Shenzhen continue to rapidly improveespecially in terms of shortening post-IPO lock up, transparency, etc.
      • Government also launched a genuine (?) Growth Enterprises Board (GEB), termed as “China’s NASDAQ”.
      • 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
    • 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
    • Investment
      CAYMAN / BVI
      HONG KONG
      OFFSHORE
      IN CHINA
      Contract
      Licenses
      LOCAL COMPANY
      WFOE
      Transfer Pricing
      Legal complexity – the “SINA” structure
      Early Stage
    • Very limited local angel activity …
      Angel
      VC
      $28B
      $19B
      U.S.
      Incubator
      Angels
      ?
      Market
      $7B
      China
      Founders
      Lei Jun (雷军):
      • Former president of KingSoft
      • Angel Investor of UCWeb, Vancl, and many other start-ups.
      • In last three years, he has helped several companies get more than $150 million in total in follow-up capital.
      • 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
    • … but some new angel groups!
      Early Stage
    • 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 entry
      Preparation
    • 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 entry
      Preparation
    • These slides are at:http://www.slideshare.net/evdemon
      You can find Chris at:
      http://twitter.com/evdemonhttp://t.sina.com.cn/evdemon
      Thank you!