Opportunities in China's Startup Ecosystem


Published on

The 2013 update from ZhenFund on the state of China's technology startup ecosystem. Last time we outlined the 3C's 2E's in understanding the differences between China and Silicon Valley. This year we focus on some of the positive trends we see developing in the startup ecosystem.

  • Hello dear, My name is mariam nasrin, I know that this email will meet you in a good health and also surprisingly but God has his own way of bringing people together. Nice to Meet you I would appreciate if you can reply me back( mariamnasrin2@gmail.com ) So that i can explain you more about me. thank Yours mariam.
    Are you sure you want to  Yes  No
    Your message goes here
  • Note on slide 6, $270bn represents the estimate for the total e-commerce volume in the US by 2015. Some formatting issues with the label disappearing, working on a new update!
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Opportunities in China's Startup Ecosystem

  1. 1. Opportunities in China’sStartup EcosystemZhenFund 2013www.ZhenFund.com
  2. 2. 2  DisclaimerThe  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 challenges3  Content
  4. 4. 4  China by the numbers1.35 billion people 70% urban by 20257.5% GDP growth over next 10 years,driven by domestic consumption2nd largest consumermarket after the US
  5. 5. 5  Source: Strangeloop; McKinsey, www.internetworldstats.com/China 2015- - - - 780 MILLION INTERNET USERSChina 2012- - - - 564 MILLION INTERNET USERS(42% penetration rate)United States 2012----245 million internet usersIndia 2012---137 million internet users~75% internet users access through mobileChina has the most internet users globally
  6. 6. 6  $445bn$270bnOnline  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 2020ChinaUSSingles day in 2012 for Taobao and Tmallalone generated more than $3bn in sales,triple US Black Friday 2011 sales$3bnSource: Alizila.com “China’s Internet is Giant Shopping Mall” InfographChina’s e-commerce volume to surpass US in 2013
  7. 7. 7  $10bn +Mobile gaming projected togrow 50% YoY through 2015 tohit ~$3.5bn USD in revenue and455mm playersSource: Economist “Ours, all ours” Apirl 6th 2013, Data from Morgan Stanley 2012 China Gaming Industry Report, Analysys InternationalChina is the world’s largest online gaming market
  8. 8. 8  Travel Advertising FilmLuxury Grocery CosmeticsSource: 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 smartphonesSource: Canalys.com Smart phone Market Shipment Forecast 2013 BRIC Countries, “China’s Communication Industry” by tech.163.com, “AtD11, It’s Clear, China beats U.S. in mobile and internet” Forbes.com 5/30/2013, Telefonica SA and Financial TimesMobile & smartphone market opportunity
  10. 10. 10  China’s digital divide: mobile internetSource: Analysys International, Morgan Stanley AlphaWise, Flurry Analytics, insidemobileapps.com, computerworld.com, Apple,Stenvall Skoeld & Company analysis•  Android has 90.1% market share,but Google Play is virtually absent•  Three key apps: WeChat, Mobile QQ,and Taobao•  Many smartphone users do notdownload apps themselves, ratherbuy phones with apps pre-installedby Shuaji 刷机 distributioncompanies•  40% of iOS install base in China,but still majority Android•  Savvy customers download appsdirectly from Apple or throughmarketplace platforms like 91助手•  iOS developers can gain brandawareness by engaging Shuabang刷榜 companies to help themclimb app store rankingsMost developers arefocusing energy on theseusers……but many futureopportunities 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 challenges11  Content
  12. 12. 50%50%Insights from 309 Chinese angels who have done at least two deals andcommitted > 1mm RMB in startup funding, representing 747 deals:12  China’s angels 2012 by the numbersSource: Cyzone.com 《中国天使投资报告》创业邦研究中心2012.12出品Background72% of angelswere previouslyfoundersMostlymen88% aremaleSectorsMobile internet, e-commerce, andconsumer servicesare the top threeareas for investmentInvolvement76% ofangels takeboard seatsRound Size60% of their portfoliostartups raised < 3mmRMB (~$500k) in theirangel roundWe see thisinvestmentstrategy decliningas Chinese angelsbecome more savvyGeographyBeijing dominates angeldeals in China,representing 22% of alldeal value and 30% ofoverall deal volume, 2-3xhigher than any otherprovinceOwnershipFor 20% of deals,angels took more than50% of the company
  13. 13. 13  China’s angels are on the riseSource: 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 typeIndividualAngel FundAngel + IncubatorAngel Teams60% of angels willexit by sellingshares to VC’s50% of angelsreporting returns of30%+18% report returnsof 200%+190  (70%)  15  (6%)  61  (22%)  6  (2%)  
  14. 14. Chinese investors are going global and many leading Silicon Valley investmentbrands have a presence in China, increasing potential for cross-bordercollaboration and deals14  Cross-border dealsMultiple Chinese VC funds andincubators have a presence in SVKey leading VC’s and US angelsalready have funds or reps in China
  15. 15. •  Provide cash, tax, and office incentives forstartups or talented post-graduates toregister for business within their province,city, or city district•  Many programs operated in conjunction withTorch tech parks and incubators15  Government funding•  The Torch Program:–  Reportedly companies housed in 89 nationalhigh tech industrial zones accounted for7.1% national GDP in 2010–  500+ tech SME incubators nationwide,claims to have incubated Lenovo, Huawei,Suntech and graduated 16k companies–  State Council established Innofund reportsinvestments of ~9bn RMB in 15,000+projects since 1999, with 100 domestic IPO’sfrom portfolioNational governmentLocal and national government have two key KPI’s:Increase GDP & Corporate Taxesto that end, A LOT of money is being made available to technology startupsSource: www.ctp.gov.cnProvincial, city, district levelgovernments
  16. 16. 16  Government fundingCaveats•  High turnover rate. Discontinuity of services and support whenofficials rotate to other posts or are promoted•  Focus on hardware rather than software. Tangible KPI’s such asbrick and mortar or registered capital are primary focus•  Lack of experienced advisors. Officials in charge of programs mayhave no experience running businesses•  Bureaucratic. Application and reporting requirements burdensometo startups
  17. 17. Major VC/PE funding cool down in 201217  992 1,269 1,178 1,7773,2474,2102,7015,38711,725177253 228324440607477817140102004006008001000120014001600$0  $2,000  $4,000  $6,000  $8,000  $10,000  $12,000  $14,000  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Inv ($mm)# dealsInvestments in China’s VC/PE Market from 2003 – 2012, estimated 40-50% decline in 2012Source: Zero2IPO Research Center, December 2011, www.zdbchina.com, Zero2ipo’s China VC/PE Review H1 2012, Zero2IPO “M&A Outlook 2013”
  18. 18. Factors affecting capital deployment18  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 Chineseinternet stocks on US markets,increased investor scrutiny•  Exit bottleneck in domestic publicmarkets•  Smarter money less willing to burncash on market land grabs (i.e. groupbuy and e-commerce sites)
  19. 19. Reasons for optimism in 201319  •  One of two Chinese internet IPO’s in theUS in 2012, YY, had strong performanceon the NASDAQ and paved the way for amore receptive capital market in 2013•  LightintheBox (ZhenFund portfoliocompany) June 2013 NYSE IPO•  Alibaba Group mega-IPO in the works•  新三板 New Third Board to expand theover the counter (OTC)market for SMEshares domestically, four pilot zones and140 listings to date, however, listingcosts 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 2012IPO M&AUSA:  IPO  vx.  M&A,  2007  -­‐  2012  Source: Thompson Reuters & National Venture Capital Association, Zero2ipo’s China VC/PE Review H1 201299,77%29,23%China:  IPO  vx.  M&A,  1H2012  IPOM&A, MBO, Liquidation, etcExit opportunities still skewed towards IPO
  21. 21. But M&A market is improvingInternet giants moving on larger scale acquisitions, but primarily onlyin larger category leaders21Q2 2011Baidu invests $306mm inQunarQ2 2013Baidu acquires PPS for$370mmQ3 2012Suning acquires Redbaby for$66mm
  22. 22. 22  BAT + Q: China’s internet giantsSEARCH E-COMMERCE/PAYMENTSSOCIAL/GAMINGTOOLSNASDAQ (BIDU)2012 revenue = $3.58bn,primarily advertising70% search marketshareStruggling to transitionto mobile search, profitmargins fallingHKSE 1688~$175bn transactionvolume in 2012 (TmallB2B and Taobao C2C)~$40bn 2012 revenue,primarily fromadvertising5% of all Chinese retail,80% market share e-commerce in China47% Alipay marketshare for onlinepayments in China,700mm registered usersNow owns 18% of SinaWeibo microblog(48mm DAU)HKSE 07002012 revenue = $6.98bn,primarily from valueadded services/gaming,(also non-trivial e-commerce revenue)~800mm QQ socialnetwork users and400mm WeChat mobilesocial network users(200mm MAU)21% online paymentsmarket (Tenpay)NYSE: QiHU2012 revenue =$239mm, primarilyadvertising and onlinegamesMajor portal destinationBaidu’s emerging rival insearch (15% marketshare)
  23. 23. 23  Online customer acquisition in China<- Major social platforms are open, reducing customeracquisition costSocial graph information not 100% open to developers -><- SEO is transparent and matureSEO algorithms change frequently-><- Email marketing is an established customer acquisitionchannelEmail marketing historically less effective, difficult to geton 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 Playblocked, Android distribution fragmented ->
  24. 24. China’s copycat phenomenon, key factors24  1  Growing available capital –investors andinternet giants willing to fund copycats2 Low hanging fruit – cheap and easy to copypure internet/mobile products, wide openspaces in the market lead to land grabs fueledby investor money ex: Groupon, Tumblr,Pinterest, and Path etc clones3  Risk aversion - Domestic VC’s and foreigncapital markets more receptive to Chinesestart ups with direct corollary in the US.Copying a model perceived as less risky.4  Foreign companies often delay too long beforetackling the Chinese market
  25. 25. Copying products designed to solve US customer needs is no guarantee ofmainstream success in China, many copycats will fail, no breakout successstories for some of the most high profile consumer internet brands*Copycats don’t always work…Successful professionals andbusiness leaders less open tosharing contacts onlineLeisure micro-blogging and design-focusedUGC not yet mainstream activity for Chinesenetizens*For Pinterest genre, excludes companies like Mogujie and Meilishuo, originally e-commerce sites with Pinterest UI integrated laterWow.taobao.comwww.duitang.comHuaban.comDiandian.com www.woxihuan.com12  
  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 usersreportedly larger than Evernote’s 4mm Chinese user baseYoudao even mimics Evernote’s marketing tactics, using similar wording on theirWeibo account. Copycats are still an issue!
  27. 27. Copycat mitigation strategies12  •  Focus on your strengths–  The exterior of pure web and mobile products can be easily copied, but corecompetencies (customer service, offline resources, advanced IP/tech) are the key tosuccess, 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, theyhave 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, ratherthan conquering the “mass” market•  Make it a local effort–  Get a Chinese investor on board, have a local connection that can pull strings foryou 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 copycats12  ”Our business is a slow business, so it has to take a lot of time by gaining users’ trustand 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 thecustomers as users, and start treating them as fans… piracy may not be a badthing. 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 makesome mistakes. I think its best just to be patient and focus on delivering a high-quality experience to Chinese players, and when there are challenges or roadblocksthen 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 improving29          “This is a long-term effort … we want the indigenous brands towork together to protect IPR, because if you do not participatetoday, tomorrow you are the victims.” -­‐  Jack  Ma  •  4/2013 Baidu wins suitagainst Qihoo for illegallyaccessing and indexingBaidu’s Baike content, thedamages were small (450kRMB), but positive sign forIP protection in ChinaSource: TechinAsia http://www.techinasia.com/china-search-qihoo-360-baidu-market-share/
  30. 30. Startup services: US versus China30  : Extensive services make startups moreefficient and cheaper to operateLarge companies gaining traction for IaaSservices, but many corollaries for US startupservices do not yet exist, are fragmented, or stillface UI issuesCRM and advertisingData hosting and managementPayments and analyticsDeveloper communities and game services??
  31. 31. 31  Internet SpeedChina’s top startup cities 2X+ slower than US averageAverage US internet speed ~ 7.4mb/sSource: ChinaCache http://mashable.com/2012/09/28/china-broadband-speed/
  32. 32. Ongoing Challenges: Lack of Trust32          “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 societydropped from 62.9/100 in2011 to 59.7 in 2012•  Only 30% of people truststrangers met on the street•  64% trust public media•  57.5% trust NGO’s•  52% trust businessesCHEATING IS PERCEIVED ASTHE NORM    Trust  in  Chinese  society  hit  an  all-­‐Jme  low  in  2012.    -­‐  The  Blue  Book  of  Social  Mentality  VSSource: http://chinadigitaltimes.net/2013/02/trust-among-chinese-drops-to-record-low/
  33. 33. APPENDIXAdditional data points33  
  34. 34. 34•  One of China’s leading angel funds•  ZhenFund believes in one principle above allothers: Integrity,•  Money with values 创业及自由•  Founded by Xu Xiaoping in 2006, currentfund a collaboration with Sequoia CapitalChina•  Investment size: Up to $500k USD•  100+ portfolio companies in China•  www.zhenfund.com for more•  Contact: zhenfund@zhenfund.com34Who are we? ZhenFund 真格基金
  35. 35. China’s angel funds35Est. 2006, $30mm USD Invest in people,high deal volume, cross-border dealsEst. 2008, Incubate + ideate, hands on,consumer internetEst. 2009, Incubate + Seed + VC, largeprofessional staff, hands on, Beijing andShanghai locationsEst. 2010, general focus on early stage TMTinvestmentsLegend Star, Est. 2008, 400mm RMB fund, 21person team, incubate with focus on technologyGlobal venture capital firm doubles as one of themost active institutional angels in ChinaEstablished angel funds in China offer a variety of investment styles andfunding amounts for local startups
  36. 36. China’s Angels36Edward Tian Charles Xue Li Kaifu Xu Xiaoping Lei Jun•  Many prominent angels are members of China’s “AngelCommittee” 天使会, but co-investment still rare, the SiliconValley party round hasn’t yet made it to China•  China’s top angels primarily investing through fund entitiesCloud 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 Incubators38  BeijingShanghaiHangzhouShenzhenDalianTaipeiMany new privately fundedincubators 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 Tencents 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)•  LightintheBoxMobile•  Tencent (WeChat)•  Dolphin Browser•  UCWeb•  Kingsoft41  Chinese companies going globalMade in China for global export, B2CTencent hoping WeChat will fuel global growth, USbase in Palo AltoBased in Wuhan with 50mm global user baseOffering products made in China for global customers25% of 400mm users outside ChinaJV in Japan and eyeing US markets
  42. 42. 42  Google Play Vacuum•  Android represents 90.1% of the OS market in China, but GooglePlay 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: CICSource:    CIC