Angels, VCs and Fundraising in China 2010


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This presentation explains the current status in China's early stage ecosystem, in terms of angel investors and venture capital. It also provides aspiring entrepreneurs with some advice on the local fundraising process.

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Angels, VCs and Fundraising in China 2010

  1. Innovation Works Confidential and Proprietary 1 Angels, VCs and Fundraising in China Chris Evdemon (易可睿) General Manager – Incubation Programs, Innovation Works Director, Business Angels Network South-East Asia (BANSEA) Founding Member, China Business Angels Network (CBAN) November 2010
  2. What does a start-up entrepreneur need? Market … A big enough market with major opportunities. Entrepreneurship … Talent, drive, skills and ideas widely available. Incubation … Real ‘turnkey’ services for start-ups. Early Stage Investors… A community of angel investors and early stage VCs. Innovation … A culture of innovation. An early stage Ecosystem
  3. What makes Silicon Valley so special? ? © Aydin Senkut Why is Silicon Valley important to China? • Constant inflow if ideas, know-how, best practices, talent, investment professionals, etc.
  4. The Venture Lifecycle © Aydin Senkut
  5. The Venture Lifecycle (Cap Table of a Big Hit)
  6. Angel Investors • Wealthy individuals, which invest their OWN MONEY. • Investments range between $10K - $1M per person, per deal. • Investment decision is typically quick and flexible. Investment terms are “lighter” than VC. • An angel may be, but not necessarily is an “accredited” or truly knowledgeable investor. • Invest with the expectation of a financial return but also as a “hobby” and usually with a willingness to help. • Commonly the first external investor(s) in a start-up. • Invest usually locally and prefer to syndicate in small groups with fellow angels they mutually trust. • Usually care about the entrepreneurs and the companies they invest in and interested in building personal relationships with the Founders and other team members. • Offer advice and guidance to Founders, their own personal networks and, when applicable, core domain expertise. Angel VC ? $28 B$19 B $7B U.S. >30 years China <10 years
  7. Very limited local angel activity in China… Lei Jun (雷军): • Chairman 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 could not get funded, now it has two rounds of investment for more than $40 million. Western Mindset vs. Local? Zhou Hongyi (周鸿祎): • Ex-Yahoo! China GM. Founder of 360 and 3721, has been called “king of the Internet channels” and “father of malware”. • Invested in Xunlei, Discuz, Qvod, Kugou, Xunyou, and others. • Among the top 20 client software companies in China, Zhou's portfolio has 4. • Xunlei was a late comer compared with FlashGet and underperforming in IDG's porfolio. Zhou picked it out and mentored it to scale. It's now the 3rd biggest client software company in China.
  8. Venture Capital • Professional investment managers that invest OTHER PEOPLE’S MONEY. • Most businesses do not use VC money. VC is only one of many financing options for a company. • But, most successful technology startups eventually have taken VC money. • Investments range between $500K - $20M per deal. • Major differences between early stage vs. growth stage VC. • Investment decision is typically slower and more bureaucratic, but also usually more diligent. Investment terms can be very strict. • Typical early stage VC “fund”:  10 year limited partnership.  Limited Partners (LPs) provide capital. They expect a minimum of 30% net IRR.  Investment professionals (?) – the General Partners (GPs) do the investing. This includes deal sourcing, due diligence, deal structuring and post-investment portfolio management.  Both GPs and LPs share in the carried interest (profit after return of investment capital to LPs), usually 20% for GPs and 80% for LPs.  Usually LPs pay the GPs an annual management fee of 2%.
  9. Today, in the U.S. … • The traditional VC model seems “broken”. Why? • It costs very little to do an internet start-up. • Seed Accelerators (e.g. ycombinator, TechStars, etc.):  Growing in popularity;  Efficient use of capital …  … despite the high failure rate. • Superangels (e.g. Ron Conway, Marc Andreessen, Dave McClure, Aydin Senkut, and many others). • Success based on fast failure, feedback and iteration. • Incremental investment: high-risk, but high-reward. • Big, mature, internet platform companies:  Google, Microsoft, Yahoo, Ebay, Amazon, AOL, Facebook, Apple, etc.  Lots of users, lots of money.  Outsourcing innovation.  Lots of M&A (but small and early). • Great for angel investors & entrepreneurs … • … not so great for VCs (the returns are not good enough!). © Dave McClure © Dave McClure
  10. • China is already the 2nd largest VC market in the world but still only about 1/4th of the U.S. • 2008 was a historical high, 2009 a logical correction after the financial crisis, 2010 has been a real test. China’s VC market is recovering fast …
  11. • The current global financial crisis has temporarily slowed down but has not 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. The trend is even more acute in 2010. The financial crisis has changed the game …
  12. • In China, there is very little attention to early stage, furthermore … • Traditional industries still account for more than 50% of the VC money invested in China. • In the U.S. Series A and B rounds typically account about half of total funds invested. • In the U.S. information technology attracted ~40% of 2009 investment. Source: FENWICK & WEST LLP … but where is Early Stage?!
  13. Early Stage VCs in China • The VC in industry in China is at its infancy. • Vast majority of VCs go for the ‘low hanging fruit’, i.e. later stage, lower risk, higher transparency, pre-IPO type of investments. • Good and experienced VC investment managers are a scarce resource in China. • Good and experienced EARLY STAGE VC investment managers are a VERY scarce resource in China. • Good and experienced EARLY STAGE VC investment managers that:  have previous own start-up / operational experience (i.e. ex-founders / entrepreneurs), and  truly work ‘hands-on’ with the team(s) to add value, at least on a weekly basis are a VERY VERY scarce resource in China. • On a more positive note, in the past couple of years there is rapid accumulation of top talent in the Chinese VC industry; also overcrowding at the growth stage is bound to bring some people back to early stage.
  14. Early (?) Stage VCs in China
  15. But what about trade sale exits?! Negligible domestic and cross-border M&A activity takes away one of the most important exit routes for early stage technology investors.
  16. • Lack of domestic 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 improve especially 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. • Q3 2010 – historical record in VC exits (>100). Improving local IPO market …
  17. • Image of Venture Capital in the eyes of most 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”. • Legal issues – a lot of regulations (new, neither mature nor tested). • Local governments increasingly act as a direct investor and/or a LP – what are the implications? There are still considerable challenges! IN CHINA OFFSHORE Contract CAYMAN / BVI HONG KONG WFOE LOCAL COMPANY Transfer Pricing Licenses Investment
  18. Selection Criteria • Entrepreneurs select their investors just as much (if not even more) as investors select their deals. • “Smart Money”: value add should be by far the most important selection criterion – how can this investor help you over and above money? • The background of the GP(s) championing your deal – domain expertise. • Potential synergies with any other existing portfolio investments. • Track record of successfully exiting portfolio companies in your sector, in various different ways. • Due diligence process is a “pain” but it is also a beneficial process – think positive!
  19. Preparation for Fundraising • Fundraising is a non-stop process which always takes more time and more effort than Founders initially believe. • Prepare well – do your own “homework” on the VC. • Prepare your fundraising materials (one-paragraph pitch, one-page executive summary and slides deck). • Prepare for due diligence. • Discuss and decide with your co-founders your own negotiation limits (e.g. valuation, various preference clauses and shareholders’ rights). • Get referrals from trusted and prominent people in the VC’s network. • Meet the VC’s investment team members on various occasions / activities – “become a known quantity”. • Arrange the first formal meeting when ready – you have one chance to get this right. Stand out! © Aydin Senkut
  20. Preparation for Fundraising • Fundraising timeline is totally dependent on all other aspects of the business. • Think of different potential growth scenarios, demonstrate that you are prepared and understand the implications. • Put the forecast of all critical factors of your business evolution on the same timeline chart, e.g. product development, customer acquisition, staff, revenues, cost, profitability and fundraising rounds.
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