Technopreneurship, Incubation and Angel Investments in China
Technopreneurship, Incubation and Early Stage Investments in China<br />Chris Evdemon (易可睿)<br />Investments & Business Development Manager, Innovation Works<br />Director, Business Angels Network South-East Asia (BANSEA)<br />Founding Member, China Business Angels Network (CBAN)<br />May 2010<br />1<br />
Is there an early stage ecosystem in China?<br />Macro – is there a big enough market and where are the market opportunities?<br />Entrepreneurship – are there talent, drive, skills and ideas?<br />Incubation– are there real ‘turnkey’ services for start-ups?<br />Early Stage Investors– is there an early stage investors community?<br />Ecosystem– are all these components combined together in a conducive environment?<br />Preparation– what do I need to do to get started?<br />
A strong middle class is emerging …<br />Macro<br />
Retail (i.e. consumerism) is booming …<br />… in the midst of the financial crisis!<br />Macro<br />
<ul><li> 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.
Market research and other statistical information is usually unreliable.</li></ul>But there is a unique set of challenges …<br />Macro<br />
Sina<br />$2.2B<br />Sohu<br />$1.9B<br />NetEase<br />$4.5B<br />Tencent<br />$38B<br />Baidu<br />$25B<br />Shanda<br />$3B<br />Giant<br />$1.8B<br />Perfect World<br />$1.7B<br />Mobile Internet & E-Commerce:Catalyst for the third wave<br />Technology companies Baidu, Tencent, Shanda rose from the ashes of dot-com bust.<br />Web portals in late 1990’s created the first boom.<br />Second Wave<br />First Wave<br />We anticipate an explosive third wave propelled by Mobile Internet, E-commerce, Online Gaming and Cloud Computing.<br />Third Wave<br />Valuation of Listed Companies<br />Mature Market<br />Major Opportunities<br />MOBILE INTERNET<br />E-COMMERCE<br />ONLINE GAMING<br />CLOUDCOMPUTING<br />Macro<br />
Challenges of multinational giants:<br /><ul><li>Too short-term profit focused;
No willingness to tailor for China.</li></ul>Chinese Internet:Lucrative space reserved for locals!<br />History of troubled multinational giants:<br /><ul><li>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.
Google : entry in 2005, share went up from 10% to 35%; exited mainland China andmoved to HK in 2010</li></ul>Chinese Internet has been lucrative:<br />Alibaba<br />Tencent<br />Baidu<br />US $100 Billion<br />+<br />Macro<br />
How is the Chinese Internet different?<br />Government regulations<br />Usage Differences(Chart below: more entertainment)<br />User Demographics Differences(average age: U.S. 42 / China 25 years old)<br />Sociologic differences<br />Greater reliance on the Internet for information<br />Users are more exploring in nature<br />Users like densely populated information<br />Chinese Users<br />American Users<br />10 sec. spent on result page<br />30-60 sec. spent on result page<br />Macro<br />
How is the Chinese Internet different?<br />Internet Café usage > 30%<br />Entertainment centric and content-heavy<br />Music is nearly all unlicensed<br />Video is heavily (but not richly) monetized<br />P2P is extremely popular<br />SNS transitionfrom copycat to localized<br />Blogging rate is much higher than U.S.<br />Mobile will be the explosive growth-catalyst<br />E-commerce is ready to shift from C2C to B2C<br />Gaming RPG flat, but casual / social growing<br />Cloud computing will create a software industry<br />Innovation Works Focus<br />Macro<br />
E-Commerce Emergence in China<br />In 2009 Chinese E-Commerce Market was US$36 billion (grew 107% yoy!) <br />E-Commerce development<br /><ul><li>Payment has been solved via escrow, COD
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</li></ul>Value proposition needs to be clear:<br />Amazon: 1-6 360buy: 3, 4, 5<br />Dianping: 1, 2 Taobao: 3, 4, 6<br />SaaS, cloud<br />Macro<br />
What is very tough to do in China …<br />Simple-minded copying of American darlings<br />Social games in China (no open platform) or U.S. (tough)<br />Logistics-driven e-commerce (if not your strength)<br />MMORPG games (only ~10% growth, hit-driven)<br />Macro<br />
Mobile Internet Analysis & Opportunities<br />Monopoly 3 carriers<br />3G deployed<br />233 million users & growing<br />Mobile Internet Users in China<br /><ul><li>CMCC (TDS-CDMA)
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)</li></ul>Macro<br />
Mobile Internet User Segmentation<br />83% of the users are younger than 30<br />Demographics of 800M potential users<br />Hi-End White Collar<br />Aspiring Young White Collar, Students<br />“3-Low” Users:Blue Collar, Military, Migrant WorkerS<br />Observations<br />2000 RMB is important price barrier<br /><ul><li>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</li></ul>Macro<br />
Today Chinese entrepreneurship is in transition. <br />Few home-grown role models although gradually a new class of serial entrepreneurs is emerging.<br />Entrepreneurship is still a new concept for local graduates – there is peer and family pressure towards ‘secure’ corporate jobs.<br />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.<br />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.<br />Entrepreneurship in China<br />Entrepreneurship<br />
New “Homegrown” Entrepreneurs<br />程炳皓(Binhao Chen)：<br /><ul><li>CEO, kaixin001.com
Zhong Guan Cun(in Beijing’s northwest corner) is still China’s best approach to a Silicon Valley ecosystem.<br />Clear priority to nurture hi-tech innovation start-ups and create an early stage investment environment. Tax incentives’ scheme.<br />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.<br />“Real-estate minded” incubation, few added value services, no service oriented mentality and lack of expertise / skills required.<br />Many “incubators” but no real incubation …<br />Incubation / Ecosystem<br />
<ul><li>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.</li></ul>China’s VC market is cooling down?<br />Early Stage<br />
The financial crisis has changed the game …<br /><ul><li> 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. </li></ul>Early Stage<br />
Source: FENWICK & WEST LLP<br /><ul><li> 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.</li></ul>… but where is Early Stage?!<br />Early Stage<br />
… and where is my trade sale exit?!<br />Negligible domestic and cross-border M&A activity takes away one of the most important exit routes for early stage technology investors.<br />Early Stage<br />
<ul><li>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. </li></ul>Improving local IPO market …<br />Early Stage<br />
Legal issues – a lot of regulations (new, neither mature nor tested).<br />Innovationis still predominantly university and government driven. <br />Image of Venture Capitalin the eyes of young Chinese entrepreneurs is that of a cash provider, no more (no appreciation of added value). <br />Deal sourcing and closing is still “guanxi”-based: “only with people I know personally” or “through my network”.<br />Vast majority of VCs go for the ‘low hanging fruit’, i.e. later stage, lower risk, higher transparency, pre-IPO type of investments.<br />Very few VCs are truly early-stage-minded and have the necessary experience and skill-set.<br />Local governmentsincreasingly act as a direct investor and/or a LP – what are the implications?<br />Early stage environment concerns …<br />Early Stage<br />
Very limited local angel activity …<br />Angel<br />VC<br />$28B<br />$19B<br />U.S.<br />Incubator<br />Angels<br />?<br />Market<br />$7B<br />China<br />Founders<br />Lei Jun (雷军):<br /><ul><li>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.</li></ul>Early Stage<br />
… but some new angel groups!<br />Early Stage<br />
Initial strategic decisions are a usually crucial component for a start-up company’s success or failure. In China flexibility is even more key.<br />Preparatory trips. Spend significant amount of time in China.<br />Develop “guanxi” (关系) or social capital networks to access information and to establish and maintain business relationships.<br />Choose the right local partners! <br />Select and setup the right legal structure: SINA vs. joint venture. Establish a clear pathway to exit.<br />Implement corporate governance and shareholder rights.<br />Manage intellectual property (if you have any).<br />Research, comprehend and ‘navigate’ the complex political and regulatory environment to your competitive advantage. <br />Preparation for China entry<br />Preparation<br />
Study and learn from best practices in foreign markets, bring your ‘know how’, add your own “secret sauce”, but … <br />Understand the Chinese local market and adapt your products and business model to the local Chinese context.<br />Where in the value chain is your place in China?<br />Know your competition. You can safely assume it is already done. Find out who, how, where, etc.<br />Add managerial and technical value to grow the local team that most likely does not have much international experience.<br />Choose your location: Beijing vs. Shanghai vs. 2nd tier cities. Government lobbying? Customer facing? Cost basis? Talent hiring? <br />Can you get local government incentives?<br />Brush up your Mandarin!<br />Preparation for China entry<br />Preparation<br />
These slides are at:http://www.slideshare.net/evdemon<br />You can find Chris at:<br />http://twitter.com/evdemonhttp://t.sina.com.cn/evdemon<br />Thank you!<br />