"The Global VC: China"

1. 1
The Early Stage Tech Ecosystem in
China
Chris Evdemon (易可睿)
Partner, Innovation Works
June 2014

2. What does any tech startup founder want?
Ecosystem
An early stage ecosystem.
Talent
Pool
Domestic
Market
Start-Up
Services
Financing
Culture

3. Understanding China
China
A booming middle class leads to
consumption growth never seen before.
36
193
0
50
100
150
200
250
300
2012 2022
Upper Middle Class
Mass Middle Class
0%
10%
20%
30%
40%
50%
60%
2005 2015 2025
Private Consumption (% of GDP)Urban Households
In 2013, U.S. >70%,
India >60%.

4. Understanding China
China
It’s a volume play. It’s incredibly challenging to operate.
Holiday Travel
Customer Service
Career Fair
Dating Event
Internet Café
Logistics

5. The Chinese Internet
Internet
79% 76%
57%
72%
83%
71%
55%
34%
70%
89% 91%
38% 34% 35%
11%
71%
0%
20%
40%
60%
80%
100%
News Search Email IM Music Gaming Blog Ecommerce
Different Usage of Internet
Enormous, mobile-centric, information overloaded.
Different demographics, usage and aesthetics.

6. The Chinese Internet
China
Appealing to the Chinese
grassroots users is what builds
amazing businesses.
Affordable
Entertainment
Curiosity
& Discovery
Self Expression Communication
Virtual Identity
& Pride
Bargain
Shopping

7. Reserved for locals and cut-throat competitive …
Internet
Most competitive market in the world.
Users expect everything for free, have near-zero
loyalty and are ruthlessly vocal
in social media about all products.
Dead
Abandoned
Inaccessible

8. Innovation, China-style …
Internet
Copy-news + blog integration
Social + Games + Qzone
Free Music + Q&A community +
cloud computing
Free listings, AdWords up-sell
Netflix + Hulu + smart ads
COD + proprietary logistics +
warehousing
Inspired
by international
“first-movers”
Localized
by integrating most
relevant features
Iterated
with amazing speed
and micro-innovations
Internationalized
starting from the
emerging markets

9. Android rules …
Internet
… and is at the heart of China’s next few multi-billion dollar companies!

10. Everything is ( real ) freemium …
Internet
… and the world has a lot to learn from China!
• Chinese online games’ hierarchy of needs.
• Deep understanding of human psychology,
desire, weakness.
• Result = 4x U.S. ARPPU, while 10% of the U.S.
per capita income.
GAMES
PAID
FREE

11. Technopreneurship in China
Entrepreneurship
Entrepreneurship is cool. not so cool.
Young people are risk taking. averse.
Failure is a plus. not acceptable.
Success stories and role models are everywhere. scarce.
The start-up ecosystem has been around for 40 years. barely 5 years.
Recirculation of capital and know-how is in its Nth iteration. 1st iteration.
But, the pace of change is near zero. lightning fast.
A good startup ecosystem is defined by its degree
of recirculation of capital and know-how.
A new class of Chinese
technopreneurs has emerged:
Hungry for
success.
Familiar with
the local
market.
Able to iterate
extremely
quickly.
Grew up with
the Internet.
+
+
+ +
$250K Chinese
“lean start-ups”

12. Starting-up in China
Entrepreneurship
Home-grown CEOs need mentoring.
 Entrepreneurs are often one-dimensional.
 Limited cutting edge innovation and imagination.
 Limited business, industry, and operational experience.
 Few home-grown role models.
 Everyone wants to be the boss.
Difficult to assemble a complete and
complementary team.
 Limited access to resources, network, and talent.
 Information flow is not fluid in China.
 Sharing culture is limited.
 >250,000 software engineers graduate annually but
hiring top talent is almost “mission impossible”.
 Angel investors are few and immature.
 They offer minimal value-add, unfair deals and have
unreasonable return expectations.
 Very few VCs have technical / product / market
understanding to evaluate early-stage opportunities.
The immature ecosystem leads to a variety of challenges.
Legal complexity.
The “VIE” structure.
IN CHINA
OFFSHORE
Contract
CAYMAN / BVI
HONG KONG
WFOE
LOCAL
COMPANYTransfer Pricing
Operating
Licenses
USD Investment
Nascent angel network.
Limited VC attention
to early stage.

13. Start-up services are scarce …
Services
China needs a lot more start-up friendly services.
© Zhen Fund
• Proper cloud infrastructure.
• Law and accounting firms that understand
Founders’ needs and can defer payments.
• Recruiters specializing in the tech industry.
• Banks that are entrepreneur-friendly and can
provide short-term liquidity.
• Modern co-working spaces that are affordable and
easy to commute to.
• Incubators that go beyond real estate, have
professional support services and offer fair deals.
• More local events, meet-ups and professional tech
media.
Various services:
Incubators / Accelerators:

14. Limited ( local ) angel ( ? ) investment activity …
Angel VC
?
$30B
$20B
$7B
Financing
Despite recent progress,
still short of Silicon Valley’s
“smart money” angel
investor definition, both in
terms of quality, quantity
and fairness.
… but gradually joined by
more and more successful
entrepreneurs, as well as early
employees / senior executives
from companies like Baidu,
Alibaba, Tencent, etc. who
start investing in start-ups and
mentoring Founders.

15. Venture Capital in China
• Already the 2nd largest VC market in the world but still only
about 1/3rd of the U.S.
• Chinese GPs are by now almost entirely local.
• Early-stage-minded GPs with previous own start-up /
operational experience are a scarce resource in China.
• Traditional industries still account for about 50% of the VC
money invested in the market.
• RMB funds are in the ascendancy and increasingly preferred
by entrepreneurs.
• Beijing (especially for TMT) is the place to be.
• 2014 is seeing major deal activity, as there are still a lot of
funds in the market with capital to deploy, and …
• … fundraising has been relatively easier for China GPs, as the
“China story” has not yet run out of steam.
• China IPOs were hit hard in the past few years but have a
major resurgence in 2014.
Financing
Growing and improving, but with limited attention to
- and relevant skillset for - early stage investments.

16. Strategic investments and M&A
• Anjuke – $50M
(2011)
• Qunar – $300M
(2011)
• Dianxin (2012)
• PPS – $370M
(2013)
• 91.com – $1.9B
(2013)
• Umeng (2013)
• AutoNavi –
$300M (2013)
• SINA Weibo –
$600M (2013)
• PPTV (2013)
• Kanbox (2013)
• UCWeb (2014)
• Comsenz (2010)
• eLong – $85M
(2011)
• Caixin (2012)
• Sogou – $450M
(2013)
Unprecedented level of activity by all major players in the last 3 years.
Major strategic deals for product,
user base and market positioning …
But also talent
acquisitions!
And industry-wide
consolidation for
online games.
Financing

17. Beware, China is coming out to the world!
Ever-increasing outflow of capital, products, business models and talent.
Financing
China
Emerging
Markets
Developed
Markets
Recent U.S. Investments International Expansion Model
Talent Constraints and … the Solution!

18. Contact me via:
http://www.iwna.io/
http://twitter.com/evdemon
Thank you!