2. Startup culture exploding in China
“It’s dynamic, messy, and very different. But Silicon Valley aside, there’s
no better place on earth for tech right now.”
- Kai Lukoff, TechCrunch
“Every year another wave of “sea turtles”—Chinese who have studied or
worked abroad—returns home. Many have mixed with the world’s best
engineers at MIT and Stanford. Many have seen first-hand how Silicon
Valley works.”
- The Economist, March 2012
“China is home to nearly half a billion internet users, twice the online
population in the US. Already home to two of the world’s top five
internet firms by market valuation, China is giving birth to innovative
start-ups and powerhouse billion dollar firms in social networking,
games, media, and e-commerce. “
- Stanford GSB
2
3. VC Funding: USA
VC Landscape in the USA
$28.4 billionin VC funding
for 3,673deals
~1000 internet deals in
2011, representing $6.9bn in
funding
Highly active in
healthcare &
biotech
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report
Data: Thomson Reuters 3
4. VC Funding: China
VC Landscape in China
$13 billionin VC funding for
1,500deals
~268 internet deals in
2011, representing $3.2bn in
funding
Industrial/energy focus,
with booming TMT sector
Source: Zero2IPO Database January 2012
www.zdbchina.com 4
5. Chinese startup scene at inflection
point
Comparison of Investments in China’s VC Market from 2003 - 2011
$14,000 1600
Inv ($mm) 1401
$12,000 # deals 1400
1200
$10,000
1000
$8,000 817
800
$6,000 607 11,725
600
477
440
$4,000
324 400
253 228 5,387
$2,000 177 4,210
3,247 200 Available
2,701 funding
1,269 1,178 1,777 growing
992
$0 0 rapidly
2003 2004 2005 2006 2007 2008 2009 2010 2011
2011: Early stage represented 25% of deals and 18% of amount invested
Source: Zero2IPO Research Center, December 2011
www.zdbchina.com 5
6. China’s 2011 internet investments
E-commerce particularly active….
$5,000 100
93
$4,500 Inv ($mm) 90
$4,000 # deals 80
$3,500 70
$3,000 60
$2,500 50
4,691
$2,000 40
29
$1,500 25 23 30
$1,000 15 20
11
$500 6 10
483 417 551
262 308
$0 29 0
E-commerce SNS Games Marketing Travel Video Others
~10 companies represented the bulk of the e-commerce investments
Source: Zero2IPO Research Center, December 2011
www.zdbchina.com 6
7. Startup challenges in China: “3C, 2E”
Copycat pervasiveness
C-level: Lack of experienced talent, especially CXO types. Battle
for engineering talent
Cultural difference – lower appetite for risk, intolerance of
failure, unwillingness to share, lack of serial entrepreneurs
Exit environment different: 69% exits IPOs (vs. ~90% M&A in US)
Ecosystem…
– Innovative environment, education, and mentorship
– Lack of services/infrastructure for China
– Not as many angels/VCs in China versus US (per capita)
7
8. Why so many copycats?
1 Growing available capital – more than doubled 2010-2011, in
some categories, investors have been willing to fund the
10th, 11th, 12th, etc. followers
2 Low hanging fruit – copying pure internet models is cheap and
easy, many teams believe that executing the fastest and grabbing
market share will lead to funding. E.g.
Groupons, Pinterests, Paths, Shopkicks.
3 Risk Aversion - Both domestic VC’s and foreign capital markets
are more receptive to Chinese start ups who have direct corollary
in the US. Copying a model is perceived as less risky.
8
9. VC’s willing to fund the 5000thGroupon
Lashou Raised $165M
1. Saw App store stats/read article on
TechCrunch
Dianping $100M 2. It worked in the U.S., low risk
3. No barrier to entry, costs little time and $
4. If I can move fast enough will be market
55tuan $200M leader, can easily get funding OR I’m
already a huge company and this takes
only a fraction of my resources to attempt
Meituan $50M
F Tuan $60M
According to Tuan800, an online portal charting group-buying
websites in China, the number of websites in the sector has
dropped to around 3,907 from its peak of 5,058 last September.
9
10. Cultural dynamics: Chinese less risk
tolerant
Lack of startup talent
b’c:
– Chinese cultural
attitude of risk
aversion…
– Inability to offer
competitive
salary, residency
permits (户口)
that allow access
to social
services, nor
additional perks
(福利)
– Stock options an
ineffective
method of
Source: TechRice
incentivizing 10
employees
15. Acquisition Psychology
US China
Your fear is that due to regulatory
Speed
Your fear is that if you don’t acquire rising complexities and barriers for M&A, while
star, your competitors will you are acquiring a company your
competitor will just copy it
IP has low perceived value, software
IP can be acquired as defensive or patents in China virtually non-
IP
offensive tactic, or for strategic purposes existent, penalties for patent violation non-
deterrents
In the war for talent, acquire companies to Most first-time start up teams are not
Talent
gain valuable developers, managers and perceived as valuable. Fear that acquired
entrepreneurs teams will quickly move on to next project.
15
16. But attitudes are changing
Internet giants holding on to major cash reserves, some have set aside
acquisition funds, testing the market with majority stake investments
Cash Reserves of Chinese Internet Companies
Name Cash ($USD)
NetEase (NASDAQ: NTES) 1.7 billion
Baidu (NASDAQ: BIDU) 1.6 billion
Alibaba (HKEX: 1688) 1.5 billion
Tencent(HKEX: 0700) 1.25 billion
Renren (NASDQ: RENN) 1.23 billion
Giant Interactive(NYSE: GA) 966 million
Sina (NASDAQ: SINA) 826 million
Sohu(NASDAQ: SOHU) 811million
Youku(NYSE: YOKU) 631million
cTrip(NASDAQ: CTRP) 611 million
Focus Media(NASDAQ: FMCN) 591 million “Baidu to invest $306 Million in
Shanda (NASDAQ: GAME) 589 million Qunar, Aptly opens travel portal”
Source: TechRice
16
17. Ecosystem Differences
US China
• Abundant knowledge • Knowledge guarded as
sharing, open source power, suspicion of copying
education preventing sharing
– Angel List model widely accepted – Angel List model still early
in Silicon Valley -- easy to share / – Emerging media and
browse ideas and deals. entrepreneurial network
• VC’s mentor and share
17
18. Ecosystem: Culture of Trust
“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
Ecosystem of trust slowly
developing for investors
and
entrepreneurs in China.
18
19. Ecosystem: Infrastructure/Services, US
Major social platforms are
open, reduces marketing spend
Extensive services make startups
more efficient and cheaper to
operate
Trustworthy, scalable infrastructure
providers
“Startup costs have come down dramatically in the last 5-10 years, and online distribution
via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream
consumer marketing channels.” – Dave McClure, 500Startups
19
20. Ecosystem:
Infrastructure/Services, China
Major social platforms do not
completely share social graph, viral
growth more difficult, search
engines have monopoly on
acquisition channels available to
entrepreneurs, driving up costs
SaaS services still
underdeveloped, many trust issues
with data
Most infrastructure services offered
by large companies, startups do not
trust internet giants to host data
20
21. China’s Angel Funds
Est. 2006, Invest in people, Est. 2008, Incubate +
network effect, as-needed ideate, hands on, consumer
problem solving internet
• Yong Che
• ShijiJiayuan • Lashou
• RYB
• Light in the Box • VIPStore
Kindergarten
• Jumei • Ushi
Est. 2009, Incubate + Seed +
Early stage TMT investments
VC, large resource base, hands • Jumei • Centaur
on• PhotoWonder • Meilele • JIaThis
• Wonderpod • AppChina • Buding
• Tapas
• Buding
21
24. China’s Incubators
Dalian
Beijing
Shangha
i
Hangzho
u
Taipei
Shenzhen
24
25. China’s Government Programs
Mission
Raise profile of domestic entrepreneurship and incentivize potential
entrepreneurs
Benefits
• No string attached, funds, matching funds, cheaper office
space, registration help, tax benefits, etc. (specifics depend on the
program)
Risks
• Tedious, relationship driven application process
• Bureaucratic reporting requirements
• Separate departments responsible for recruiting versus
implementation, sometimes resulting in empty promises
• Outcomes often measured in quantity and not quality.
25
26. In sum…
Copycat pervasiveness
C-level: Lack of experienced talent, especially CXO types. Battle
for engineering talent
Cultural difference – lower appetite for risk, intolerance of
failure, unwillingness to share, lack of serial entrepreneurs
Exit environment different: 69% exits IPOs (vs. ~90% M&A in US)
Ecosystem…
– Innovative environment, education, and mentorship
– Lack of services/infrastructure for China
– Not as many angels/VCs in China versus US (per capita)
26
27. ZhenFund 2.0
• One of China’s leading angel funds
• ZhenFund believes in one principle
above all others: Integrity
• Founded by Xu Xiaoping in 2006
• Recent fund is a collaboration with
Sequoia Capital China
• Fund size: US $30MM fund (half RMB
and USD)
• Investment size: Up to $500k USD
• Over 80 angel investments in China
• www.zhenfund.com for more
• Contact: zhenfund@zhenfund.com
27
Notes de l'éditeur
Internet was not included as a separate category in the US VC Investment data, accounting for the seeming discrepancy between Software (20% of the pie chart) and internet deals (about 24% of the total funding amount), it is likely included not only in software but in IT Services, media and entertainment, consumer, etc.
Note: some industry stats different depending on how “VC” is defined, for example:http://blogs.wsj.com/deals/2012/02/02/venture-capitalists-flock-to-china-leave-europe-behind/
Big Chinese internet giants discourage innovation by copying instead of acquiringSource: CIC
*Many Chinese entrepreneurs perceive acquisition as a strategy of last resort, synonymous with failure.
Note: Companies like Tencent are still conflicted internally as to whether adopt open platform strategy or contiCash Reserves of Chinese Internet Companiesnue to buy the best applications (particularly games) it sees on its platform, we may see contradictory behavior from them in the acquisition space. Sources:http://techrice.com/2011/10/02/chinas-internet-companies-ranked-by-cash-on-hand/http://www.techinasia.com/baidu-invests-306-million-in-qunar/
Other challenges:- In China is ICP registration approval can take 2-3 weeks, sties will be inactive during registration, so entrepreneurs need to plan in advance with multiple domain names so that can shift users to alternate site while registration for main site occurs- Beijing has some of the most expensive commercial real estate in the world, and internet is expensive in commercially zoned buildings meaning many teams work in small residential buildings, often having co-living work spaces for employees
Other Early Stage Funds:Chinese Founder’s Fund: http://www.cffpartners.com/portfolio.htmlDaD Asia:http://www.dad-asia.com/
A brief sketch of some of China’s emerging personalities in angel investing天使会: Influential Group of China’s Top Angels (Founded March 2011, http://angel.cyzone.cn/forum/2012/)包凡 BaoFan、蔡文胜CaiWensheng、何伯权 He Boquan、季琦JiQi、雷军 Lei Jun、李开复 Li Kaifu、吕谭平LvZhangping、倪正东 Ni Zhengdong、徐小平XuXiaoping、薛蛮子XueManzi、杨向阳 Yang Xiangyang、曾李青ZengLiqing
Incubators are becoming increasingly popular, Innovation Works has shown good early traction, many are very new.清华大学启迪创新研究员(Beijing)www.tri-tuspark.comInnovation Works (Beijing & Shanghai)Founder: Li Kaifuhttp://www.chuangxin.com/Cloud Valley (Beijing)Founder: Edward Tianhttp://www.cloud-valley.com/ChinAccelerator(Dalian)Founder: Cyril Ebersweilerhttp://chinaccelerator.com/HAXLR8R (Shenzhen and Bay Area)Founder: Cyril Ebersweilerhttp://www.haxlr8r.com/Tisiwi (Hangzhou)Founder: 庞小伟 Long Xiaoweiwww.tisiwi.comYuanfen Flow (Beijing)Founder: David Ben Kayhttp://yuanfenflow.org/incubator/portfolio/China Entrepreneurs Incubation Center (Beijing)Founder: Eric Schmidt (not the Google one)http://www.ce-online.cn/content/incubation-centeriStart(Shanghai)www.istartvc.comMap Source: http://hua.umf.maine.edu/Chinese/maps/chinese_map.gif