An introduction to mainland China's current situation in terms of an early stage technology companies ecosystems - what's there and what's missing? What does a technopreneur need to do to prepare?
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Technopreneurship, Incubation and Angel Investments in China
1. Technopreneurship, Incubation and Early Stage Investments in China Chris Evdemon (易可睿) Investments & Business Development Manager, Innovation Works Director, Business Angels Network South-East Asia (BANSEA) Founding Member, China Business Angels Network (CBAN) May 2010 1
2. Is there an early stage ecosystem in China? Macro – is there a big enough market and where are the market opportunities? Entrepreneurship – are there talent, drive, skills and ideas? Incubation– are there real ‘turnkey’ services for start-ups? Early Stage Investors– is there an early stage investors community? Ecosystem– are all these components combined together in a conducive environment? Preparation– what do I need to do to get started?
6. Most consumers do not care about brand, although more and more people are starting to have brand awareness.
7. The consumer market is still very fragmentedfor most product / service categories.
8. 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.
9. Emerging middle class has only just started to pay attention to diet, fitness, and a healthy lifestyle.
10. Women have recently started to buy accessories, cosmetics, fancy lingerie, etc. in order to enhance their sense of well-being and self-respect.
12. Market research and other statistical information is usually unreliable.But there is a unique set of challenges … Macro
13. Sina $2.2B Sohu $1.9B NetEase $4.5B Tencent $38B Baidu $25B Shanda $3B Giant $1.8B Perfect World $1.7B Mobile Internet & E-Commerce:Catalyst for the third wave Technology companies Baidu, Tencent, Shanda rose from the ashes of dot-com bust. Web portals in late 1990’s created the first boom. Second Wave First Wave We anticipate an explosive third wave propelled by Mobile Internet, E-commerce, Online Gaming and Cloud Computing. Third Wave Valuation of Listed Companies Mature Market Major Opportunities MOBILE INTERNET E-COMMERCE ONLINE GAMING CLOUDCOMPUTING Macro
28. Google : entry in 2005, share went up from 10% to 35%; exited mainland China andmoved to HK in 2010Chinese Internet has been lucrative: Alibaba Tencent Baidu US $100 Billion + Macro
29. How is the Chinese Internet different? Government regulations Usage Differences(Chart below: more entertainment) User Demographics Differences(average age: U.S. 42 / China 25 years old) Sociologic differences Greater reliance on the Internet for information Users are more exploring in nature Users like densely populated information Chinese Users American Users 10 sec. spent on result page 30-60 sec. spent on result page Macro
30. How is the Chinese Internet different? Internet Café usage > 30% Entertainment centric and content-heavy Music is nearly all unlicensed Video is heavily (but not richly) monetized P2P is extremely popular SNS transitionfrom copycat to localized Blogging rate is much higher than U.S. Mobile will be the explosive growth-catalyst E-commerce is ready to shift from C2C to B2C Gaming RPG flat, but casual / social growing Cloud computing will create a software industry Innovation Works Focus Macro
42. SNS and crowd-sourcing sites that are not copiable but monetizable, as advertising value increasesValue proposition needs to be clear: Amazon: 1-6 360buy: 3, 4, 5 Dianping: 1, 2 Taobao: 3, 4, 6 SaaS, cloud Macro
43. What is very tough to do in China … Simple-minded copying of American darlings Social games in China (no open platform) or U.S. (tough) Logistics-driven e-commerce (if not your strength) MMORPG games (only ~10% growth, hit-driven) Macro
57. What do early-adopter young users want? Top 10 Desired Apps Top 5 Android Apps Smart Dialer Web Search Localized SMS Email IM (QQ, MSN) Browser Music Player Maps Games Youtube E-book Reader Camera & Photo News & Micro-blogging Video SNS (Renren, Kaixin) Macro
58. Today Chinese entrepreneurship is in transition. Few home-grown role models although gradually a new class of serial entrepreneurs is emerging. Entrepreneurship is still a new concept for local graduates – there is peer and family pressure towards ‘secure’ corporate jobs. 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. 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. Entrepreneurship in China Entrepreneurship
68. Zhong Guan Cun(in Beijing’s northwest corner) is still China’s best approach to a Silicon Valley ecosystem. Clear priority to nurture hi-tech innovation start-ups and create an early stage investment environment. Tax incentives’ scheme. 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. “Real-estate minded” incubation, few added value services, no service oriented mentality and lack of expertise / skills required. Many “incubators” but no real incubation … Incubation / Ecosystem
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70. 2008 was a historical high, 2009 a logical correction, 2010 will be a real test.China’s VC market is cooling down? Early Stage
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72. 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.
73. 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. Early Stage
76. In the U.S. Series A and B rounds typically account for over 45% of total funds invested.
77. In the U.S. information technology attracted ~40% of 2009 investment.… but where is Early Stage?! Early Stage
78. … and where is my trade sale exit?! Negligible domestic and cross-border M&A activity takes away one of the most important exit routes for early stage technology investors. Early Stage
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80. However, the stock markets in Shanghai and in Shenzhen continue to rapidly improveespecially in terms of shortening post-IPO lock up, transparency, etc.
81. Government also launched a genuine (?) Growth Enterprises Board (GEB), termed as “China’s NASDAQ”.
82. 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. Improving local IPO market … Early Stage
83. Legal issues – a lot of regulations (new, neither mature nor tested). Innovationis still predominantly university and government driven. Image of Venture Capitalin the eyes of 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”. Vast majority of VCs go for the ‘low hanging fruit’, i.e. later stage, lower risk, higher transparency, pre-IPO type of investments. Very few VCs are truly early-stage-minded and have the necessary experience and skill-set. Local governmentsincreasingly act as a direct investor and/or a LP – what are the implications? Early stage environment concerns … Early Stage
84. Investment CAYMAN / BVI HONG KONG OFFSHORE IN CHINA Contract Licenses LOCAL COMPANY WFOE Transfer Pricing Legal complexity – the “SINA” structure Early Stage
87. In last three years, he has helped several companies get more than $150 million in total in follow-up capital.
88. 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.Early Stage
90. Initial strategic decisions are a usually crucial component for a start-up company’s success or failure. In China flexibility is even more key. Preparatory trips. Spend significant amount of time in China. Develop “guanxi” (关系) or social capital networks to access information and to establish and maintain business relationships. Choose the right local partners! Select and setup the right legal structure: SINA vs. joint venture. Establish a clear pathway to exit. Implement corporate governance and shareholder rights. Manage intellectual property (if you have any). Research, comprehend and ‘navigate’ the complex political and regulatory environment to your competitive advantage. Preparation for China entry Preparation
91. Study and learn from best practices in foreign markets, bring your ‘know how’, add your own “secret sauce”, but … Understand the Chinese local market and adapt your products and business model to the local Chinese context. Where in the value chain is your place in China? Know your competition. You can safely assume it is already done. Find out who, how, where, etc. Add managerial and technical value to grow the local team that most likely does not have much international experience. Choose your location: Beijing vs. Shanghai vs. 2nd tier cities. Government lobbying? Customer facing? Cost basis? Talent hiring? Can you get local government incentives? Brush up your Mandarin! Preparation for China entry Preparation
92. These slides are at:http://www.slideshare.net/evdemon You can find Chris at: http://twitter.com/evdemonhttp://t.sina.com.cn/evdemon Thank you!