Download - China's Entrepreneurship Ecosystem
China’s Entrepreneurship Ecosystem
ZhenFund 2012
Startup culture exploding in China
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“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
VC Funding: USA
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VC Landscape in the USA
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ ReportData: Thomson Reuters
$28.4 billion in VC
funding for 3,673 deals
~1000 internet deals in 2011, representing
$6.9bn in funding
Highly active in
healthcare & biotech
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VC Funding: ChinaVC Landscape in China
Source: Zero2IPO Database January 2012 www.zdbchina.com
~268 internet deals in 2011, representing
$3.2bn in funding
Industrial/energy focus,
with booming TMT sector
$13 billion in VC
funding for 1,500 deals
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Chinese startup scene at inflection point
2011: Early stage represented 25% of deals and 18% of amount invested
Source: Zero2IPO Research Center, December 2011www.zdbchina.com
Available funding growing rapidly
2003 2004 2005 2006 2007 2008 2009 2010 2011$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
0
200
400
600
800
1000
1200
1400
1600
992 1,269 1,178 1,7773,247
4,2102,701
5,387
11,725
177253 228
324
440
607
477
817
1401Inv ($mm)# deals
Comparison of Investments in China’s VC Market from 2003 - 2011
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China’s 2011 internet investments
~10 companies represented the bulk of the e-commerce investments
Source: Zero2IPO Research Center, December 2011www.zdbchina.com
E-commerce SNS Games Marketing Travel Video Others$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
0
10
20
30
40
50
60
70
80
90
100
4,691
483 262 417 551 30829
93
2925 23
116
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Inv ($mm)# deals
E-commerce particularly active….
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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)
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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.
VC’s willing to fund the 5000th Groupon
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1. Saw App store stats/read article on TechCrunch
2. It worked in the U.S., low risk3. No barrier to entry, costs little time
and $4. If I can move fast enough will be
market leader, can easily get funding OR I’m already a huge company and this takes only a
fraction of my resources to attempt
Lashou
Dianping
55tuan
Meituan
Raised $165M
$100M
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.
$200M
$50M
F Tuan $60M
Cultural dynamics: Chinese less risk tolerant
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Lack of startup talent b’c: – Chinese cultural
attitude of risk aversion…
– Inability to offer competitive salary, residency permits (户口 ) that allow access to social services, nor additional perks (福利 )
– Stock options an ineffective method of incentivizing employees
Source: TechRice
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U.S. Exit Profile: M&A dominated
China’s Exit Profile: Primarily IPO
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Chinese Exits 2010M&A mostly limited to non-Internet
sectors
330
58
IPOM&A
299
36
IPOM&A
Chinese Exits 2011
Source: Zero2IPO Research Center, Dec 2011
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Why have acquisitions been so weak for internet in China?
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China’s Internet Giants want to do it all
Source: CIC
Your fear is that due to regulatory complexities and barriers for M&A, while you are acquiring
a company your competitor will just copy it
Acquisition Psychology
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US China
Sp
eed
Tale
nt
IP
Your fear is that if you don’t acquire rising star, your competitors will
IP can be acquired as defensive or offensive tactic, or for strategic purposes
In the war for talent, acquire companies to gain valuable developers, managers and
entrepreneurs
IP has low perceived value, software patents in China virtually non-existent, penalties for
patent violation non-deterrents
Most first-time start up teams are not perceived as valuable. Fear that acquired
teams will quickly move on to next project.
But attitudes are changingInternet giants holding on to major cash reserves, some have set asideacquisition funds, testing the market with majority stake investments
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Name Cash ($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) 811 million
Youku (NYSE: YOKU) 631 million
cTrip (NASDAQ: CTRP) 611 million
Focus Media (NASDAQ: FMCN) 591 million
Shanda (NASDAQ: GAME) 589 million “Baidu to invest $306 Million in Qunar, Aptly opens travel
portal”
Cash Reserves of Chinese Internet Companies
Source: TechRice
Ecosystem Differences
US• Abundant knowledge
sharing, open source education– Angel List model widely
accepted in Silicon Valley -- easy to share / browse ideas and deals.
• VC’s mentor and share
China• Knowledge guarded as
power, suspicion of copying preventing sharing– Angel List model still early– Emerging media and
entrepreneurial network
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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.
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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
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Ecosystem: Infrastructure/Services, China
Most infrastructure services offered by large companies, startups do not
trust internet giants to host data
SaaS services still underdeveloped, many trust issues with data
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
China’s Angel Funds
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Est. 2006, Invest in people, network effect, as-needed
problem solving•Shiji Jiayuan•Light in the Box•Jumei
Est. 2008, Incubate + ideate, hands on, consumer
internet • Lashou• VIPStore• Ushi
Early stage TMT investments•Jumei •Meilele•Buding
Est. 2009, Incubate + Seed + VC, large resource base,
hands on•Wonderpod•Tapas•Buding
•Centaur•JIaThis
•Yong Che•RYB
Kindergarten
•PhotoWonder•AppChina
China’s Angels
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Edward Tian
Charles Xue
Li KaifuXu
XiaopingLei Jun
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China’s Angels (cont’d)
Cai WenSheng He Boquan Bao Fan Ji Qi Lu Tanping Ni Zhengdong Zeng Liqing
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China’s Incubators
Beijing
Shanghai
Hangzhou
Shenzhen
Dalian
Taipei
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China’s Government Programs
MissionRaise profile of domestic entrepreneurship and incentivize
potential entrepreneursBenefits• 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.
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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)
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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: [email protected]
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