Handbook for Finnish Start-ups for Entering Chinese Market

Executive summary

1. China’s boom for start-ups, capital and mass entrepreneurship

2. Key start-up cities in China

3. Incubation boom, context and business types

4. Key incubators for Finnish start-ups in China

5. Success stories - Tips for Finnish start-ups

6. Summary - Entry options and incubator selection

7. Appendix

Agenda

1. China’s boom for start-ups, capital and mass entrepreneurship

In 2015, about 12 000 new companies founded each day in China with a total of 4.4 million newly registered companies during the year (CAGR 21.6%).

Over 80% of the registered companies in the tertiary industry (services).

In 2015, venture capital (VC) allocated to China’s start-up sector reached USD 49 billion in deals making it the world’s second largest VC market after the US.

Canada

10

20

30

40

60

70

80

90

PERCENTAGEINCREASEINNEWBUSINESSESINSELECTEDCOUNTRIES2010-2015

=Increaseinnumberofstart-ups

50

100

Percentageincrease(%)

Japan US Australia India UK China

1. China’s boom for start-ups - Macro trends and drivers

Nigeria

80

160

240

320

480

560

620

700

COUNTRIESWITHTHEHIGHESTNUMBEROFINTERNETUSERSASOFJUNE2016(inmillions)

=NumberofInternetusers

400

780

Numberofusers(million)

Japan USBrazil IndiaRussia China

721.4

462.1

139.1

268.9

115.1103.197.2

Urbanization adding over 350 million new people to urban population by 2030, when China’s total urban population is expected to reach 990 million people. By 2030, China will have over 220 cities with a population of over 1 million.

Digitalization accelerating growth of Internet-related businesses thanks to over 720 million Chinese Internet users, of which over 90% using a smartphone to access the Internet. Average time spent on Internet per day by a Chinese consumer equalling 3.8 hours.

URBANIZATION

DIGITALIZATION

CENTRALGOVERNMENT LargeCompanieslikeBAT

CAPITAL START-UPPLATFORMS ENTREPRENEURIALSPIRIT

VCfrompublicandprivatesources

Subsidiesandtaxcuts

Seedandangelinvestments

Incubators

Co-workingandmakerspaces

Onlinecommuni esofentrepreneurs

“Massentrepreneurship”guidelinebycentral

government

SuccessstoriesandexamplesbytheBATand

otherunicorns

START-UPS

1. China’s boom for start-ups - Start-up funding

5

10

15

20

25

0

30

35

USDbillion

40

80

120

160

200

0

240

280

1

3

1

3

11

36

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

USDbillion

DISCLOSEDTECHINVESTMENTSINCHINESESTARTUPS

NEWMONEYADDEDTOCHINESEGOVERNMENTVCFUNDS

• As China’s economy decelerates start-ups are one of the few asset classes with strong growth potential. Thus, it has been relatively easy for tech entrepreneurs to secure funding from government funds, VCs, PEs and the Internet giants like Baidu, Alibabaand Tencent (the BAT).

• Chinese government support for technology start-ups started at large scale in 2014. As a result, in 2015 the government VC funds raised about RMB 1.5 trillion (USD 220 billion).

1. China’s boom for start-ups - Start-up funding

TWO MAIN TYPES OF FUNDS/INVESTORS IN CHINA

USD VENTURE FUNDS

• Usually prioritized by foreign start-ups or SMEs in China, as these funds can invest in companies all around the world in addition to China.

• Usually invest in foreign start-ups through special purpose vehicle in Hong Kong or other offshore locations, since if the foreign start-up is a wholly foreign-owned enterprise (WFOE) it is not entitled to accept local RMB investments.

• Major USD funds using special purpose vehicle include GGV Capital, IDG Capital Partners and Gobi Partners.

• Foreign start-ups in China can also benefit from the USD funds because of the global mind-set and experience that USD funds bring to the start-up.

USD + RMB VENTURE FUNDS

• Major USD + RMB funds in China include SAIF Partners, KPCB China and TDF Capital.

• Holders of RMB/CNY currency investing predominantly in Chinese start-ups.

• Possible for foreign entrepreneurs to get an investment from RMB funds, but it is often more bureaucratic. Or, foreign start-ups can get RMB funding directly from the government, but it might require changes in the start-up’s legal structure.

• Hence, if a start-up seeking funding from RMB funds, better set up a domestic Chinese company and pass ownership to a Chinese person, or set up a JV with a Chinese partner.

• Major RMB funds in China include Shenzhen Capital Group and New Margin Ventures.

RMB VENTURE FUNDS

1. China’s boom for start-ups - Start-up ecosystem

START-UPCOMMUNITY

• Promoters• Network• Bestprac ces

• A tude

POLICY

FINANCE

GLOBALANDDOMESTICMARKETS

CORPORATIONS(B2B)

CONSUMERS(B2C)

TRENDSINFRASTRUCTUREANDSUPPORT

EDUCATIONANDQUALIFICATIONS

R&DENTITIES

TALENTPOOL

Are you ready for China?

Page 10

Steps for licensing technology

1. File for IPR protection in

home country and in China

2. Confirm technology is

legally importable in China

3. Select a Chinese import partner/

licensee

6. Sign the contract

5. Seek approval from MOFCOM for

contracts under approval system

4. Negotiate a technology

transfer agreement

7. Register the contract

with relevant government institutions

8. Relationship management

and compliance monitoring

Note: Although most technologies can be imported into China, to be sure, you should consult the Catalogue for Prohibited and Restricted Technology Imports (the ‘Technology Import Catalogue’), published by the Ministry of Science and Technology (MOST) and the Catalogue for the Guidance of Foreign Investment Industries (the ‘Investment Catalogue’), jointly published by the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC).

Licensing contracts must be approved by and registered with the Ministry of Commerce. Use of confidentiality agreements and non-compete agreements are important.

Documentation generally required for patent licensing

1. Patent licensing request;

2. Patent licensing agreement;

3. Patent certificate;

4. Identification documents of the licensor;

5. Identification documents of the licensee;

6. Power of attorney;

7. If the agreement has not been filed within three months, an additional declaration of the effectiveness of the agreement will have to be produced;

8. Proof of official change of name if the one used now is not the same as the one used in the agreement.

General provisions for trademark licensing

• A clear description of the mark;

• The purpose or purposes of the licence (i.e., for merchandising);

• The territory and/or distribution channels to which the licence applies;

• Whether the licence is exclusive or non-exclusive;

• A statement or statements that no other right title or interest in the mark is granted beyond the

1. China’s boom for start-ups - Innovation policy and regulations

Note: Although most technologies can be imported into China, to be sure, you should consult the Catalogue for Prohibited and Restricted Technology Imports by Ministry of Science and Technology!

STEPS OF LICENCING A TECHNOLOGY IN CHINAGeneral tips to protect the

IPR in China: Register your intellectual

property rights (IPR).

Be vigilant and patrol trade

fairs and surf various B2B and

B2C websites (e.g. Alibaba,

Taobao) to keep eye on

potential infringing articles.

In case of identifying an

infringement, enforce your

rights by entering into Notice

and Take Down procedures by

yourself as well as by

consulting professional law

firms about further

enforcement proceedings.

Consult free advisory of China

IPR SME Helpdesk: www.china-

iprhelpdesk.eu

2. Key start-up cities in China - Beijing

Shenzhen

Beijing

Shanghai

Hangzhou

Guangzhou

Chengdu

• Beijing the largest start-up hub in China and the closest resemblance to Silicon Valley. Only in few years, Beijing has become home of the second largest number of valuable tech start-ups in the world after Silicon Valley.

• Beijing having mature investment environment with high efficiency in allocation of capital. In 2015, Beijing placed over 1,700 fresh investments accounting for a major stage of the total VC investments within China equalling USD 41.8 billion (vs. 241 investments in Shanghai respectively).

• Beijing’s key start-up hub located in Zhongguancun district, where about 50 start-ups are established and registered each day. Zhongguancun is also the hub of Chinese unicorns, of which the most famous ones include Xiaomi (smartphone maker, valued USD 46 billion), Meituan-Dianping (USD 18 billion) and Didi-Kuaidi (USD 34 billion).

BEIJING-SPECIALFEATURES

ü POPULATION:13.45millionpeople(oneofthelargestdomes cmarketsintheworld).ü COSTLEVEL:Veryhigh.Beijing’saveragesalarylevelhighestinChinawithamonthly

averageincomeofRMB9,227(2015).

ü GOVERNMENTSUPPORTFORSTART-UPS:LaunchofaUSD6.4billionstart-upfundin2015.Inaddi on,therearetaxcuts,administra vesubsidies,R&Dsupport,whileBeijing’smunicipalgovernment’soffersUSD100,000toeligiblestartupswithavisionintechnology.

ü TALENTPOOL:China’sho esttalentpoolduetoPeking,TsinghuaandRenminUniversi es.

ü LANGUAGECAPABILITY:Interna onalenvironment,highchancetogetalonginEnglish,whileChinesepreferred.

ü TRANSPORTATION:DirectflightfromFinland,excellentflightandrailwayconnec onstootherChineseci es.

2. Key start-up cities in China - Shanghai

• Shanghai still Mainland China’s most international and open city in regard to global business and flow of goods, services and foreign talents. In 2015, Shanghai represented 18% of total investments (USD 41.6 billion) made into start-ups in China equalling about USD 7.5 billion.

• Even though Shanghai’s start-up community somewhat smaller than in Beijing, Shanghai is more accessible for foreign companies. Since mid 2016, over 70,000 start-ups have been set up in Shanghai being 20% more than in 2015.

• Shanghai the top go-to location for foreign investors currently representing 10% of all investment activities occurring in Shanghai.

• Shanghai’s government supporting the city’s start-up ecosystem. It also offers a permanent residence permit relatively easily for the tech entrepreneurs.

Shenzhen

Beijing

Shanghai

Hangzhou

Guangzhou

Chengdu

SHANGHAI-SPECIALFEATURES

ü POPULATION:14.43millionpeople.ü COSTLEVEL:Veryhigh.Shanghai’saveragesalarylevelsecondhighestinChinaa er

BeijingwithamonthlyaverageincomeofRMB8,664(2015).

ü GOVERNMENTSUPPORTFORSTART-UPS:Investorscanbecompensatedforupto60%oftheirini alinvestmentdependingonsomefactorssuchassizeoftheventureandnumberofemployees.Moreflexiblevisaandworkpermitpolicyappliedtotechentrepreneurs.

ü TALENTPOOL:OneofChina’sbesttalentpoolsduetoJiaoTong,FudanandTongjiUniversi es.

ü LANGUAGECAPABILITY:Veryinterna onalenvironment,onecangetalongwithEnglish.

ü TRANSPORTATION:DirectflightfromFinland,excellentflightandrailwayconnec onstootherChineseci es.

2. Key start-up cities in China - Shenzhen

Shenzhen

Beijing

Shanghai

Hangzhou

Guangzhou

Chengdu

• Shenzhen has enjoyed relatively open policies since 1980, when it was the first city designated to be China’s Special Economic Zone. Hence, Shenzhen has already long been China’s key hub for original equipment manufacturers (OEM) of all kinds of consumer and technological products.

• As a result, Shenzhen’s start-up ecosystem now housing a massive number of technology and hardware companies from all over the world including Microsoft, Intel, Tencent, Huawei and BYD. Large technology companies have set up their own start-up programs and platforms (e.g. “Tencent University”)

• Shenzhen’s Huangqiangbei district China’s key market for electronic components with daily revenue of USD 160 million and daily foot traffic of 500,000 people.

• Shenzhen Stock Exchange has opened ChiNext board, a Nasdaq-type exchange for high-growth and high-tech start-ups, while Shenzhen’s crowd funding platforms are also well developed.

SHENZHEN-SPECIALFEATURES

ü POPULATION:3.55millionpeople.ü COSTLEVEL:High.Shenzhen’saveragesalarylevelthirdhighestinChinaa erBeijing

andShanghaiwithamonthlyaverageincomeofRMB7,728(2015).

ü GOVERNMENTSUPPORTFORSTART-UPS:StrongsupportfromthegovernmentaswellasthelaunchofChiNextboardontheShenzhenStockExchangein2009.Developedcrowdfundingpla ormssuchasAngelclub,RenRenTouandYunchou.

ü TALENTPOOL:Lesstalentcul va oninuniversi es,butalargetalentpoolorigina ng

fromalloverChinathankstotopglobalandChinesetechgiantsinthecity.

ü LANGUAGECAPABILITY:Interna onalenvironment,onecangetalongwithEnglish,whileChinesepreferred.

ü TRANSPORTATION:DirectflightfromFinlandtoGuangzhou,fromwhereabullettrainconnec ontaking30mintoShenzhen.Excellentflightandrailwayconnec onstootherChineseci es.

3. Incubation boom, context and business types - Boom

• Chinese authorities decided to start supporting start-ups in a large scale in 2005 resulting in a dramatic increase in the number of incubators.

• During 2005-2015, the number of incubators had surged from about 500 (2005) to 2,300 (2015) and already to 4,000 in 2016.

• The growth of incubator business in China likely to continue, as the number of incubators is expected to reach 5,000 by 2020.

• Currently, there is a significant overcapacity of incubation programs and workspaces across China with an occupation rate of about 40%.

2005 20152010

700

1400

2100

2800

3500

4200

4900

535

135

896

346

2300

520

5600

1000

5000

2020E

NUMBEROFINCUBATORSINCHINABY2020E

=Incubators =“High-level”na onalincubators

3. Incubation boom, context and business types - Context

• Geographically, Chinese incubators mainly concentrated in coastal region and around Tier 1 megacities of Shanghai, Beijing, Tianjin, Shenzhen and Guangzhou.

• New interesting growth clusters include Nanjing, Suzhou, Hangzhou, Ningbo, Dalian, Shenyang, Wuhan, Chengdu and Xi’an.

• The growth in the number of incubators in China has been mainly due to the local government’s preferential tax policies, abundant capital injections and support for start-up incubation spaces through offerings of free land, lower taxes, subsidies for operational costs and funding.

SichuanHubei

Shaanxi Henan

Hebei

Anhui

Jiangxi

Guangdong

Beijing

Tianjin

Shandong

Heilongjiang

Jilin

Liaoning

Jiangsu

Zhejiang

Shanghai High

Low

DENSITYOFINCUBATORSPER

PROVINCE

DENSITYOFINCUBATORSBYPROVINCEINCHINA(2016)

3. Incubation boom, context and business types - Service context

SEEDCAPITAL:Thismeansthattheacceleratororincubatormayinvestwithmoneyfromanoutsideinvestor.

COMMUNITY:Thisreferstointerac onwithotherentrepreneursthatareatasimilarstageofdevelopment.Astart-upcanlearnsignificantlyfromothersimilarstart-upsandbuildanetworkwithitspeers.

MENTORSHIPANDEDUCATION:Inmanyincubators,accesstomentorsisinformal,whilemostacceleratorprogramshaveaformalmentorshipnetworkandaprocessgivingastart-upnewcontacts.

BUSINESSDEVELOPMENT:Thisreferstoanintroduc ontopoten alcustomers,partnersandemployeesthatcanaccelerateastart-up’scredibility,productdevelopmentandsales.

PATHTOFURTHERFUNDING:Manyincubatorsandacceleratorsorganizedemodaysenablingastart-uptogetitselfexposedtoangelorventurecapitalinvestors.Itcannotnecessarilyguaranteeaninvestment,butitisamuchmoreefficientwayforastart-uptogetvisibility.

ADMINISTRATIVETASKS:Bookkeeping,payroll,taxes,insuranceandothernecessarydailytaskstakelotsof me,whichisoneofthemostvaluableresourcesastart-uphas.Hence,manyincubatorsandacceleratorsofferassistance,staffandexper setohelpstart-upswithdailyadministra on,whichinChinao entakeslotsof me.

OFFICESPACE:FormostChineseincubators,sharedofficespace,furnitureandInternetaccessarethemainvalueproposi ons.Therealvalueofaco-workingspaceistheflexibilityitprovideswhenastart-upisnotyetreadyforalong-termofficelease.

3. Incubation boom, context and business types - Types

EXTERNALINCUBATIONINTERNALINCUBATION

ü INVESTOR:Largecompaniesü PURPOSE:Extensionofproductline,

acquisi onofnewtalentandinnova on,R&Dsupport.

ü SEGMENT:O enlimitedtoavery

specificsegmentorfieldofresearch,technologyorinnova on.

ü INVESTOR:Venturecapital(VC)firms,seedandangelinvestors.

ü PURPOSE:Financialreturn.

ü SEGMENT:Nostrictcriteriafortargetsegmentsaslongasthemarketislargeenough,thestart-upteamiscapabletoscaleupthebusinessandthe mingisright.

TWOTYPESOFINCUBATIONBUSINESSINCHINAEXTERNALINCUBATORS

(SEED,VC,ANGELINVESTORS)

GOVERNMENT-BACKEDINCUBATORS

UNIVERSITY-BACKEDINCUBATORS

PRIVATECAPITAL-BACKEDINCUBATORS

INTERNALINCUBATORS

(LARGECOMPANIES)

SOFT-LANDINGPLATFORMS

FINNISHINCUBATORSWITHCHINAAMBITION

4. Key incubators and accelerators for Finnish start-ups in China

GOVERNMENT-BACKED INCUBATORS

Z-InnoWay, BeijingUniqueness: Gatekeeper to

all major Chinese incubators.

UNIVERSITY-BACKED INCUBATORS

TusPark, BeijingUniqueness: Access to large science park resources and

other 35 TusPark science parks across China.

PRIVATE CAPITAL-BACKED INCUBATORS

InnoSpace, Shanghai/DalianUniqueness: Innovation community integrating IPO club, InnoSpace, InnoWork, InnoMaker and InnoLifeas a home for entrepreneurs.

TechCode, Beijing/Shanghai/ShenzhenUniqueness: Strong background as technology real estate developer for industrial parks.

COMB+, BeijingUniqueness: Launch of Nordic-China Innovation and Acceleration program in 2016 with Pivot5.

TechTemple, Beijing/Shanghai/ShenzhenUniqueness: Strong fund raising capability.

Experience in working with overseas teams,

WeWork, ShanghaiUniqueness: Access to all other WeWork spaces and community globally. Pioneer of international start-up culture.

SimplyWork, ShenzhenUniqueness: High service level to members with cheap price.

DayDayUp, BeijingUniqueness: Air purifying system installed, strong media connection to Global Mobile Internet Conference (GMIC).

NakedHUB, ShanghaiUniqueness: Co-life concept about healthy living and working.

XNode, ShanghaiUniqueness: Alliances with foreign start-up programs like Australia and Japan.

Chinaccelerator, ShanghaiUniqueness: Software accelerator

HAX, ShenzhenUniqueness: World’s largest hardware accelerator.

TroubleMaker, ShenzhenUniqueness: Strong engineering consulting capability

4. Soft-landing platform + Finnish accelerators with China ambition

FinChi Innovation CentreUniqueness: Soft-landing platform provided

by the Finnish government.

SOFT-LANDING PLATFORM

FINNISH ACCELERATORS WITH CHINA AMBITION

Make a market study to learn more about Chinese market, investment trends and development of your industry and policy framework before you enter!

Don’t choose the first partner candidate passing by, since there are plenty of players that only try to gain from you!

Come often to China and keep adapting your product to the market!

Find a Chinese partner by going through a careful partner search process. Go, observe and meet extremely much people!

Find the best talents to your sales and R&D - make them synchronize!

Have a Chinese team member to whom you can trust to understand your market!

Be all the time in the frontline of your market - speak one word and listen to two words to understand, what the customer needs. Then take it to the R&D!

Be patient and listen to you local team members and partners!

Create a company culture of going global - that’s the point!

5. Success stories - Tips for Finnish start-ups

Don’t enter China with part-time effort!

6. Summary - Entry options and incubator selection

Finnish star t -ups

Star t -up’s level of independence

Mar ket r esear ch (e.g.TekesMarketAccessProgram,

3rdpartyservice)

Slush China

Finnish acceler ator with

Chinese par tner (s)

Soft -landing plat for m (e.g. FinChi)

Chinese co-wor k ing space/

incubator plat for m

Par tner sear ch (e.g.viaChineseteammembers,3rdpartyservice)

CH

INE

SE

MA

RK

ET

High

Low

Finnish star t -ups

INVITE-ONLYACCELERATORPROGRAMS

• Acceleratorspre-screeningandrequiringstart-up’sequitywithaninitialinvestment.

TAILOR-MADEACCELERATORPROGRAMSFORFINNISHSTART-UPS

• Programscustomizedbasedontheclient’sneedsandpricedcase-by-case.

CO-WORKING/MAKERSPACES:• Providersofworking/makerspacewithanonline

community.

7. Appendix 1.

Step1:Nameapproval(dura on1-1.5weeks)

Nameapplica onform

• Signature

Cer ficateofincorpora on

Leasecontract,canalsousevirtualaddress(alreadysignedwithlandlord)

• Signature

Step2:Onlinefiling(3days)

Notask

Step3:Businesslicenseapplica on(dura on1.5weeks)

Licenseapplica onform

RealEstateOwnershipCer ficate(givenbylandlord)

Ar clesofassocia on

Nameapprovaldocument(receivedinStep1)

Resolu onofshareholderscommi ee

Passportcopiesofshareholder,legalrep,financialofficial

• Signature• 1copyofdocument• 2copiesofdocument• 1copyof

document

• Signature• Signature• 1copyofeachpassport

Step4:Companystampmaking(dura on2days)

Notask

Step5:Bankaccountopening(dura on2weeks)

• OFFICIALPROCEDURE:Livepresenceandoriginalpassportoflegalrepresenta ve

Passportofthelegalrepresenta ve

=Finnishdocumentnamethatisneeded

=Chinesedocumentnamethatisneeded

=Copyofdocumentneeded

=Signaturetodocumentneeded=Livepresenceneeded

COMPANYSETUPPROCESSANDTIMELINEINCHINA

TOTAL:3MONTHS

Leasecontract,canalsousevirtualaddress(alreadysignedwithlandlord)

Thank you - step in.

WeWork, Shanghai