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

15

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: zhenfund@zhenfund.com

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