The 2013 update from ZhenFund on the state of China's technology startup ecosystem. Last time we outlined the 3C's 2E's in understanding the differences between China and Silicon Valley. This year we focus on some of the positive trends we see developing in the startup ecosystem.
2. 2
Disclaimer
The
material
in
this
presenta/on
has
been
prepared
by
ZhenFund.
This
informa/on
is
given
in
summary
form
and
does
not
purport
to
be
complete.
Informa/on
in
this
presenta/on,
including
forecast
financial
informa/on,
should
not
be
considered
as
advice
or
a
recommenda/on
to
investors
or
entrepreneurs.
This
presenta/on
may
contain
forward
looking
statements
including
statements
regarding
our
intent,
belief
or
current
expecta/ons.
Readers
are
cau/oned
not
to
place
undue
reliance
on
these
forward
looking
statements.
ZhenFund
does
not
undertake
any
obliga/on
related
to
ac/ons
resul/ng
from
this
presenta/on.
3. • Market opportunity, a macro perspective
• Startup ecosystem challenges and opportunities
– New sources of capital (angels, cross-border, government)
– Venture capital/private equity
– Public markets and exit opportunities
– BAT + Q: the internet giants
– Customer acquisition challenges
– Copycats and intellectual property
– Developer services and infrastructure
– Remaining challenges
3
Content
4. 4
China by the numbers
1.35 billion people 70% urban by 2025
7.5% GDP growth over next 10 years,
driven by domestic consumption
2nd largest consumer
market after the US
5. 5
Source: Strangeloop; McKinsey, www.internetworldstats.com/
China 2015
- - - - 780 MILLION INTERNET USERS
China 2012
- - - - 564 MILLION INTERNET USERS
(42% penetration rate)
United States 2012
----245 million internet users
India 2012
---137 million internet users
~75% internet users access through mobile
China has the most internet users globally
6. 6
$445bn
$270bn
Online
retail
volume
(2015E)
Shipping costs comparatively low
• 44% of China’s population will shop online in 2015,
representing 375mm customers
• E-commerce projected to reach 16% of retail sales by 2020
China
US
Singles day in 2012 for Taobao and Tmall
alone generated more than $3bn in sales,
triple US Black Friday 2011 sales
$3bn
Source: Alizila.com “China’s Internet is Giant Shopping Mall” Infograph
China’s e-commerce volume to surpass US in 2013
7. 7
$10bn +
Mobile gaming projected to
grow 50% YoY through 2015 to
hit ~$3.5bn USD in revenue and
455mm players
Source: Economist “Ours, all ours” Apirl 6th 2013, Data from Morgan Stanley 2012 China Gaming Industry Report, Analysys International
China is the world’s largest online gaming market
8. 8
Travel Advertising Film
Luxury Grocery Cosmetics
Source: Worldwatch, Guardian.co.uk, Wikipedia CNBC, China.org.cn
…and will soon be the #1-2 market globally for:
9. 9
China produces 70% of the world’s smartphones…
…and is also the #1 market for smartphones,
• 29% of global shipments in 2013 (E)
• 354mm subscriber base (compared to 219mm in the US)
• 92% of Chinese 18-30 yo own smartphones
Source: Canalys.com Smart phone Market Shipment Forecast 2013 BRIC Countries, “China’s Communication Industry” by tech.163.com, “At
D11, It’s Clear, China beats U.S. in mobile and internet” Forbes.com 5/30/2013, Telefonica SA and Financial Times
Mobile & smartphone market opportunity
10. 10
China’s digital divide: mobile internet
Source: Analysys International, Morgan Stanley AlphaWise, Flurry Analytics, insidemobileapps.com, computerworld.com, Apple,
Stenvall Skoeld & Company analysis
• Android has 90.1% market share,
but Google Play is virtually absent
• Three key apps: WeChat, Mobile QQ,
and Taobao
• Many smartphone users do not
download apps themselves, rather
buy phones with apps pre-installed
by Shuaji 刷机 distribution
companies
• 40% of iOS install base in China,
but still majority Android
• Savvy customers download apps
directly from Apple or through
marketplace platforms like 91助手
• iOS developers can gain brand
awareness by engaging Shuabang
刷榜 companies to help them
climb app store rankings
Most developers are
focusing energy on these
users…
…but many future
opportunities are here!
Distribution still complicated
11. • Market opportunity, a macro perspective
• Startup ecosystem challenges and opportunities
– New sources of capital (angels, cross-border, government)
– Venture capital/private equity
– Public markets and exit opportunities
– BAT + Q: the internet giants
– Customer acquisition challenges
– Copycats and intellectual property
– Developer services and infrastructure
– Remaining challenges
11
Content
12. 50%50%
Insights from 309 Chinese angels who have done at least two deals and
committed > 1mm RMB in startup funding, representing 747 deals:
12
China’s angels 2012 by the numbers
Source: Cyzone.com 《中国天使投资报告》创业邦研究中心2012.12出品
Background
72% of angels
were previously
founders
Mostly
men
88% are
male
Sectors
Mobile internet, e-
commerce, and
consumer services
are the top three
areas for investment
Involvement
76% of
angels take
board seats
Round Size
60% of their portfolio
startups raised < 3mm
RMB (~$500k) in their
angel round
We see this
investment
strategy declining
as Chinese angels
become more savvy
Geography
Beijing dominates angel
deals in China,
representing 22% of all
deal value and 30% of
overall deal volume, 2-3x
higher than any other
province
Ownership
For 20% of deals,
angels took more than
50% of the company
13. 13
China’s angels are on the rise
Source: www.stepvc.com 创业接力天使和清科研究中心 《2012年中国天使投资与天使孵化研究报告,清科研究中心
2012.09,www.zdbchina.com, Cyzone.com 《中国天使投资报告》创业邦研究中心2012.12出品
Angels by type
Individual
Angel Fund
Angel + Incubator
Angel Teams
60% of angels will
exit by selling
shares to VC’s
50% of angels
reporting returns of
30%+
18% report returns
of 200%+
190
(70%)
15
(6%)
61
(22%)
6
(2%)
14. Chinese investors are going global and many leading Silicon Valley investment
brands have a presence in China, increasing potential for cross-border
collaboration and deals
14
Cross-border deals
Multiple Chinese VC funds and
incubators have a presence in SV
Key leading VC’s and US angels
already have funds or reps in China
15. • Provide cash, tax, and office incentives for
startups or talented post-graduates to
register for business within their province,
city, or city district
• Many programs operated in conjunction with
Torch tech parks and incubators
15
Government funding
• The Torch Program:
– Reportedly companies housed in 89 national
high tech industrial zones accounted for
7.1% national GDP in 2010
– 500+ tech SME incubators nationwide,
claims to have incubated Lenovo, Huawei,
Suntech and graduated 16k companies
– State Council established Innofund reports
investments of ~9bn RMB in 15,000+
projects since 1999, with 100 domestic IPO’s
from portfolio
National government
Local and national government have two key KPI’s:
Increase GDP & Corporate Taxes
to that end, A LOT of money is being made available to technology startups
Source: www.ctp.gov.cn
Provincial, city, district level
governments
16. 16
Government funding
Caveats
• High turnover rate. Discontinuity of services and support when
officials rotate to other posts or are promoted
• Focus on hardware rather than software. Tangible KPI’s such as
brick and mortar or registered capital are primary focus
• Lack of experienced advisors. Officials in charge of programs may
have no experience running businesses
• Bureaucratic. Application and reporting requirements burdensome
to startups
17. Major VC/PE funding cool down in 2012
17
992 1,269 1,178 1,777
3,247
4,210
2,701
5,387
11,725
177
253 228
324
440
607
477
817
1401
0
200
400
600
800
1000
1200
1400
1600
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Inv ($mm)
# deals
Investments in China’s VC/PE Market from 2003 – 2012, estimated 40-50% decline in 2012
Source: Zero2IPO Research Center, December 2011, www.zdbchina.com, Zero2ipo’s China VC/PE Review H1 2012, Zero2IPO “M&A Outlook 2013”
18. Factors affecting capital deployment
18
Source: Wall Street Journal “Fears of an IPO Flood in China” April 16, 2013
• Macroeconomic and political climate
(major CCP leadership change in 2012)
• Poor performance of some Chinese
internet stocks on US markets,
increased investor scrutiny
• Exit bottleneck in domestic public
markets
• Smarter money less willing to burn
cash on market land grabs (i.e. group
buy and e-commerce sites)
19. Reasons for optimism in 2013
19
• One of two Chinese internet IPO’s in the
US in 2012, YY, had strong performance
on the NASDAQ and paved the way for a
more receptive capital market in 2013
• LightintheBox (ZhenFund portfolio
company) June 2013 NYSE IPO
• Alibaba Group mega-IPO in the works
• 新三板 New Third Board to expand the
over the counter (OTC)market for SME
shares domestically, four pilot zones and
140 listings to date, however, listing
costs are high for startups (~1mm RMB)
and liquidity is low
21. But M&A market is improving
Internet giants moving on larger scale acquisitions, but primarily only
in larger category leaders
21
Q2 2011
Baidu invests $306mm in
Qunar
Q2 2013
Baidu acquires PPS for
$370mm
Q3 2012
Suning acquires Redbaby for
$66mm
22. 22
BAT + Q: China’s internet giants
SEARCH E-COMMERCE/
PAYMENTS
SOCIAL/
GAMING
TOOLS
NASDAQ (BIDU)
2012 revenue = $3.58bn,
primarily advertising
70% search market
share
Struggling to transition
to mobile search, profit
margins falling
HKSE 1688
~$175bn transaction
volume in 2012 (Tmall
B2B and Taobao C2C)
~$40bn 2012 revenue,
primarily from
advertising
5% of all Chinese retail,
80% market share e-
commerce in China
47% Alipay market
share for online
payments in China,
700mm registered users
Now owns 18% of Sina
Weibo microblog
(48mm DAU)
HKSE 0700
2012 revenue = $6.98bn,
primarily from value
added services/gaming,
(also non-trivial e-
commerce revenue)
~800mm QQ social
network users and
400mm WeChat mobile
social network users
(200mm MAU)
21% online payments
market (Tenpay)
NYSE: QiHU
2012 revenue =
$239mm, primarily
advertising and online
games
Major portal destination
Baidu’s emerging rival in
search (15% market
share)
23. 23
Online customer acquisition in China
<- Major social platforms are open, reducing customer
acquisition cost
Social graph information not 100% open to developers ->
<- SEO is transparent and mature
SEO algorithms change frequently->
<- Email marketing is an established customer acquisition
channel
Email marketing historically less effective, difficult to get
on ISP white list for email providers->
Chinese startups face unique challenges acquiring customers online:
<- Mobile app distribution channels fairly concentrated
(Apple and Google Play)
Shuabang services distort Apple store rankings, Google Play
blocked, Android distribution fragmented ->
24. China’s copycat phenomenon, key factors
24
1 Growing available capital –investors and
internet giants willing to fund copycats
2 Low hanging fruit – cheap and easy to copy
pure internet/mobile products, wide open
spaces in the market lead to land grabs fueled
by investor money ex: Groupon, Tumblr,
Pinterest, and Path etc clones
3 Risk aversion - Domestic VC’s and foreign
capital markets more receptive to Chinese
start ups with direct corollary in the US.
Copying a model perceived as less risky.
4 Foreign companies often delay too long before
tackling the Chinese market
25. Copying products designed to solve US customer needs is no guarantee of
mainstream success in China, many copycats will fail, no breakout success
stories for some of the most high profile consumer internet brands*
Copycats don’t always work…
Successful professionals and
business leaders less open to
sharing contacts online
Leisure micro-blogging and design-focused
UGC not yet mainstream activity for Chinese
netizens
*For Pinterest genre, excludes companies like Mogujie and Meilishuo, originally e-commerce sites with Pinterest UI integrated later
Wow.taobao.com
www.duitang.com
Huaban.comDiandian.com www.woxihuan.
com
12
26. 26
…but foreign entrants shouldn’t discount them!
Launched in June 2011 Netease’s 有道云笔记 (Youdao Yunbiji) at 8mm users
reportedly larger than Evernote’s 4mm Chinese user base
Youdao even mimics Evernote’s marketing tactics, using similar wording on their
Weibo account. Copycats are still an issue!
27. Copycat mitigation strategies
12
• Focus on your strengths
– The exterior of pure web and mobile products can be easily copied, but core
competencies (customer service, offline resources, advanced IP/tech) are the key to
success, expect copycats but don’t be discouraged
• Avoid internet giant territory
– Don’t go after categories and products that can be easily copied by BAT + Q, they
have thousands of engineers and millions in cash at their disposal, focus on niche/
vertical markets or businesses with strategic offline resources
• Pick your battles
– Focus on serving the customers who do enjoy using your product or service, rather
than conquering the “mass” market
• Make it a local effort
– Get a Chinese investor on board, have a local connection that can pull strings for
you when issues arise
– Empower local staff
• Shorten the chain of command for decision making
• Give local GM’s a stake in the business
28. On dealing with copycats
12
”Our business is a slow business, so it has to take a lot of time by gaining users’ trust
and having them be comfortable with using our product. It’s more of a trust business”
- Evernote China’s GM Amy Gu on rivals in China
“At the end of the day, it’s still too attractive a market to pass up on.”
– Flipboard Product Director for Greater China Alvin Tse
“We took something from the music industry, which was to stop treating the
customers as users, and start treating them as fans… piracy may not be a bad
thing. It can get us more business at the end of the day.”
– Mikael Hed, Rovio CEO, on piracy in China
“Be patient. I think that approaching the market too aggressively, you can make
some mistakes. I think it's best just to be patient and focus on delivering a high-
quality experience to Chinese players, and when there are challenges or roadblocks
then you just have to take them one at a time and deal with them.”
– Mike Morhaime, President and Co-founder Blizzard Entertainment
29. IP protection is improving
29
“This is a long-term effort … we want the indigenous brands to
work together to protect IPR, because if you do not participate
today, tomorrow you are the victims.” -‐
Jack
Ma
• 4/2013 Baidu wins suit
against Qihoo for illegally
accessing and indexing
Baidu’s Baike content, the
damages were small (450k
RMB), but positive sign for
IP protection in China
Source: TechinAsia http://www.techinasia.com/china-search-qihoo-360-baidu-market-share/
30. Startup services: US versus China
30
: Extensive services make startups more
efficient and cheaper to operate
Large companies gaining traction for IaaS
services, but many corollaries for US startup
services do not yet exist, are fragmented, or still
face UI issues
CRM and advertising
Data hosting and management
Payments and analytics
Developer communities and game services
?
?
31. 31
Internet Speed
China’s top startup cities 2X+ slower than US average
Average US internet speed ~ 7.4mb/s
Source: ChinaCache http://mashable.com/2012/09/28/china-broadband-speed/
32. Ongoing Challenges: Lack of Trust
32
“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
• General trust level in society
dropped from 62.9/100 in
2011 to 59.7 in 2012
• Only 30% of people trust
strangers met on the street
• 64% trust public media
• 57.5% trust NGO’s
• 52% trust businesses
CHEATING IS PERCEIVED AS
THE NORM
Trust
in
Chinese
society
hit
an
all-‐Jme
low
in
2012.
-‐
The
Blue
Book
of
Social
Mentality
VS
Source: http://chinadigitaltimes.net/2013/02/trust-among-chinese-drops-to-record-low/
34. 34
• One of China’s leading angel funds
• ZhenFund believes in one principle above all
others: Integrity,
• Money with values 创业及自由
• Founded by Xu Xiaoping in 2006, current
fund a collaboration with Sequoia Capital
China
• Investment size: Up to $500k USD
• 100+ portfolio companies in China
• www.zhenfund.com for more
• Contact: zhenfund@zhenfund.com
34
Who are we? ZhenFund 真格基金
35. China’s angel funds
35
Est. 2006, $30mm USD Invest in people,
high deal volume, cross-border deals
Est. 2008, Incubate + ideate, hands on,
consumer internet
Est. 2009, Incubate + Seed + VC, large
professional staff, hands on, Beijing and
Shanghai locations
Est. 2010, general focus on early stage TMT
investments
Legend Star, Est. 2008, 400mm RMB fund, 21
person team, incubate with focus on technology
Global venture capital firm doubles as one of the
most active institutional angels in China
Established angel funds in China offer a variety of investment styles and
funding amounts for local startups
36. China’s Angels
36
Edward Tian Charles Xue Li Kaifu Xu Xiaoping Lei Jun
• Many prominent angels are members of China’s “Angel
Committee” 天使会, but co-investment still rare, the Silicon
Valley party round hasn’t yet made it to China
• China’s top angels primarily investing through fund entities
Cloud Valley Innovation Works ZhenFund Shunwei Capital
39. • Q3 2004 Baidu acquires hao123 (50mm RMB)
• Q3 2010 Shanda acquires Ku6 (share swap and $37.2mm), Eyedentity
($95MM), Mochi Media ($80mm)
• Q3 2010 Tencent acquires Comsenz (valued at >$10mm)
• Q1 2011 Sina acquires 19% share Mecox Lane ($66mm)
• Q1 2011 Baidu invests in Anjuke (led $50mm round)
• Q2 2011 Tencent's strategic 16% stake in eLong ($84.4mm)
• Q2 2011 Baidu invests majority strategic stake in Baidu ($306mm)
• Q4 2011 Tencent strategic 4.6% stake in Huayi Brothers (450mm RMB)
• Q3 2011 Sina acquires 9% stake in Tudou ($66.4mm)
• Q3 2011 Baidu strategic 40% stake in Fanshu.com (47.6mm RMB )
• Q4 2011 Renren acquires 56.com ($80mm)
39
M&A/Strategic Investments (through 2011)
40. • Q2 2012 Ctrip acquires ⻜飞常准 (20mm RMB)
• Q3 2012 Tencent investment in Caixin (undisclosed)
• Q3 2012 Renren invests in Social Finance ($46mm)
• Q3 2012 Tudou-Youku merger ($1bn)
• Q3 2012 苏宁易购 Suning acquires Redbaby 红孩子 ($66mm)
• Q1 2013 Baidu announces plan to make strategic investment in Kingsoft
• Q2 2013 Baidu to acquire PPS for ($370mm)
• Q2 2013 Alibaba takes 18% stake in Sina Weibo ($586mm)
40
M&A/Strategic Investments (2012-2013)
41. E-commerce
• Alibaba (Aliexpress)
• 360buy (JD Express)
• LightintheBox
Mobile
• Tencent (WeChat)
• Dolphin Browser
• UCWeb
• Kingsoft
41
Chinese companies going global
Made in China for global export, B2C
Tencent hoping WeChat will fuel global growth, US
base in Palo Alto
Based in Wuhan with 50mm global user base
Offering products made in China for global customers
25% of 400mm users outside China
JV in Japan and eyeing US markets
42. 42
Google Play Vacuum
• Android represents 90.1% of the OS market in China, but Google
Play is virtually absent
• Multiple 3rd party android marketplaces vying for user attention
43. 43
43
China’s Internet Giants want to do it all Source: CIC
Source:
CIC