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The Early Stage Tech Ecosystem in China

Chris Evdemon (易可睿 )Partner, Innovation Works

June 2014

What does any tech startup founder want?

Ecosystem

An early stage ecosystem.

Talent Pool

Domestic Market

Start-Up Services

Financing

Culture

Understanding China

China

A booming middle class leads toconsumption growth never seen before.

2012 20220

50

100

150

200

250

300

36

193

Upper Middle Class

Mass Middle Class

2005 2015 20250%

10%

20%

30%

40%

50%

60%

Private Consumption (% of GDP)Urban Households

In 2013, U.S. >70%, India >60%.

Understanding China

China

It’s a volume play. It’s incredibly challenging to operate.

Holiday Travel

Customer Service

Career Fair

Dating Event

Internet Café

Logistics

The Chinese Internet

Internet

News Search Email IM Music Gaming Blog Ecommerce

0%

20%

40%

60%

80%

100%79% 76%

57%

72%

83%

71%

55%

34%

70%

89% 91%

38% 34% 35%

11%

71%

Different Usage of Internet

Enormous, mobile-centric, information overloaded. Different demographics, usage and aesthetics.

The Chinese Internet

China

Appealing to the Chinese grassroots users is what builds

amazing businesses.

Affordable Entertainment

Curiosity & Discovery Self Expression Communication Virtual Identity

& PrideBargain

Shopping

Reserved for locals and cut-throat competitive …

Internet

Most competitive market in the world. Users expect everything for free, have near-zero

loyalty and are ruthlessly vocal in social media about all products.

Dead

Abandoned

Inaccessible

Innovation, China-style …

Internet

Copy-news + blog integration

Social + Games + Qzone

Free Music + Q&A community + cloud computing

Free listings, AdWords up-sell

Netflix + Hulu + smart ads

COD + proprietary logistics + warehousing

Inspired

by international “first-movers”

Localizedby integrating most

relevant features

Iterated

with amazing speed and micro-innovations

Internationalizedstarting from the emerging markets

Android rules …

Internet

… and is at the heart of China’s next few multi-billion dollar companies!

Everything is ( real ) freemium …

Internet

… and the world has a lot to learn from China!

• Chinese online games’ hierarchy of needs.

• Deep understanding of human psychology, desire, weakness.

• Result = 4x U.S. ARPPU, while 10% of the U.S. per capita income.

GAMES

PAID

FREE

Technopreneurship in China

Entrepreneurship

Founder

Success

Mentor

Angel or VC

Entrepreneurship is cool. not so cool.

Young people are risk taking. averse.

Failure is a plus. not acceptable.

Success stories and role models are everywhere. scarce.

The start-up ecosystem has been around for 40 years. barely 5 years.

Recirculation of capital and know-how is in its Nth iteration. 1st iteration.

But, the pace of change is near zero. lightning fast.

A good startup ecosystem is defined by its degree of recirculation of capital and know-how.

A new class of Chinese technopreneurs has emerged:

Hungry for success.

Familiar with the local market.

Able to iterate extremely quickly.

Grew up with the Internet.

+

+

+ +

$250K Chinese “lean start-ups”CEO / Produ

ct Manag

erUI / UXDesig

ner

CTO + 5

more engineers

Starting-up in China

Entrepreneurship

Home-grown CEOs need mentoring.

Entrepreneurs are often one-dimensional.

Limited cutting edge innovation and imagination.

Limited business, industry, and operational experience.

Few home-grown role models.

Everyone wants to be the boss.

Difficult to assemble a complete and complementary team. Limited access to resources, network, and talent.

Information flow is not fluid in China.

Sharing culture is limited.

>250,000 software engineers graduate annually but hiring top talent is almost “mission impossible”.

Angel investors are few and immature.

They offer minimal value-add, unfair deals and have unreasonable return expectations.

Very few VCs have technical / product / market understanding to evaluate early-stage opportunities.

The immature ecosystem leads to a variety of challenges.

Legal complexity. The “VIE” structure.

IN CHINA

OFFSHORE

Contract

CAYMAN / BVI

HONG KONG

WFOELOCAL

COMPANYTransfer Pricing

OperatingLicenses

USD Investment

Nascent angel network. Limited VC attention to early stage.

Start-up services are scarce …

Services

China needs a lot more start-up friendly services.

© Zhen Fund

• Proper cloud infrastructure.

• Law and accounting firms that understand Founders’ needs and can defer payments.

• Recruiters specializing in the tech industry.

• Banks that are entrepreneur-friendly and can provide short-term liquidity.

• Modern co-working spaces that are affordable and easy to commute to.

• Incubators that go beyond real estate, have professional support services and offer fair deals.

• More local events, meet-ups and professional tech media.

Various services:

Incubators / Accelerators:

= PROSPERITY!

Limited ( local ) angel ( ? ) investment activity …

Incubators

VCs

Founders

AngelsAngel VC

?

$30B$20B

$7B

Financing

Despite recent progress, still short of Silicon Valley’s

“smart money” angel investor definition, both in terms of quality, quantity

and fairness.

Xu Xiaoping Lei JunCai

Wensheng Angel Funds

Angel Club

… but gradually joined by more and more successful entrepreneurs, as well as early employees / senior executives from companies like Baidu, Alibaba, Tencent, etc. who start investing in start-ups and mentoring Founders.

Venture Capital in China

• Already the 2nd largest VC market in the world but still only about 1/3rd of the U.S.

• Chinese GPs are by now almost entirely local.

• Early-stage-minded GPs with previous own start-up / operational experience are a scarce resource in China.

• Traditional industries still account for about 50% of the VC money invested in the market.

• RMB funds are in the ascendancy and increasingly preferred by entrepreneurs.

• Beijing (especially for TMT) is the place to be.

• 2014 is seeing major deal activity, as there are still a lot of funds in the market with capital to deploy, and …

• … fundraising has been relatively easier for China GPs, as the “China story” has not yet run out of steam.

• China IPOs were hit hard in the past few years but have a major resurgence in 2014.

Financing

Growing and improving, but with limited attention to - and relevant skillset for - early stage investments.

Some facts:

Strategic investments and M&A

• Anjuke – $50M (2011)

• Qunar – $300M (2011)

• Dianxin (2012)• PPS – $370M (2013)

• 91.com – $1.9B (2013)

• Umeng (2013)• AutoNavi –

$300M (2013)• SINA Weibo –

$600M (2013)• PPTV (2013)• Kanbox (2013)• UCWeb (2014)

• Comsenz (2010)• eLong – $85M (2011)

• Caixin (2012)• Sogou – $450M (2013)

Unprecedented level of activity by all major players in the last 3 years.

Major strategic deals for product, user base and market positioning …

But also talent acquisitions!

And industry-wide consolidation for

online games.

Financing

Beware, China is coming out to the world!

Ever-increasing outflow of capital, products, business models and talent.

Financing

China Emerging Markets

Developed Markets

Recent U.S. Investments International Expansion Model

Talent Constraints and … the Solution!

Contact me via:

http://www.iwna.io/

http://twitter.com/evdemon

Thank you!