Entrepreneurship and
Venture Investment in China
York Chen 陈友忠
iD TechVentures Ltd. 智基创投
Jan., 15, 2008, Ann Arbor
Global Private Equity and Emerging Markets
Univ. of Michigan
Entrepreneurship and
Venture Investment in China
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China VC Market Overview, 2007
China at the Center of Global VC Market
The Hot Market and On Going Soft-landing
From High Tech to High Growth
From USD Offshore to RMB Onshore Investment
Deal Structure in China
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Venture Opportunities in China
VC Investment Annual Amount
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Investment Industry Breakdown
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Investment Geographical Distribution
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Investment: RMB vs. USD
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Investment Stage Distribution
*Average amt. is based on deals with disclosed value.
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Investment Stage Distribution
(in Deal Number)
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Investment Stage Distribution
(in Amount Invested)
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Deals Exit
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
VC Annual Fundraising Amount
Source: China VC Annual Report, Jan-Nov Data, by Zero2IPO
China at the Center of
Global VC Market
China at the Center of Global VC Market
• China, for the first time, surged to the second spot in the
global VC market. Top four in terms of 2006 investment
amount (Dr. Martin Haemmig):
– USA: US$25.75 B (VentureOne data)
– China: US$1.78 B (Zero2IPO data)
– UK: US$1.73 B (VentureOne data)
– Israel: US$1.62 B (Israel VC Association data)
• But, considering VC activity’s significance to its economy,
China’s VC industry is still at an infant stage. Top four
countries’ VC amount to its GDP (Dr. Mannie Liu):
– Israel: about 0.5%
– Europe: about 0.3 to 0.4%
– USA: about 0.2%
– China: about 0.067%
Foreign VC Funding Flow in China
LP
Angel
FFF
LP Fund
Start-up
FoF
GP
Foreign Funding
Suppliers
Foreign VCs with
Operation in China
Chinese Start-ups
With Offshore
Entities
VC: Much Internationalized Ind.
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At the moment, foreign VCs lead the way supplying more
than 70% of VC funding in China.
Fund raising completely from foreign LP and FoFs
Fund managed by foreign GP companies with liaison
offices in China
Fund outflow to offshore holding entities owned by Chinese
entrepreneurs
Divestment through overseas IPO and M&A
Chinese portfolio are funded by offshore money. So, VC
activity is less affected by China economic cycle and macro
policy.
Among all industries, VC’s manpower comes with the
highest educational and professional level, mostly foreign
trained.
Note: point 5 & 6 are views of Mr. Zhao Min(赵民), Chairman,
Adfaith Management Consultant (正略钧策), July 12, 2006
Foreign VC:
Go Alone or Go Thru Local Teams?
• VC is a localized operation in terms of local talents, local
supporting infrastructure, local decision making, and
should even local fund raising.
• Out of the driving distance and crossing the Pacific is just
too tough for American counterparts. “Tourist VC” won’t
work. Sand Hill Road VCs will either enhance their own
local operation or park their interests with a local team.
• Two examples of shifting to partnership:
– KPCB gave up own effort, to work through an
enhanced TDF team joined by SAIF’s Joe. Raised a
China Fund, 360M, in April ‘07.
– Mayfield stopped its own effort in China by parking all
interests in China with GSR Fund II.
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Local VC:
To Partner or Not to Partner?
• Home grown VCs, many of them
grown out of hi-tech/financial
groups or government entities, are
emerging as key players.
• China GP teams are pondering
should they outsource fund raising
challenges to Sand Hill Road
peers by giving up some
economic interests and
operational independence?
• A question to follow: will there be
independently owned and
managed China-rooted VCs in the
long run?
China Rooted VC Brands
• CDH 鼎辉
• CDH VC 鼎辉创投
• SAIF 赛富
• Legend 联想
• New Margin 联创
• Infotech 英富泰克
• DT 德同创投
• SBCVC 软银中国
• iDT VC 智基创投
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“Great Leap” of Mega Funding
• Ballooning of VC fund raising in China. US$4B VC fund raised
each year for both ’06 and ’05. Added US$5.4B for ‘07.
• Quite a few mega VC/PE funds raised in 1H ‘07, in less than
two or even only 1.5 years from previous vintage ’05 funds.
• Mega funds raised in 1H ‘07:
– TDF II (120M) to “KPCB China Fund” 360M
– Sequoia China Capital I (200M) to total 750M (Sequoia
China Capital II 250M and Sequoia China Growth I 500M)
– SAIF II (643M) to SAIF III 1.1B
– CDH PE II (310M) To CDH PE III 1.6B
– IDG Accel I (290M) to IDG Accel II 550M
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A China Miracle:
Chasing for Better Return Drives Funding to China
• Sand Hill Road peers took one or two decades to reach
mega funding size. For example, KPCB, founded in ‘72,
had its Fund IX reached 550M in ‘99, then Fund XII of 600M
in ’06.
• It’s a “China Miracle” for local VC/PE to reach mega size in
just a few years. And, all these funding are endorsed and
invested by reputable and leading Western LPs and FoFs.
Take SAIF III. It gathered one of the most impressive LPs
including endowment funds of Harvard, Princeton, Cornell
and Dartmouth, CalPERS and NY State pension funds,
Dupont, Common Fund, Horsley Bridge, .. (*)
• The VC/PE funds in China have really seen good financial
returns in past few years. And, these foreign investors are
confident about the future opportunity going forward in
China.
*: Source: Andy Yan Interviewed by Zero2IPO eWeekly, May, 2007
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Another China Miracle:
The Booming Local Stock Market
• The foundation of “China Miracle” with huge foreign funding
is the long sustaining high growth of local economy, which is
the same ground for current booming stock market and high
P/E in China.
• It looks scary for Shanghai Composite jumped from 1000 in
05 to 5100 in 07, with average PE stays at 50X. But, for 10
years up to 03, it stayed at 1500 level, and even dropped
down to 1000 in 05. No appreciation for more than 10 years
while the local economy comes with impressive double digit
growth. So, with a longer time horizon, the hot market might
just reflect “under value” adjustment.
• Accumulated fortune and personal saving (up to USD2.3
trillion) channeled into limited investment vehicle, such as
real estates and stock market.
The Hot Market and
On Going Soft-landing
China VC up to Mid-’06:
Active and being Over-heating
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After ten years subdued and “Check In, No Check Out” VC
environment, China VC starts to kick off a virtuous circle from 2004.
Successful and active divestment brought high return to VC investors.
And, in return facilitated successful fund raising for more active venture
activities in China.
With improving and potentially high returns in China, many mainstream
VCs, LP funds and hightech MNCs are flocking into China.
Keywords of China VCs changed in 04 to 06:
– “It’s here, and it’s for real”.
– THEN: Why China, and why now? NOW: How?
– “Cautiously Optimistic”
The market is characterized by strong supply of GP teams, LP funds
and VC People
More VC Players Joining the Market
• One of the most significant development of China VC since ’04 has
been the market getting world’s attention, and the flocking-in of Sand
Hill Road VCs.
• More veteran VC players from Taiwan, Singapore, Israel, Korea,
Japan and Europe are also setting operations in China.
• The hot environment and proven divestment track-record also invites
many China focused first-time GP teams, LP funds as well as FoFs.
• Foreign VCs into China is not only seeking local direct investment
opportunity, but also out of the need to support their venture activities
in their home countries. Many deal flows based in the Valley will
likely have China presence. In some cases, even doing the due
diligence for a foreign deal might need to visit China.
Five Routes Sand Hills Rd VCs
Take to Enter China
• Model A (Setting up own China fund)
– Sequoia China; KPCB China
• Model B (Joint or Franchising Fund)
– IDG Accel China Fund; DFJ DragonFund China
• Model C (Global GP becomes a China LP)
– As a LP to a China fund to have a platform to develop China
opportunity.
• Model D (Liaison offices with local professionals)
– DCM, NEA, Bessemer, Atlas, Redpoint, BlueRun, GAP, Granite,
Highland, ….
• Model E (Sideline observers, ad-hoc investors)
– Continue to explore the China strategy, or not yet buy-in the China
story
From original presentation “The Way We Were, China VC in 2005”
Shanghai, Dec., 14th, 2005, CVCF
Global GP Becomes a China LP
• Len Baker pioneered and defined the
unique model. His Sutter Hill invested
8M each into Chengwei’s fund I and II in
‘99 and ‘04 respectively, and 5M into
TDF in ‘05.
• The closeness and strategic relationship
between the two parties, and economic
terms for US parties, are varied.
• Qiming, without an Ignition name, is
more than “Ignition China”. Two VC
veterans from the Seattle relocated to
Shanghai bridging the HQ and China
“branch” under a much solid and
substantial mechanism.
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DCM – Legend Capital
3i - CDH
Sierra – Gobi
Light Speed – DT Capital
Sutter Hill – Chengwei, (TDF)
Greylock; NEA – N. Light
Worldview - Infotech
Mayfield - GSR
Ignition - Qiming
Much Funding Chasing Quality Deals
• Considering the fact that rather big portion of funding is
focusing on local value add service segments (internet,
web2.0, MVAS, broadband, ….), the issue of fund’s oversupply is sector specific.
• And, many funds, especially first-time funds raised in
2005, have the pressure to “pour” out investment quickly.
Investment pace is quicken than what it should be.
• While funding supply multiplied, quality deal flows not
increased at the same pace. Supply-demand
mechanism at work. Valuation jacks up. Start-ups get
much bigger funding than originally planned.
• Illustrating cases: Blog China (Bokee) and BlogCN.
LP Funds’ Larger Allocation for Asia
- Case Study on Horsley Bridge International Funds
Fund
Year
Territory Coverage
HB Int’l I
1998
Europe/Israel
HB Int’l II
(Actual allocation:
15%, 4 Asia funds)
HB Int’l III
(Actual allocation:
30%, including 5
China funds)
2000
Europe/Israel
Asia (<25%)
2004
Europe/Israel
Asia (No Limit)
Source: Mr. Gary Bridge presentation on Zero2IPO Conference
Palo Alto, April 25, 2006
More Professionals Jumping On
Though with a short history
in China, VC’s virtuous
circle is in the forming.
Successful VC-backed
entrepreneurs are turning
around and becoming:
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Serial entrepreneurs
GP venture capitalists
LP investors
Angel investors
Entrepreneur Turns VC
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GSR
Sequoia
DCM
BlueRidge
Northern
James Ding (Asiainfo)
Neil Shen (Ctrip)
Hurst Lin (Sina)
Justin Tang (eLong)
Feng Deng; Yan Ke Light
(Netscreen)
• CyberNaut Zhu Ming (WebEx)
• CBC Capital Edward Tian (CNC)
• TPG
Sing Wang (Tom)
• Matrix
Bo Shao (EachNet)
Reshuffling of VC Professionals
• Like in other industries, old
players are supplying talents to
new comers. New GPs, by
head-hunting, to jump-start
operation in the rather
competitive environment.
• VC is a people business. Deal
flows usually go with the people
into new funds.
• VC job opportunity opening up,
and a war of retaining and
recruiting good people. HR cost
lifts up.
• For newly build-up VC teams,
the “break-in” of team members
will be a challenge to go through.
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Sequoia China:
– Zhang Fan (DFJ)
– Zhou Qui (Legend)
– Steven Ji (Walden)
CDH Ventures:
– Wang Gongquan (IDG)
– Wang Shu (IDG)
– Huang Yan (Intel)
– Vivian Chen (Walden)
Granite:
– Foo Jixun (DFJ)
– Jenny Lee (Jafco)
Qiming:
– Duane Kuang (Intel)
– Ed Zhou (Cisco)
KPCB:
– Joe Zhou (SAIF)
– Tina, David, Forrest (TDF)
Events in ‘06 Led to Softened and
Reserved VC Environment
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VCs’ investment during the over-heating period are
coming to a “Reality Check”. A time to review and to see
if anything need to be adjusted.
Government regulatory measures on cross-border
transaction are putting negative implications on overseas
VC investment in China.
MVAS, provides substantial revenue source to China
internet companies, experiences depressed environment
due to MII and operators’ discipline measures since June
‘06. And, government agencies’ crackdown on TV
Shopping, music, game and UGC video.
The momentum for “China Concept” IPO has not been
carried on from 05 to 06. Latest stock performance of
those listed Chinese companies are also not encouraging.
More Cautious Investment Pace
After mid-’06, China VCs proactively do self
adjustment in areas of:
– Take more reserved and cautious steps
toward new investment. Slow down
investment pace.
– Not to chase around deals. Tender term
sheets carefully.
– Deals’ valuation coming down. Investment
terms shifting to be more favorable to VCs.
– Avoid Web2.0. Cautious on MVAS, and other
deals without sensible revenue projection.
Diversifying Investment Focus
• Pure Web2.0 projects were difficulty to get VC attention and funding.
• MVAS will take time to recover. Maybe need to wait till 3G launch for
a new start.
• VCs are still keen and willing to bet on future killer app for internet and
broadband applications. IPTV opportunity is still a few years away.
• Many VCs start to pay attention to non-Internet, or even non-TMT,
sectors. On top of IT hardware opportunities (IC design, Semicon, key
component, module, …), VCs interests have extending to:
– Medical devices and health care services,
– Retailing, franchising and branding for consumer services and
goods
– Alternative energy and green tech
– Manufacturing, logistics, Mining, ….
– Outsourcing services
“Soft-landing” for a Healthy Adjustment
• On the macro, as long as China economy continues to
open up and with healthy growth, VC activities here will
continue to be active and promising. We continue to see
foreign VCs and LPs interests toward China keeping high.
• In 2000, we experienced a VC “Hard-landing”, reflecting
passively to the dotcom corruption. Painfully taking huge
casualties, and it took 3 years to recover.
• Since mid-’06, we are taking the counter-measure actions
into our own hands by proactively do the self-adjustment
before the situation running out of control. The on-going
soft-landing since mid 06 illustrates maturity of China VC
industry.
From High Tech to High Growth
TMT Investment (%) Decreases
Other
Hi-tech
9.4%
Healthcare
2.5%
Unknown
1.4%
Services
13.3%
Traditional
13.0%
2005 VC Investment: USD1.06B
IT
60.3%
2007 VC Investment: USD3.18B
Source: Zero2IPO Annual China VC Data
High Growth: New Cluster for VC Inv.
• Observation of China stock markets:
– China stock markets in Shanghai and Shenzhen are
mainly servicing government owned entities. Most of
1500 listed companies are of government
conglomerates.
– Stock market re-engineering has being on for only
two years. Less than 200 listed are of private SME.
– As a result, quite some good and long operating
traditional companies are still kept private. These
companies are usually being listed in the West.
• Projecting China economy’s healthy growth into the
future, these high growth companies are growing to
become a promising cluster, and good target for VC/PE
investment.
Diversifying of VC/PE Operation
From
Expand to
Sector
High Tech (TMT)
High Growth
Deal Structure
Offshore USD
Onshore RMB
Entrepreneurs
Returnees
Locals
Location
Coastal East
West & Inland
IPO
Red Chips
A & H Shares
Deal Generation
Own Screening
Thru Partnership
Stage
Early/Expansion
Late/Pre-IPO
37
From High Tech to High Growth
• Crowded, overheating and competitive TMT sectors
putting constraints on return potential.
• And, not like in the mature economies, high return
opportunity in China might not necessarily be powered by
high tech. Still quite lots of traditional sectors not being
well served. And each sector, no matter how narrowly
defined, present high growth and high margin potential,
and as a result high return opportunity for investment.
• Zero2IPO data also shows that TMT sectors dropped
from some 70% for past several years to below 50% in
2007.
• Successful IPOs since 06 of New Oriental, Home-Inns,
Belle Shoes, Weiqian Lamen, …. Illustrate the high
growth sector opportunities.
Consumer Power in China
(a flavor of high growth investment in China)
• With fast growing GDP and urbanization, the middleclass is expanding quickly as a powerful consumer group.
Products and services addressing their consumer needs
gradually become an important target of VC/PE
investment.
• Cases in point:
– Food: Mengniu, Shuanghui, Huiyuan, Youge
– Restaurants: Weiqian, Chamate, Zhenggongfu, Xiaofeiyang,
Little Swan, …
– Education: New Oriental, ChinaEDU, 100e, …
– Medical services: CiJi, AiKang, Jiamei, ….
– Hotels: Home-Inns, Mandarin Court, 168/268, ….
From USD Offshore to
RMB Onshore Investment
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China’s Foreign VC Operation
- Funding & Divest. Stay Offshore (二头在外)
Portfolio
Management
Divestment &
Financial Return
to LPs
Deal Flow Screen
& Investment
Fund Raising
& Set up Fund
The Changing Tides
• The shifting tides are mainly due to the legal and
regulatory changes happening in past three
years. Through SAFE circulars #75 and #106, MOC #10
and other administrative measures, Chinese government
tried to discourage local deals to be restructuring into
offshore holding for USD funding and overseas listing.
• As a result, offshore restructuring becomes much time
consuming and challenge, if not impossible.
• At the same time, the local VC/PE environment is greatly
improved. The local IPO, legal framework and LP
funding sources are getting better.
• It might take years for RMB onshore investment to
become the mainstream of VC/PE activities in
China. But, an emerging trend needs to be watched
closely.
RMB Inv Significance Only be
Seen from 08 Onward
By Number of Deals
Sino-foreign JV
175M, 16.5%
By Amount Invested
(US$M)
Domestic,
160M, 15%
Foreign, 740M, 70%
2005 VC Investment: USD1.06B
2007 VC Investment: USD3.18B
Source: Zero2IPO Annual China VC Data
Foreign LPs & Funds in China Projects
(Current Status)
LP
LP
3a
RMB
Fund
2
3
Project
Project
Project
Project
USD
Fund
1
Project
Onshore Offshore (Offshore Holding)
Route 1: invest into China projects’ offshore holding entities, mostly in Cayman
Route 2: Direct cross border investment and turn a China entity into a JV
Route 3a & 3: to sponsor and initiate a local registered RMB fund.
(Route 2)
Direct Investment into Chinese Co
Using Existing Offshore LP Fund
Offshore
Local Shareholders
Local Co., Ltd.
LP Fund
LP Fund
SPV
SPV
Local Shareholders
Public
Local Shareholders
Foreign Invested Co. Ltd.
A Share Listed
Onshore
Source： Mr. D.C. Lee, SBI Crosby, Jan., 17th, 2007, Shenzhen
A Foreign Fund Sponsors a RMB
(Route 3a)
Fund
GP
GP
LP
LP 1
Fund
Mgmt
Fund
Mgmt
LP 2
LP 3
RMB Fund
USD Fund
Onshore Offshore
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Overseas LPs’ Role
• Conventional LP practice (long term, not interfering GP
operation, management fee/carried arrangement)
prevailing in the West is not yet popular in China. Local
LP funding supply is still at shortage.
• At the moment, government owned/affiliated funds could
be a good source for RMB funding. Many government
agencies (ministries, banks, provinces, municipalities, hitech parks...) set up matching funds (引导基金) to support
RMB fund formation.
• With the improving of legal, forex and tax issues, overseas
LPs and FoFs, in the mid-long terms, will continue to play
a key role in supplying funding into China’s VC/PE industry.
47
Get Government LP Funding?
• Pro:
- A Debatable Issue
- To enlarge the fund size for economies of scale. And, bigger
fund size to be eligible for registering as “non-institution”
entity (minimum USD10M)
- Government endorsement for fund set-up as well as better
tax terms, SAFE approval, project’s R&D subsidy, IPO
opportunity, deal flow sourcing, …
- Avoid perception of a foreign fund without local root.
• Con:
- Local LP likes to involve in fund management. Put negative
impact to a GP’s independence and decision making process.
- The fund and its GP will need to register in a particular city,
and with constraints on investment’s location, sectors, …
- Not easy to bring more than one government LP to invest into
a fund.
Government Funding as LP
• Model I (LP & GP)
On top of LP funding, government entities will also be
shareholder to GP, which turns to be a JV. Involved
formally and directly in VC management and decision
making.
• Model II (Involve in Decision Making)
Government entities won’t join GP set up and operation.
But, will join Investment Committee and usually have a
veto right
• Model III (More as a Conventional LP)
Not involved in decision making and not put limitation on
where to invest. But, will ask the GP and the fund to be
registered in the local.
Foreign LPs & Funds in China Projects
(Future Scenario)
LP
LP
4
3b
RMB
RMB
Local
Local
Fund
Fund
RMB
RMB
JV
JV
Fund
Fund
3a
2
3
Project
Project
USD
Fund
Fund
Project
1
Project
Onshore Offshore (Offshore holding)
Route 3b: foreign LP’s direct investment into local RMB funds
Route 4: local LP’s investment into foreign funds or FoFs
Deal Structure in China
Distinct Foreign and Local Operation
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•
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Distinction of USD offshore holding investment and RMB local entity investment is a
particular phenomena in China.
Foreign VCs: use offshore USD fund to invest into China deals’ offshore holding
entities with all equity activities happening outside of Chinese jurisdiction. Local
VCs: use RMB to invest into deals’ PRC entities and seek local divestment.
Distinct Foreign and Local VC Groups
- Foreign VC contributed more than 70% of funding.
- For many years, the encouraging trend of profitable exits is only applicable to
foreign VCs. Local VCs’ profitable divestment is only happening since 07.
Offshore Holding a Preferred Structure
(up to 07, and changing)
Offshore holding arrangement is a preferred structure for Chinese entrepreneurs
and VCs as it provides a feasible and practical route for funding, divestment and all
equity events. Its advantage and attraction to Chinese entrepreneurs and VC
communities:
- Go away from laws and regulations in China. Many of them are not friendly to
venture activities, including lack of preferred shares, stock options limitation,
double tax, …
- Bypassing capital account control on foreign exchange
- More flexible and usually profitable divestment options by overseas IPO, M&A
or trade sales.
Foreign VC Investment
Kept Equity Activity Offshore
VC Mgmt
VC Mgmt Co. LP Fund
（Rep. Office）
Investment
Management
Portfolio’s onshore entity
Portfolio’s offshore
Holding
WFOE: Wholly Foreign Owned Enterprise
On
Shore
Off
Shore
(York chart, ‘02, quoted in HBS cases #805-090 and #805-091)
Special PRC Vehicle for Projects
Off-limit to Foreign Co.
VC Mgmt Co.
VC Mgmt Co. LP Fund
(Rep. Office)
Investment
Management
Invest
WFOE
A SPV Co.
(Licensing & revenue
booking vehicle)
On
Shore
Off
Shore
Offshore
Holding
(York chart, ’02, quoted in HBS cases #805-090 and #805-091)
Restructuring into Offshore Holdings
• Offshore restructuring involves the following steps:
- The Chinese founders set up an offshore holding
company in Cayman Island or BVI with the
shareholding structure and management control
mirroring those of their local company in China.
- With kind of swap scheme, transferring the equity they
hold in the Chinese local company to the offshore
holding. This will typically convert the local company
into a WFOE (Wholly Foreign Owned Enterprise).
• The offshore holding company will then be the vehicle
seeking VC investment, future funding as well as for listing
or be merged. All equity events happening offshore.
Companies’ funding and IPO proceeds will be kept offshore,
and remit into China as and when operation required.
Chinese founders’ assets, rights and proceeds stays
offshore.
RMB Funding as an Optional Source
• The current offshore entities set up, getting USD
investment and looking for offshore market listing is
getting tougher and might not be a viable option in for
longer term.
• Eventually, the VC/PE industry in China will do local
RMB fund raising, local RMB investment into local
entities, and have the portfolio divested thru local IPO or
M&A. So, to complete the four major activities of a VC
cycle (funding, investing, value add to portfolio, and
divestment) all onshore.
• VC investors as well as entrepreneurs should take note
to watch the emerging mega shift closely, and explore
RMB fund initiative seriously. 2007 was the year kicking
off a long transition toward the mega shift.
(Part I)
Venture Opportunities in China
- The “Three Represents”
Conceptualized and first presented in
Zero2IPO China VC Conference
Dec. 16, 2004; Beijing
China: World Market & World Factory
Product & services to
serve the domestic
market
•
•
•
•
•
Huge & growing domestic
market
WTO and opening up
Stable inv/buz environment
Engine for global economy
growth
An integral part of MNC’s
globalization
Manufacture, R&D, … to
serve the world
• Abundant engineers, skillful &
diligent labor
• Local talents fostered by
MNC
• Management fr abroad &
HK/TW
• Private sector is catching up
• MNCs’ Asian HQs and R&D
center
• Fr “Made in China” to
“Create in China”
Emulating the Business Model
Across the Pacific
• China is a huge market. Any business model, even
focusing on a very niche market, it could be successful.
• Even just emulating a well proven and successful
business model from the States is feasible.
• US companies will need to focus on huge and
challenging local market first. Even for going abroad, it
will go to Europe and Japan first. A golden time
window for China start up to “copy” and grow.
• The market leader in a particular segment may go
public; the 2nd and 3rd could be potential M&A targets
for MNC in the same sector who want to jump starts or
complement its China development. (refer to next slide)
Potential Exits for China start-ups
Lead players may go IPO
• Ctrip、 eLong
• 51Job
• Shanda、NetEase、The9
World Perfect, Jinshan, ..
• Dangdang (on IPO route)
• Baidu、Huicong
• Linktone、Tom Online
KongZhong、Hurray
Tencents
Others may be acquired
ChinaHR (40% by Monster)
17173、Digital Red
Joyo (by Amazon)
3721 (by Yahoo)
MemeStar, Power Genius,
Treasure Base, Goodfeel,
Crillion…(several scores)
Huge local market represents
the opportunities in consumer products
and services
•
•
•
•
•
China has a huge local market. A segment leader could make a
powerful player no matter how narrow the vertical market is defined.
The statistics we are familiar with, such as 550M mobile users, 137M
Internet users, 91M broadband users and 5.5M college graduates
every year…., could transfer into huge business opportunity.
Consumer market is much promising than enterprise market.
Consumer products have big sales opportunity, while consumer
services have maximum capital efficiency.
Opportunity for entrepreneurs and investors：
- Local value add services (MVAS, broadband, internet,
Web2.0,…)
- Media, advertising, digital contents, …
- Other products and services concerning daily life, health and
amusement
World factory status represents
the opportunities in ‘import substitution’
•
•
•
•
China has been the world factory, a powerhouse to churn out
products sold all over the world. However, quite some key
components are imported or supplied by foreign players. So, ‘import
substitution’ provides opportunities for local entrepreneurs.
It’s not necessary about leading technology. KSF are on mature
technology, large volume, with longer term demand and higher price
elasticity.
Core competences: global standard product design (technology),
local manufacturing (cost) and good local customer relationship
(service)
Opportunities for entrepreneurs and investors:
1. IC design
2. Key components design and manufacturing
Abundant cost effective resources represents
the opportunities in outsourcing services
•
•
•
•
With China’s abundant engineer, cheap labor, cost effective
operation, and stable business environment, it could provide
outsourcing services to global market.
Start ups should leverage China-based advantages to provide
value-added services to enhance competence and competitiveness.
Core competence: international standard operation, overseas
marketing activities (order taking) and the scaling up/down ability
Opportunities for entrepreneurs and investors:
- Hardware OEM/ODM services
- SW outsourcing, BPO and Call Center service
- IC design and outsourcing service
- Digital content creation, …
(Part II)
Venture Deals with Chinese
Characteristics
- China Deals’ “Three Represents”
Conceptualized and first presented in
China VC Half-Year Conference, Zero2IPO
Beijing, Jul. 8th, 2002
Know-how and Know-who
“If Ebay is the shark in the Pacific,
Alibaba could be the crocodile in the Yangtze River.”
– Jack Ma, Alibaba
•
China projects requires both Know-how and know-who.
•
“Returnees” (Sea Turtle 海归/龟) refers to managers and
entrepreneurs coming back from abroad. My new definition：
-
‘Ocean Turtle’ (大洋龟)：Conventional definition of returnees,
with oversea education and MNC exposure. But being remote
from home country for long.
-
‘Strait Turtle’ (海峡龟)：Professionals from Taiwan, HK &
Singapore. With MNC experience, global views and familiar with
China Market
-
‘River Turtle’ (江河龟)： Local management of MNC operation
in China. Familiar with both international operation and local
market
Represents Those with
Practical Technology Application
•
•
•
•
Advanced technologies helps to build up entry barriers & develop
the business successfully. But, in China, it’s “Technology
Application, NOT Technology Creation”.
Leading edge technology and critical innovation breakthrough are
of global competition. It will be tough and impractical to find
locally developed technology, which could stand for global
competition. However, service, integration and localized
technology application are of local competition.
A practical approach: To see how to apply those well proven
advanced global technology and business model into China’s
local market.
Good role models of “From SI to Products” (by Asiainfo,
Huawei, …. ), TMT Model (Trading-Manufacturing-Technology,
by Legend/Lenovo) and OEM-OBM Model (Acer).
Represents Those
Servicing the Mega Local Market
•
•
•
•
China has a huge local market to be served. A start-up could be
highly successful even by only servicing the local market.
“Import Substitution” business has also big potential. Take IC
design. It will be much feasible for local start ups to target at
ICs with huge quantity, stable demand, price sensitive and
trailing edge tech. Those will be highly demanded by the
“World’s Factory” by replacing imported components.
Channel and logistics has high value as China market is vast,
diversified and segmented.
Need close cooperation and complementary strength of returnees
and locally grown-up talents; Emphasize on both marketing
(know-who) & technology (know-how).
Represents Those with
Highest Execution Power
•
•
•
•
Implementation counts, NOT Presentation. Entrepreneurs need
to focus fully on operation on the ground.
Key stumbling points: Time to Product, Time to Market, Time
to Revenue, & Time to Profit
“Alumni” founding team for founding members being worked
for several years together as a team in MNCs is a big plus.
Founding members will need times to “break-in” and be
seasoned in order to exercise team power.
Exit is the cardinal principle. Only those could be successfully
exited are good projects.
China: a Risky Market for Foreigners
China is a tough
market for foreign
players. Business
initiative needs “摸着
石头过河” (a
Chinese proverb:
holding the rock to
cross the river).
Familiarize with local
regulations, market
admittance system
and industry practice
to avoid operational
and legal risks.
危
机会
摸着石头过河
Thank You !
谢谢
yorkchen@idtvc.com
www.idtvc.com
VC Blog http://yorkchen.fastart.cn
雁行中国 http://blog.sina.com.cn/yanxing