Opportunities in Chinas

Startup Ecosystem
ZhenFund 2013
www.ZhenFund.com
2
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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
China by the numbers
1.35 billion people 70% urban by 2025
7.5% GDP growth over next 10 years,
driven by domestic consumption
2
nd
largest consumer
market after the US
3
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
$445bn
$270bn
Cnllne reLall volume
(2013L)
Shipping costs comparatively low
44% of Chinas population will shop online in 2015,
representing 375mm customers
E-commerce projected to reach 16% of retail sales by 2020
C
h
i
n
a

U
S

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 Chinas Internet is Giant Shopping Mall Infograph
Chinas e-commerce volume to surpass US in 2013
U
S

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 6
th
2013, Data from Morgan Stanley 2012 China Gaming Industry Report, Analysys International
China is the worlds largest online gaming market
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
China produces 70% of the worlds 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, Chinas Communication Industry by tech.163.com, At
D11, Its Clear, China beats U.S. in mobile and internet Forbes.com 5/30/2013, Telefonica SA and Financial Times
Mobile & smartphone market opportunity
10
Chinas digital divide: mobile internet
Source: Analysys International, Morgan Stanley AlphaWise, Flurry Analytics, insidemobileapps.com, computerworld.com, Apple,
Stenvall Skoeld & Company analysis , Kai Lukof,


Android has 90.1% market share,
but Google Play is virtually absent
Many smartphone users do not
download apps themselves,
concerned about data plan use for
big downloads,tend to buy phones
with apps pre-installed by Shuaji
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
iOS developers can gain brand
awareness by engaging Shuabang
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
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
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
Chinas angels by the numbers in 2012
Source: Cyzone.com 2012.12
B
ackgrou
n
d
72%
of angels
w
ere previously
founders
M
o
s
t
ly

m
e
n

8
8
%
a
re

m
a
le

Sectors
M
obile internet, e-
com
m
erce, and
consum
er services are
the top three areas for
investm
ent
B
o
a
rd
s

7
6
%
t
a
k
e

b
o
a
rd

s
e
a
t
s

R
ound Size
60%
of their portfolio
startups raised <
3m
m
R
M
B (~$500k)
in their angel round
We see this
investment
strategy declining
as Chinese angels
become more savvy
G
eo
grap
h
y
Beijing dom
inates
angel deals in China,
representing 22%
of
all deal value and 30%

of overall deal volum
e
Ownership
For 20%
of deals,
angels took m
ore than
50%
of the com
pany


13
Chinas angels are on the rise
Source: www.stepvc.com 2012,
2012.09,www.zdbchina.com, Cyzone.com 2012.12
Angels by type
Individual
Angel Fund
Angel + Incubator
Angel Teams
60% of angels will
exit by selling
shares to VCs

50% of angels
reporting returns of
30%+

18% report returns
of 200%+
190 !"#$%
13 !'$%
61 !(($%
6 !($%
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 VCs and US angels
already have funds or reps in China
Provide cash, tax, and ofce 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

13
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 IPOs
from portfolio
National government
Local and national government have two key KPIs:
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
Government funding
Caveats
High turnover rate. Discontinuity of services and support when
ofcials rotate to other posts or are promoted
Focus on hardware rather than software. Tangible KPIs such as
brick and mortar or registered capital are primary focus
Lack of experienced advisors. Ofcials in charge of programs may
have no experience running businesses
Bureaucratic. Application and reporting requirements burdensome
to startups

Major VC funding cool down in 2012
17
992
1,269 1,173
1,777
3,247
4,210
2,701
5,387
13,003
7,320
177
253
228
324
440
607
477
817
1505
1071
0
200
400
600
800
1000
1200
1400
1600
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Inv ($USD mm)
# deals
Investments in Chinas VC Market from 2003 2012, estimated 40-50% decline in 2012
Source:, Zero2ipos China VC/PE Market Review 2012, hup://research.pedally.cn/dowloadles/20133613413763.pdf

Factors afecting 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)
Reasons for optimism in 2013
19
One of two Chinese internet IPOs 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
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
20
488
416
331
321
488
433
92
7
13
68
31
49
2007 2008 2009 2010 2011 2012
IPO M&A
!"#$ &'( )*+ ,-#. /001 2 /03/
Source: Thompson Reuters & National Venture Capital Association, Zero2ipos China VC/PE Review 2012

144,
59%
99,
41%
45678$ &'( )*+ ,-#. /03/
IPO M&A, MBO, Liquidation, etc
Exit opportunities: Chinese VC backed companies still
skewed towards IPO
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
BAT + Q: Chinas 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, prot
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

Baidus emerging rival in
search (15% market
share)

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 efective, difcult 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 ->
Chinas 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 VCs 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

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 prole consumer internet brands*











Copycats dont 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.com Diandian.com www.woxihuan.
com
12
26
but foreign entrants shouldnt discount them!
Launched in June 2011 Neteases (Youdao Yunbiji) at 8mm users
reportedly larger than Evernotes 4mm Chinese user base
Youdao even mimics Evernotes marketing tactics, using similar wording on their
Weibo account. Copycats are still an issue!
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, ofine resources, advanced IP/tech) are the key to
success, expect copycats but dont be discouraged
Avoid internet giant territory
Dont 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 ofine 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 efort
Get a Chinese investor on board, have a local connection that can pull strings for
you when issues arise
Empower local staf
Shorten the chain of command for decision making
Give local GMs a stake in the business
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. Its more of a trust business
- Evernote Chinas GM Amy Gu on rivals in China

At the end of the day, its 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

IP protection is improving
29


This is a long-term efort we want the indigenous brands to
work together to protect IPR, because if you do not participate
today, tomorrow you are the victims. ) *+,- .+
4/2013 Baidu wins suit
against Qihoo for illegally
accessing and indexing
Baidus 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/
Startup services: US versus China
30
: Extensive services make startups more
efcient 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
Internet Speed
Chinas 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/
Ongoing Challenges: Lack of Trust
32


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+;B 2D@26:2;,2? 57 E225 +;B 563?5 2+,1
75126 +;B 5+-2 + ,1+;,2 57>25126FG
) <:,576 HA+;>
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 NGOs
52% trust businesses
CHEATING IS PERCEIVED AS
THE NORM

063?5 :; I1:;2?2 ?7,:25= 1:5
+; +44)JE2 47A :; (#K(F

) 012 L432 L77- 78 97,:+4 .2;5+4:5=
VS
Source: http://chinadigitaltimes.net/2013/02/trust-among-chinese-drops-to-record-low/

APPENDIX


Additional data points
33
34

One of Chinas leading angel funds
ZhenFund believes in one principle above all
others: Integrity,
Money with values
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
Chinas 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 staf, 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 rm doubles as one of the
most active institutional angels in China
Established angel funds in China ofer a variety of investment styles and
funding amounts for local startups


Chinas Angels
36
Edward Tian Charles Xue Li Kaifu Xu Xiaoping Lei Jun
Many prominent angels are members of Chinas Angel
Committee , but co-investment still rare, the Silicon
Valley party round hasnt yet made it to China
Chinas top angels primarily investing through fund entities
Cloud Valley Innovation Works ZhenFund Shunwei Capital
Chinas Angels (contd)
37
Cal WenSheng Pe 8oquan 8ao lan Zeng Llqlng
Chinas Incubators
38
Beijing
Shanghai
Hangzhou
Shenzhen
Dalian
Taipei
Many new privately funded
incubators emerging
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)
Q2 2012 Ctrip acquires

(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

Suning acquires Redbaby

($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)
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
Ofering products made in China for global customers
25% of 400mm users outside China
JV in Japan and eyeing US markets
42
Google Play Vacuum
Android represents 90.1% of the OS market in China, but Google
Play is virtually absent
Multiple 3
rd
party android marketplaces vying for user attention

43 43
Chinas Internet Giants want to do it all Source: CIC
Source: ClC