I just spent a few weeks in Japan and China on a book tour for theJapaneseandChineseversions of the Startup Owners Manual. In these series of 5 posts, I thought Id share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks toKai-Fu Leeof Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of theStanford Center in Beijing,and my publisher China Machine Press.
The previous postdescribed the evolution of the Chinese Venture Capital system. The next two posts are about what I saw and learned in my short stay exploring Beijings entrepreneurial ecosystem.
Entrepreneurship in Beijing
In the few days I was in China I met with several VCs, angel investors, business press and spoke to hundreds of entrepreneurs. I was blown away by what I saw in Beijing. First, I was amazed by the physical impact of the city itself. This was a modern city in a hurry to make a first impression think of what Rome looked like in the time of the empire or New York in the 1920s now its Beijing announcing that China has arrived.However if you scratch the surface, you can still find a bit of the old Beijing in thehutongs. Drive 50 miles outside the city into the surrounding villages and you see the distance China has to travel to bring the rural areas into the 21stcentury. In Beijing we hadnt seen air so badly polluted since we had been in Agra in India in the winter where I swear there was a day you could wave your hand in front of you and see traces of it in the air (and their excuse was they burn dung for heat.)
David Lin and theMicrosoft China Acceleratorwas gracious enough to host two wonderful days of events for me. I trained theStartup Weekend NextBeijing mentors and instructors, presented to several hundred entrepreneurs, and had a great fireside chat withZhen Fund founding partner Xu Xiaopingin front of another roomful of entrepreneurs.
Kai-fu Lee of Innovation Workswas equally generous with his time. We had a fireside chat with a room full of eager entrepreneurs. And he was generous in sharing his insights about the current state of entrepreneurship and investment in China. And through it all Louis Yuan my patient and wonderful publisher fromChina Machine Presskept me moving through the events.
But what made the overwhelming impression for me was finding an entrepreneurialsoftwarecluster on par with the Internet software portion ofSilicon Valley. The physical heart of the Beijing startups is inZhongguancunin the Haidian District, located in the northwest side of Beijing. Startups here are primarily in what they call the TMT (Technology, Media and Telecommunications) segment. Not only does Zhongguancun have Chinese startups, but global technology companies (Nokia, Ericsson, Motorola, Sony Ericsson, Microsoft, IBM, Sun, Oracle, BEA, Alcatel Lucent, Google) all have offices here or elsewhere in Beijing.
If there ever was any question about the value of ChinasTorch Programwalk aroundZhongguancun. It was the first of the 54 Science and Technology Industrial Parks.
China Venture Capital
An entrepreneurial ecosystem is driven one of two ways; either by acrisis(i.e. innovation in the U.S. during World War II,) or during peacetime byprofit.
If its driven by profit then the ecosystem needs both entrepreneurs as well as Venture Finance.
China now has plenty of both.
China has the biggest Venture Capital industry outside the U.S. To compare the two, in 2011 U.S. venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967 Internet deals with $6.7 billion.
By comparison, in 2011 Chinese VCs invested $13 billion in all deals. Out of that total, they funded 268 Internet deals with $3.2 billion. About1/3 of all Chinas Venture Capital investmentis made in Beijing and the majority of those investments are in the Technology, Media and Telecommunications (TMT) sector Ill describe shortly.
As vibrant as the China venture business has been, 2012 was a different story. VCs pulled back and only invested $3.7 billion in all deals, funding just only 43 deals with $563 million.
Closed for You, Open For Us
First a bit of context in what the VCs in Beijing are investing in. China has essentially closed its internal search, media and social network software market to foreign companies who wouldnt play with the government rules on theGreat Firewall. (China blocks objectionable website content and monitors everyones Internet access.)Google retreated to Hong Kong andBaidutook its place. Facebook was too frightening to Chinese censors, soRenrenis the leading social media player. Email? Working professionals/white collar use emails, but most users grew up instant messaging on TenCents QQ and most are moving toWeixin/WeChat. Twitter? No, its SinaWeibo, and if you want games with your chat TenCent. Amazon and Ebay? Nope in China itsAlibabas Taobaoor360buy.com. If youre outside of China, you never hear about these companies or interact with them because theyre geared to serve only Chinese users.
This closed but very large market means that greater than 90% of Chinese software startups focus exclusively on the Chinese market. (The <10% that decide to go global early do so by startingoutsideof China. Another 10% may try to go global when theyre larger and have the resources for two languages, cultures and regulations. )
This has resulted in a completely different consumer software ecosystem than found elsewhere in the world. Given the closed market to U.S. Internet companies, VCs in China have guided startups to execute the copy to China model. Thinking, if it worked in the U.S., copying a known model is less risky than trying something new and untested. The problem is that this space is getting really crowded from the bottom up as everyone tries the 200thclone and from the top down, as the major incumbents try to fill every possible market niche.
The table below maps the type of software in China to their global equivalents in each product category in the Technology, Media and Telecommunications (TMT) sector.
A Huge Market is Finally Real
For a hundred years the fantasy of global marketers was, if only everyone in China would buy one That day is final here. The numbers of mobile subscribers are staggering 1.18 billon, 260 million are 3G. Chinese Internet companies live in a large closed, self-contained ecosystem with 564millionweb users with420 millionhaving mobile web access. 309 million use microblogs and 242 million shop online. (BTW, market research, financial and other statistical informationare usually unreliable in China, but even taken with a grain of salt these are staggering numbers.)The table below fromweb2asia.comshows the number of users of online social networks as of 2009. Did I mention this is a huge market.
Investment in the Technology, Media and Telecommunications (TMT) sector
The charts belowfrom David Lin, Microsoft Accelerator detail investments in the Technology, Media and Telecommunications (TMT) sector almost all of it is centered in Beijing. (Note that these numbers differ from the Zhen Fund data -welcome to statistics in China but they both provide an overall sense of the market size and direction.)45% of all Venture Capital Investment in China went into the Technology, Media and Telecommunications (TMT) sector.
The number of deals in Technology, Media and Telecommunications more than doubled in 2011 over the previous five years and slowed back down dramatically in 2012. More than 1,600 VC investments in TMT have been made since 2007, with a record high of 436 in 2011.
Internet investments makes up more than 50% of all the deals in Technology, Media and Telecommunications made since 2011, while, E-commerce investments, in turn, accounts for nearly 50% of the investment deals in Internet. Investments in Mobile Internet makes up roughly 11% of all the deals in Technology, Media and Telecommunications, and have been on the rise since 2011.
Series-A round investments dominates Technology, Media and Telecommunications (TMT) deals, making up 60% of all.
Beijing, Guangdong (including Shenzhen) and Shanghai came out as the most dynamic spots for Technology, Media and Telecommunications (TMT) investments.
Beijing Venture/Angel Ecosystem
While Beijing has VCs and Angel investors happy to write a check there arent as many angels/VCs in China versus US per capita. Several VCs mentioned that theres a funding gap for seed stage investments. The Angel/Seed network in Beijing feels fragmented and mostly inexperienced (as are a good number of the China VCs). Kind of reminded me of the drivers in Beijing they were all driving in a way that made me think they all just got their drivers license until I remembered that they did. Car sales in China went from 1 million in 2001 to 14 million in 2011.
Other Beijing ecosystem issues I heard about were the things we take for granted: the lack of knowledge sharing (pay it forward isnt part of the culture,) limited mentoring (few experienced mentors,) and a lack of open source education, and noAngelListmodel. In the U.S. its easy to share and browse ideas and deals, but in China theres a long legacy of guarding knowledge as power, and the justifiable paranoia of someone copying your idea prevents sharing.
Liquidity
Unlike the U.S. there are almost no mergers or acquisitions in this market segment. Its much easier to just steal their ideas and hire their employees. So big companies rarely acquire startups. Liquidity for most Internet startups happens via IPOs. 70% of exits in China are via IPO (in the U.S. on NASDAQ or the NYSE or on ChiNext, Chinas equivalent of NASDAQ) compared to the 90% of exits in US via mergers or acquisitions. Alibaba (commerce), Tencent (games/chat) and Baidu (search) all have market caps over $40 billion.The next post, the Gold Rush and Fire Extinguishers Beijing entrepreneurs, startup culture and some conclusions.
Lessons Learned
Liquidity is via IPOs not buy outs