is outsized return still possible in china? - seca.ch

Innovation Works Confidential

Is Outsized Return Still Possible in China? The Innovation Works Approach to Early-Stage Investing

Kai-Fu Lee

Chairman & CEO July 2012 EMAIL: [email protected]

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China’s GDP to Outstrip USA by 2018

Source: PwC Projections based on World Bank Data, GDP per capita in 2009 dollars, adjusted for purchasing power parity (PPP)


The Private Equity Model is Being Challenged

PE – 85%

Venture – 10%

Real estate – 4%

Multi-stage – 1%

Growth - 48%

Expansion - 43%

Early - 6% Profitable - 3%

Source: ChinaVenture, 2010 Venture Capital and Private Equity Market Statistics

$40b in new funds raised Almost exclusive focus on late-stage

• Past IRR up to 100%

• 2010-2011 were record IPO years

• 8,000 PE funds!

• No more “IPO arbitrage”

Pros Cons


China Internet = largest market + lowest cost

0

100

200

300

400

500

2006 2007 2008 2009 2010 2011

Mobile Internet Internet

Source: iResearch

500M internet & 300M mobile internet users

$300K Chinese “lean start-ups”

4

CEO/Product manager

User experience designer

CTO + 7 more engineers


1126%

599% 546% 514% 467% 463% 403% 399% 389% 384%

China’s Internet Sector Opportunities

2006 2007 2008 2009 2010 2011

17 50

117

233

302

356

137

210

290

384

457

513

Source: iResearch and CNNIC Source: iResearch

50x in 9 years 15x in 10 years

500m Internet + 350m Mobile Internet Users In 2014, China Internet = $123b Annual Revenue

App Session Growth (Q1 ‘11 vs. Q1 ‘12) In the Last 10 Years…

• Internet sector grew 5x faster than GDP

• 10x increase in the number of annual IPOs

• 346x increase in Internet market cap

Source: Flurry


Startup Cost Drops to Historic Low

6

Google & Facebook were built this way.

Fair economics for founders & investors

Investor

Founders

CEO/Product manager

User experience designer

CTO + 7 more engineers

Validate product idea in 9 months* 10 people x 9 months = only $300K

= ~ $2M valuations at seed stage

* Source: Eric Ries: The Lean Startup


40m Users in <2 Years

125m Users in 1.5 Years

$ 1b Revenue in 2 years

250m Devices covered in <2 years

Amazing Growth Stories


Early-Stage Can Deliver Extraordinary Returns

Seed Angel Venture Growth Pre-IPO

Seed Angel Venture Growth Pre-IPO

People 2 10 30 200 800

Capital $0.2M $0.5M $10M $25M $100M

Duration 6 months 6 months 2 years 2 years 2 years

Valuation $2M $15M $30M $150M $400M

15x in <18 months


• Industry Data

• Proprietary Data

• Research Team:

IW Case Study: Select Key Investment Themes

Theme selection criteria:

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Selection based on:

IW Expertise IW Research Silicon Valley Advisers

• Product + Tech Experts

• Industry Experts

1

High Growth

High Value

Low Capital Expenditure

Localizable Differentiated


IW Concentrates Investments on Specific Themes

10

Group-Buying

2009

Covers 210M devices in 1.5 years

>1M Tapas Phones + >10M apps

600M app downloads in 2 years

35M users in 2 years 5M users in 1 year

Alexa global 1500 in 6 months

100M downloads in 1.5 years

7M users in 1 year

Users 3x, Revenue 10x in 3 months

Zynga-like platform

HTML5 game platform

No barrier to entry, competes on cost only, lacks merchant value.

LBS Platform B2C E-Commerce

iPad/iPhone edutainment for toddlers

Not currently suitable for China. China LBS should focus on: food/fun + make/save money.

Mostly in trouble; One having massive lay-offs.

Price & marketing war leading to likely bubble. 6500 clones, 500 dying/month.

High user acquisition costs. No longer “lean startup”.

2011 2010

Android Ecosystem Casual + Mobile Game Ecosystem

Unfilled Need In SNS

Monetizable O2O Service


IW Attracted “best-of-class” Founders/ CEOs

He Huang Co-founder, Leiyoo PM Director, Tencent

Jack Xu CEO, Diandian Co-founder, Renren.com (multi-billion US$ IPO)

Binsen Tang CEO, Xingcloud Founder, Elex Tech, 4th largest social game developer in the world

Ye Wang CEO, Doodle Mobile Special Assistant to CEO, Google China

Ryan Xu CEO, Buding Founder & CTO, Tsinghua Tongfang Micro-electronics

Lei Zhang CEO, Tapas Baidu Mobile director; 8 yrs. Huawei experience

Erik Huang COO, Zhihu Sr. Editor, Sohu

Jeffrey Ma CEO, Nevel VP of R&D, Rising 10+ experience in security

Chuan Luo CEO, AppChina CEO, MSN China CEO, Myspace China COO, China Mobile 139

Serial entrepreneurs Experienced executives

Junyu Wang COO, Wandoujia Senior designer, Google China

Limin Zhou CEO, Wandoujia Chief Architect, Baidu

Fan Jiang Founder, Umeng Google China

Hongfei Tian CEO, LOOA Oracle USA

Mily You President, Tapas PM Director, Tencent Mobile

Fei Zhao Co-founder, Leiyoo Engineering Director, Renren

Zhenyang Zhan CEO, Xinyou COO, Kingsoft Games

Jing Jian CEO Co-founder, Lianzhong Games

Jun Xiong CEO, Tongbu CTO, NetDragon

Innovation Works Confidential 11

2


Help Startups Scale Up Quickly with Services

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Build first product prototype

Iterate & improve product

Market & promote product

Prepare for next-round funding

& growth

The IW company-building process

1 2 3 4

Legal / GR

Offshore set-up

Share issuance

Term sheets

Local licenses

Finance

Payroll

Taxes

Budget

Rent

Tech / UX

System reviews

Code reviews

Design reviews

Introductions

Mentoring

Mentoring sessions

Executive coaching

Team building

X-company clubs

PR/Marketing

Grants & subsidies

PR events

Product promotion

Speaking slots

Recruiting

Internet headhunter

Resume database

Campus recruiting

EIR program

Aiming to save >50% time spent by entrepreneurs on these areas

3


IW Senior Team Leading 45 Full-Time Professionals

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Kai-Fu Lee Chairman & CEO Corporate VP at Apple, SGI, Microsoft, Google.

Founded Microsoft Research Asia (“hottest computer science laboratory” in Asia, according to MIT Tech Review).

Founded Google China and doubled market share.

Carnegie Mellon, Ph.D. (first speaker-independent speech recognition system; “Most Important Innovation of 1988” by Business Week).

35,000,000 followers in Sina + Tencent Weibo (~Twitter), and author of five best-selling books.

Hua Wang Managing Partner Former entrepreneur and Google BD Director.

Foremost expert in Chinese mobile & internet.

Stanford, MBA.

Tina Tao COO 20 years experience at Google, Microsoft, IBM, Acer.

Executive roles in operations, sales, marketing, R&D.

Yale, MBA.

Chris Evdemon Partner Former entrepreneur, angel investor for 6 years. Managing Partner at Eastern Bell VC. INSEAD, MBA.

Christine Lang Partner 15 years experience in TMT analysis and investing. AVP, Analysys International. Beijing University, IMBA.

John Qiu Partner 15 years experience in TMT. Former entrepreneur. 2 years McKinsey experience. 5 years at Morningside Venture (head of BJ office). Tsinghua University, B.A.

30 15 45 Operations

Team Investment

Team


Recruiting, Mentoring, and “Everyday” DD

Speech: 8000 people

Written exam: 1000 people

Interview: 100 people

Offer: 30 people

Welcome!

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Recruiting at 13 Top Schools

1:1 Mentoring & “Everyday” DD

Weekly distinguished lecturers

Jerry Yang, Yahoo

Ray Ozzie, Microsoft

Huang Brothers, Guitar Hero

Steve Chen, Youtube

Bill Buxton, Microsoft

Gary Wang, Tudou

500,000 Resume Database


Double-down on Winners to Maximize Shares

• Participate in a disproportionately high portion of China tech home-runs: • Goal is to own 30% - 35% after Series A & B;

• Highly selective in each round after formation / seed: • Increase position by doubling-down & focusing attention on winners.

SEED $300K

SERIES B $4m

SERIES A $4m

ANGEL $700K

120

50

12

30

15%

15%

20%

50%

Comparable to VC

Outsized Returns

# Getting Funding

% of Capital Allocated

15

4


IW Results in 2 Years: 13 Series A & 2 Exits

Partnering with top VCs in China:

Two M&A Exits = 17X return in ~ 1 year

47 Series A

13

Closed

4 M&A

2

Ongoing (Seed + Pre-Series A) 28

13 Series A delivering 20X step-up from seed


IW is the #1 brand in seeding tech startups in China!

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Innovation Works Terms

• Fund Terms: • $250 million target fund size, $300M hard cap

• 2.5% annual management fee, significantly reduced after six years

• 20-30% carried interest (20% if return <3x, 25% for 3-4x, 30% for >4x)

• 10 year term, with potential 1-year extensions

• Multi-stage fund from seed to Series B

• ~5% GP contribution

• Completing fist closing in July around $150M, exceeding original expectation by 50%.

• Allocation tight but available for second and final closing in Q4 2012.

• Investment Goals: • Leverage China’s growing internet + mobile market, and low cost

• Identify investment themes that are fastest growing, most localizable & differentiable

• Invest in “best-of-class” entrepreneurs within these themes; double down on the most promising

• Participate in a disproportionately large percentage of within-sector IPOs (goal = ~20% share at IPO)

• Operational Strategy: • Apply management fee predominantly to exceptional service, instead of high partner compensation

• Grow world-class staff from 45 60 in Beijing & Shanghai to assist entrepreneurs

• Provide exceptional service aiming to reduce time spent on non-product tasks by 50%

• Co-locate with companies to facilitate mentoring, culture-building, synergies, and “everyday DD”

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Closing Remarks

• China’s growth shall continue.

• China will become a tech giant; bet on it.

• Consider diversified investment approach in China.

• Early-stage investment can produce great IRR.

Kai-Fu Lee EMAIL: [email protected]

is outsized return still possible in china? - seca.ch

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