Kalaari in China Vani Kola

June 12 - 20, 2016

Supported by Dhruvin

Contents

⼀。Introduction

⼆。Key Learnings

三。Travel Tips

四。Conclusion

五。Appendix

Compiled by Tara Kola

⼀ Introduction

Aboard the Oriental Express

Travel Log of our first trip to China

China India

1.4B people

1.3B people

Year of Economic Reforms

1991Year of Economic Reforms

1978

GDP 10.9 trillion GDP 2.1 trillion

⼀Why Visit China

Learn from China’s Venture Capital Success Reasons behind velocity of Chinese startups Understand how they have built large ecosystems Discover what is next for Chinese tech startups Discover the scope for collaboration Make new friends

Why Visit China1. Learn from China’s Venture Capital Success

¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥

₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹

VC Investment in 2015

♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞

32 unicorns

Number of Unicorns

Total Value of Unicorns

IPOs in 2015

♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞ ♞

◼ ◼◼◼◼◼◼◼ ◼◼◼◼◼◼◼ ◼◼◼◼◼◼◼ ◼ ◼

◼ ◼◼◼◼◼◼◼ ◼◼◼◼◼◼◼ ◼◼◼

$27 billion +

7 unicorns$6.5 billion +

219 IPOs

21 IPOs

$170.3 billion

$31.6 billion

Why Visit China2. Analyze the reasons behind the velocity of Chinese startups

Xiaomi Global Smartphone Sales

Number of Startups and GDP

Annual e-tailing Revenue

Growth in Number of Startups

GDP

Why Visit China3. Understand how Chinese companies have built large ecosystems

Venture Capital

风险投资wind risk throw capital

throwing capital into the wind

⼆ Key Learnings What we learnt from China

⼀1. India can follow China’s

development path

India can develop like China1) “Manufacturing is critical for development.”

• 20 years ago, India picked services, China picked manufacturing. Manufacturing distributes money through all levels of society. In China, it wasn’t broadband quality/penetration that enabled the profitability of e-commerce companies, but the rise in income through manufacturing.

• How fast manufacturing can grow in India will affect how much people can spend on internet.

2) “Indian consumers behave similarly to Chinese consumers.”

3) “Growth of e-commerce in India similar to early Chinese e-commerce.” • 80% of users didn’t have credit cards in China when e-commerce started.• Alibaba created escrow. An India company will need to solve payments.

India can develop like China4) Trajectory of phone usage is similar

• In China, phones were first used for information like maps, then transactions, and then for services, finally for everything else. India seems to be on a similar trajectory

• Mobile payments has huge opportunity in China. Alibaba and WeChat enable offline payments by scanning a QR code. Perhaps a high utility app in India will start offering the many other online services apps like WeChat do.

“We may take different roads to reach development, but we will both ultimately reach our destination.”

2. Critical differences between China and India

⼆

Critical Differences1) The Great Firewall

• The Great Firewall was key in enabling the early local tech companies (Baidu, Tencent, etc.) to grow and flourish. These companies played a crucial role in the growth of China’s tech industry.

• Indian startups are exposed to US competition, and thus may not have the incubating effect of the Great Firewall.

• Should Indian companies have some offline, local component, since purely online companies would compete with US companies

• Unlike China, India has not seen any large purely online businesses.

Critical Differences2) Many sectors have consolidated in China. India still dominated by SMEs.

• Alibaba started as a B2B, but realized the far greater B2C opportunity, transforming their success.

• In China, heavy industry SMEs are largely consolidated. Markets are generally less fragmented.

• B2B in textiles, commodities and a few other sectors seem to have workable models.

3) 20 years ago China picked manufacturing, India picked services. Now, Chinese government is pushing services, Indian government is pushing manufacturing.

4) While India is culturally more similar to China than US, still some differences.

3. Chinese companies are interested in India as a market

三

India as a Market1) Chinese companies are looking to expand globally

• Pressure for Chinese companies that have done well to go abroad to expand their market base. India is a major market they hope to capture.

2) Some Chinese startups are looking to India as a primary market

3) Skepticism about Chinese companies going abroad• Many felt that most Chinese companies that have tried to expand to India, have

not done so successfully.

• Companies with heavy operations or that require cultural insight can’t easily go abroad. Standard service companies can go abroad.

• Skepticism about how well Chinese companies will be able to run a company in India and handle Indian entrepreneurs.

4. Investors in China are looking to India

四

Chinese Investors on India1) India is at an inflection point for Chinese investors

• Because of the strong belief that India will follow China’s development success, there is great interest in investing in India.

• Some already have invested: Alibaba - PayTM, Snapdeal, Xiaomi - Hungama, Ctrip - Makemytrip, Didi - Ola. Many others would like to.

2) Chinese financial investors primarily interested in growth investment• Growth capital for India is going to come from outside of India.

• Chinese investors are unlikely to start with early stage. China is now a global financial center, so growth funding can likely come from China.

Chinese Investors on India3) Chinese investors interested in models that have worked in China

• Systematically transfer business models that are successful in China over some fixed period of time to India

4) Some large companies have India investment strategy• Strategic investments help build relationships and land smoothly into India as a

potential market - e.g. Didi in Ola, Ctrip in Makemytrip.

5. Investors in China still skeptical about India

五

Skepticism about investing in India• Skeptical about India’s political structure, and the ability to sustain growth with

people coming in and out of office every few years.

• India is too diverse of a market - it feels like many countries.

• Telecom service in India is too slow/too expensive, making it hard to monetize. Fragmented and weak mobile networks minimize network effects.

• Category leaders have not emerged. Apart from e-commerce, other sectors in India are not mature enough yet.

• Lack of financial transparency in Indian businesses is a turnoff for international investors.

6. Chinese investors and companies can add unique value to Indian startups

六

Learning from China’s experience 1) Chinese investors can help Indian companies learn from China’s experience

2) Finding Chinese parallels for Indian companies is useful for learning and

strategic collaboration

3) O2O models targeting young people gaining traction

4) Chinese market more competitive and less fragmented than Indian market

5) India’s current funding chasm as a temporary hurdle similar to China in 2003

6) Startup Velocity-Creating great returns-Wealthy entrepreneurs becoming LPs

or VCs-10B RMB fund raised recently — Virtuous cycle

7) Average P/E 50 on China exchange for internet companies

8) Smart Hardware, Internet Plus, Content, Fintech, Health. Mobile gaming,

Robotics, AI, some of the current trends

7. Chinese companies have built large ecosystems

七

Building EcosystemsEcosystems enable the core business to expand and develop better monetization strategies

1) Alibaba, a data company. Jack Ma Health and Happiness vision

• Started with B2B, then into B2C, payments, financial services, cloud computing.

• Expands into other businesses aggressively such as Ali Music, Ali Sports, Ali Health, etc, cross-leveraging the Alibaba businesses. E.g. For Ali Sports, they sponsor events like World Cup, operate sports stadiums. They can target customers with tickets based on the information they have from Alipay and Taobao.

• They allow customers to pay later if their credit history on Alipay is good enough.

Ecosystems

Mi Ecosystem

Phones

TV

Water Purifier

Rice Cooker

Band

Air Purifier • Sell hardware through mi.com; 3rd largest e-commerce site in China

• Hardware carries low margins but gives insights in to a user’s daily life

• Approximately 1000 SKUs on site - 95% of sales are mi brand products, or the products of Xiaomi portfolio companies

2) Xiaomi

EcosystemsGaming

Music

VideoApps

Ads

• Difficult to monetize OS, so monetization is done through ads and games

• #3 game distributor in China, produces its own games

• 20 independent apps by Xiaomi; use these apps to learn about customer behavior

• Own ad network; push relevant ads depending on phone usage

8. Future Trends in China: Content, Local, Innovation

⼋

Future Trends in China1) Investing in unique content

• High quality content was expensive in China previously. Now startups are trying various strategies for developing content alongside being a platform for user-produced content.

• Vine and live-streaming are very popular in China now with good monetization.• Many companies are going upstream to get exclusive content so that content can

only be streamed on their platform.• Content companies are starting to do very well in terms of valuation. If a company

can’t create its own content, they need to invest/buy/cooperate with content companies, whether traditional industries like movies, or online content.

• Many companies making strategic investments in this direction.

Future Trends in China2) Solving local problems

Examples of Chinese startups solving local problems: • Logistics - The Uber for long-distance trucking. In China, trucks are generally

owned by the driver, who is responsible for sourcing clients. Generally, drivers struggle to find jobs once they have reached their destination that will take them back home, so they often have to drive empty. This app allows shipment companies looking for trucks to make requests, and for truck drivers to accept jobs as soon as a job is completed.

• Healthcare - An online platform for doctors. The best doctors work at public hospitals, where they are rushed and healthcare is cheap, but these doctors often want a few patients for a more lucrative private practice. Recent legislation has allowed doctors at public hospitals to take on a private practice on the side. This platform enables doctors to find and keep in touch with good patients they wish to include in their private practice.

Future Trends in China3) Innovation

Artificial IntelligenceIoTCutting edge hardware

• Hardware accelerators such as HAX in Shenzhen have incubated startups that compete with high tech Silicon Valley companies.

• DJI dominates consumer drone market with 70% market share

• Engineering talent from the two top Chinese universities — Tsinghua and Peking — and VC money provide boost to startups which can cater to a smartphone population of 530 million

• There are now more than 100M smart devices in China. Believe this is the same inflection point as smartphones in 2007-08. To a consumer, the value of data increases in a non linear fashion when he/ she owns multiple smart devices

9. Similarities and Differences between Chinese and Indian Venture Capital

九

Differences in Chinese & Indian Venture Capital

1) Funds have successful entrepreneurs as individual LPs

2) VC firms often have RMB and USD funds• Different LPs and different exit channels - RMB is exited in China, USD is exited in

US or Hong Kong

3) Diversity in investment team size and philosophy • Some funds had compact investment teams to minimize management overhead.

Others had large teams offering services to portfolio companies.

4) China has ~20% women VCs. India still has only ~5%. Women in top positions in large companies significantly higher (35% in top tech companies).

5) Angel investing is thriving, and more organized.

Similarities in Chinese & Indian Venture Capital

6) Many local Chinese firms have offices and investments in the US

• China startup ecosystem has historically had strong ties to the US. Initially began with Chinese abroad returning to set up startups and VC funds.

• Global funds made first foray. Today dominated by local funds many times breaking away from their original start in global funds

• Employees in the startups that succeeded have continued the cycle of starting their own companies. Starting with entrepreneurs who had global education and work experience. Now, the startup industry is almost entirely local, homegrown with fewer Chinese returnees/expats.

• People from traditional industries are also creating new generation of startups (we sometimes heard this referred to as InternetPlus) disrupting traditional industries.

• Many senior GPs now spend time in the Valley sourcing Chinese Americans who have global aspirations for startup ideas that could be built through China.

10. Building relationships in China takes time

⼗

Building Relationships

Indian companies can benefit greatly from their Chinese counterparts:1)Visit China to see for yourself the velocity of Chinese startups, learn about their

culture and their people2) It is important for Indian companies to start a conversation with their Chinese

equivalent startups. Meet Chinese entrepreneurs, exchange notes on sector and how to scale

3) Learn from their mistakes and their success. Customise business model for India

Visit Meet Learn

Key Learnings1) India can follow China’s development path

2) There are critical differences between China and India

3) Chinese companies are interested in India as a potential market

4) Investors in China are interested in India though some skepticism persists

5) Companies scaling rapidly is the norm, not the exception, unlike in India

6) Chinese investors and companies can add unique value to Indian startups

7) Chinese companies have built large platform ecosystems

8) Future Trends in China: Content, Local, Innovation

9) Indian Venture Capital can learn from Chinese counterparts on exits

10) Building relationships in China takes time

三 Travel Tips

Eat, Breathe, Connect, Experience

Eat 吃

Vegetarian and gained weight!Many people, including Chinese friends, warned us that it is difficult to be vegetarian in China. However, with some language skills and knowledge of the food, we found it easy to eat well and enjoy the food. Here are our tips for vegetarian visitors to China.

Communicate in Chinese

If you cannot speak Chinese, have someone write down your dietary preferences in Chinese. Don’t bother trying to speak the words - between tones and pronunciation, it is unlikely anyone will understand you.

English Chinese

I am vegetarian

Does this have meat?

Do you have any vegetarian food?

Vegetarian and ThrivingKnow what food to look forHere are some of our favorite foods that are good for vegetarians.

Malatang ⿇辣烫 Hotpot ⽕锅 Xiangguo ⾹锅

Baozi 包⼦ Mapo Tofu ⿇婆⾖腐 Eggplant 鱼⾹茄⼦

Vegetarian and Thriving3. Know how to find vegetarian food

• Places to eat can be found on every street in China. Type the food you are looking for into Baidu maps, or ask someone nearby where to find a shop (see table below).

• Malatang, Hotpot, Xiangguo, and Baozi are generally sold in roadside shops dedicated to these foods. Other dishes are found at sit down restaurants with menus.

English Chinese

I want to eat ___. ___

Where can I eat ___? ___

呼吸Breathe

PollutionMany told us Beijing is extremely polluted, and we would need masks. Each day we were there was beautiful, and no one wore a mask. From the media, one would think Beijing looks like this everyday:

But this is not the case. Pollution varies day-by-day, month-by-month.

You can check Beijing’s air quality forecast at http://aqicn.org/forecast/beijing/

Experience

经验

Sightseeing• Take a couple days out of your trip to see Beijing, and visit some of these spots.

Forbidden City

The Great Wall

Temple of Heaven

Summer Palace

Beihai Park

Imperial College

Shopping• If you are planning to shop in Beijing, here are some of our recommendations:

Nanluoguxiang 南锣⿎巷 Panjiayuan 潘家园 Tianyi Market 天意市场

Street shopping in an old hutong (alleyway). Gives you a taste of old Beijing, alongside unique food and boutique shops.

Arts, crafts, and antiques market, bazaar-style. Start bargaining at 1/10th the price

A massive building full of all sorts of goods. Bargaining is the norm. Difficult without Chinese speaking skills.

Communicate

通信

Communication• The quality of service we experienced was extremely high throughout our trip.

• Taxis and many restaurants don’t expect tips.

• Difficult to communicate in English, even with office receptionists, at markets, etc. We were prepared for the language barrier, and hired a Chinese-speaking intern to help.

• Remember Google, Twitter, Facebook, etc. are blocked in China. Be prepared with a high-quality, well-rated VPN. Wifi in business hotels is usually already on a VPN.

• The following apps might be helpful for communicating and getting around:Utility Apps

Translation Pleco, Google Translate (download offline since Google is blocked)

Transportation Baidu Maps, Didi Dache, Uber, Ctrip

Search Bing (since Google is blocked)

四 Conclusion

India and China: Past, Present, Future

过去Past

PastSeparated by the Himalayas, China and India have always remained culturally distinct. Yet the constant trickle of ideas, words, and technology across the shifting borders has deeply influenced both societies.

Technology• The Silk Road was an informal network of trade routes that passed from China to the

West. Across these networks, technology was periodically transferred between China and India. India benefitted from Chinese advances in silk production, paper, and to some extent gunpowder, among other things.

Ideas• Buddhism lead to a stream of people coming between China and India. Fa Xian and

Xuanzang, Buddhist travelers from China, were some of the earliest chroniclers of India. The description in their travel journals helped locate Nalanda during excavation, among other Indian archeological sites.

• Some say the word China comes from the Sanskrit word Qina (land of the Qin) - the word Qina is mentioned in the Mahabharata while describing the great kingdoms.

• Chinese has many Sanskrit loan words (e.g. mallika = jasmin = moli )• The word chai comes from the Chinese word for tea, cha

PastChai

• Tea cultivation was an imperial secret in China. The British were addicted to tea, which became an expensive obsession. In 1848, a British botanist named Robert Fortune was sent by the British East India Company dressed as a Chinese man (illegal for foreigners to enter China at the time) to steal tea and begin growing it in India.

• Tea was then planted in Assam and Darjeeling. Low quality tea dust was sold to the local Indians, who mixed it with milk, sugar, and spices to make it palatable.

Living• Parsi cemetery was found near Guangzhou where the Parsi opium merchants

lived. Parsi community still leaves in Guagnzhou. • Chinese tea planters, and other immigrants settled in India. Developed Hakka

noodles, Gobi Manchurian, and our other favorite Indo-Chinese foods. • Third generation Indian-Chinese Meiyang Chang is a Bollywood actor (acted in

Badmaash Company).

Present

现在

985

7.5%

GDP

17.9

10.9

2.1

Gold Demand

22.5

849

Movies Made

476

745

1602

Smartphone Subscribers

329234

Growth

2.4%

6.9%

Online Retail Market

349

11

GMV, bn US$606

tonnes

USD

1042millions

India and China Today

Future

未来

Looking AheadIndia will have 700 Mn smartphone users by 2020, enabling many business models- China has 530 Mn smartphone users today. These users first used a smartphone for

information, then for games and entertainment and eventually made transactions

Mobile video traffic in India will grow at 83% CAGR between 2015 and 2020. Video content will account for 72% of mobile data traffic by 2020- Vine and other live-streaming services are extremely popular in China- Original content companies will do well as people spend more time on their smartphones

E-commerce story has just started. Temporary blips occurred even in China 10 years ago- E-commerce is 15% of retail sales in China because of the inefficiency of offline markets- India will grow in a similar fashion and can emulate the success of Chinese companies

India has 23 million middle class adults compared to China’s 108 million - Growth in this segment will propel consumer spending and create opportunities for Indian startups

Looking AheadA robust, domestic exit market is critical for a sustainable VC ecosystem- Chinese startups prefer to list on local stock exchange owing to a high PE ratio- Liquidity through exit gives confidence to local LPs and local funds- China had the most number of tech IPOs in the world in 2015

Successful entrepreneurs and early employees of large tech companies in India will turn angels or second time entrepreneurs- India already seeing signs of it with a very active angel ecosystem- Mukesh Bansal and Ankit Nagori launched Curefit, a health and wellness company

Large tech companies will provide incubation, talent and capital for the next generation startups- Baidu, Alibaba and Tencent (BAT) invested more than $10 billion in on-demand services

from 2014 to July 2015- Xiaomi invests in hardware startups and sells products under the Mi brand

终 The End

Compiled by Tara Kola

五 Appendix Further Reading

Report on India, China, US

Source: Goldman Sachs