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]
1
Innovation Works Confidential
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)
Innovation Works Confidential
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
Innovation Works Confidential
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
Innovation Works Confidential
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
Innovation Works Confidential
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
Innovation Works Confidential
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
Innovation Works Confidential
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 $400M
15x in <18 months
Innovation Works Confidential
• Industry Data
• Proprietary Data
• Research Team:
IW Case Study: Select Key Investment Themes
Theme selection criteria:
9
Selection based on:
IW Expertise IW Research Silicon Valley Advisers
• Product + Tech Experts
• Industry Experts
1
High Growth
High Value
Low Capital Expenditure
Localizable Differentiated
Innovation Works Confidential
IW Concentrates Investments on Specific Themes
10
Group-Buying
2009
Covers 210M devices in 1.5 years
>1M Tapas Phones + >10M apps
600M app downloads in 2 years
35M users in 2 years 5M users in 1 year
Alexa global 1500 in 6 months
100M downloads in 1.5 years
7M users in 1 year
Users 3x, Revenue 10x in 3 months
Zynga-like platform
HTML5 game platform
No barrier to entry, competes on cost only, lacks merchant value.
LBS Platform B2C E-Commerce
iPad/iPhone edutainment for toddlers
Not currently suitable for China. China LBS should focus on: food/fun + make/save money.
Mostly in trouble; One having massive lay-offs.
Price & marketing war leading to likely bubble. 6500 clones, 500 dying/month.
High user acquisition costs. No longer “lean startup”.
2011 2010
Android Ecosystem Casual + Mobile Game Ecosystem
Unfilled Need In SNS
Monetizable O2O Service
Innovation Works Confidential
IW Attracted “best-of-class” Founders/ CEOs
He Huang Co-founder, Leiyoo PM Director, Tencent
Jack Xu CEO, Diandian Co-founder, Renren.com (multi-billion US$ 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
Innovation Works Confidential
Help Startups Scale Up Quickly with Services
12
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
Innovation Works Confidential
IW Senior Team Leading 45 Full-Time Professionals
13
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
Innovation Works Confidential
Recruiting, Mentoring, and “Everyday” DD
Speech: 8000 people
Written exam: 1000 people
Interview: 100 people
Offer: 30 people
Welcome!
14
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
Innovation Works Confidential
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
Innovation Works Confidential
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
Innovation Works Confidential
IW is the #1 brand in seeding tech startups in China!
17
Innovation Works Confidential
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”
18
Innovation Works Confidential
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]