Innovation, Chinese Style - Kai-Fu Lee

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Innovation, Chinese Style

Kai-Fu Lee創新工場 Chairman & CEOMay 2015

• China’s Internet Market• Unique Chinese Opportunities• How to harvest these opportunities

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China: ~$600BUS: ~$1800B

Rest-of-World: ~$300B

US & China Dominant

China’s growth to outstrip US by 2025$300K Chinese “lean start-ups”

China: Largest market + low cost of human capital

Mobile: An exponentially growing opportunity in last 4 years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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5374

94112

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384

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513

564

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630

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245

540

620Rapid Growth of China’s Mobile Internet Market

Internet users in China

Mobile Internet Users （ iOS&Android ）

The Industry has reached an “internet +” stage

Service industryConsumer goods Industrial products and raw materials

Online gamesMusic

Mobile Phones

Maternal & Child Supplies

CosmeticsTelecom Prepaid

Home Appliances

Household Electricals

Clothing

Food

Stationery

Online Procurement

Other Services

Digitals

Steel

Other Industrial Products

Deg

ree

of

Influ

ence

Duration of Effect

Furniture

Furniture

Jewellery

2001-2005 2006-2010 2011-2015

New Cars

Finance

Online Manga

Chemicals

Overseas Shopping

Travel Transportation

Plastics Construction Machinery

Takeaway Manicure Fitness

Flash deals Auto Service

Used CarsBuying/Renting

Houses

Laundry

Medicare

Show Store Chains

Hotel

Information

Reading

Plane Tickets

Movie

KTV

Education

An overabundance of VC capital High competition

Kaixin001.com vs. Kaixin.com (Renren)

Baidu vs. SNDA

Tencent vs. Qihoo 360

Jingdong vs. Suning

• China’s Internet market is a gladiatorial fight to the death

High competition Robust business model

• High stakes – 1.3 billion users• Huge VC/PE $• Lucrative high-growth• Ineffective regulations• Hungry entrepreneurs

• China’s Internet Market• Unique Chinese Opportunities– Unique talents– Demographics and users– Large workforce

• How to harvest these opportunities

• Tencent’s Shenzhen headquarters at 2:00am

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Strength #1: Hard Working

• Broad Group: 30-story luxury hotel built in 15 days

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Strength #2: Speedy & Efficient Execution

• The Long March• The Great Wall of China

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Strength #3: Tenacity and Focus

1 year223K people8,000 miles traveled on foot166K people died

800 years3m people3,000 miles400k people died

Creativity Product & User Passion Strong Leadership Teamwork Focus Execution & Speed

US China

US vs. China Entrepreneurs

Emergence of Serial Entrepreneurs

Chinese Internet over the past ten years, created a large number of outstanding middle-level managers and serial entrepreneur.

Fissions among entrepreneurs in each start-up. For example: Tapas alone emerged over 10 CEOs, all were veteran serial entrepreneurs.

Longfei Li ： 1988, joined Tapas at age of 22 as PM; founded iLongyuan at 25, valuation >$100M in just 2 yrs.

Internet entrepreneurs invested by VC,5 years ago, were from <100 companies.

Now, are from >2000 companies, even including central and state-owned enterprises.

Young entrepreneurs to start their own companies becomes a common practice and major trend.

• China’s Internet Market• Unique Chinese Opportunities– Unique talents– Urban Migration– Decisive Policy– Incumbents


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Largest Urban Migration in Human HistoryEach year, more than 12M people relocate from countryside to the city, strong demand in transforming surplus low-end labors to high-end workers.

Traditional industry labors into Internet O2O space, provide and deliver service. They can bear high-intensity work to receive better rewards.

Urbanization rate >1.35%/y

Case study: Sufficient labor being fertile ground for innovative O2O in China

Low labor costs and enough independent practitioners are the source of China’s innovative O2O platform.

Helijia： Nail-polish and manicure

Rid of offline stores and intermediaries; Free professional training, generating new

supplies Founded in 2014, , thousands of nail

technician ， unit sale $20, valuation >$200M; Horizontal development into home beauty and

salon services.

eDaijia： Your designated driver!

Centralize scattered drivers on eDaijia platform; P2P mode, sharing economy;

Fouded in 2011, 80k drivers ， valuation >$800M;

Cover 150 cities ， daily reservations over120k



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Decisive Policy-Making & Implementation

• Chinese government is vigorous and effective

• New policies bring about new opportunities.

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End of 2013, began anti monopoly; In 2014, opened 17 ports to automobile trade; Oct. 2014, canceled car dealer filing policy; Jan. 2015, parallel import car policy approved; New regulations on Automobile brand sales and

management to be introduced.

Import Engine Plants

Domestic Brands

Domestic 4S Shops

Secondary Deals

Consumers(Scattered, less options)

canceled car dealer filing

policy


Domestic Brands

Domestic 4S Shops

Comprehensive Deals e-Commerce

Consumers(Scattered, more options)


Domestic Brands

Domestic 4S Shops

e-Commerce

Consumers(Centralized, many options)

Port Trader

+Regulation on Parallel Import

Automobile

+

Prime Dealers

Up to 2013 2014 2015

Case study: Parallel Import Automobile: Policy changes created hundreds of billions of dollars market in < 2 years

Stanley Gao



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Inefficient Incumbents

Internet reconstructs theretail industry

Internet reconstructs theservice industry

National Agent

Regional Agent

Provincial Agent

Municipal Agent

……

Traditional Retailers

Manufacture

Scattered Consumers

……

Headquarter

Regional Office

Provincial Office

Municipal Office

Direct Selling

消费者Centralized Consumers

Manufacture

Online Stores

Traditional Business Channels

Buying new houses in China is troublesome and always crowded, purchasing second-hand

housing is to face fraud and 2.6% commissions, renting needs to pay lots of intermediary fees.

An efficient and reliable Real Estate O2O platform for developers, brokers, buyers and sellers. Cover 60 cities, in 2014 GMV $30B.

Online Retailers

Case study: Internet Finance, Credit data, and other emerging FinTech models

Yu'e Bao：Monetary Fund of Chinese “Diaosi”

Chinese P2P：Complementary and Alternative for Banks

Registered users >185M Capital amount > $90B Per capita about $500 Flexible draws and can be

used for online shopping at any time.

Household savings rate is high, while civilian investment channels are lacking;

Difficult for individuals or small and medium-sized enterprises to obtain bank loans, neither P2P nor P2B;

Various types of assets: Mortgages/Auto loans, supply chain loans, financial leasing, asset backed securitization, factoring market, and stock matches endowment …

Stanley Gao

Fewer traditional consumer brands than the US

Example of Brands in US Media - WSJ, NYT, Disney, Penguin, Random House etc..

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Case Study: U17

Seamless experience to offline cultural markets.

World’s leading comic platform; Over 20M users, valuation >$100M; Over 14,000 Animation writers, 7,000

authorizations of copyright, 3,700 exclusives, 30,000 comics;

7 comics with more than 500M IP clicks.

Animation: 100,000 bad jokes>2B Broadcasts

Animated film ： 100,000 bad jokes

No.3 Box-office in Chinese AF history.

Authorized Mobile Game:Single-day deposit over

$300,000.

Booklet Fan fiction Concert Theatrical

events…

Integrate online contents to create ecosystem.

• China’s Internet Market• Unique Chinese Opportunities• How to harvest these opportunities– Small Monopoly– Expansion– Defensive “moat”– 創新工場 Advantage

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Identify Growth Trends + Analyze Unique Chinese Opportunities

© 2015 – Innovation Works – Private & Confidential.

2011 2012 2013

Android Ecosystem Entertainment / SNS Smart Devices

2014

Mobile Gaming O2O Digital Content

2015

Urban Migration

Decisive Policy

Incumbents

Unique Talents

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Find a beachhead monopoly.

A large enough market

• Habit Forming Services• User Generated Content• Services (e.g. Two-Side Marketplaces)• Viral Growth

Underlying Changes

Value of Internet comes from monopoly, even in small fields. With a good enough solution (10x better compared to the past), and some competition barriers , forming your first monopoly is possible.

Lever1

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Identify “monopoly beachhead” with the lean startup

+

Case study: Yuantiku’s first step = Beachhead Monopoly

Practice tests for high school and college entrance examinations on Mobile Internet: Increasing efficiency through usage on mobile phones and PCs.

Photo Search for Questions: homework approach, taking unsolved problem’s picture, then searching through application for solutions.

– 13M registered student users

– Valuation $360M


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Find scalable way to grow

Produce High Quality Content ：Leveraging professionals,

Provide Standardized Service ：Leveraging social resources, rather than creating resources.

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StableEruptExplore

Traditional Linear Growth

Exponential Growth

Grow to dominate small space

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Broaden into adjacent markets

Simplify

In Depth Verticalization

Photoshop’s innovative localization in China. Rapid expansion to establish market’s

leading position. Successful horizontal expansion of products:

Meipai, BeautiCam, Meitu Phone… Over 100M registered users. Company’s valuation at $2B.

Mobile Internetized Products

MeipaiWorld’s No.1 short video maker in smart mobile.

BeautiCamThe most popular selfie

app with millions of users.

Meitu PhoneChina’s prevalent female

mobile phone.


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Build up Barrier of Entry

In 2010, JD invested heavily on constructing its own warehouses and logistics system, causing huge deficits; but after three years, it has become the company’s core competitiveness.

With a preliminary beachhead monopoly advantage, as well as a speedy, efficient, and reasonable priced growth method, next huge monopoly will emerge once invested.

Maintain monopoly with “Chinese Premium”

… and the world has a lot to learn from China!

• Chinese online games’ hierarchy of needs.• Deep understanding of human psychology,

desire, weakness.• Result = 4x U.S. ARPPU, while 10% of the U.S.

per capita income.

GAMES

PAID

FREE

• Monetization via deep understanding of human psychology/weakness

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Gaming’s Hierarchy of Needs

Your own digital “blank canvas”, those who worship you as a virtual king

FREE

PAIDEmotional bond via an online “guilds”; invoking deep hatred of “enemies”

An endearing relationship with the game, always top of mind.

Base level satisfaction via graphics and rewards schedule

Freemium Example #4: Qihoo 360 (security)

• 360 free features:– Anti-virus– “Safe” Browser– Search portal

• 360 paid features:– NONE!

• End result? – A lucrative, locked-in

ecosystem

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Online marketing services

Browser game portal and platform

Search engine

Sales of anti-virus software

63%

26%

10.5%

0.5%

2011 Annual Report


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創新工場：We operate a unique early stage ventures model for China.


Investment Team

Professional Services

Co-Working Space Community

Founders’ Funds

IW North America

EIR / Venture Partners

Core Model

Cross-Border

Sourcing and Portfolio

Management

Domain Expertise

+ + +

Brand + + +

2010 300 members, 1,700m2, 15 projects

2012 3,000 members, 5,000m2, 50+ projects

150+ portfolio companies

300+ founders

7,000+ project team members

5,000m2 of co-location space

2009 2015 evolution.

2009 70 members, 300m2, 6 projects

© 2015 – Innovation Works – Private & Confidential.40

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2015

Investment team, professional services and co-working space.

•A team with entrepreneurial mindset.

•Motivated by fund return upside.

•Offering fair economics to founders.

•With patience and passion to mentor.

•Product and technology expertise.

•With supporting professional services.

•And the largest community in China.

Investment Services Full-TimeProfessionals

5,000 m2 of a unique co-working environment in Beijing and in Shanghai

$500 millionunder management ($ Fund I/II and BJ/SH RMB Fund)

41© 2015 – Innovation Works – Private & Confidential.

Professional Services

Investment TeamPartners / IC

1. Identify trends early, select and invest in key themes.

3. Double-down on winners.

HighGrowth

HighValue

Low Capex

Localizable & Differentiable

Seed

Angel

Series B

Series A

2. Find top founders and help them scale up quickly.

4. Apply learnings to find more winners.

A unique investment process, starting from seed stage.

42© 2015 – Innovation Works – Private & Confidential.

Acquired Domain Expertise

The most established brand in the early stage tech space in China.


IW has already built and funded several “star” companies.


>$2B

>$300M

>$100M

>$50M

Current Valuation Range

The first Chinese VC firm with a team in the U.S.Bay Area team: Chris Evdemon and Ricky Wong. Four focus areas: developer tools, SaaS tools for SMEs, IoT and online education.Operating for 22 months, 21 portfolio companies, mostly in Seed and Series A rounds.Allocated US Fund size of $25M. Additional benefits: (a) serving as a landing base for IW portfolio companies in the U.S., and (b) synergies and learnings for the entire IW community.

www.IdeaBulb.vc


Something appropriate with Idea Bulb & 創新工場

Developer Tools

ProductivityTools

ConnectedDevices

OnlineEducation

Others

ACQUIRED

FAILED

FAILED

Thank you!

[email protected]

Investing in China’s Top Founders.


Innovation, Chinese Style - Kai-Fu Lee

Small Business & Entrepreneurship

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