The Way We Were China VC in 2005

Acer Confidential The Way We Were China VC in 2005 York Chen iD TechVentures Ltd. (Acer VC） Shanghai; Dec. 14, 2005 Acer Confidential Welcome CVCF held the first time in Shanghai, the city produces six of nine projects with best returns. A Joint Survey by CVCA and Zero2IPO; Nov. 18, 2005 Acer Confidential Agenda • Reviewing ’04, Observing ’05 • Current Events, Future Trend China VC Statistics, 2005 (by Zero2IPO) 2004：A Turning Point for China VC • Acer Confidential Active, warming up & with Optimistic Outlook After ten years subdued and “Check In, no Check Out” VC environment, 2004 is the year kicking off a virtuous circle. Historical high investment amount (USD1.27B). Very active divestment brought high return to VC investors. And, in return facilitated successful fund raising. Series of divestment and fund raising are new to China VC. The positive development in 2004 was starting from 2003 with series of high profiled M&A: MemeStar by Sina, New Palm by HK.com; EachNet by Ebay, 3721 by Yahoo, … These deals paved the way for an eventual Nasdaq IPO: Ctrip in Dec., 2003, triggered the second wave of China tech company go IPO in Nasdaq after a three years absence. Other historical remark: Linktone was the first pure MVAS to be listed in Nasdaq in March, ’04, brought up other threes: Kongzhong, Tomonline and Hurray; Shanda listed in May, ’04, made SAIF as the VC hero for the year: 40M investment got net return of 400M. Look into ’05 from end of ’04: bright future, warming environemt and full of rosy perspective. • • • Acer Confidential 2005： Heating Dotted with Cold Fronts Active Fund Raising with Many New Funds & New Teams • • • • With improving and warming VC environment in China, many mainstream VC and LP funds flocking into China, or waiting to see how to enter. 2005 is the year for fund raising. Reported more than 4 billions was raised in the year. Many new funds and new teams are setting up in China. 。 Huge amount of funding chasing for limited quality deals. Valuation was pushing up, terms deteriorated, bubble building, and might be detrimental to China VC’s long term healthy development. “China Concept” being over-used in Wall street. Many listed Chinese companies was below water. New listing companies’ number, raised amount and valuation are going down, though there are super deals onto to Nasdaq, such as Baidu, SunTech, focusMedia as well as Alibaba. SAFE circular incident adds up complications and uncertainty to commonly practiced offshore legal structure arrangement. It also dragged down full year’s investment amount for the year. • Acer Confidential Current Events, Future Trend • GPs turn into partnership, Emerging VC Brands with China Roots • More Foreign Players Joining, Globalizing and Improving VC Environment • US Sand Hill Road VCs Taking Different Routes entering China • “China Miracle”, Acquiring MNC Operation, Pre-IPO Home-run, .... • SAFE Circular Incident Underscores the Regulatory Risks • “Super Girl Singers”, again, Underlining Opportunity on Technology Applications • Web2.0 Ushering in VC2.0 • Warm, Hot or Overheating? GPs turn into partnership, • • • Acer Confidential Emerging VC Brands with China Roots Early stage of China’s VC industry are supported mainly by tech and financial groups. The GP companies started as a subsidiary, then gradually span-off or through “management buy-out”, to restructure into partnership. A GP’s independence could be examined by: equity ownership, management control, investment decision rights, branding, and carried interests distribution. Notable examples: o From Softbank Asia (owned by Softbank, solely funded by Cisco) to SB Asia (SAIF, a partnership), managing LP fund. o From Softbank China (Softbank money) to SBCVC (dropped Softbank name and managing a newly raised LP fund). o From Acer VC (100% owned by Acer) to iD TechVentures (owned by Stan Shih and other partners) managing third party LP funds. o From Venture TDF (Singapore tech development VC) to TDF Capital Partners with three partners. o From DragonTech (Shanghai Industrial affiliated) to DT Capital Partners with 4 partners. o From managing exclusively IDG fund, IDG VC now concurrently managing a joint fund by Accel and its LPs. o CDH and Legend, … are also more independent from CICC and Legend Holding respectively. Acer Confidential More Foreign Players Joining, Globalizing and Improving VC Environment • One of the most powerful phenomena in China VC in past two years is the flocking-in of Sand Hill Road VCs, who against VC practice by flying over Pacific Ocean to do investment. • The heating environment also invites many first-time funds and GP teams by spin-off from exiting VC or by entrepreneur-turn-VC. • Sand Hill Road VCs into China is not only seeking for local investment opportunity, but also out of the need to support their US portfolio, which might have China presence. In some cases, even doing the due diligence for a USA deal will need to visit China. • The incoming main stream VCs usually seeking local alliance (next page), which is good for both parties. It also helps of maturing and perfecting local VC professionalism in China. Acer Confidential US Sand Hill Road VCs Taking Different Routes Entering China • “Tourist VCs” (coined by Dr. Talin Hsu) are strengthening their local presence in China. But, in most cases, partners are based in the States, and decision making are still made out of HQ across the Pacific. • Local presence are done by different models: o Own China fund with homegrown partners: Sequoia China fund of 200M with Neil Shen and Zhang Fan as China partners. o Joint Fund: Accel and IDG formed a joint fund IDG-Accel China Growth Fund, raising 250M for expansion stage investment. Be managed by IDG. o A global GP to become a China LP: DCM into Legend fund II, Mayfield into GSR, 3i into CDH, Sierra into Gobi, Sutter Hill into Chengwei and TDF, GreyLock/NEA sponsor Northern Light …… o Set up local offices: NEA, Bessemer, Granite, DCM, BlueRun, Atlas, GAP (in HK), …. “China Miracle” Acer Confidential Acquiring MNC Operation, Pre-IPO Homerun, .. • Yahoo handed all its China operation and US$1B to Alibaba, exchange for 40% stake. Implied valuation at USD4.3B, same level as Skype. It shows a China start up could be as powerful as a global player. • If Alibaba case is a cue, a Chinese start-up could merge (take over) and manage a MNC’s interests in China. • SunTech, a solar equipment company in Wuxi, could give its Pre-IPO investors more than 7 times return in less than one year. Another “China Miracle”. • Then, the China unique deals of Shangda, FocusMedia, those MVNS, …. Jing Yong, a legendary Chinese kungfu novelist, initiated the Summit (西湖论剑) with Jack Ma in 2000. Acer Confidential SAFE Circular Incident Underscore the Regulatory Risks • SAFE Circulars 11 and 29 ask for filing and approval for offshore holding entity restructuring had put the unwarranted, but rather widely practiced, ways of getting foreign VC funding into a legal test. • The pre-mature and rather rush announcement of the two Circulars is detrimental to foreign VC's investment in China. It has also caused much dispute among ministries. • The strict and hard-to-implement measures has been toned down after receiving the criticism from the VC communities and intensive cross-ministries consultation. A new circular, numbered 75, effective Nov. 1st, 2005, is to replace the two prior circulars. • The incident underscored and heightened the legal and regulatory risk and uncertainty of doing investment in China. (A PPT file summarizing the incident be available from York at yorkchen@idtechventures.com.cn) Acer Confidential “Super Girl Singers”, again, Underlining Opportunity on Technology Applications • “Super Girl Singer” (超级女声) contest is the most watched TV program and the most mobilized social event in China in 2005. Millions of viewers sent SMS to vote for their favorite singers. In China, it’s all about technology application, and how to apply that to China’s vast consumer base, and even into mass’ daily life. China VC opportunity, in the years to come, is on technology application, not technology creation. o Local value-add services will be the segment with best return in the near-mid term. o VC operation also requires very localized operation. • • Top 10 Finalists Acer Confidential Web2.0 Ushering in VC2.0 • Bokee (BlogChina) got 10M funding from Granite (lead), Mobius, Bessemer and SAIF with post money 30M, and BlogCN also got 10M investment from Granite, DFJ and IDG, ushering a new era of “concept deal” funding, AGAIN. • Though not with proven business and revenue model in China, Web2.0 got much attention from VCs. Mushrooming start-ups with various business models: blog, podcasting, social networking, e-matching, virtual family, RSS, WIKI, …. • Web2.0 kicks off a new era of China VC operation. Web2.0 business model is chased after due to its compatible and well recognized counterparts in the States, easily scalable and better capital efficiency. Heating environment also contribute to this with much money chasing for too few viable deals. Valuation is of irrationally high: Series A without validated business model for 5 to 10M range, while series B could ask for up to 30M. Acer Confidential Warm, Hot or Overheating? • Mainstream “tourist VCs” flocking in with unlimited funds. Many China-dedicated funds have also being raised. It’s estimated that over 5 billion VC funds are available for China deal investment, and some of them are pressured to do deals. • Quality deal flows not increased much, but supply of funds had multiplied. Supplydemand mechanism at work, valuation jacking up. • Funding by “concept”, not P/E, P/R, but P/D (P/Dream) • High valuation leads to higher-than-required funding size. • Crowded and exciting VC conferences and gatherings. Hype on Nasdaq, “digital fortune”, Overheating? Yes. rug-to-rich story, …. Bubble burst? When? Acer Confidential China VC Statistics, 2005 A survey report by Gavin Ni Founder and CEO, Zero2IPO Dec. 14, 2005, Shanghai (statistics and views fr page 17 to 30, courtesy of Zero2IPO) Acer Confidential Overall Investment 2001-2005 1400 1200 1000 216 226 1269 1 0 5 7 .1 6 253 233 117 300 250 200 150 100 50 0 992 800 600 400 200 0 518 418 2001 2002 2003 2004 2005 Am o u n t In ve s te d (U S $ M) N u m b e r o f D e a ls Acer Confidential Industry Breakdown Healthc ar e Other Hi- tec h 3.0% Ser v ic es 8.6% Tr aditional 9.4% IT 66% Traditional 13.0% Unknow n 5.2% O ther H i-tec h 9.4% S ervic es 13.3% H ealthc are 2.5% U nk now n 1.4% 8.2% IT 60.3% by Number of Deals by Amount Invested Acer Confidential Industry Distribution by Amount Invested (US$M) Internet Telec ommunic ations IC Serv ic es Traditional Other Hi-tec h Healthc are Sof tw are IT Serv ic es IT Unknow n Opto-elec tronic s Computer Hardw are & Peripherals 2 0 3 .1 8 1 9 9 .6 9 1 8 1 .2 5 1 4 0 .8 4 1 3 7 .9 5 9 9 .7 1 2 6 .1 6 2 1 .7 0 1 4 .0 0 1 1 .2 2 5 .2 1 1 .5 0 0 50 100 150 200 250 Acer Confidential Industry Distribution (by Number of Deals) Internet Telec ommunic ations IC Traditional Serv ic es Healthc are Sof tw are Other Hi-tec h IT Unknow n Opto-elec tronic s IT Serv ic es Computer Hardw are & Peripherals Unknow n 50 39 33 22 20 19 17 7 7 3 3 1 12 0 10 20 30 40 50 60 Acer Confidential Average Deal Size By Industry (US$M) Other Hi- tec h Ser v ic es IT Ser v ic es Tr aditional IC Telec ommunic ations Inter net Opto- elec tr onic s IT Unknow n Healthc ar e Computer Har dw ar e & Per ipher als Sof tw ar e Unknow n 1 4 .2 4 7 .0 4 7 .0 0 6 .9 0 6 .4 7 5 .7 1 4 .3 2 1 .7 4 1 .6 0 1 .5 4 1 .5 0 1 .3 6 2 .4 6 0 2 4 6 8 10 12 14 16 Acer Confidential Geographical Distribution by Amount Invested (US$M) Beijing Shanghai Jiangs u Guangdong( Shenz hen ex c luded) Shenz hen Tianjin Shandong Hunan Z hejiang Qinghai Sic huang Xinjiang A nhui Liaoning Hubei Heilongjiang Inner Mongolia Unknow n 0 50 46.65 45.00 27.04 22.71 21.94 9.29 5.76 4.33 2.79 2.19 1.64 1.24 0.90 79.52 100 150 200 250 300 350 400 95.61 164.77 146.33 379.44 Acer Confidential Geographical Distribution by Number of Deals Beijing Shanghai Shenz hen Shandong Jiangs u Guangdong( Shenz hen ex c luded) Z hejiang Sic hang Liaoning A nhui Hunan Hubei Inner Mongolia Xinjiang Tianjin Qinghai Heilongjiang Unknow n 72 43 18 17 13 13 9 5 5 4 3 3 2 1 1 1 1 22 0 10 20 30 40 50 60 70 80 Acer Confidential Investment Stage Distribution U n kn o w n 1 1 .6 % P re -IP O 3 .0 % E xp a n s io n 1 1 .6 % G ro w th 3 2 .2 % U n kn o w n 6 .9 % P re -IP O 1 4 .5 % G ro w th 3 2 .3 % Ma tu re 5 .2 % S ta rt-u p 3 6 .5 % E xp a n s io n 2 0 .9 % Ma tu re S ta rt-u p 1 2 .5 % 1 2 .9 % by Number of Deals by Amount Invested Acer Confidential Fund Raising 2002-2005 (US$M) 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2002 2003 2004 2005 1298 639 699 4033 Acer Confidential Venture-backed IPOs, 2005 Company Hurray! Asia Silk Longcheer TechFaith Listing Date 02/2005 05/2005 05/2005 05/2005 Market NASDAQ SESDAQ SGX NASDAQ Industry Telecom Tradition al Telecom Telecom Investor GGV, Fidelity, etc Sun Ventures DFJ, etc Intel Capital, Qualcomm Ventures, etc. 3i, etc. Softbank China, UCI, CDH, DFJ, WI Harper, TDF, 3i, Goldman Saches, etc. GST Focus Media 06/2005 07/2005 HK Main Board NASDAQ Software Media Acer Confidential Venture-backed IPOs, 2005 Company AAC Listing Date 08/2005 Market HK Main Board Industry Tradition al Investor Chengwei Ventures, P V P, TDF, GGV, etc. Baidu.com Paradise Electronics Yurun Food Kasen International 08/2005 10/2005 10/2005 10/2005 NASDAQ HK Main Board HK Main Board HK Main Board Internet Tradition al Tradition al Tradition al DFJ, IDG, TDF, etc CDH,etc. Goldman Sachs， CDH, GS Fund Warburg Pincus Acer Confidential Venture-backed IPOs, 2005 Company Vimicro International Haisheng Juice SunTech Power Listing Date 11/2005 Market NASDAQ Industry IC Investor Infotech Ventures, Power Pacific, GAP, DCM,etc. GS Capital Partners 2000 L.P. Goldman Sachs, DragonTech, Actis, etc 11/2005 12/2005 HK Main Board NYSE Tradition al New Energy Sources Xiwang Sugar Minth Group 12/2005 12/2005 HK Main Board HK Main Board Tradition UOB Investment,etc. al Tradition al Baring Acer Confidential Venture-backed M&As, 2005 Acquirer Acquiree Index Corporation Acer Confidential Conclusions: 2005 - Web2.0 & VC 2.0 2005: Web 2.0 plus VC 2.0 • The history high for fund being raised • Internet is the most hot area for VC • Beijing is the most hot place for VC • Venture-backed IPO and M&A activities are more and more active • Foreign VCs still dominate China venture capital market 2006: Money chasing deal • Total VC investment will exceed 2005 • In a new cycle, VCs become more competitive • Be Careful of Valuation (For more on Zero2IPO, visit www.zero2ipo.com.cn) Acer Confidential With that Mr. Stan Shih, Acer Group's Founder & Chairman, retired from computer operation and launched iD SoftCapital Group, Acer VC is renaming into iD TechVentures. The company focuses on early stage tech venture investment in Greater China. Thank You ! yorkchen@idtechventures.com.cn www.idtechventures.com.cn