Opportunities in Chinas Startup Ecosystem

ZhenFund 2013

www.ZhenFund.com

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Disclaimer

The material in this presenta/on has been prepared by ZhenFund. This informa/on is given in summary form and does not purport to be complete. Informa/on in this presenta/on, including forecast nancial informa/on, should not be considered as advice or a recommenda/on to investors or entrepreneurs. This presenta/on may contain forward looking statements including statements regarding our intent, belief or current expecta/ons. Readers are cau/oned not to place undue reliance on these forward looking statements. ZhenFund does not undertake any obliga/on related to ac/ons resul/ng from this presenta/on.

Market opportunity, a macro perspective Startup ecosystem challenges and opportunities

New sources of capital (angels, cross-border, government) Venture capital/private equity Public markets and exit opportunities BAT + Q: the internet giants Customer acquisition challenges Copycats and intellectual property Developer services and infrastructure Remaining challenges

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Content

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China by the numbers

1.35 billion people 70% urban by 2025

7.5% GDP growth over next 10 years, driven by domestic consumption

2nd largest consumer market after the US

5 Source: Strangeloop; McKinsey, www.internetworldstats.com/

China 2015 - - - - 780 MILLION INTERNET USERS

China 2012 - - - - 564 MILLION INTERNET USERS

(42% penetration rate)

United States 2012 ----245 million internet users

India 2012 ---137 million internet users

~75% internet users access through mobile

China has the most internet users globally

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$445bn

$270bn

Online retail volume (2015E)

Shipping costs comparatively low

44% of Chinas population will shop online in 2015, representing 375mm customers

E-commerce projected to reach 16% of retail sales by 2020

Chin

a

US

Singles day in 2012 for Taobao and Tmall alone generated more than $3bn in sales, triple US Black Friday 2011 sales

$3bn

Source: Alizila.com Chinas Internet is Giant Shopping Mall Infograph

Chinas e-commerce volume to surpass US in 2013 US

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$10bn +

Mobile gaming projected to grow 50% YoY through 2015 to hit ~$3.5bn USD in revenue and

455mm players

Source: Economist Ours, all ours Apirl 6th 2013, Data from Morgan Stanley 2012 China Gaming Industry Report, Analysys International

China is the worlds largest online gaming market

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Travel Advertising Film

Luxury Grocery Cosmetics

Source: Worldwatch, Guardian.co.uk, Wikipedia CNBC, China.org.cn

and will soon be the #1-2 market globally for:

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China produces 70% of the worlds smartphones

and is also the #1 market for smartphones, 29% of global shipments in 2013 (E)

354mm subscriber base (compared to 219mm in the US) 92% of Chinese 18-30 yo own smartphones

Source: Canalys.com Smart phone Market Shipment Forecast 2013 BRIC Countries, Chinas Communication Industry by tech.163.com, At D11, Its Clear, China beats U.S. in mobile and internet Forbes.com 5/30/2013, Telefonica SA and Financial Times

Mobile & smartphone market opportunity

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Chinas digital divide: mobile internet

Source: Analysys International, Morgan Stanley AlphaWise, Flurry Analytics, insidemobileapps.com, computerworld.com, Apple, Stenvall Skoeld & Company analysis , Kai Luko,

Android has 90.1% market share, but Google Play is virtually absent

Many smartphone users do not download apps themselves, concerned about data plan use for big downloads,tend to buy phones with apps pre-installed by Shuaji distribution companies

40% of iOS install base in China, but still majority Android

Savvy customers download apps directly from Apple or through marketplace platforms like 91

iOS developers can gain brand awareness by engaging Shuabang companies to help them climb app store rankings

Most developers are focusing energy on these

users

but many future opportunities are here!

Distribution still complicated

Market opportunity, a macro perspective Startup ecosystem challenges and opportunities

New sources of capital (angels, cross-border, government) Venture capital/private equity Public markets and exit opportunities BAT + Q: the internet giants Customer acquisition challenges Copycats and intellectual property Developer services and infrastructure Remaining challenges

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Content

50% 50%

Insights from 309 Chinese angels who have done at least two deals and committed > 1mm RMB in startup funding, representing 747 deals:

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Chinas angels by the numbers in 2012

Source: Cyzone.com 2012.12

Background

72% of angels

were previously

founders

Mostly men

88% are

male

Sectors

Mobile internet, e-

commerce, and

consumer services are

the top three areas for

investment

Boards

76% take

board

seats

Round Size

60% of their portfolio

startups raised <

3mm RMB (~$500k)

in their angel round

We see this investment strategy declining as Chinese angels become more savvy

Geography

Beijing dominates

angel deals in China,

representing 22% of

all deal value and 30%

of overall deal volume

Ownership

For 20% of deals,

angels took more than

50% of the company

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Chinas angels are on the rise

Source: www.stepvc.com 2012,2012.09,www.zdbchina.com, Cyzone.com 2012.12

Angels by type Individual

Angel Fund

Angel + Incubator

Angel Teams

60% of angels will exit by selling shares to VCs

50% of angels

reporting returns of 30%+

18% report returns

of 200%+ 190 (70%)

15 (6%)

61 (22%)

6 (2%)

Chinese investors are going global and many leading Silicon Valley investment brands have a presence in China, increasing potential for cross-border

collaboration and deals

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Cross-border deals

Multiple Chinese VC funds and incubators have a presence in SV

Key leading VCs and US angels already have funds or reps in China

Provide cash, tax, and oce incentives for startups or talented post-graduates to register for business within their province, city, or city district

Many programs operated in conjunction with Torch tech parks and incubators

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Government funding

The Torch Program: Reportedly companies housed in 89 national

high tech industrial zones accounted for 7.1% national GDP in 2010

500+ tech SME incubators nationwide, claims to have incubated Lenovo, Huawei, Suntech and graduated 16k companies

State Council established Innofund reports investments of ~9bn RMB in 15,000+ projects since 1999, with 100 domestic IPOs from portfolio

National government

Local and national government have two key KPIs: Increase GDP & Corporate Taxes

to that end, A LOT of money is being made available to technology startups

Source: www.ctp.gov.cn

Provincial, city, district level governments

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Government funding

Caveats

High turnover rate. Discontinuity of services and support when ocials rotate to other posts or are promoted

Focus on hardware rather than software. Tangible KPIs such as brick and mortar or registered capital are primary focus

Lack of experienced advisors. Ocials in charge of programs may have no experience running businesses

Bureaucratic. Application and reporting requirements burdensome to startups

Major VC funding cool down in 2012

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992 1,269 1,173 1,777 3,247

4,210 2,701

5,387

13,003

7,320

177 253 228

324

440

607

477

817

1505

1071

0

200

400

600

800

1000

1200

1400

1600

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Inv ($USD mm)

# deals

Investments in Chinas VC Market from 2003 2012, estimated 40-50% decline in 2012

Source:, Zero2ipos China VC/PE Market Review 2012, hQp://research.pedaily.cn/dowloadles/20133613413765.pdf

Factors aecting capital deployment

18 Source: Wall Street Journal Fears of an IPO Flood in China April 16, 2013

Macroeconomic and political climate (major CCP leadership change in 2012)

Poor performance of some Chinese internet stocks on US markets, increased investor scrutiny

Exit bottleneck in domestic public markets

Smarter money less willing to burn cash on market land grabs (i.e. group buy and e-commerce sites)

Reasons for optimism in 2013

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One of two Chinese internet IPOs in the US in 2012, YY, had strong performance on the NASDAQ and paved the way for a more receptive capital market in 2013

LightintheBox (ZhenFund portfolio company) June 2013 NYSE IPO

Alibaba Group mega-IPO in the works New Third Board to expand the

over the counter (OTC)market for SME shares domestically, four pilot zones and 140 listings to date, however, listing costs are high for startups (~1mm RMB) and liquidity is low

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488 416

351

521 488 435

92

7

13

68

51

49

2007 2008 2009 2010 2011 2012

IPO M&A

USA: IPO vs. M&A, 2007 - 2012

Source: Thompson Reuters & National Venture Capital Association, Zero2ipos China VC/PE Review 2012

144, 59%

99, 41%

China: IPO vs. M&A, 2012

IPO M&A, MBO, Liquidation, etc

Exit opportunities: Chinese VC backed companies still skewed towards IPO

But M&A market is improving

Internet giants moving on larger scale acquisitions, but primarily only in larger category leaders

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Q2 2011 Baidu invests $306mm in

Qunar

Q2 2013 Baidu acquires PPS for

$370mm

Q3 2012 Suning acquires Redbaby for

$66mm

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BAT + Q: Chinas internet giants

SEARCH E-COMMERCE/PAYMENTS

SOCIAL/ GAMING

TOOLS

NASDAQ (BIDU) 2012 revenue = $3.58bn, primarily advertising 70% search market share Struggling to transition to mobile search, profit margins falling

HKSE 1688 ~$175bn transaction volume in 2012 (Tmall B2B and Taobao C2C) ~$40bn 2012 revenue, primarily from advertising 5% of all Chinese retail, 80% market share e-commerce in China 47% Alipay market share for online payments in China, 700mm registered users Now owns 18% of Sina Weibo microblog (48mm DAU)

HKSE 0700 2012 revenue = $6.98bn, primarily from value added services/gaming, (also non-trivial e-commerce revenue) ~800mm QQ social network users and 400mm WeChat mobile social network users (200mm MAU) 21% online payments market (Tenpay)

NYSE: QiHU 2012 revenue = $239mm, primarily advertising and online games Major portal destination Baidus emerging rival in search (15% market share)

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Online customer acquisition in China

Chinese startups face unique challenges acquiring customers online:

Chinas copycat phenomenon, key factors

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1 Growing available capital investors and internet giants willing to fund copycats

2 Low hanging fruit cheap and easy to copy pure internet/mobile products, wide open spaces in the market lead to land grabs fueled by investor money ex: Groupon, Tumblr, Pinterest, and Path etc clones

3 Risk aversion - Domestic VCs and foreign

capital markets more receptive to Chinese start ups with direct corollary in the US. Copying a model perceived as less risky.

4 Foreign companies often delay too long before tackling the Chinese market

Copying products designed to solve US customer needs is no guarantee of mainstream success in China, many copycats will fail, no breakout success stories for some of the most high profile consumer internet brands*

Copycats dont always work

Successful professionals and business leaders less open to

sharing contacts online

Leisure micro-blogging and design-focused UGC not yet mainstream activity for Chinese

netizens

*For Pinterest genre, excludes companies like Mogujie and Meilishuo, originally e-commerce sites with Pinterest UI integrated later

Wow.taobao.com www.duitang.com

Huaban.com Diandian.com www.woxihuan.com

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but foreign entrants shouldnt discount them! Launched in June 2011 Neteases (Youdao Yunbiji) at 8mm users

reportedly larger than Evernotes 4mm Chinese user base

Youdao even mimics Evernotes marketing tactics, using similar wording on their Weibo account. Copycats are still an issue!

Copycat mitigation strategies

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Focus on your strengths The exterior of pure web and mobile products can be easily copied, but core

competencies (customer service, oine resources, advanced IP/tech) are the key to success, expect copycats but dont be discouraged

Avoid internet giant territory Dont go after categories and products that can be easily copied by BAT + Q, they

have thousands of engineers and millions in cash at their disposal, focus on niche/vertical markets or businesses with strategic oine resources

Pick your battles Focus on serving the customers who do enjoy using your product or service, rather

than conquering the mass market Make it a local eort

Get a Chinese investor on board, have a local connection that can pull strings for you when issues arise

Empower local sta Shorten the chain of command for decision making Give local GMs a stake in the business

On dealing with copycats

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Our business is a slow business, so it has to take a lot of time by gaining users trust and having them be comfortable with using our product. Its more of a trust business

- Evernote Chinas GM Amy Gu on rivals in China

At the end of the day, its still too attractive a market to pass up on. Flipboard Product Director for Greater China Alvin Tse

We took something from the music industry, which was to stop treating the customers as users, and start treating them as fans piracy may not be a bad thing. It can get us more business at the end of the day.

Mikael Hed, Rovio CEO, on piracy in China

Be patient. I think that approaching the market too aggressively, you can make some mistakes. I think it's best just to be patient and focus on delivering a high-quality experience to Chinese players, and when there are challenges or roadblocks then you just have to take them one at a time and deal with them.

Mike Morhaime, President and Co-founder Blizzard Entertainment

IP protection is improving

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This is a long-term eort we want the indigenous brands to work together to protect IPR, because if you do not participate today, tomorrow you are the victims. - Jack Ma

4/2013 Baidu wins suit against Qihoo for illegally accessing and indexing Baidus Baike content, the damages were small (450k RMB), but positive sign for IP protection in China

Source: TechinAsia http://www.techinasia.com/china-search-qihoo-360-baidu-market-share/

Startup services: US versus China

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: Extensive services make startups more ecient and cheaper to operate

Large companies gaining traction for IaaS services, but many corollaries for US startup

services do not yet exist, are fragmented, or still face UI issues

CRM and advertising

Data hosting and management

Payments and analytics

Developer communities and game services

?

?

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Internet Speed

Chinas top startup cities 2X+ slower than US average

Average US internet speed ~ 7.4mb/s

Source: ChinaCache http://mashable.com/2012/09/28/china-broadband-speed/

Ongoing Challenges: Lack of Trust

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The culture of Silicon Valley encourages people with diverse skills and experiences to meet and trust each other and take a chance together.

- Victor Hwang

General trust level in society dropped from 62.9/100 in 2011 to 59.7 in 2012

Only 30% of people trust strangers met on the street

64% trust public media 57.5% trust NGOs 52% trust businesses

CHEATING IS PERCEIVED AS THE NORM

Trust in Chinese society hit an all-Jme low in 2012.

- The Blue Book of Social Mentality

VS

Source: http://chinadigitaltimes.net/2013/02/trust-among-chinese-drops-to-record-low/

APPENDIX

Additional data points

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One of Chinas leading angel funds ZhenFund believes in one principle above all

others: Integrity, Money with values Founded by Xu Xiaoping in 2006, current

fund a collaboration with Sequoia Capital China

Investment size: Up to $500k USD 100+ portfolio companies in China www.zhenfund.com for more Contact: zhenfund@zhenfund.com

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Who are we? ZhenFund

Chinas angel funds

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Est. 2006, $30mm USD Invest in people,

high deal volume, cross-border deals

Est. 2008, Incubate + ideate, hands on,

consumer internet

Est. 2009, Incubate + Seed + VC, large

professional sta, hands on, Beijing and Shanghai locations

Est. 2010, general focus on early stage TMT investments

Legend Star, Est. 2008, 400mm RMB fund, 21

person team, incubate with focus on technology

Global venture capital firm doubles as one of the

most active institutional angels in China

Established angel funds in China oer a variety of investment styles and funding amounts for local startups

Chinas Angels

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Edward Tian Charles Xue Li Kaifu Xu Xiaoping Lei Jun

Many prominent angels are members of Chinas Angel Committee , but co-investment still rare, the Silicon Valley party round hasnt yet made it to China

Chinas top angels primarily investing through fund entities

Cloud Valley Innovation Works ZhenFund Shunwei Capital

Chinas Angels (contd)

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Cai WenSheng He Boquan Bao Fan Zeng Liqing

Chinas Incubators

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Beijing

Shanghai

Hangzhou

Shenzhen

Dalian

Taipei

Many new privately funded incubators emerging

Q3 2004 Baidu acquires hao123 (50mm RMB) Q3 2010 Shanda acquires Ku6 (share swap and $37.2mm), Eyedentity

($95MM), Mochi Media ($80mm) Q3 2010 Tencent acquires Comsenz (valued at >$10mm) Q1 2011 Sina acquires 19% share Mecox Lane ($66mm) Q1 2011 Baidu invests in Anjuke (led $50mm round) Q2 2011 Tencent's strategic 16% stake in eLong ($84.4mm) Q2 2011 Baidu invests majority strategic stake in Baidu ($306mm) Q4 2011 Tencent strategic 4.6% stake in Huayi Brothers (450mm RMB) Q3 2011 Sina acquires 9% stake in Tudou ($66.4mm) Q3 2011 Baidu strategic 40% stake in Fanshu.com (47.6mm RMB ) Q4 2011 Renren acquires 56.com ($80mm)

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M&A/Strategic Investments (through 2011)

Q2 2012 Ctrip acquires (20mm RMB) Q3 2012 Tencent investment in Caixin (undisclosed) Q3 2012 Renren invests in Social Finance ($46mm) Q3 2012 Tudou-Youku merger ($1bn) Q3 2012 Suning acquires Redbaby ($66mm) Q1 2013 Baidu announces plan to make strategic investment in Kingsoft Q2 2013 Baidu to acquire PPS for ($370mm) Q2 2013 Alibaba takes 18% stake in Sina Weibo ($586mm)

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M&A/Strategic Investments (2012-2013)

E-commerce Alibaba (Aliexpress) 360buy (JD Express) LightintheBox

Mobile Tencent (WeChat) Dolphin Browser UCWeb Kingsoft

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Chinese companies going global

Made in China for global export, B2C

Tencent hoping WeChat will fuel global growth, US base in Palo Alto

Based in Wuhan with 50mm global user base

Oering products made in China for global customers

25% of 400mm users outside China

JV in Japan and eyeing US markets

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Google Play Vacuum

Android represents 90.1% of the OS market in China, but Google Play is virtually absent

Multiple 3rd party android marketplaces vying for user attention

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Chinas Internet Giants want to do it all Source: CIC

Source: CIC