Monday, May 02, 2011

A Bubble? - Chinese Style.

You think we are experiencing a bubble? Sure we are - but in China, everything is bigger – much bigger.

I've just returned from China and made a couple of illuminating visits.

First to Innovation Works. The brain-child of Kai-Fu LeeInnovation Works is an incubator, Beijing style.
Lee, having been with Apple and Silicon Graphics in the US,  Microsoft China and then Google China, Kai-Fu knows a thing or two about identifying, attracting and nurturing talent.

He tells me that they have 120,000 graduates on their database on which to call to help staff the dozens of companies being incubated in his Beijing offices, a few blocks from Beijing University.

Innovation Works houses 400 young people working away at building a wide range of companies. About 30 of these are directly employed by Innovation Works and are called the ‘platform team’. These folks (average age I guess about 27/28) are business, finance and marketing graduates whose job it is to attend to the formation, funding, administrating, recruiting for the start-up companies and helping them with their ‘go to market’ plans.
In fact, they do everything other than build the product itself.

This was how incubators were meant to work during the ‘first bubble’ of the late 90’s and 2000.
The difference – as we all know -  is that now the cost of building a product and getting it market tested is a fraction of what it once was AND in China it is a fraction of what it costs in the US or Europe.
Not only is working space extraordinarily cheap but engineers and graduates generally earn 1/5th of their US/Euro counterparts – AND are apparently of high quality and in plentiful supply.

The effect of this is that the $200,000 which Innovation Works invests in these start-ups takes them a very long way indeed. So far that a typical Series A, Kai-Fu tells me, commands a $50m post money Series A.
Yes, that's $50m! I checked twice. Not $15m but $50m.

Given the number of $1bn+ funds which have been raised recently in China [Sequoia etc etc], it is not surprising that VCs aren’t much interested in placing a couple of million in a number of start-ups.

During my visit, Chris Evdemon, who runs the incubator, was just finalizing the judging for next crop of start-ups to join the line – following what I understood was a Seedcamp type application and review process.

It was difficult to get a good picture of what all these start-ups were working on and how their evolution may impact on world markets but my impression was that the vast majority (approx 90%) were aimed at the Chinese market – in ecommerce, mobile apps, social, Android development platforms and games.
The latter category being the most likely to be reaching global markets any time soon.

I expect that retaining star talent and building large, meaningful companies will become challenging as it becomes ever easier for talent to get their own backing and the skills required to build serious global businesses go beyond engineering and towards marketing, finance and management.

My second visit was to a relative veteran of the Chinese ecommerce world – Diane Wang, founder and CEO of DH Gate.
DH Gate is a B2B marketplace matching (with a number of important added value elements) SME buyers worldwide to Manufacturers in China.

DHgate.com was founded in early 2004. Before founding DHgate, Diane was one of the founders of Joyo.com, where she successfully led the company through the Internet boom, downturn and revival. After a year of its establishment, Joyo became the top B2C brand in China. Diane was also the Country Marketing Director of Cisco Systems. From 1993 to 1999, Diane was the Marketing Service Manager and Head of Business Development Department for Microsoft (China).
Thus far in her career, Diane has received "Outstanding Woman of China" and "Outstanding Woman of Beijing" awards—two of the highest forms of recognition given to professional women in China.

TAG was fortunate in investing a small amount in DH Gate’s $6m Series B round in 2007. At the time its gross monthly trading volume was around $1m. Today its at least 15X that and employs over 700 people.

Its interesting that the Chinese Government, as part of its recently published 5 year plan, has included information technology as a fundamental part of their strategy for stimulating internal demand and as a driver of growth. The focus on infra-structure development is truly astounding and with it will inevitably come very rapid growth.

Driven by ongoing urbanization, improving broadband infrastructure, and an influx of affordable smart devices and applications, China’s mass market consumers are starting to take up applications in Internet entertainment, e- commerce, digital content, and mobile Internet.
With an expected 750m netizens by 2015 and the Chinese telecom operators competing to take up broadband speed, and promote 3G wireless data with attractive tariff plans, subsidized smart phones and tablets for consumers the future looks bright for the Chinese technology sector.
[ref Jeffreys Asia Equity Research, April 2011]

Comparing China’s adoption of the web to the rest of the world is instructive.
Almost one quarter of everyone on the planet connected to the web is resident in China.
They have twice the web population of the US and 9 times that of the UK- today.

That said, the market to foreign web services is pretty inaccessible (unlike luxury goods)– as Google and others are finding. Local companies are adept at replicating, improving and adapting to their market.



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