Dr. Kai-Fu Lee's Talk on Innovation with Chinese characteristics. Videos (Part 1) https://freeflowapp.com/v/et97qv (Part 2) https://freeflowapp.com/v/5uyqyg US venture arm, www.ideabulb.vc China venture arm, www.chuangxin.com More on Kai-Fu Lee, http://en.wikipedia.org/wiki/Kai-Fu_Lee

1. Innovation, Chinese Style
Kai-Fu Lee
創新工場 Chairman & CEO
May 2015
1

2. • China’s Internet Market
• Unique Chinese Opportunities
• How to harvest these opportunities
2

3. China: ~$600B
US: ~$1800B
Rest-of-World: ~$300B
US & China Dominant

4. China’s growth to outstrip US by 2025
$300K Chinese “lean start-ups”
CEO/Product
manager
User experience
designer
CTO + 7 more
engineers
China: Largest market + low cost of human capital

5. Mobile: An exponentially growing opportunity in last 4 years
22
34
53
74
94
112
139
212
298
384
457
513
564
600
630
4
20
55
245
540
620
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Rapid Growth of China’s Mobile Internet Market
Internet users in China
Mobile Internet Users（iOS&Android）

6. The Industry has reached an “internet +” stage
Service industryConsumer goods Industrial products and raw materials
Online
gamesMusic
Mobile
Phones
Maternal &
Child Supplies
Cosmetics
Telecom Prepaid
Home Appliances
Household
Electricals
Clothing
Food
Stationery
Online
Procurement
Other Services
Digitals
Steel
Other Industrial Products
DegreeofInfluence
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 Cars
Buying/Renting
Houses
Laundry
Medicare
Show Store Chains
Hotel
Information
Reading
Plane Tickets
Movie
KTV
Education

7. An overabundance of VC capital  High competition
Kaixin001.com vs. Kaixin.com (Renren)
Baidu vs. SNDA
Tencent vs. Qihoo 360
Jingdong vs. Suning

8. • 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

9. • China’s Internet Market
• Unique Chinese Opportunities
– Unique talents
– Demographics and users
– Large workforce
• How to harvest these opportunities

10. • Tencent’s Shenzhen headquarters at 2:00am
10
Strength #1: Hard Working

11. • Broad Group: 30-story luxury hotel built in 15 days
11
Strength #2: Speedy & Efficient Execution

12. • The Long March
• The Great Wall of China
12
Strength #3: Tenacity and Focus
1 year
223K people
8,000 miles traveled on foot
166K people died
800 years
3m people
3,000 miles
400k people died

13. Creativity Product & User Passion Strong Leadership
Teamwork Focus Execution & Speed
US China
US vs. China Entrepreneurs

14. 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.

15. • China’s Internet Market
• Unique Chinese Opportunities
– Unique talents
– Urban Migration
– Decisive Policy
– Incumbents
• How to harvest these opportunities
15

16. 16
Largest Urban Migration in Human History
Each 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

17. 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

18. • China’s Internet Market
• Unique Chinese Opportunities
– Unique talents
– Urban Migration
– Decisive Policy
– Incumbents
• How to harvest these opportunities
18

19. Decisive Policy-Making & Implementation
• Chinese government is vigorous and effective
• New policies bring about new opportunities.

20. 20
 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
Import Engine Plants
Domestic Brands
Domestic
4S Shops
Comprehensive
Deals
e-Commerce
Consumers
(Scattered, more options)
Import Engine Plants
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

21. • China’s Internet Market
• Unique Chinese Opportunities
– Unique talents
– Urban Migration
– Decisive Policy
– Incumbents
• How to harvest these opportunities
21

22. Inefficient Incumbents
Internet reconstructs the
retail industry
Internet reconstructs the
service 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

23. 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 …

24. Fewer traditional consumer brands than the US
Example of Brands in US Media - WSJ, NYT, Disney,
Penguin, Random House etc..

25. 25
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.

26. • China’s Internet Market
• Unique Chinese Opportunities
• How to harvest these opportunities
– Small Monopoly
– Expansion
– Defensive “moat”
– 創新工場 Advantage
26

27. 27
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

28. 28
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.
Lever
1
2
3
Identify “monopoly beachhead” with the lean startup

29. 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

30. • China’s Internet Market
• Unique Chinese Opportunities
• How to harvest these opportunities
– Small Monopoly
– Expansion
– Defensive “moat”
– 創新工場 Advantage
30

31. 31
Find scalable way to grow
Produce High Quality Content：
Leveraging professionals,
Provide Standardized Service：
Leveraging social resources, rather
than creating resources.
31
StableEruptExplore
Traditional Linear
Growth
Exponential
Growth
Grow to dominate small space

32. 32
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
Meipai
World’s No.1 short video
maker in smart mobile.
BeautiCam
The most popular selfie
app with millions of users.
Meitu Phone
China’s prevalent female
mobile phone.

33. • China’s Internet Market
• Unique Chinese Opportunities
• How to harvest these opportunities
– Small Monopoly
– Expansion
– Defensive “moat”
– 創新工場 Advantage
33

34. 34
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.

35. 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

36. • Monetization via deep understanding of human
psychology/weakness
36
Gaming’s Hierarchy of Needs
Your own digital “blank canvas”, those who worship you as a virtual king
FREE
PAID
Deification
Brotherhood,
Hatred, Pride
Addiction,
Enchantment,
Community
Excitement
Emotional 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

37. 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
37
Online marketing
services
Browser game portal
and platform
Search engine
Sales of anti-virus software
63%
26%
10.5%
0.5%
2011 Annual Report

38. • China’s Internet Market
• Unique Chinese Opportunities
• How to harvest these opportunities
– Small Monopoly
– Expansion
– Defensive “moat”
– 創新工場 Advantage
38

39. 39
創新工場：We operate a unique early stage ventures model for China.
© 2015 – Innovation Works – Private & Confidential.
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 + + +

40. 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
40
2015

41. 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.
19 28 47
Investment Services Full-Time
Professionals
5,000 m2
of a unique co-working environment in Beijing and in Shanghai
$500 million
under management ($ Fund I/II and BJ/SH RMB Fund)
41
© 2015 – Innovation Works – Private & Confidential.
Professional ServicesInvestment TeamPartners / IC

42. 1. Identify trends early, select and
invest in key themes.
3. Double-down on winners.
High
Growth
High
Value
Low
Capex
Localizable &
Differentiabl
e
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

43. The most established brand in the early stage tech space in China.
© 2015 – Innovation Works – Private & Confidential.
43

44. IW has already built and funded several “star” companies.
© 2015 – Innovation Works – Private & Confidential.
44
>$2B
>$300M
>$100M
>$50M
Current
Valuation
Range

45. 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
© 2015 – Innovation Works – Private & Confidential.
45
Something appropriate with Idea Bulb & 創新工場
Developer
Tools
Productivity
Tools
Connected
Devices
Online
Education
Others
ACQUIRED
FAILED
FAILED

46. Thank you!
startups@ideabulb.vc
Investing in China’s Top Founders.
© 2015 – Innovation Works – Private & Confidential.