IT start-ups in China vs US Wu-Fu Chen Acorn Campus September 9, 2003

The VC “LANDSCAPE” in 2000 # of VC Firms in Existence # of Professionals # of First Time VC Funds Raised # of VC Funds Raised This Year VC Capital Raised This Year ($B) Avg VC Fund Size Raised This Year ($M) Source: NVCA Yearbook 2001; Venture Economics

A Generic Early 90’s Model Round TypeDate Amount Raised (MM) Pre-Money Valuation (MM)IRRMultiple 1SeedJan-90 $ 0.50 $ 2101% stJan-91 $ 3.00 $ 1070% ndJan-92 $ 8.00 $ 3250% rdJan-94 $ $ 10032% IPOJan-95 $ 150 Total Private Capital $ 25 Million

A Generic Late 90’s Model4 Round TypeDate Amount Raised (MM) Pre-Money Valuation (MM)IRRMultiple 1SeedJan-97 $ 5 $ 3579% stJan-98 $ 10 $ 10065% ndJan-99 $ 25 $ 20059% rdJan-00 $ 60 $ 60052% IPOJan-01 $ 1000 Total Private Capital $ 100 Million $200 ?

VC funding cycles 1990 – 1994: Market Driven 1995 –1999: Technology Driven 2000 – 2005: Cash/Finance Driven 2006 – ????: Market Driven

Market Trends A lot of IT technologies were developed during bubble years IT technology applications will move migrate from Enterprise to Home, Automobile, and Human

Fundamental Market Drivers Live better, Quality of life –Material –Spiritual Live longer, Quantity of life

Quality of Life Basic human’s needs are pretty well fulfilled due to advances in Manufacturing Technologies The supply side ( supply limited) economy is shifted to demand side triggering potential deflation Future valuation creation will be shifted to soft features such as: improve safety, reduce stress, save time, improve look and feel

Quantity of Life As the Quality of Life improves, human would like to live longer and hence the Quantity of Life becomes priority 1

Great market opportunities E-services –Integration of computing, communication, and storage Entertainment/ Educational –Digital Media –Online gaming Health Care –Remote monitoring, Diagnostics –Drug discovery computing platforms

Business Model The world gets smaller due to improvements in communications and transportation technologies It is critical that a startup must access to global market and leverage global resources to be competitive

Mega shifts Switching – from circuits to packets –Data then voice; Backbone then access Transmission – from electronic to photonic, wired to wireless –First long haul then metro then access Functions – moving from the enterprise to the net –First intra, then inter-enterprise Offering – from products to services –Quality of Services. SLAs define new relationship with customers Information Technology – from in-house to off- shore

Factors for successful high Tech startups Market Management & Technical Talents Regulatory Environment

Market Huge Market attracts great products US has huge market and early adaptor market for IT China has huge potential IT market under development China is already the world number 1 in IT manufacturing

Management & Technical Talents US has long history of entrepreneurship with a great supply of management & technical talents China has a large number of low cost junior technical talents but lacks experienced management & technical talents

Regulatory Environment Over all, China is still way behind US in this front: –Corporate Governance –Financial Transparency –IPR protections –Exit strategies This is the number one reason that international investors are still hesitating

Strategy for IT startups in China Recruit overseas experienced management team and technical leaders Set up global operations from day 1 Focus on Greater China market initially Build Solution and Distribution partnership

Conclusion Regulatory environment is the number one for improvement to reduce investment risks Good time to invest cautiously since the market is turning around Great China investments will shine and continue to improve for a long time