Moderator:  David Wolf,   CEO    Wolf Group Asia

 Panel:

• William Bao Bean,  Partner   Softbank China & India Holdings
• Andrew Chen,  Partner     BlueRun Ventures
• Charles Pan, GM   Orange Capital
• Tangos Chan, VP    China Growth Capital

Q: How has the global financial crisis affected the VC climate in China?
A: Exactly the same as the US.  Not going to bother paraphrasing.

Q: What makes a Chinese Entrepreneur better / different?
A: US: decks are well structured, CEOs are polished and sharp.  CHINA: much younger, more grass-roots entrepreneurs.  
     US: ready, aim, fire   CHINA:  ready, fire - go see what you killed    US: still in the bunker figuring out what to shoot

Q: Advice to / opinions of expat entrepreneurs? 
A: Tend to only invest in experienced Chinese entrepreneurs. 
     Understanding of Chinese culture (to know your users) is a requirement 
     More attractive:  Chinese who leave, learn in US, come back
     IP + good approach to business model coming to China from another country  

Q: Post-Series-A, what does the cap structure look like between Founders / VC /  employees?
A: Chinese founders will typically own more than in US.  This is because of Chinese culture.  Talent/engineering cost is very low.  Angel round will get a company to 20-30 employees.  Also, companies need less cash so founders end up keeping more.  (lower cap-ex)

Q: What are the exit strategies here in China and what are the corresponding legal hurdles?
A: Shooting for overseas IPO or M&A.  Company will be owned by a holding company based off-shore.
     China working on a NASDAQ competitor starting Q1 2010 (Jimbot (sp?))
     Trading volume in China is already 4x Hong Kong’s
     PE ratios higher in China as well.  All of this should help more local IPOs
     Chinese consumers understand the concept of investing, also helpful     

Q: How are Chinese entrepreneurs connecting with VCs (is there an angel/incubator equivalent in China?)
A: Events & conferences, lots of demos in China.  Not many incubators yet.
     There are some angel groups in Shanghai - not making a lot of progress yet.  60 angels ~ 4 deals.  Each angel is committed to invest $5k/year = lots of startups. 

Notes:

• 1-5mm fetching about 10-40% of a company normally here. (Softbank - backed by Cisco)
• Funds are preserving so they can do follow-on investments for their portfolio companies
• 15 person company buring 12k/mo in China - 2nd largest language learning company in the world
• in RMB investments there is no concept of preferred / common stock
• Must have an RMB fund on-shore to invest in China
• There are constraints on equity ownership by foreign investors.  Forces investors to localize
• There are still unclear tax issues after liquidity events in China
• It’s about investing in people, just like in the US
• Retaining people is key - much harded to do in China - competing with the big, stable companies.  An investment in a charismatic, likeable leader carries a lot of weight
• “You’re ATM card is less secure than your online gaming account in China” - the gaming acct has a lot more value built in
• Service-based innovation in the US tends to be based on core technology innovation in China.  Example:  Kindle developed in China, commercialized in US.
• Orange:  in China to find business model innovations to bring back to Europe.  
• Behavioral targeting on the Internet:  US you get in trouble (Beacon?) - in China it’s coming out of Government / University labs.
  - Chinese gov’t is motivated in tracking people and their habits whereas US gov’t is not.  
   

Eric’s blog:  startuplessonslearned.blogspot.com

Twitter: @ericries (tag with #leanstartup)

Presentation Notes:

• Most startups fail catastrophically
• How many startups have lived up to their employees, founders and investors?
• Most startups that succeed turn out to be something totally different from the initial vision of the company
• Difference between a successful startup and a failure is the number of iterations the company could afford before death / success
• Eric’s new company - IMVU - bring avatars and digital goods to the USA

IMVU:

• shipped in 6 months - a horribly buggy beta product
• charged from day 1
• Visionary Customers can be just as or more valuable to the business as the founders
  - must be in constant dialog with those visionary customers
  - those visionary customers live with the same pain that the founders did when they came up with the business idea
• Iterate constantly.  IMVU pushes to production 50x per day
• No PR, no launch
  - this way you only focus on what your customers think
• 2007 revenues of $10mm, still growing nicely

Lean Startups Go Faster

• Full-scale refactoring of how software is developed.
• Commodity technology stack - easy, cheap: EC2, grid, cloud, etc etc
• Customer Development (find out what customers want before you build it)
• Agile (lean) product development (fast iterations)
  - Principles drawn from Lean Manufacturing and Toyota Production System
  - Where problem is known but solution is not
  - Meetings are waste, revising code is progress
• Product development at a lean startup:
  - problem and solution both unknown
• get rid of departments.  2 teams:  problem team, solution team
• Problem team constantly asks what the problem is and is there a business here if we can solve it?
• Solution team constantly asks what the problem is and if the product is sufficiently solving it (constantly iterate)
• The biggest source of waste in any startup is building something nobody wants.

Disclaimer (AJ):  My notes don’t do Eric’s presentation or concepts justice.  Please watch Eric’s recorded presentations and look at his actual slides.

This perspective is from the smaller seed / angel investor perspective.

Panel: Dave McClure, Joyce Kim, Ryan Pipkin, David Troy

• Downturn has been worse for VCs than for startups (harder for VCs to raise money relative to the valuation hit for startups)
  VC as an asset class has performed terribly and many of their LPs are “overweight” in the class.  All bad for VCs
• Lots of VCs will be disappearing over the next few years.  The good ones will survive (CRV, August, etc)
• New environment:
  - more focus on getting revenue, get to break even cash flow
  - get to sustainability on the Series A so you don’t have to raise money later (usually won’t be the case)
  - Seed Funds (SoftTehc, Maples Investments), and Incubators / Angels (YCombinator, TechStars) are gaining traction in this environment
  - much cheaper to prove concept these days - < $50k 
• Troy - making 100-250k investment in 1-3mm pre-money companies in BWI area only
• Pipkin - makes software that helps angels manage / syndicate their deals.  
• Angel Capital Association: 160 member organization of angel investor groups
• Due diligence process is much more arduous now
• Startup valuations down 33-50% on average in the Valley
• VCs taking 50% longer to close investments, on average
• Legal:
  - not a lot more convertible notes going around (except for McClure)
  - they’ve started capping these notes (cap the Series A valuation) in the last year and a half
  - terms are very pro-investor.  Less term sheets, less room for negotiating
  - easier to take a board seat on A round or get a liquidation preference
• Series B’s are impossible to do right now.  Best you can do is likely 50% down round or worse.  Many are dying now - too speculative.
• Trend for Micro-Seed ($0-$100k to get a prototype built and start proving a market):
  - panel is bullish on micro-seed model
  - Pipkin:  there may too many micro-seed incubators out there, Paul Graham has a secret sauce 
•  Troy:  You have just as good a chance at good returns in a small startup than you do in the public markets
• Panel agrees outlook for Angels are looking much better than VCs right now, at least from an ROI perspective
• Kim:  Seed round expectations have completely changed.  Try-and-see not as viable now - must be building a real business.  Less R&D investments.
• Is there still room for no-revenue, pure-growth companies in the VC model?
  - Kim - not really, unless it is a proven entrepreneur
  - McClure - seed yes, VC less so
  - Concensus: we must be at break-even by next round.  We’re basically bankers now.  
• Net-net:  Fail fast and move onto the next one.  Don’t waist too much money proving/disproving what you think will work.

Startonomics / Startup Metrics:  (Dave’s AARRR)

• Acquisition:  what channels do customers come from?
• Activation: do they have a good 1st experience?
• Retention: will they come back?
• Referral: do they tell other people (net promoter score)
• Revenue: will they pay / how to make money?

       - crucial for startup to track these things to take some of the risk out of the business for their investors.
       - We’re seeing the professionalization of the low end of the investment market

Q: How do angels feel about a quick exit at a smaller valuation (as opposed to the larger, follow-on deals ending in larger exits)
A: There is more of an oppty for angels and seed funds for deals like these since the VCs aren’t interested in them.  It really depends on the fund size … all about ROI.  Someone managing a 10mm fund would be happy with a smaller exit. 

The slides:

Panel:  Dave McClure (Founders Fund) , Dan Gould (Fox Interactive Media), Bradley Horowitz, VP at Google 

• Social gaming platforms slowly becoming more popular in the US
• McClure: Features really don’t matter that much  (on platforms)
• monetization/distribution is more important
• Looking for the intersection of users and money
• Throwing traffic at an uncompelling feature won’t help it.  It will go away as soon as you turn the traffic off.  This is how Yahoo! has been attempting to grow the popularity of some of their features.
• Top 3 Social Platforms in the US:  FB, MySpace, Twitter … also, the Web as a platform
• Gould: “It’s a mistake for FB to spend too much time copying twitter” … FB a lot more personal, that’s its strength.  
• Would make more sense for MySpace to have more asymmetric features (like Twitter) because of the “broadcast” nature of MySpace
• How much $ would you allocate to the FB ecosystem as opposed to the Twitter ecosystem (companies built on on those platforms):
• Horowitz:  I”d give it to GM (hehe) … correction, Google Wave
• Gould: All on FB because it has a lot more mainstream stay than Twitter (even in the long run)   [I agree]
• None of the top payment gateways in US (eBay, Apple, AMZN) are social networks.  Why not?
  … because they have “shit people want to buy” (as to say they don’t need social networks).
  Google basically has all those pieces in place (socail + payment).
  Horowitz: Who you know and who your friends are may or may not be important from a purchasing standpoint 
  Gould: “You can buy music on MySpace … but the US should learn from Japan on social payments”

Mobile Wars in the US (iPhone, Pre, Android, RIM)

• iPhone is the leader because of a superior phone, superior platform … Steve Jobs bullying AT&T as opposed to the other way around (traditionally)
• Why has Android not dominated the market:  too early in Android’s life.  Android is still very much a work in progress.
  GOOG trying to get competitors to use better browsers, raise the bar for technology (cites Gears and Chrome as filling the holes in browsing experiences)
• “What’s good for the Internet tends to be good for Google”

• McClure: Why aren’t there social networks around Moms/Kids/Families?  
• Huge oppty to figure out how to organize those groups that want to connect to each other (play dates, etc) to help figure out where the “family spend” goes (strollers, schools, etc etc)

Passion:

• Gould: When you have communities of people that are passionate about a particular topic, you end up with highly active forums (the dark matter on the Internet)
• These sites aren’t collecting hundreds of millions of users but are making good money and are able to sustain
• Ning is making inroads here by allowing social networks be created around niche verticals
• Panel seems to agree that the silo’d social networks will continue to co-exist with the macro-network (MySpace, FB)
• Gould: sometimes barriers can be good — bad UI and slow pageload keeps only the true enthusiasts on board - keeps content high quality
• Gould: we need more hardware in the US that can help link the online and offline worlds.  The stored value cards in JP are very effective.

The slides from Dave: 

Gaming Trends (in Japan and Globally):

- video game market is becoming mature
- it’s a hollywood like business model now.
- costs $30mm to make a game which puts break-even at 3mm units.  Go big or go home.
- other mediums (mobile / pc) more like the broadcasting business (as opposed to hollywood)
  -  easier to fine-tune, lower cost, much more revising the experience, etc.  (long tail gaming)
- casual gaming demographic is changing a lot - tilting older and more female

Presenter: Moba-ge-town (DeNA Co) 

- Founded in Tokyo, March 1999
- Mobile portal, ad network (mobile), e-commerce
- New business:
 - AirLink (travel agency business)
- > 500mm pageviews / day (largest in JP)
- Virtual SNS with high quality free games
- over 70% penetration among teens
- stickiness & addictiveness (70% new user return rate)
- USD$200m annual revenue - 70% profit margins 
 - Ad revenue (place ads and pay sponsor fee)
 -  ”Success-based ad revenues” - basically a CPA model / affiliate program
 - Sales of avatars (virtual goods)  - 2D and 3D avatars
 - Display ads are 40% / the rest is 60%.  Virtual goods a small piece right now.
 - main user base in their 20s 
 - “Tie Up Ads” - national brand advertising.  Coca-cola, etc.
  - end user goes to the retail store, buys the can of coke.
  -  user takes pic of can with phone, uploads it (2D barcode)
  - DeNA sends uesr’s info to coke so coke can market to them
  - Coke gives the user coupons, targeted messages, etc
- Mobile payment system key to all of these businesses

- Mobile auction service: Mobaoku
 - very popular for buying/selling items via mobile phone
- Talk about boot strapping - Moba-ge-town was started by 3 staffers (1 engineer) in 3 months