China's Start-Up Landscape (And How to Engage With

China’s start-up landscape (and how to engage with it)

SHANGHAI 2018 Table of contents

THE START-UP LANDSCAPE IN CHINA1 3

ABOUT THIS STUDY 13

ABOUT COVESTRO 13

ABOUT KAIROS FUTURE 13

1 This is an overview of a comprehensive study of the start-up landscape in China. The full study contains an in-depth analysis of certain fi elds as well as approaches for engagement suitable for Covestro. The full study will not be disclosed. THE START-UP LANDSCAPE IN CHINA

Despite a tightening of venture capital in China in the last few years, China’s start-up scene is booming. The total assets under management by Chinese venture capital institutions has reached over CNY 5 trillion, up from almost nothing two decades ago when tech giants such as Baidu, Alibaba, and Tencent had just started to emerge. In 2017, over 100 Chinese start-ups were listed in stock markets around the world, and China added 34 new companies to its stock of unicorns (companies less than 10 years and valued at USD 1 billion or more), now standing at more than 270. Measured by amounts raised, invested, and exited, China is now second only to the U.S. in the fi eld of global venture capital.

For a comprehensive picture of the what, where, who, and how of China’s start-up landscape, this study acquired, merged, cleaned, and structured data from Zero2IPO and Tianyancha, two data- bases with information about companies, start-ups, and investments. The resulting consolidated database covers more than 100,000 funding deals involving more than 30,000 start-ups and more than 10,000 funding institutions. The data were used to analyze geographical, sectoral, topical, and stakeholder aspects of the Chinese start-up landscape.

For an understanding of how and why Chinese and multinational corporates engage with start- ups in China, we interviewed 11 corporates, 45 facilitators (such as incubators and accelerators) and several entrepreneurs and scholars. We also sifted through news articles, reports, and policy documents for additional information.

Several factors have fuelled the Chinese start-up boom: • After three decades of maturing, Chinese start-up and innovation ecosystems have gained a critical mass of knowhow and resources. • The Chinese government views ‘mass entrepreneurship’ as the next stage of the country’s path towards becoming an innovation powerhouse, and has introduced a slew of policies to encour- age and support start-ups. • Entrepreneurs have become the new heroes in Chinese society, with the examples set by successful founders such as Jack Ma having created an aspirational ideal. • An expanding consumer class is demanding, and willing to pay for, novel solutions catering to their needs. • Capital requirements have fallen steadily in many industries, from sensors (fueling the IoT revolu- tion) to 3D printing to industrial robots, making it easier for start-ups to enter. • A backbone of technology giants, notably Tencent and Alibaba, is nurturing entire ecosystems of start-ups, viewing start-ups as vehicles for experimentation and rapid execution. • New fi nancing solutions have emerged for small companies in China, such as the New Third Board, the New Fourth Board, angel networks, and government seed and venture funds from the national to the district level.

Not all is rosy for the Chinese start-up ecosystem. Chinese start-ups have a peripheral position in global start-up networks and their businesses have a lower share of international users than their overseas counterparts. Access to talent is mentioned by Chinese entrepreneurs as a key challenge. Private venture capital has become more diffi cult to access since the venture capital peak in 2015 (though other sources have become available, as discussed further below).

3 Start-up ecosystems have consolidated around some key Chinese tech companies: Tencent, Alibaba, Lenovo, Baidu, JD, Xiaomi, Qihoo 360, and TCL are the Chinese corporates most active in start-up investment. A majority of Chinese unicorns are backed by these tech giants. The vision, infrastructure, and deep pockets of the Chinese tech giants are important forces shaping the evolution and accelerating the rate of change of the Chinese start-up landscape.

Backbone networks (2/2) Rastar Gland Pharma Zenmen

Fosun

Xiaomi Qihoo 360 Agriculture

Automotive Enlight Media Biotech & pharmaceuticals Dixintong Megmeet We Doctor Chemistry & new materials iQIYI Cloud, AI & big data Construction & real estate Maoyan China Internet Plus TCL E-commerce Youku Tudou Baidu Education & training Lazada Group 58 Tongcheng Go-Jek Flipkart Tuniu RT-MART Fintech & insurance Best Logistics Tesla Lianjia Wasu Media China Literature Qunar Food Kuaishou Yixin Finance Gaming & entertainment Shiji Group Huayi Brothers Sougou Tencent Greentech & energy Weibo yiche.com Alibaba Lyft Ele.me Health products & services Alibaba Cloud Cainiao Intelligent hardware & devices Koubei Grab Taxi Didi China San Jiang Elong Unicom Ofo Internet services Easyhome Tujia NIO Yintai Paytm-One97 Farfetch Logistics & transportation Mobike Machinery & instruments Ctrip Zhongan Insurance China Post Service Bank JD Media & marketing Cambricon Photonics & optoelectronics Retail Yonghui Supermarket

IT & telecom Xueersi Ant Financial Face++ New Oriental Education

Motorola Huace Media Lenovo

Pizza Express IBM PC Median

Figure 1. Investment network of the leading corporate stakeholders in the Chinese start-up landscape. The size of a bubbleindicates the number of investments deals. Each link represents one or more investments. Note that the network does not show current ownership, since it does not take into account divestments or mergers. Analysis: Kairos Future

4 Various agencies and levels of the Chinese government and other key stakeholders in the Chinese start-up landscape. Policies that indirectly impact entrepreneurship in China can be di- vided into three clusters based on their objectives: (1) accelerating the rate of scientifi c and technological achievements; (2) promoting transformation and upgrading of industries; and (3) bridging academic research and real-world applications.

Likewise, policies that directly impact entrepreneurship can be categorised into three clusters based on their objectives: (1) improving the institutional mechanisms to facilitate entrepreneurship; (2) improving incentives and fi nancing for entrepreneurs; and (3) fostering talent and inspiring entrepreneurship.

The government’s toolbox for achieving these objectives include (1) direct funding and investment; (2) tax incentives; (3) fi nancial policies; (4) educational guidelines; (5) entrepreneurship infrastructure development; (6) law-making; and (7) authority and power over appointments.

Entrepreneurship and startup policy landscape

Improve the Accelerate the rate Promote institutional Improve the of scientific and transformation and Bridge academic incentives and Foster talent and mechanisms to research and real- inspire technological upgrading of facilitate financing for achievements industries world applications entrepreneurs entrepreneurship entrepreneurship

Develop Transform China into Improve infrastructure for a leading mass Support manufacturing power mechanisms for Optimize financial breakthroughs in 13 technology transfer policies and entrepreneurship and incentives academic fields (e.g. Deepening business quantum control, commercialization Develop services to Take the lead in next system reform protein machinery, help mass gene editing, fusion gen information- entrepreneurship energy) driven technologies and innovation

Utilize financial Inspire people to Achieve Increase talent flow markets to facilitate innovate and environmental funding and become sustainability investment entrepreneurs Realize 19 Increase the quality “important projects” Boost of life for all citizens by 2020 and 2030 entrepreneurship in (e.g. high-end chips, through health Strengthening IP rural areas gas cooled nuclear innovation reactors, AIDS protection Establish trading Expand investment platform for science to help the prevention, aircraft Feed China by and technology development of Attract overseas engines, quantum transforming the results start-up companies communication) agricultural and food Chinese and global technology sectors talent

The government’s toolbox for achieving desired policy goals

Direct funding & Educational Authority and investment Tax incentives Financial policies guidelines Infrastructure Legal changes evaluation

Figure 2. Overview of government policies with direct and indirect impact on the Chinese start-up and funding landscape. Analysis: Kairos Future

5 Through government guidance funds on national, provincial, city, and district levels, the government is a major force in Chinese venture capital funding. Currently, 358 of these funds are focused on venture funding, with capital raising targets of USD 665 billion. Some of these funds allocate capital to further specifi c policy plans, such as Made in China 2025, and to advance areas such as AI and robotics. Unlike private venture capital, the government guidance funds are well represented in inland regions.

Government funds

Types of grants Timeline

350 14% - 300 33% 250

200

150 Number of funds of Number 45% 100

8% stage investment

50 Number of funds for early

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

25 22% stage -

CNY) 20 40% early bn

for 15

Amount 10 raised 5

30% investment ( 8% 0 Amount 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Startup grants Industry grants National Provinci al City District PPP grants Unspecified

Figure 3. Number of funds and amount invested by government guidance funds by investment focus and year. Analysis: Kairos Future

6 Government funds Government District City Provincial National level level level level Inner Mongolia Inner Hangzhou Shanghai Beijing Beijing Shandong 1,038 1,953 1,212 2,354 Xi’an 519 3,484 Hebei 14 12 11 11 21 192 535 10 39 8 Shenzhen Shanghai Shenzhen Qingdao Ji’nan 1,418 1,160 2,085 519 105 Guangxi 16 10 12 Yunnan 8 3 Gansu 2,675 526 15 63 8 8 Hangzhou Guiyang Foshan Wuhan Shijiazhuang Ganzi 1,115 1,133 2,073 518 12 70 Shaanxi 8 4 8 Hainan 1 1,820 460 60 4 6 1 Maanshan Beijing Jinmen Ningbo 1,100 1,070 1,580 Wuhan 505 25 3 4 5 1 2 Shanxi Wuhan 1,678 Henan 411 20 40 1 4 Chongqing Pingxiang Xiangtan Dezhou 1,050 1,569 502 889 14 Xinjiang 3 3 8 1,384 Hunan Anhui 357 13 30 5 7 Mianyang Hangzhou Chengdu Nanjing 1,044 1,541 Chongqing 500 708 Jiangsu 15 Beijing 1,382 1 6 6 326 11 12 29 5 Guangzhou Dongguan Shihezi Ningde 1,043 1,500 Sichuan Taiyuan 500 700 1,212 Haixi 21 301 1 5 2 19 10 2 3 Maanshan Guangdong Ha’erbin Meizhou Liaoning Ningbo Qinghai 1,434 1,159 500 700 960 300 10 21 1 2 3 3 7 9 Yangzhou Heilongjiang Luzhou Shanghai JInhua Dalian 1,430 Tianjin 1,113 500 630 901 286 1 2 6 2 7 4 9 9 Quanzhou Chengdu Jinhua Zhejiang 1,348 Hefei Ningxia Jiangxi 467 603 900 11 14 908 277 5 1 11 1 3 6 each city since 2015. since city each raised by city by raised amount total represents size Circle 2015. since province each in funds provincial by raised amount total represents color Province Dongguan Fuyang Xuzhou Wuhan 1,258 Fujian 400 601 892 Jilin 674 230 12 23 2 8 4 5 - level government funds in funds government level Changshan Quzhou Xiamen Guizhou Foshan - 1,237 Hubei level government government level 400 600 584 205 880 11 11 3 2 3 7 Shunde Pudong Fundand Shanghai of Entrepreneurship Funds of Innovation Management of FundRural And Urban Talent Fund of Chengduof Fund Talent National Rising Rising of FundInfotech National and Development FundInnovation Education National Development Fund Enterprise and Small Medium National Fundand Innovation of University Entrepreneurship Mass Fund Innovation National Fund Cultural Innovation National and Quarantine and Funds Inspection of Academy Chinaof Achievements Transformation Dalian Yulong Fund Yulong Dalian Development Economic of FundChengduNew Fundand Innovation of Foshan Entrepreneurship Mass Fund Shanghai of Innovation Technology of Funds Fund of Guiding Shenzhen Municipal Government Financing Guarantee Fund of Shandong of FundGuarantee Financing Guiding of FundGuangdong Entrepreneurship Fund Anhui of Intelligence and Voice Artificial Intelligent Development Mediumof FundHenanEnterprise and Small Fund of Investment Innovation Collaborative Amount raised (CNY million) Deals Venture Capital Venture of FundFunds Capital Venture Fund Top Top national levelfunds Top district TusHoldings Top city province level funds level province Gaoxin Chengmai level level District level level Africa Investment Investment China - Africa and funds funds Zhongguancun

Figure 4. Geographical distribution of government guidance funds. Analysis: Kairos Future

7 Despite several booms and busts in China’s short venture capital history (the ‘capital spring’ of 2014-2015 gave way to the ‘capital winter’ of 2016, which then turned into the ‘harvest year’ of 2017), the number of private venture capital institutions has grown from 10 in 1995 to 500 in 2005 and 5,000 in 2015. The composition of venture capital sources has changed over time. Angel investments became abundant in 2014-2015, as a large number of wealthy individuals joined the VC fray. With the tightening in 2016, more start-ups turned to the newly established Third New Board for fi nancing.

Funding stages and rounds Rounds Stages

40 250 45 600

200 USD) 30 450 USD) ) bn bn ( 30 (

150 deals 20 of 300 invested 100 invested shousands (thousands) ( 15 Number of deals Number 10 150 50 Amount Amount Distribution

0 0 0 0 Seed stage St artup stage Expansion Maturity stage Unknown A B C D E F G stage Pre-A Unknown Seed roundAngle round

Private placement St rategic investThe ment Third New Board

100% 100%

75% 75% amount

50% 50% invested of 25% 25% Share of invested amount Share

Timeline 0% 0%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Seed round Angel round Pre-A Seed stage St artup stage Expansion stage Mature stage A B C D E F G St rategic invest ment Private placement The Third New Board

Figure 5. Funding stages and rounds in China by number of VC deals and over time. Analysis: Kairos Future

8 The leading private VC institutions in China include Zhen Fund, K2VC and Sinovation Ventures in the initial funding stage, and IDG Capital, MatrixPartners, and Sequoia Capital China in the sub- sequent funding stages. While most of the top venture capital fi rms invest most heavily in internet services, Tianxing Capital invests in chemistry and new materials as well as on greentech and energy.

Figure 6. Leading funds in early stage investment (blue) and growth stage investment (orange). The heat map indicates which areas they invest in (dark red indicates high level of funding). The black bars indicate total number of deals and amount invested for each fund. Analysis: Kairos Future

The number of entrepreneurial spaces has expanded strongly in recent years, with such spaces having become an important element in the Chinese start-up landscape. They fall into the categories of creative spaces (standing at around 4,300 across China), incubators (around 3,300), and accelerators (around 400). Some provide resources and services to start-ups, others simply off er offi ce space. The largest providers include UCommune, Sinovation Venture, Kr Space, Legend Star, NashWork, and Dark Horse. Government incentives have sped up the expansion, but led to a total occupancy rate as low as 40%. Nonetheless, China’s entrepreneurial spaces have helped 22,000 start-ups to attract funding. Some have close collaboration with industry partners and off er access to their start-ups through open demo days.

Geographically speaking, Beijing, Shanghai, and Shenzhen (in order of maturity) are the only truly global start-up ecosystems in China. The larger areas around these cities – the Bohai Rim, the Yangtze River Delta, and the Pearl River Delta – are dense mega city regions that off er diverse resources. Each has its distinct profi le: Beijing has evolved into a stronghold of information technology, cultivating most of China’s unicorn start-ups; Shanghai, with its surrounding Yangtze River Delta, has been at the heart of the e-commerce boom and consumer-driven innovation; Shen- zhen, as well as the wider Pearl River Delta region, has been the focal point for the maturation of the Chinese manufacturing sector. The strength of each region is clearly refl ected in the types it nurtures: internet companies in Beijing; e-commerce and fi ntech in Shanghai; intelligent hardware in Shenzhen.

9 Figure 7. Early-stage investment intensity and profi le by province. Analysis: Kairos Future

10 While start-ups in internet services, intelligent hardware, and B2B services attract most investments, smaller areas are experiencing rapid growth: automotive, logistics, AI, rental econo- my, and ‘new retail’ have been particularly hot in recent years. Fintech and insurance, logistics and transportation, and automotive are the areas that have attracted the highest investment amount per deal.

Figure 8. Number and average size of investment deals by industry. Analysis: Kairos Future

11 Among China’s 270-and-counting unicorn start-ups, the coff ee brand Luckin Coff ee become the fastest to achieve this status in June 2018, when it secured funding valuing it at USD 1$ billion only 6 months after its founding. The previous record holder, AI chip maker Cambricon, reached its unicorn status in 17 months. Apart from AI, smart and electric cars is another fertile ground for start-ups, with unicorns including NIO, WM Motor, CHJ Automotive, and XPeng Motors, all eager to take on Tesla and other global incumbents.

Agriculture Greentech & energy Automotive Health products & services B2B services Household products & services Intelligent hardware & devices Biotech & pharmaceuticals Internet services Chemistry & new materials IT & telecom Cloud, AI & big data Logistics & transportation Construction & real estate Maschinery & instruments E - commerce Media & Marketing Photonics & optoelektronics Education & training Ressource extraction & processing Fintech & insurance Retail Furniture & interior decoration Social networks Gaming & entertainment Software & apps

Figure 9. Chinese unicorns by founding date. Analysis: Kairos Future

Chinese start-ups tend to tap into one or more of a repertoire of models that have gradually emerged and proven successful in the Chinese business context: cost innovation; speed in execution, scale-up and cloning; opportunity facilitation rather than service provision; ecosystem-driven innovation; customer-centricity even at the cost of core competence focus; mechanisms for minimising the need for trust; riding global tech waves; analytics-driven models; external capacity exploitation; and ‘blue pond’ strategies.

12 ABOUT THIS OVERVIEW

This is an overview of a comprehensive study of the Chinese start-up landscape. The full study is an in-depth analysis of certain fi elds and areas within this landscape and off ers details on possible approaches for engagement for Covestro. The full study will not be disclosed. The overall study was conducted jointly by Covestro and Kairos Future’s China offi ce, located in Shanghai.

ABOUT COVESTRO With 2017 sales of EUR 14.1 billion, Covestro is among the world’s largest polymer companies. Business activities are focused on the manufacture of high-tech polymer materials and the development of innovative solutions for products used in many areas of daily life. The main segments served are the automotive, construction, wood processing and furniture, and electrical and elec- tronics industries. Other sectors include sports and leisure, cosmetics, health and the chemical industry itself. Covestro has 30 production sites worldwide and employs approximately 16,200 people (calculated as full-time equivalents) at the end of 2017. For more information about the project, contact:

Robby Xu Open Innovation APAC E: [email protected]

ABOUT KAIROS FUTURE Kairos Future is an international consulting and research company that helps companies and business leaders to understand and shape their futures. We provide market and industry research, trend analysis, scenario planning, innovation search, data mining and analytics, capability development, and strategy advice. The company was founded in 1993 and is headquartered in Stock- holm. For more information, please visit our website, www.kairosfuture.com, or contact:

Tomas Larsson General Manager Kairos Future China T: +86 (0)21 5116 2903 M: +86 185 0170 3546 E: [email protected]