August 31, 2017 Deep Dive: Shanghai A Globally Connected City with a Vibrant Startup Scene This is the second report in our series on startups in China. In this series, we focus on the startup ecosystems in Shenzhen, Beijing and Shanghai to provide insights into how these three cities are incubating businesses with global potential. In this second report, we discuss Shanghai, a global financial center with a budding startup ecosystem. 1) The Shanghai startup ecosystem has grown rapidly in recent years, nurtured by ample government support and considerable investment from China s corporate giants. 2) In terms of technology, China is a nation of early adopters, and Shanghai can act as a gateway for foreign startups to tap into these early adopters, allowing them to test and refine their value proposition for expansion into China. 3) Shanghai is a still considered a tough, competitive landscape for early-stage startups, especially given the capital winter of 2015 2016, which was marked by a more cautious approach by venture capital (VC) investors and lower valuations for startups. Deborah Weinswig Managing Director, FGRT deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 1
Table of Contents Executive Summary... 3 Introduction... 4 Shanghai by the Numbers... 4 The Backdrop The National Drive for Mass Entrepreneurship... 6 A Vast Pool of Talent... 7 Incubators, Accelerators and Co-Working Spaces... 8 It Takes a Village... 8 IC Café... 11 Success Stories and Notable Startups... 11 On the Shoulders of Giants Benefiting from Previous Generations of Entrepreneurs... 11 The Unicorns... 12 A City of Experiments Shanghai s E-Commerce Ecosystem... 15 Shanghai A Gateway to a Nation of Early Adopters... 17 Notable Retail-Related Startups... 18 The Availability of Financing... 18 What Money Can or Cannot Buy Shanghai Is About to Find Out... 18 The State of Venture Capital... 19 Conclusion... 20 2
Executive Summary This is the second report in our series on startups in China, a continuation of our coverage of other global ecosystems and startup hubs: India, Berlin, London, Paris and Amsterdam. In our first report, Shenzhen An International Hub of Hardware Innovation, we discussed how Shenzhen has evolved to become the world s hardware mecca. In this report, we look at Shanghai s value proposition to tech startups and tech entrepreneurs. Against the backdrop of China s economic slowdown and a national government initiative to encourage entrepreneurship, Shanghai offers a well-developed startup ecosystem poised for further growth. Within China there has been much discussion about why Shanghai did not produce any of the current Internet giants known collectively as BAT Baidu, Alibaba and Tencent which hail from Beijing, Hangzhou and Shenzhen, respectively. The dominance of large corporations in Shanghai has been considered a hindrance to the development of agile startups with top talent possibly being diverted to the corporate sector The pursuit of a stable corporate career could be promoting a risk-averse mindset among young potential entrepreneurs. It is worth noting, however, that the cosmopolitan city already has a proven track record in producing successful startups in the e- commerce, finance and gaming and entertainment spaces. Shanghai also boasts some of China s top universities in science and engineering, attracting the brightest of the brightest to academic institutions such as Fudan University, Shanghai Jiao Tong University, and East China University of Science and Technology. Therefore, the city already has a generation of successful tech entrepreneurs who have changed hats and taken on the invaluable role of investor and mentor for the next generation of startups. Shanghai s formidable corporate sector, with its deep pockets, and now emboldened by an influx of government funds, is putting its resources behind accelerating the growth of the city s startup ecosystem. Source: istockphoto 3
Introduction Shanghai has a dynamic economy that is almost synonymous with China business. Its hinterland, the Yangtze River Delta, accounts for over onethird of the country s GDP. Anyone who has set foot in Shanghai would have experienced first-hand its competitive attitude and pioneering spirit. After all, the metropolis has long been the testing ground for many of the government s economic and financial pilot programs. Since 2014 when the central government s latest national campaign for mass entrepreneurship and innovation kicked off, Shanghai seems to be running a race against the rest of China to build the best startup ecosystem. However, a startup ecosystem does not operate on a build it and they will come principle. Providing ample funding and policy support does not necessarily guarantee a startup ecosystem s long-term success. In this report, we look at Shanghai s value proposition to tech startups and tech entrepreneurs. Shanghai by the Numbers Shanghai represents both pros and cons for international startups wanting to set up base in there. Despite pollution and rising property prices, the city provides a favorable environment from which to be based, with its advanced business infrastructure and vast talent pool. Shanghai has the economies of scale, the business infrastructure and a critical mass of people and money to provide fertile ground for a vibrant startup ecosystem. Pros An advanced economy as an international financial, trading and logistics hub: Shanghai is home to the world s leading container port and one of the world s busiest international airports. The city is slated to become an international financial center by 2020, according to China s State Council. Although what Source: istockphoto exactly that entails, or what degree of financial and trade liberalization that would bring, no one knows for sure. However, one thing is certain Shanghai has the economies of scale, the business infrastructure and a critical mass of people and money to provide fertile ground for a vibrant startup ecosystem. Top marks for English proficiency: Shanghai was ranked no.1 in Englishlanguage proficiency in China, beating Hong Kong by a slim margin, according to the EF English Proficiency Index 2017. A Hub for science and technology education: Shanghai s education system is extremely competitive at all levels, attracting some of the best talent in the country. Top academic institutions include Fudan University, Shanghai Jiao Tong University, and the East China University of Science and Technology. See The availability of talent section below. 4
Cons Pollution levels: In terms of the levels of PM2.5 the fine particulate matter that is especially hazardous to health pollution in China s major cities is on a downward trend. In Shanghai, PM2.5 levels fell from 61 micrograms per cubic meter to 50 between 2013 and 2015, compared to Beijing where they fell from 99 to 81 and Guangzhou where they fell from 54 to 39. In 2016, Shanghai s PM2.5 level slightly rose to 53 micrograms per cubic meter. These levels are far above the World Health Organisation s upper safety limit of 35 micrograms of PM2.5 per cubic meter. Thus, Shanghai still has some way to go before it is clear of pollution, according to the Air Quality Assessment Report (2), published by Guanghua School of Management, Peking University in 2016. Source: istockphoto In the past 10 years, average residential property prices in Shanghai have risen fivefold. High housing cost: The largest cities of China have become very expensive to live in. In the past 10 years, average residential property prices in Shanghai have risen fivefold (after offsetting average income increases in each city), compared with Shenzhen where they tripled and Beijing where they doubled, according to a 21st Century Business Herald report. How these domestic comparisons will play out in the future is anyone s guess, especially with emerging metropolises such as Hangzhou home of Alibaba and a major startup magnet just 200km from Shanghai. If we look at trends in housing prices in 2016 and 2017, we can imagine the Shanghai entrepreneur feeling slightly less pressure from housing costs than a counterpart in Shenzhen or Beijing. Shanghai s residential property prices have stayed lower per square meter than those of Beijing and Shenzhen as of the end of 2016. The average Shanghai resident spends a lower percentage of income on housing, at 48% of income, compared to the Shenzhen resident s 54% or the Beijing resident s 60%. However, China housing prices are experiencing a gradual slowdown in 2017. Since October 2016 the Chinese government started imposing measures in more than 45 cities to curb the surging housing prices. These measures have just begun to take effect by mid-2017, especially for Beijing whose municipal government launched additional pricecurbing measures in March this year. By June 2017, Shanghai housing prices saw a month-to-month decline, Shenzhen prices stalled, and Beijing s dropped month-to-month for the first time since 2015. However, compared to a year ago, housing prices in these three firsttier cities are still higher higher by 8.6% for Shanghai, 2.7% for Shenzhen, and 10.7% for Beijing. 5
Figure 1. Economic Data Comparison Demographics Quality of Life Economy Shenzhen Shanghai Beijing Hong Kong Population 11,378,900 24,150,000 21,710,000 7,298,600 Average Age 33 37 36 44 Ages 15 44 (%) 73% 50% 53% 45% Number of New Registered Migrants 160,000 60,000 70,000 N/A Average Housing Prices (RMB/sqm) 4,848 3,097 3,212 15,547 Housing Price as a % of Income (%) 54% 48% 58% 60% Office Rental Prices (RMB/sqm/month) 258 268 383 1,785 Pollution (PM2.5) (ug/m3) 30 51 81 26 GDP (RMB, Billion) 1,750 2,512 2,301 2,398 Per Capita GDP (RMB) 158,000 103,796 106,497 328,941 Average Income (RMB) 11,671 15,739 16,285 38,518 Primary Industry (%) 0.0% 0.4% 0.5% 0.1% Secondary Industry (%) 39.5% 29.1% 19.2% 7.2% Tertiary Industry (%) 60.5% 70.5% 80.3% 92.8% Source: Local City Statistical Bureaus/KPMG/Ernst & Young/NBS/CEIC/NDRC/IMF/Demographia/E-House The Backdrop The National Drive for Mass Entrepreneurship The Shanghai startup scene can seem like a gold rush to the casual observer, especially with government incentives available at an unprecedented scale. Local policies in Shanghai, such as a risk compensation scheme introduced in January 2016, which bails out angel investors investment losses, can only be understood against the backdrop of China s national policies. The national mass entrepreneurship and innovation campaign is often attributed as the brainchild of Premier Li Keqiang, who first mentioned it in his Summer Davos speech in mid-2014 and then again in the 2015 government work report. More importantly, the policy drive signifies China s acknowledgement of an economic slowdown. It is widely accepted that ensuring employment for university graduates will be difficult unless China embraces tech startups and entrepreneurship. China is hoping that technologies and internetdriven startups can become the new economic engine. This national mass entrepreneurship initiative is in essence a stimulus package. China is hoping that technologies and internet-driven startups can become the new economic engine. The goal is that a successful startup ecosystem at the city or provincial level should mature into a vibrant technology sector for China, replacing the old-style pursuit of GDP growth through manufacturing and industrial exports. This is not the first time for China to use policy measures to stimulate the growth of entrepreneurship. Most notably during 1998 2003, China was in economic transition with state-owned enterprises (SOE) reforms in 1998 and ascension to the World Trade Organisation in 2001. At the same time, there was the Asian financial crisis beginning in 1997 and the end of the global dotcom era in 2000. Chinese government policies at the time also strongly encouraged technology, R&D and entrepreneurship. Science parks at China s leading universities were established during this time. This also happens to coincide with the period of time when Baidu, Alibaba and Tencent (BAT) were founded. 6
A Vast Pool of Talent Shanghai is home to some of the top-ranking universities in China including Fudan University, Shanghai Jiaotong University, Tongji University, East China University of Science and Technology and East China Normal University and their highly selective science and engineering programs attract top students from all over the country. Source: istockphoto During a previous wave of entrepreneurship and innovation, all five universities established science parks in a government-funded initiative during 2000-2003. During a previous wave of entrepreneurship and innovation, all five universities established science parks in a government-funded initiative during 2000-2003. These science parks offer tax and rental subsidies, and help startups and tech companies recruit talent from Shanghai s best universities and high schools. Since 2015 in the latest mass innovation policy campaign, a curriculum teaching entrepreneurship was made compulsory at the tertiary education level. As a result, academic institutes and support centers for entrepreneurship were set up or rejuvenated at universities throughout China. Some of Shanghai s universities were among the first to implement the initiative. Nowadays, it is relatively common for full-time students at China s universities to Source: istockphoto concurrently run their own startup projects. Many universities allow students to apply for sabbaticals in order to further develop their startups, or to obtain academic credit for achievements in their startups. 7
Below, we highlight several science parks and startup support programs. Fudan University The Fudan University Science Park was established in 2000 and currently houses 800 registered companies and 13 public service agencies specializing in innovation and incubation. It has been responsible for over 1,000 technology transfer projects and 300 patents. In recent years, the science park has successfully incubated and scaled several tech startups in cloud and data technologies, education technology and mobile software. The university s Student Entrepreneurship Centre provides student entrepreneurs with office space, equipment and mentorship. As of the end of 2016, it had supported 152 companies and provided over 18.62 million in funding. Shanghai Jiao Tong University In 2016, Shanghai Jiao Tong University opened a center to support entrepreneurship in collaboration with the Shanghai Human Resources and Social Security Bureau and the Bank of Shanghai. The goal of the center is to provide theoretical and intellectual support for further innovation development in Shanghai. East China University of Science and Technology The science park at East China University of Science and Technology supported global internet gaming and entertainment company, Giant Interactive Group which reported 1 billion in profit in 2016 during its earlier years. The science park has a track record of helping R&Doriented companies in the biotech, new materials and electronics spaces scale and commercialize, and, in recent years, has developed training, office space and an online community for early-stage startups. Incubators, Accelerators and Co-Working Spaces It Takes a Village The number of incubators, accelerators and co-working spaces in Shanghai has grown rapidly. In 2014, there were fewer than 40 incubators, accelerators and co-working spaces. This number rose to 60 by mid-2015. Today, there are over 500 entities that are incubators, accelerators or co-working spaces in Shanghai. The lines that define incubators, accelerators and co-working spaces have blurred in China. These entities are collectively referred to as mass incubation space ( 众创空间 ) in daily parlance and in government policy, as further explained below. The explosive growth in incubator-style entities has several implications. Incubators from overseas, particularly those with a globally known brand and proven track record, play an important role in Shanghai: A large number of incubators and accelerators are mainly operated by local enterprises or corporates, many of which do not have much experience in advising, mentoring or growing startups. In contrast, incubators and accelerators associated with a global brand name can give credibility to the Shanghai startup ecosystem as a whole. They can also help attract overseas talent and provide support to the startups when it comes time to expand outside of China. 8
The lines between the roles of incubators, accelerators and coworking spaces are very fluid in China, as each entity maintains the flexibility to respond to the latest government incentives or startup needs: Entities that call themselves incubators in China often offer short-term boot camps, similar to what accelerator programs, rather than tying down the startups for a one- or twoyear program. Most co-working spaces in large cities find themselves having to advise startups on legal or intellectual property issues, or to connect startups with investors. These incubator-style entities are known as zhongchuang kongjian ( 众创空间 ) in Chinese more accurately translated as mass innovation space. It is a cross between an event space, a community and a trendy café, complete with the services offered by an incubator. This is the type of space that has been receiving the greatest policy attention of late. Source: istockphoto A competitive landscape is emerging: It is a survival of the fittest environment, not just for startups, but also for the incubator-style spaces. Some mass incubation spaces compete by focusing on their specialization in the Internet of Things (IoT) or content marketing, for example. Those co-working spaces operating purely on an office-leasing model and offering limited startup support services are generally not expected to survive in the next few years. Shanghai is not alone in terms of rising concerns of an overcapacity in mass innovation spaces. Suzhou, a leading high-tech manufacturing hub, which is near to Shanghai, targets to build 300 incubator-style entities by 2020. Tianjin, a city near Beijing, aims to increase the number of mass innovation spaces in the city from 100 in 2016 to 150 by the end of 2017. Chongqing, China s most populated city with over 30 million people, aims to build 1,000 such spaces by 2020. 9
Below, we highlight a few accelerators that have significant overseas partnerships. Chinaccelerator A Shanghai-Based Startup Accelerator Chinaccelerator, a branch of SOSV an early-stage startup investment firm with $300 million under management was the first accelerator in Shanghai to focus on cross-border innovation, helping international startups enter China and Chinese companies expand internationally. Chinaccelerator picks a small number of promising startups twice a year. The accelerator program includes an investment of $30,000 for approximately 6% of equity, and provides office space, training and mentorship support. In addition, startups can collaborate with a network of corporate partners through Chinaccelerator s corporate innovation program. Microsoft Accelerator A Professional Network Provided by Microsoft Microsoft Accelerator provides startups with access to top Microsoft partners and customers, business connections and technical knowledge. The program has offices located in seven cities, including Seattle, London, Berlin, Tel Aviv, Bangalore, Beijing and Shanghai. Some 647 companies worldwide have joined the accelerator program and have generated an average of $5.2 million in follow-on funding. Microsoft supports the tech startup community by offering technology enablement through programs such as BizSpark, which gives free access to Microsoft Azure cloud services, as well as funding through its Microsoft Ventures fund. Plug and Play A World-Leading Startup Accelerator Plug and Play is a global innovation platform and startup accelerator with 22 offices around the world, including in Silicon Valley, Shanghai, Beijing and Shenzhen. Plug and Play runs 12 industry-specific accelerator programs twice a year, which act as a platform for major corporations and high-quality startups to connect and collaborate. Plug and Play has helped market leaders such as PayPal, Danger, Google, DropBox, LendingClub, Zoosk, SoundHound, CreditSesame and Skytree, and has over 400 more early-stage startups in its portfolio. Shanghai Valley An Online and Offline Investment Platform Shanghai Valley is a China-focused accelerator that provides an online and offline investment platform for institutional investors. Startups, as part of the platform, receive investment money from pre-screened institutional investors. Institutional investors, after investing, become local partners to provide resources and connections to help the startups grow. The online and offline platform also gives startups a secure way to communicate to build visibility and credibility with investors. X-Node An Accelerator Operating Multiple Co-Working Spaces in Shanghai X-Node operates multiple co-working spaces located in core commercial areas around Shanghai Jingan, Zhangjiang, Hongqiao and Donghu. The company holds three to four events weekly, including lectures, networking sessions and focus workshops for small teams. X- Node also partners with 10 incubators and innovation programs from around the world, among which are Rocketspace and NUMA. 10
The New Breed Mass Innovation Spaces Below, we take a closer look at a local community café for integrated circuit startups that benefitted from government funding. In early 2015, 36 of these Shanghai mass innovation spaces formed an alliance, so that they could coordinate better among themselves and with government. Among the founding members of this alliance is SuHeHui, an angel investor institution. Apart from running a co-working space and helping angels find startups, SuHeHui offers a 4-month program in which selected startups have to join training and networking once a week. But the startups are not required to have their team work from SuHeHui s offices. Like an accelerator program, a demo night is held at the end of 4 months. Another mass innovation space, Tech50, is located in suburban Jiading District. It combines co-working with co-living, pitch competitions, and entrepreneurs training. Featured below, IC Café was also one of the pioneers of these incubator-style entities in Shanghai. IC Café IC Café was set up in 2012 as a café for enthusiasts in the semiconductor industry (hence the name IC, which stands for integrated circuit). Eight cofounders contributed a total of 160,000 for the initial setup capital. It took about two years to break even. By early 2015, the immensely popular coffee club had expanded to Beijing and Shenzhen, hosting community events to a full house every other night. Despite its popularity, the café was struggling financially. Early 2015 was also a time when several privately-owned startup incubators and tech community spaces in Shenzhen and Beijing were shutting down or laying off staff. Thanks to government support, IC Café was saved from the same fate. The Science and Technology Committee of the Pudong District government rented a 300-square meter office as an incubation space that can accommodate 12 15 startups at a time, and made IC Café the operator. IC Café has since expanded to Hefei and Wuhan in China, and also overseas to Singapore and Silicon Valley. Success Stories and Notable Startups On the Shoulders of Giants Benefiting from Previous Generations of Entrepreneurs In a successful startup ecosystem, it is helpful to have previous generations of successful entrepreneurs to serve as investors, mentors and role models. Some successful startups from 10 20 years ago now dominate their respective industries, and have cultivated a valuable pool of talent. Shanghai had experienced several waves of tech entrepreneurship, and can boast startup successes in the areas of e- commerce, gaming and entertainment, and finance. Below, we highlight a few examples of how the current generation of startups benefits from the experience of the previous generation of entrepreneurs. 11
IDG Capital Partners: IDG Capital Partners, a major venture capital (VC) fund in China, was founded by Haiyin Tan a graduate of Shanghai Jiao Tong University and a holder of a Harvard MBA. Tan was Cofounder and CEO of EachNet, an e-commerce company and online trading community, which brought the ebay business model to China in 1999, and was subsequently was sold to ebay in 2003. Ymatou: Ymatou is a cross-border e-commerce platform founded by Bibo Zeng who was a member of the management team of EachNet. Zeng convinced Feipeng Zhang, a former Technology Director at Shanda Networking, to join him at Ymatou. Shanda Group: The company began as a gaming startup in 1999, and listed on the NASDAQ in 2004 for several years. Its Cofounder Tianqiao Chen is one of the richest men in China. Shanda subsequently spun off its gaming operations and became an investment and holding company. Shanda Networking: Shanda Networking, the original games and entertainment content developer, which has since been spun off, has a campus in Shanghai that houses its own innovation team of 300 people working in the areas of speech, multimedia, cloud computing and search. Shanda s innovators are responsible for several notable startups such as Wifi Master Key, an app that allows smartphones to automatically find and log onto nearby free Wi-Fi networks. The app claims to have over 900 million active users globally. UCloud: This company offers a cloud-computing solution that is China s answer to Amazon Web Services. It was cofounded by former Shanda Chief Security Officer Xinhua Ji together with two former Tencent executives. Ele.me: Ele.me, a key player in China s online-to-offline (O2O) food delivery market, poached the chief technology officer of Ctrip s international business unit to become Ele.me s CTO. Ctrip, now an online giant in travel products, started out in Shanghai in 1999. The Unicorns Shanghai is sometimes seen as lagging behind neighboring Hangzhou, home to Alibaba s headquarters. The topic of Why Shanghai has not produced a Jack Ma has been widely debated in online forums and government meetings since as early as 2008. The reality is that Shanghai has a very different startup ecosystem to Hangzhou s. Shanghai s prowess as an international finance, trading and logistics hub has made this inevitable. In fact, a ranking of unicorns startup companies valued at over $1 billion that have emerged from Shanghai gives us a glimpse into how corporate giants have helped fast-track the growth of the more mature startups (see Figure 3, Chinese Unicorn Ranking). Lufax No.1: Internet finance company Lufax the unicorn with the highest valuation started as a peer-to-peer lending platform in 2011 with registered capital of 837 million. Lufax was set up by China Ping An Group, one of the country s leading insurance and finance companies. It is actually more of a corporate entrepreneurship project than a startup. 12
ZhongAn Insurance No.2: ZhongAn Insurance was launched in 2013 by Ping An, Tencent and Alibaba as China s first online-only insurance company. Henlius Pharmaceuticals No.6: Henlius Pharmaceuticals is a joint venture 70% controlled by Fosun Pharmaceuticals, part of the conglomerate Fosun Group. Headquartered in Shanghai, Fosun Group is involved in real estate, asset management, private equity, entertainment and hospitals around the world. In any other advanced economy, these so-called unicorns would likely fall under the classification of corporate activity and not part of the startup ecosystem. The fact that they are on a unicorn list illustrates a key point China s startup ecosystems are developing on an entirely different trajectory from the early Silicon Valley legends that had humble beginnings in a garage or a basement. The deep pockets and frontline, battlefield knowledge of China s corporate and Internet giants are enabling new entrepreneurial projects to scale at a speed and a magnitude near to impossible in other major markets. Figure 3. 2016 Chinese Unicorn Ranking Ranking in Shanghai Ranking in China Company Valuation ($ Bil.) 1 5 Lufax 18.5 2 12 ZhongAn Insurance 7.6 Industry Founded Description Internet Finance Internet Finance 2011 2013 3 16 WM Motor 5.0 Transportation 2011 4 17 Ele.me 4.1 E-Commerce 2008 An online Internet finance marketplace in China. It is an associate of China Ping An Group. An online-only property insurance company. An automobile manufacturer. A platform that offers an online food-delivery service. 5 23 E-shang 3.2 Logistics 2011 6 24 Henlius 3.2 Health Care 2010 7 26 Suning Jinrong 3.0 Internet Finance 2006 8 26 JK.cn 3.0 Health Care 2014 A logistics warehousing infrastructure and facilities developer and total solutions provider for e-commerce, retail and cold chain operators. The company develops, produces and commercializes monoclonal antibody drugs. The financial arm of Suning Commerce Group focused on developing consumer-based Internet financial services. An online healthmanagement app that provides online treatment options from doctors. 13
Ranking in Shanghai Ranking in China Company Valuation ($ Bil.) Industry Founded Description 9 26 Singulato 3.0 Transportation 2014 An automobile manufacturer that focuses on the development of autonomous vehicles. 10 40 YueWen 2.0 Source: China Torch/Great Wall Enterprises Strategy Research Center Culture and Entertainment 2015 11 50 Tecenet 1.9 Health Care 2014 12 53 NEXTEV 1.7 Transportation 2014 13 56 PP Dai 1.5 14 56 JieMian 1.5 Internet Finance News and Media 2007 2014 15 65 Ane56 1.3 Logistics 2010 16 70 iwjw 1.3 Real Estate 2014 17 71 Yiguo 1.2 E-Commerce 2007 18 71 New Dada 1.2 Logistics 2016 19 80 Hujiang 1.1 Internet Education 2015 20 83 Fanli 1.0 E-Commerce 2006 21 83 Boqii 1.0 E-Commerce 2007 22 83 Ymatou 1.0 E-Commerce 2010 23 83 52mf 1.0 Real Estate 2010 24 83 Chubao 1.0 Software 2012 25 83 cn.wifi.com 1.0 Software 2012 26 83 Xiao Hong Shu 1.0 E-Commerce 2013 An online publishing and e-book company. A marketplace for medical equipment. An automobile manufacturer that focuses on electric vehicles. An online peer-to-peer (P2P) lending platform. A news website focused on business and finance. A logistics company integrating traditional logistics with data analysis. An online real estate agency. An online marketplace for fruits and vegetables. An app connecting delivery workers with short-haul delivery jobs. An online education company. An online shopping site that facilitates thirdparty purchases of various customers. An online marketplace for pet-related products. An online marketplace that focuses on crossborder e-commerce. An online real estate agency. A mobile communication app. A free Internet access services company. An online shopping website for overseas luxury goods. 14
A City of Experiments Shanghai s E-Commerce Ecosystem Although Shanghai does not have an e-commerce giant comparable to Hangzhou s Alibaba, the city has enabled an e-commerce ecosystem of its own. One such example is Yihaodian the e-commerce platform famously acquired by Walmart in 2015, started in Shanghai. We highlight a selection of startups in the e-commerce space that have utilized Shanghai s affluent, convenience-addicted consumers, its access to financing and mature logistics infrastructure to test and refine new business models. The following figure shows these startups spread along the business-to-business (B2B) and business-to-consumer (B2C) spectrum, and cover the mass market and luxury sectors. Figure 4: Mapping Shanghai s E-Commerce Startups Source: FGRT Social Network-Driven Buying Mogujie (translates to mushroom street): Mogujie, a buyer-based social network targeting female consumers in China, was founded in 2010. In early 2016, the company announced it was merging with Beijing-based rival Meilishuo. The resulting company, Meili Group, combines Mogujie s strength in female consumers under the age of 23 with Meilishuo s strength in consumers aged 23 30. Although Meili Group has since been eclipsed by both Alibaba and JD.com, the Shanghai homegrown startup proved itself as a self-sustaining business model as early as 2010 2011, when Mogujie was generating monthly revenues of 1 million with a team of just 50 people. Mogujie was a pioneer in China with its business model that drives purchases through social networks and photo-sharing, much like Pinterest has attempted to do in the US. Luxury E-Commerce Mei.com: A flash sales site for luxury and fashion items, Mei.com received an investment of $100 million from Alibaba in 2015. It has since revamped Alibaba s flash sales channel for luxury goods and incorporated virtual reality (VR) into online fashion shows. Mei.com is an unusual case as a startup cofounded by a foreigner in China, Frenchman Thibault Villet that was able to scale to its current size and 15
success. Shanghai s openness and connection to foreign luxury brands has certainly played a role here. Cross Border E-Commerce Xiaohongshu (translates to little red book): A Series C funded startup that was founded in 2013, Xiaohongshu is an app that gives overseas shopping tips. The app started out by helping Chinese travelers draft a shopping list ahead of their overseas trip, and has since evolved into a community of passionate shoppers and an aggregator of usergenerated content. Investors behind Xiaohongshu include Tencent Holdings and GGV Capital. Ymatou (yangmatou, translates to foreign pier): Ymatou is a Series B funded e-commerce platform, offering cross-border e-commerce and sales campaigns showcasing foreign brands to Chinese consumers. It claims to have 1 million active users and 10,000 daily orders. Affiliate Marketing Fanli (translates to return benefits): Using cash rebates to direct shoppers to reputable e-commerce stores, Fanli was named by Deloitte as one of China s top high-growth technology firms. According to the company, it recorded revenues of nearly 3 billion ($459 million) in 2016. In March 2017, Fanli announced that it is seeking a Shanghai IPO. Verticals Fruit Day: An online marketplace for fresh fruit deliveries, Fruit Day was founded in 2005 and is now a Series D funded company. Beginning as a traditional fruit vendor with a 30-year history, the company transformed itself into an e-commerce venture. Logistics ANE Logistics: ANE Logistics is one of the leading less-than-a-truckload trucking logistics company in China, pioneering advanced IT systems and a franchise business model. e-shang: e-shang is a leading logistics infrastructure operator with over 4 million square meters of logistics facilities in China, and a further 3 million square meters of projects in the pipeline. The company operates logistics warehousing infrastructure and distribution centers for retail, e-commerce and cold chain industry needs, and formed a joint venture with Redwood Group from California to became Asia s largest logistics infrastructure developer. KXTX: KXTX is a supply-chain and logistics company that has integrated over 1,000 small- and medium-sized road transportation companies onto its IT platform. Alibaba s Cainiao Technology Network is the second-largest shareholder of the company. 16
Shanghai A Gateway to a Nation of Early Adopters The sheer size of the Chinese consumer market is an attraction unto itself. For tech startups wanting to test their cutting-edge hardware or software ideas, China is the ideal testing grounds. It is unique in that it is a nation of early adopters, with a keen interest in trying new things and the consumption power to back it up. This is most helpful to tiny startups needing the momentum to scale. Shanghai, as the secondmost-populated city in China and home to a dense cluster of affluent, tech-savvy, mobile-ready consumers, is a gateway to China s early adopters. This is the reason why a simple online to offline (O2O) business model could scale to the level of success achieved by Ele.me the food delivery company that was founded on the campus of Shanghai Jiao Tong University. Below, we take a closer look at the Ele.me story. We also highlight several retail-related startups which are foreignowned and incubated in Shanghai that have taken advantage of the on-the-ground access to Chinese consumers. The Rise of Ele.me Today, Alibaba-backed Ele.me serves over 2,000 cities in China and processes 9 million orders a day. From its humble beginnings with two cofounders in 2008, then expanding to a workforce of 2000 in 2015, the company today employs 15,000 people. Ele.me is on the path to further dominance. In August 2017, the company announced it was in talks to acquire competitor Baidu. Should this take place, Ele.me s market share in China s fooddelivery market would increase from 35% currently to an estimated 53%. Although there were several food-delivery apps popular among Shanghai Jiao Tong University students, Ele.me rose to dominance in its early days on campus by launching an advertising campaign appealing to student gamers who rarely left their dorm rooms because they were busy playing video games. As Ele.me began to catch on among consumers, it expanded to offer a restaurant management IT platform known as NAPOS. Essentially, this helped Ele.me transition from a B2C food delivery app to a B2B company, adding value to the food and beverage industry. Initially, Ele.me monetized its app and food delivery service to consumers by taking a commission from food sales. This led restaurants to try to go direct to the consumer to get them to order directly from the restaurant and to avoid using apps such as Ele.me. Subsequently, Ele.me launched an IT platform that helps restaurants manage online orders, customer data and restaurant management. Restaurants no longer need to use phone lines for takeaway orders, making peak hours more manageable. Moreover, restaurants were also able to track data such as the ingredients used in each dish and to better analyze their supply chain. Ele.me was able to monetize this need by charging for the use of its software. Source: itunes.apple.com 17
Again, we see that Shanghai s critical mass of people and of restaurants allowed a company such as Ele.me to quickly sign up thousands of users for the software it had developed. By 2012 2013, it claimed to have 50,000 restaurants signed up in Shanghai alone, as well as 50,000 in each of seven other cities in China. The business model Ele.me uses is not new. However, being based in Shanghai made it possible for the company to tap into the national market, and to scale and monetize in a way that might be difficult in other countries. Of course, Ele.me was neither the first, nor the last, to enter the O2O food-delivery service industry. Between 2013 and 2014, it went through a nasty cash-burning race with its competitors. In 2015, Ele.me launched a food ingredients sourcing platform for the B2B market, that was later merged into the NAPOS platform. At the end of 2015, it also launched its Fengniao 30-minute delivery service for all kinds of food and perishables, including meals, flowers, bakery products and groceries. Notable Retail-Related Startups Fashory Provides Fashion Insight by Combining Content and Online Shopping: Fashory is a mobile app that merges the content element of magazine editorials with online shopping in order to provide relevant outfit suggestions. Users learn about their own preferences from the discovery process, and the browsing data is used to make personalized recommendations to users. Shopal An E-Commerce Platform for Offline Retailers: Shopal is a mobile app solution for offline retailers. The e-commerce platform allows offline stores to connect and communicate with customers. Through the data from store owners, Shopal can provide customer segmentation, sales forecasts and big data analysis. The Squirrelz Finds Free Design Materials Nearby: The Squirrelz operates two platforms thesquirrelz.com, which is a B2C platform on which designers sell products made from reusable factory materials, and 2Stash.com, a B2B platform that connects designers and brands with factories that possess unwanted or unusable fabric providing creatives with the materials they need to create new products. TrustLuxe A Luxury Online Retailer: Trustluxe offers niche luxury brands, such as Bea Valdes, Shaun Leane and Roy Lichtenstein, to Chinese consumers. The company collaborates with brands, designers, artists, galleries and craftsmen from all over the world to sell their creations online and offline to China. The Availability of Financing What Money Can or Cannot Buy Shanghai Is About to Find Out Risk-Compensation Policy In February 2016, Shanghai introduced a risk-compensation policy for angel investors called Provisional Measures on Managing Shanghai Angel Investor Risk Compensation. The policy aims to compensate investors for as much as 60% of any actual losses resulting from the failure of seed investments in tech startups in Shanghai. The new policy covers up to 3 million for each unsuccessful investment case, with a 18
limit of 6 million per investment firm per year. For early-stage investment losses, the compensation is limited to 30% of total losses, which is effective for the first two years. Government Subsidy Programs The Shanghai government offers various subsidy programs in different districts. For example, the following programs are available in Pudong: Company registration subsidy: 2,000 30,000 Entrepreneurship loan: 200,000 3,000,000 Rental assistance program: The maximum allowance is 4,500 per person per year Social insurance subsidy: The maximum allowance is 100,000 per year Service business one-off subsidy: 3,000 5,000 Innovative solution one-off subsidy: 5,000 10,000 Training subsidy: A maximum of 3,000 per person Source: istockphoto The State of Venture Capital The Chinese Government Is the Largest VC Investor in the World The period 2015 2016 is sometimes referred to as the capital winter for Silicon Valley and for global startup investments. Asia also saw a similar trend marked by more cautious investments and lower valuations. However, the Chinese government made sure the capital winter did not last long in China. In 2015, China raised 1.5 trillion ($231 billion) in state-backed venture funds, and funnelled them to 780 funds across the country, according to Zero2IPO. This amount is five times higher than the amount raised by any other VC firm in the world. In 2016, China set a record high in VC investments. The second half of the year saw increasing investment in artificial intelligence (AI), according to KPMG s Venture Pulse report. Investment by VCs in China increased 19% year over year to $31 billion in 2016. In the previous year, deal volumes had declined by 42% to 300 19
from 513, according to KPMG. Several mega-deals recorded early in 2016 account for the stellar performance. Even with easier access to capital, market forces were still at play. Between 2014 and 2016, 800 Chinese O2O startups that were at the series A financing stage were shut down, according to a Guangzhou Daily report. Notable VC Firms In the third quarter of 2016, Shanghai was ranked no.2 among Chinese cities in terms of the total number of angel investments, according to data from PEdaily.cn, a media company that focuses on investment news. In the same quarter, the total amount of angel investments in Shanghai reached 369 million, accounting for 11% of all angel investments in China. In fact, Shanghai was one of the leading cities in raising funds for startups. Below, we highlight two leading VC firms. Kleiner Perkins Caufield & Byers: Kleiner Perkins Caufield & Byers is one of the top American VC firms specializing in incubation and investment in early-stage and growth companies. With 45 years of experience in investment, the firm has already backed over 850 companies, among which include industry leaders such as Amazon, Electronic Arts, JD.com, Google and Twitter. KPCB mainly focuses its investments in practical areas, including technology and life sciences. The company has offices in Menlo Park, San Francisco and Shanghai. Northern Light Venture Capital: Northern Light Venture Capital is a China-focused VC firm targeting early-stage opportunities of innovation and disruptive technology. The firm manages $1.7 billion and has backed over 180 companies. Northern Light focuses on three main sectors: technology, media and telecom (e.g., intelligent solutions, enterprise solutions), advanced technology (AI, robotics, cleantech, new materials) and healthcare (e.g., e-health, in-vitro therapeutics). Some of the successful exits include Spreadtrum, one of the leading chipset makers in China, and meituan.com, a Chinese group-buying website. Conclusion We are positive about the outlook of Shanghai as a major startup ecosystem. It has proven to be an effective gateway for domestic startups to tap into affluent young consumers, and we expect international startups to have the same advantage should they choose to locate in Shanghai. The cosmopolitan city has a cluster of accelerators and incubators, a track record of successful domestic startups, and the business infrastructure and education system to support the growth of a successful startup ecosystem. The greatest source of uncertainty is the effect of government policy. The current scale of financial support is unprecedented, and its effects on Shanghai s entrepreneurial landscape remain to be seen. 20
Deborah Weinswig, CPA Managing Director FGRT New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 deborahweinswig@fung1937.com Freda Wan Pivotal China Consulting Kiril Popov Senior Analyst Simic Chan Senior Research Associate Hong Kong: 2nd Floor, Hong Kong Spinners Industrial Building Phase 1&2 800 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 4406 London: 242-246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 New York: 1359 Broadway, 18th Floor New York, NY 10018 Tel: 646 839 7017 FungGlobalRetailTech.com 21