Perspectives

Battling for customers

Credits

Analysts
Mr Aaron Lim, Analyst

Research
Mr James Tan, Beijing

Overview

Estimated to total US$86 billion in 2016 and growing at an annual rate of 6.7%1, the global video gaming market is not only large but growing rapidly. These figures hint at the attractiveness of investing in the space, and investors who succeed in identifying the next big thing will reap tremendous profits. However, the video gaming ecosystem is extremely complex and not all areas are favorable. In order to identify segments with the most potential for venture investment, this report delineates the video gaming value chain, and analyzes its segments across three criteria: 1) competition, 2) market, and 3) exit opportunities. Segments with fewer competitors are preferred to segments with more competitors; large and growing markets are preferred to small and stagnant ones; segments with more exits are preferred to segments with fewer exits. Through the analysis, two segments: 1) cloud gaming, and 2) game monetization have been selected.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

This market analysis report on gaming by Quest Ventures is a timely look at the ecosystem of video gaming. It looks at emerging technologies and where consumer preferences are likely to head, the key players in specific segments and the market opportunities that they are tapping into.

Estimated to total US$86 billion in 2016 and still projected to grow at a quick clip, the global video gaming market is attractive to investors. This is a complex market and navigating it and determining where to play our bets remain both a science and an art. On the one hand, statistics point towards strong emergence of handhelds and mobile gaming. On the other hand, we believe that communal gaming – esports – will bring on a different level of experience and demand on producers.

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Cloud gaming

The market for cloud gaming services is growing quickly and estimated to increase fivefold in users to reach US$460 million revenue by 2015. With no market leader and fewer than ten competitors in the market, there is potential for new ventures to establish themselves. In addition, the recent acquisition of Gaikai by Sony, and establishment of Shinra Technologies by Square Enix signals industry confidence in cloud technology. However, past examples have highlighted the shortcomings of a B2C approach due to the high cost of Internet bandwidth. With Internet prices unlikely to fall soon and uncertain consumer demand, venture capital firms should instead concentrate on cloud gaming startups with B2B plays.

Game monetization

Although gaming specific numbers are unavailable, global revenues from mobile in-app advertising and payments approximated US$15 billion in 2013. With games accounting for 66% of total app revenues2, the market for game monetization software appears to be extremely large. However, the space is very crowded and competitors include both gaming specialists and app monetization generalists. Nevertheless, unlike other apps where traditional methods are appropriate, games have unique requirements that generalists do not offer. Furthermore, even though there are many competitors in the space, current solutions are generally targeted at developed economies. Emerging markets with large gaming populations that have bad access to first world payment solutions are thus underserved. Hence, investing in game monetization startups focused on emerging markets has potential.

Gaming Value Chain

The video gaming value chain consists of five distinct layers:

1. gaming experiences
2. distribution channels
3. publishers
4. enabling technologies and
5. game developers.

On one end of the spectrum, high capital costs of producing gaming experiences increases barriers of entry and entrenches current incumbents. As a result, gaming experiences represent the most consolidated layer. On the other end of the spectrum, free development tools allow almost any individual to become a game developer. Hence, due to the low barriers of entry, game developers represent the most fragmented layer.

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Gaming Experiences

Consoles

Competition

There are only major three console players in the market namely: 1) Microsoft, 2) Sony and 3) Nintendo. They cater to different categories of consumers with Nintendo targeting casual gamers with the Wii priced at $99, while Microsoft and Sony both target the hardcore crowd with the Xbox One and PS4 priced similarly at around $500. These three players dominate the marketplace, and although there were attempts by other console makers such as Ouya to enter the fray, such alternative consoles failed. Some reasons cited for the failures lie with the poor selection of games, developer support and limited capabilities3.

Market

Although consoles were banned in China until Jan 2014, grey market sales numbered at least 1.2 million units yearly from 2002 to 20094 from the three major players. This is low in comparison to US sales, which constituted about 20 million in 20085. The recent lifting of the console ban might boost sales, but with Chinese consumers accustomed to playing PC games and the growth in mobile, consoles might have a hard time finding a space in the already crowded gaming market. Global unit sales of fourth-generation consoles (Xbox One and PS4) is estimated to be around 18 million units in 20146. At a price of approximately $400 per unit, consoles sales were around $7 billion in 2014.

Exit opportunities

Ouya recently announced a partnership with Xiaomi to bring their games into China7. However, this deal does not appear to involve the console itself, but rather Ouya’s software which might be installed on Xiaomi’s new TV setup box. There have been no recent exits for console startups. Thus opportunities seem scarce, but this might be because there have not been many new console startups.

Notable companies

Handhelds

Competition

Sony with their PSP systems – $240 and Nintendo with their DS systems – $120 onwards dominate the handheld market. Similar to the console market, Sony targets hardcore gamers while Nintendo targets the casuals. In addition, Nvidia recently launched a new video gaming handheld – the Nvidia Shield Tablet & Portable that is priced at $199. It was well-received with critics praising the new handheld as well-built and powerful8. Sales figures have not been released, hence it is still too premature to determine the reception among consumers. There are also more niche players in this space such as the GCWZero9 which was crowdfunded, and iReadyGo a Chinese handheld can also be used as a phone and costs RMB200010.

Market

Dedicated gaming handhelds are undoubtedly facing pressure from smartphones, and sales have plunged as a result11. Chinese companies have tried to innovate in this area by combining the two features. There have been flops in the past, notably Nokia’s N-gage gaming phone12. However, with technological improvements and Chinese appetite for mobile gaming there might be some potential in this area. Quarterly sales of Nintendo’s 3DS in 2014 numbered around 2m, suggesting that yearly sales volume is around $1 billion.

Exit opportunities

Exit opportunities are not very clear.

Notable companies

Cloud gaming

Competition

There is much more competition here than in the previous two categories. In this sector, there is no clear market leader and a variety of business models that range from B2C (Onlive, Gaikai) to B2B (Playcast, G-cluster). On one hand, B2C companies operate on a subscription model, with users paying a subscription to access and play games. The value proposition offered to consumers is that they can rely on the cloud to provide processing power instead of owning the hardware themselves. On the other hand, B2B companies partner with entertainment providers such as TV networks to offer games to their viewers, either on-demand or on a subscription basis. Firms compete on technological prowess (i.e. latency) and game selections. Chinese startups are also active in this scene, with companies like Cybercloud and Gloud already active in the marketplace.

Market

It appears that B2C business models do not work very well due to the lack of infrastructure and high cost of bandwidth for end consumers. Onlive faced challenges initially due to their focus on consumers13. “The company had deployed thousands of servers that were sitting unused, and only ever had 1,600 concurrent users of the service worldwide.”14 This suggests that there is not much consumer need for such cloud gaming products. B2B business models do appear to work better. Gaikai focused on partnerships with companies, getting their services and games onto existing distribution channels, instead of directly marketing to consumers or relying on a proprietary service platform.15 According to Sega’s managing director, the market for cloud gaming services is estimated to be around $460 million in 2015.16 In addition, user installed base is expected to increase fivefold to nearly 150 million in 2015.17

Exit opportunities

There seems to be potential in exits for cloud gaming companies. Sony recently acquired Gaikai for $380 million in 201218. Shortly after the acquisition, Gaikai services started appearing on the Playstation systems as Playstation Now, allowing users to stream old PS games on newer systems19. This suggests that cloud gaming companies make good tech acquisition targets, and with the video gaming industry trying to diversify product offerings, it might be a good time to invest.

Notable companies

Virtual Reality

Competition

Competition in the virtual reality (VR) space is pretty stiff with both large and small companies in the fray. The most famous company is Oculus20, whose main product is the Rift – a VR headset that costs $350. Cheaper alternatives also exist such as the Carl Zeiss’s VR One21 that costs $99. However, technical capabilities differ greatly between the two with the Rift using an internal display while consumers can use their own smartphones as a screen with the VR One. Although the majority of the population is familiar with VR headsets, there are many different types of VR products. Leap Motion and Nimble VR both developed a product that allows users to “bring their hands into the virtual world”. Virtuix developed a full-body machine that allows users to use their whole body to “step into the virtual world”. In China, ANTVR22 was recently successfully backed on Kickstarter, raising $260,000.

Market

The market for VR is extremely nascent, with no consumer VR headsets in the marketplace right now. Samsung’s Gear VR which is developed in partnership with Oculus seems poised to be the first consumer-grade VR headset to be launched in Fall 201423. Although reception among critics have been positive, real consumer need for such headsets still has not been established. In addition, Leap Motion only secured approximately 500,000 units in first year sales at a price point of $80, having predicted sales of 5m units24. Results suggest that there is low consumer need in the area, with first year sales volume of Leap Motion at only around $40 million.

Exit opportunities

Although Oculus was acquired by Facebook for $2bn, this is the exception rather than the norm, with no other VR companies being publically acquired in recent years.

Notable companies

Gaming portals

Competition

The gaming portals space is crowded with many different sites that serve a variety of HTML5 and Flash games to their users. These sites generally do not develop their own games, but instead share ad revenue with game developers in order to acquire content. Monetization for both developers and the platform also comes in the form of selling virtual goods and microtransactions. Some sites including Kongregate, Gameforge and 17173 offer social elements like leaderboards and badges to get their gamers to spend more time on the platform. Although many portals serve games directly on the web or mobile, others like QQ Games require gamers to first download a general QQ client before they can play. In addition, some sites like Kongregate offer sponsorships to developers for their games, as long as the developers include a link back to the gaming platform site25. Chinese platforms and American platforms differ significantly in terms of site layout and focus. On the one hand, Chinese portals seem to act more like distribution channels, mostly requiring gamers to download specific game clients, with home pages reflecting such a focus. On the other hand, American portals focus on immediately getting users to start playing games, as can be seen from their home pages. In addition, in China, many large Internet companies are in the space and it might be difficult for a startup to enter the market.

Market

The market for gaming platforms seem positive, and recent statistics from Gamestop’s annual report show that Kongregate has 3 million monthly unique visitors26. The report also mentions that the majority of the site’s revenue comes from microtransactions. Gameforge also reports high number of users and the same trend in microtransactions driving revenues27. Information for other platforms were difficult to acquire, but the longevity of gaming platforms (since the 1990s) suggests that there is demand for these services among consumers. Kongregate revenues were estimated to be around $4-10 million in 201028 and Miniclip’s is estimated to be around $30 million in 201029, suggesting that the total yearly revenue from this market might be around 100s of millions. With the lack of offerings and quality in the casual browser game portal in the Chinese market30 and the potential latent demand, we should further investigate this category.

Exit opportunities

Kongregate was acquired by Gamestop in 201031, Ijji was acquired by Aeria Games in 201032. This suggests that are opportunities to be acquired by companies who are in the game industry, but want to diversify their revenue streams.

Notable companies

PC

Competition

The PC space is relatively fragmented with many different companies competing for market share. However, it is important to note that specialty gaming PC companies do not generally manufacture their own parts, but source components from hardware manufacturers like AMD or Intel. Value is created by configuring component parts to optimize performance in games (e.g. overclocking). Competition is stiff, and companies in China produce both gaming desktops and notebooks.

Market

PC gaming is still the dominant money maker in the Chinese gaming market, attributing for $8.7 billion in revenues in 2013 as compared to $1.8 billion from mobile games33. With such high demand for PC games, there is undeniably demand for the hardware that supports these games. A study by JPR estimated the worldwide PC gaming hardware market to be about $21.5 billion, with enthusiast and performance PCs accounting for 70% of market share.34

Exit opportunities

Voodoo, an American gaming PC company was acquired by HP in 200635. Recently, in November 2014, Ngame closed a $10m Series A, led by Fortune Capital. These show that there might be opportunities for gaming PC startups to raise additional VC funding or to be acquired by larger PC manufacturing firms.

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Distribution Channels

Online

Competition

The competition for digital distribution of games occurs on a global scale and across 4 verticals: PC, console, handhelds and mobile. For online PC games, firms like Steam (Valve) and Origin (EA) dominate. These companies offer both English and Chinese versions of their sites, although the sites are not fully translated36,37. In China, large gaming companies such as Sina, Netease do not have an online distribution arm offering their consumers options to directly download PC games. Instead, they either redirect to the relevant gaming websites or to other distributors like Steam for downloaded PC games38. This lack of interest could be attributed to the fact that most popular English client games might not have Chinese versions. Furthermore, locally developed Chinese games generally do not distribute through stores such as Steam or Origin. In addition, extremely popular locally published games such as World of Warcraft (Blizzard Activision & Netease JV) also have different distribution strategies. For console games, online distribution is often vertically integrated. Console and handheld manufacturers offer their gamers the option to directly download games via the Sony Playstation Store, Nintendo eShop and Xbox Live. For mobile games, digital distribution is mostly conducted through app stores with Google, Baidu, Tencent and Apple all in the space.

Market

Digital distribution has been gaining traction quickly as Internet penetration improves globally. In the US and EU, aggregate digital distribution has been growing at a 33% CAGR, while in China CAGR is projected to be 10% over the next 3 years.39 In addition, a report by DFC Intelligence states that digital PC sales represent 92% of all PC game sales worldwide. The market for digital distribution seems to be burgeoning and overtaking physical sales extremely quickly. Research by NPD Group estimates the global market for digital distribution to be around $7 billion in 201340. However, the lack of content in China suggests that foreign business models of distribution companies might not work.

Exit opportunities

In 2013 Linden Lab acquired Desura for an undisclosed amount in a bid to diversify41. In addition, online distribution startups might be attractive to large Chinese Internet companies due to their lack of digital distribution capabilities.

Offline

Competition

Competition in the offline distribution occurs across a variety of retailers, both specialty and non-specialty.

Market

Offline distribution is contracting, and a large shift to digital distribution is occurring. Even distribution of console games which has traditionally occurred offline is moving online42. Hence, the market for offline distribution appears to be in decline with the NPD Group expecting double digit declines YoY for physical games43.

Exit opportunities

Exit opportunities are unclear.

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Publishers

Mobile

Competition

In China, there is substantial competition for mobile publishing with both large Internet companies like Tencent and independent houses like CMGE (San Guo Zhi), Yodo1 (Cut the Rope), iDreamSky (Fruit Ninja), Chukong (Where’s My Water) competing for market share. All companies with the exception of CMGE are full-service publishing platforms that help Western developers localize, monetize and distribute their games in China. CMGE on the other hand concentrates on locally developed mobile games. Tencent (Candy Crush Saga) is also a mobile gaming publisher, partnering with King to bring Candy Crush to China exclusively through its Weixin/ QQ platforms. Other publishers who do not have vertically integrated distribution channels work with a variety of partners to distribute the mobile games that they publish.

Market

As the appetite for mobile games in China increases, so does the number of foreign developers wanting to tap into the market. However, it appears that the market is already saturated with many players that court both local and foreign mobile game developers. Furthermore, hit game developers already have established relationships with mobile publishers in China. As publishing is a B2B business, startups wanting to offer such services have to tap existing relationships in order to succeed. In addition, knowledge and partnerships with various distributors are important in order to succeed as a publisher. These reasons seem to suggest that it would be difficult for a new player to enter the mobile publishing business. One possible way to circumvent existing relationships is for publishers to identify relatively unknown developers that have games with potential and publish them, entering at an earlier stage of the process and taking on more risk. A positive example would be iDreamSky, whose revenues grew from $3.1 million in 2012 to $40.7 million in 2013. The explosive increase suggests that there is still a lot of potential for growth in this segment.

Exit opportunities

In 2013, Yodo1 raised $5m in Series A round led by Singtel Innov844.

PC

Competition

The competition for PC publishing in China is high with many large companies in the fray. Foreign companies usually operate via joint ventures (JV) with Chinese publishers to bring their games into the region. One notable example is the NetEase and Activision Blizzard JV, which allowed NetEase to gain substantial revenues through the World of Warcraft franchise45. Regulations make entering the Chinese market with a regular (i.e. non-web) PC game extremely difficult, and developers have go through a stringent approval process46. Rampant piracy results in Western games often being localized through unofficial language add-ons47.

Market

As a result of piracy and regulations, we see that most foreign PC game developers who enter the market are MMORPGs that combat piracy through subscription or freemium models. As a benchmark, Perfect World’s online game operating revenues were $401 million in 2012. However, this number includes both the publishing and development arm.

Exit opportunities

Exit opportunities are unclear.

Console

Competition

In the past, console game publishing was vertically integrated with the console manufacturer. However, manufacturers such as Microsoft have recently introduced self-publishing programs to empower developers to create more content for consoles48. This has spawned independent publishers such as Devolver Digital who might not provide financing to developers but instead help developers navigate the publishing process49. In China, console game publishing is extremely nascent, with authorities only recently lifting the 14 year ban on consoles in September 2014. Hence, there are few competitors in the market50. With the launch of Xbox One in China, Perfect World, Snail Games and Tencent are a few of the publishers working with foreign console game developers to bring their games to the region.

Market

The market for console game publishers seem attractive. Although official sales numbers have been low so far, there is a booming console grey market in China with an estimated 2-3 million units sold at retail prices in 200951. Furthermore, there are few local developers of console games as a result of the ban. Thus, it appears that there is a huge need for publishing and localization services in order for foreign developers to tap into this market. However, there are both business and regulatory risks in the console industry. Firstly, gamers are unaccustomed to playing console games52. Secondly, there are regulations surrounding the type of content that console games can have53. Although there are both business risks and regulatory risks, the potential of the market combined with developers’ need and lack of competition makes this an attractive sector to investigate.

Exit opportunities

There have been no exits in the past. However, there is potential to be acquired by gaming companies looking to move into adjacent industries, or even for IPOs in a similar vein to iDreamSky.

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Enabling Technologies – Software & Middleware

Game development

Competition

There is a lot of competition in game development software and middleware. This segment can be broken down into: 1) full-suite game engines and 2) specialized game engine modules. On one hand, full-suite game engines such as Unity combine different modules (physics, artificial intelligence, audio, etc.) into one platform, and provides developers with a comprehensive solution. On the other hand, specialized game engines such as the Havok physics engine provide developers with a single function that can be combined with engines from other providers. Besides differences in functionality, game engines also span a spectrum of platforms and genres. Niche game engines such as RPGMaker and Arcade Game Studio provide solutions for developers intending to create games in those genres. Platform specific engines such as XNA for the Xbox, provides developers an environment for creating platform specific games. Pricing models for game engines include one-time fee, subscription, licensing and free. Firms offer both open source (Cocos 2d-x), licensed (Unreal Engine), one time fee (Unity), and free (XNA) solutions to game developers.

Market

The market for game engines consists of both established and independent game developers creating games for various platforms. In recent years, development tools have become more accessible to independent developers as gaming companies attempt to expand the games available on their platforms. The availability of such tools lowers barriers of entry into game development, which is a potential reason behind the increasing number of developers54. The low barriers and growing popularity of mobile games appear to suggest sustainable demand for niche gaming engines that cater to the mobile development crowd. However, although there seems to be demand for engines, the presence of established players in the market combined with the difficulties a startup will face in creating a proprietary engine makes this segment a difficult one to enter. Exact revenues of game engine companies are unavailable. However, Unity Technologies, with 45% market share, announced that revenues grew 130% year on year55.

Exit opportunities

Game engine companies have been acquired by companies in the same industry but adjacent verticals. One example is the acquisition of Corona a 2d mobile game engine developer in 2014 by Fuse Powered a mobile payments firm for an undisclosed sum. In the same year, Bitsquid, an interactive engine was acquired by Autodesk for an undisclosed sum.

Game monetization

Competition

Although game monetization may occur across a variety of methods, one-time payments are relatively straightforward to implement – developers/ publishers charge a single fee to provide gamers access to their games. This section will instead focus on middleware that aid freemium games in monetization. There are two main ways to monetize a freemium game: 1) in-game ads, and 2) in-game payments. Both types of firms generally operate on a revenue-sharing basis with game developers.

The space for in game advertisements is very fragmented with no dominant player. These companies generally do not cater only to games. Instead, they offer solutions for products with ad inventory to sell/ manage. Companies such as Vungle and Beachfront specialize in newer formats such as video ads, while mature formats such as interstitials and static banner ads are offered by companies such as Fusepowered and Playhaven. Bigger companies like Airpush offer multiple ad formats. Ad monetization companies mostly compete via proprietary algorithms that aim to optimize revenue from inventory. Mo9 is a unique Chinese business that allows players to pay after consumption of virtual goods.

In game payments are generally controlled by the distribution channels. For example, Apple and Google both offer in-app payment SDKs that developers must use when integrating in-app payments for apps that are distributed in their app stores. These SDKs are secure ways for consumers to make payments using specified methods. For 3rd-party app stores without payment restrictions, developers have the option of integrating solutions from companies such as Fortumo and OKPay. These companies offer payment solutions such as carrier billing or bank transfers that might not be offered by Google or Apple’s payment SDKs.

Markets

Likewise, the market for mobile monetization can be broken down into two categories: 1) in-game ads and 2) in-game payments. A report by IDC and App Annie estimates the revenue generated by in-app ads to be around $8 billion in 201356, and in-app payments in iOS App Store to be around $7.7 billion (author’s estimate)57. With games accounting for 66% of total app revenues58, the market for game monetization software appears to be large. As freemium models gain traction, revenues from both categories might grow further in the near future. However, rates differ across regions, with India estimated to experience the highest growth at 8.7x from 2013 to 2017. The popularity of ad formats also differs across developers, with newer formats gaining popularity in 2014.

Exit opportunities

There appears to be opportunities in exits for game monetization companies with Science Inc. a holding company acquired Playhaven a in-app advertising company in September 2014 for an undisclosed amount. Yahoo acquired Flurry for $240 million in 2014.

Video Game Analytics

Competition

Competition in video game analysis is high with both: 1) video gaming analytics specialists and 2) analytics generalists. On one hand, specialists such as Ninja Metrics and Unity focus more on user analytics and often provide such capabilities out of the box. On the other hand, generalists such as Google Analytics and Mixpanel require more configuration for video gaming applications. These companies generally operate on a subscription basis, and charge according to the amount of data being processed by the software, usually calculated via MAUs (Monthly Active Users).

Market

The size of the video gaming analytics software market is uncertain and there is a lack of research in the space. However, since there are approximately 200m video gamers in the USA59, and DeltaDNA charges $1,800/month for analyzing 500k MAUs, a conservative estimate for the global video gaming analytics market would be below $500 million.

Exit opportunities

Exit opportunities are unclear for specialist companies. However, for generalist companies there appears to be interest in the market. Generalist company, Flurry was recently acquired in June 2014 by Yahoo for $240 million.

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Game Developers

Mobile

Competition

Competition in mobile game development is extremely stiff, with both established companies and independent developers in the space. Both production values and genres of games vary widely. Likewise, cost for mobile game development range from tens of thousands to millions of dollars60. In addition, although business and monetization models differ widely, there has been a shift to freemium models. A study by IDC and App Annie showing that freemium business models receive the most revenue followed by in-app advertising models61.

Market

Mobile has undoubtedly boomed in recent years, and is projected to double in revenue from $17.5 billion in 2013 to reach $35.4 billion by 201762. However, despite the growth, it is important to note that successes are rare with 92% of all Chinese mobile games losing money63. Investing in mobile game developers are thus a risky affair, but with potential for huge payoffs.

Exit opportunities

Successful developers with breakout games might go on to be acquired by larger companies. For example, in 2012, $210 million acquisition of Funzio by Gree, $325 million acquisition of Playcrab by Ourpalm. Recent years have also seen successful mobile game developer IPOs, including: 1) King – maker of Candy Crush Saga, 2) Forgame – maker of 风云天下, 3) Ourpalm – maker of 3D Ultimate Racing.

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China’s Startup Incubation Landscape

Credits

Analysts
Mr See Wei Jie, Analyst

Research
Mr James Tan

Overview

This report covers the expansive Incubation scene in China. With its status as a global economic powerhouse, there has been a surge in the number of incubators there, each with their unique characteristics. With the in-depth analysis provided within the report on these features and how they impact the startups within the incubator, readers will get a better understanding on the type of incubators and the startups suited to join each one.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

With more than 1,000 incubators across China, it is timely to take a look at this phenomenon, its evolution and achievements.

A spurt of new accelerators modeled after the US-based Y-Combinator, and an increase in venture capital funding, have sparked interest in many universities, corporations and investment firms in the accelerator model. In what is very much still virgin territory, the definition of accelerator is up for debate. We attempt to end the debate on the definition in this report.

Some of the new accelerators have grabbed the spotlight. We dive into their programming, their model, and their results. The report concludes with what we believe to be the key ingredients contributing to the success of any accelerator model.

In time, will China have a competitor to Y-Combinator?

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Introduction

Ever since the concept of seed accelerator sprung up in 2005 in Silicon Valley, it has been an avenue for serial entrepreneurs and investors to connect and shape startups into a scalable and viable business. An accelerator derives the majority of its characteristics from an incubator, thus we would like to start off by introducing the concept of incubation and acceleration.

Incubators

There are no definite definitions of what an incubator is, according to the National Business Incubation Association, “a business incubator is an economic development tool designed to accelerate the growth and success of entrepreneurial companies through an array of business support resources and services. To put it simply, we define incubator as:

“An organization that complements an entrepreneur’s lack of business skills by providing the assistance to fill the knowledge gap they need to develop a successful business and product.”

There are five primary services/assistance that business incubators offer to start-ups, they are (1) Financial Consulting Service, (2) Management Assistance, (3) General Business Assistance, (4) Professional Business Assistance and (5) Physical Services. As a result of these services that startups can tap on, incubators have become a popular option for technology startups on a global scene. The rise of startup incubators can be attributed to a myriad of factors ranging from government initiatives to private investors looking at developing their portfolio. More importantly, this trend points to a higher level of venture capital activity in a highly competitive technology industry.

Types of Incubators

There are two types of incubators in general, namely (1) Non-profit and (2) For-profit. We understand that in the US, 25% of incubators are for-profit while 75% are non-profit. As the name suggests, non-profit incubators are normally owned by governments or universities while for-profit incubators are owned by privately owned with the purpose of making profits. We can further classify incubators into the following:

After a brief introduction about the concept of incubators, we will move on to discuss more about accelerators.

Accelerators

Before we start on this section, we need to ask ourselves one question. Are accelerators any different from incubators? Essentially, incubators and accelerators share common features of providing an environment to serve the needs required from a startup and also only accepting startups with potential commercial viability. We want to point out one major difference between an incubator and an accelerator, which is the length of the program period. Normally, an accelerator will only house a start-up for up to 6 months.Before we start on this section, we need to ask ourselves one question. Are accelerators any different from incubators? Essentially, incubators and accelerators share common features of providing an environment to serve the needs required from a startup and also only accepting startups with potential commercial viability. We want to point out one major difference between an incubator and an accelerator, which is the length of the program period. Normally, an accelerator will only house a start-up for up to 6 months.

The Rise of Accelerators

In 2005, Paul Graham proposed the idea of a seed accelerator by setting up Y Combinator. The accelerator is a short-term program (usually from 3-6 months) where startups are housed in an accelerator and given the support they need. The support may include working space, legal and banking services, mentorship programs, networking opportunities in return for a small proportion of the startups equity. The idea of a quick short-term program, with an aim of accelerating the growth of startups, became very receptive. Startups saw this as a chance to become big and obtain the facilities and support they required to grow.

Grey Area: Differences between An Incubator and An Accelerator

It is necessary to dedicate a section to discuss the differences between an incubator and an accelerator. We believe that the distinction between an incubator and an accelerator is important as the concept of incubation and acceleration tends to be used interchangeably at times.

During our own research process, discussions were held to strengthen the understanding of the concept of incubation and acceleration.  Before we start on this section, you might want to think about how you differentiate an incubator from an accelerator? We will share our thought process in this section and list down some questions that we asked ourselves during the course of our research process.

1) Does an acceleration program need to provide a common working space for companies participating in the program?

2) Is an acceleration program not providing for common working space considered an accelerator?

3) If an incubator offers an acceleration program, are they now considered an accelerator?

A Third Dimension

After going through those questions, I hope you roughly get an understanding of how to differentiate an incubator and an accelerator. From our point of perspective, we believe there is a third dimension to be added to the concept of incubation and acceleration, and this third dimension is an acceleration program. What do we mean by an acceleration program? We start off by putting out this equation called the Accelerator Equation:

Accelerator = Incubator + Acceleration Program

This is the equation that will differentiate an accelerator from an incubator. However, when we say differentiate, it doesn’t mean that an accelerator is different from an incubator. An accelerator is essentially an incubator running an acceleration program. There are two single components on the RHS of the equation, incubators and acceleration program. You can be an incubator just by itself or an organized acceleration program just by itself. But in order to be an accelerator, you need to have both components, incubator and acceleration program.

Acceleration Program

We have discussed what is an incubator and what is an accelerator. So this section will touch on exactly what is an acceleration program? In this section, we will discuss the acceleration program as a single entity, which means that these types of programs do not provide for a common working space for its participants. Thus, this will exclude those acceleration programs that are managed by accelerators.

Acceleration programs are normally hosted by companies with the primary motivation of marketing their products to participants. Examples of such programs in China include the IBM Smart Camp and Microsoft’s “Cloud Accelerator Program”. Most commonly, common working spaces are not provided, however, valued-added business services will be provided for participants.

In the next part of this report, we will take a look at the startup scene in the U.S, in particular the incubator scene. With the US as the benchmark, we can relatively gauge the direction of where China’s incubator scene is heading towards. For the purpose of this report, we will generalize incubators and accelerators under the broad term of incubator.

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A Case Study On US Incubators/Accelerators Scene

Silicon Valley has housed more billion dollar companies than any other startup ecosystem anywhere else. Hence, we find it appropriate to devote a section of our report to discuss and analyze the various aspects of the ecosystem in Silicon Valley that we feel are applicable in China’s context. In particular, we will discuss in-depth about Silicon Valley’s prominent accelerator, Y Combinator.

A quick look at the funding sources for startups in the US (Figure 1) shows that Incubators/Accelerators make up about 11% of the funding sources. This means that one-tenth of startups in the US are funded by incubators and accelerators. This is a healthy percentage and we will use this figure as a comparison figure to evaluate China’s incubation landscape.

As expected, the percentage of Self-funded and Family & Friends stands at 35%, this underlines the importance of bootstrapping in the path of entrepreneurship. However, this also outlines the importance of networks. If the entrepreneur is not equipped with wide personal networks, bootstrapping will not be able to provide the network that incubators/accelerators will provide. By performing a simple linkage of incubator/accelerator and potential investors, we can say that around 64% of total funding sources are linked to incubators/accelerators in the US. This figure will be referred to in the later section of the report. The percentage of related funding sources of incubators/accelerators indicate the importance of incubators/accelerators in the US startup scene.

Y Combinator

In this section, we will look at one of the most popular accelerators in the world, Y Combinator. They are the pioneer of the term “Accelerator” and invest seed money in nascent startups and assisting to turn their ideas into companies. Founded in 2007, Y Combinator assists promising startups in exchange for their equity (in the range of 2-10%). Being one of the most popular accelerators, it is estimated that only 65 out of 1000 applications are selected to participate in the program (Barrehag et al, 2012).

Following is a brief summary of Y Combinator’s accelerator program presented in a table:

Since 2005, Y Combinator has funded over 460 startups with prominent ones such as Dropbox for example. With the great success following this new model of startup funding, there is an increasing incubator trend in the US. We will take a closer look at this trend in the next section.

Incubators Trends

According to statistics from National Business Incubation Association (NBIA), there is a growing incubator trend during the timeframe of 2002-2011 in the United States. The total number of incubator programs in the US has grown by approximately 47% from 2005 – 2011. About 463 of the 1400 incubators estimated were from the technology sector.

To Use Incubators or Not?

It is estimated that about 4% of startups are in incubator programs in the US. NBIA-funded research indicates that startups taking part in incubators program nearly double the survival rate of those that did not participate in an incubator program (Markovich, 2012). According to Bloomberg, incubated startups’ survival rate after 5 years stand at 87% as compared to 44% for startups that didn’t use incubators (Bloomberg, 2010).

As seen from the statistics, 87% of incubated startups survived after 5 years as compared to 44% of startups that had not participated in any incubator programs. On an absolute figure, the number of surviving non-incubated firms is higher than the number of surviving incubated firms. However, it is of no doubt that incubators will greatly increase the probability of survival. There are of course doubts cast over this overly optimistic figure and effectiveness of business incubators that we thought would be interesting to point out.

A study conducted by Amezcua of the Whitman School of Management questioned the effectiveness of business incubators opposed to that of the statistics released by NBIA (Blanchard, 2012). According to Amezcua research, 42% of incubated firms failed by 3.63 years in his sample size of 655 incubated firms and only 4% managed to exit their incubator.

Factors Contributing To Effectiveness of an Incubator

According to our understanding, Amezcua is not undermining the effects of a business incubator but trying to point out that claims that incubators are highly successful are overstated. We acknowledge this fact and also want to point out that one study is not definitive of business incubators’ effectiveness in general. However, Amezcua’s research serves to point out the importance of several factors contributing to the success of firms going through an incubator/accelerator program. We have identified factors skewing the result of any research studies on the effectiveness of an incubator/accelerator:

Role of US Government

With the United States having one of the oldest and largest incubation systems, it would be interesting to give an overview of the role the US government plays in the US incubation/acceleration scene. Governments globally view business incubators as a tool to foster new ventures primarily to achieve the objectives of job creation and economic development (Aruna Chandra T. F., 2009).

In May 2012, the Obama Administration announced a $26 million Advanced Manufacturing Jobs and Innovation Accelerator Challenge to accelerate “innovation-fueled” job creation and economic prosperity (U.S. Department of Commerce, 2012), this is an example of how the US government participated in the incubation and acceleration scene in recent times. The US government’s involvement in the incubators/accelerators scene is mainly through funding under various levels (federal, state and local) (Aruna Chandra T. F., 2009). Most commonly, the source of the funding will decide the strategic focus and selection process of the respective incubators/accelerators. In the case of government funding, the incubator will be more inclined to achieve the main objective of economic development.

After going through briefly on the incubation/acceleration scene in the U.S., we will move on to the next section of the report to focus on the incubation and acceleration scene in China.

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China’s Incubators Landscape

Ever since the implementation of the Torch Program by the Ministry of Science & Technology (MOST) in 1988, the number of Business Incubators (BIs) increased from 100 at the end of 1988 to more than 1000 incubators nationwide by 2011 (智妍数据研究中心, 2012). It is also estimated that the number of high technology incubators is above 900 with 346 owned by the Chinese government. China had undergone two major phases of business incubator growth from 1988 till present. The first phase lasted for a period of 10 years during which the government only provided “physical resources, such as land and buildings, along with access to governmental sources of risk capital with little or no emphasis on value-added services, such as business consulting or networking” (Aruna Chandra C.-A. C., 2011). The second phase marks the development of increasingly specialized and industry-specific incubators with a focus on serving high-tech enterprises and entrepreneurs by providing a wider range of services from low to high value-added service (Yan Z. , 2004). Following the second phase of incubation growth in China, there are currently several major types of BIs in China. We will discuss the different types of incubators in China in the next section.

Types of Incubators in China

There are several types of business incubators in China and we have summarized it into a formatted table as follows:

 

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Incubator Business Model In China

After looking at the different types of business incubators there are in China, we will now discuss the different types of business models that a business incubator in China can adopt.

“Incubation + Seed Funding” Model

This model represents those incubators situated in university science parks leveraging on the university’s background, reputation, alumni connections and deal sources. With the university science parks’ resources, the incubators under this model are able to identify startups in a particular rising industry with high technological advancements. From the identified list of prospective start-ups, the incubators will provide seed funding and incubation services in exchange for equity stake in the prospective start-ups. Examples of start-ups that IPO-ed under this type of incubation model include Highlander (海兰信)、Sumavision (数码视讯) etc.

“Angel Funding + New Product Innovation” Model

Innovation Works (创新工场) is the perfect representative of the “Angel Funding + New Product Innovation” model. We will discuss Innovation Works in greater detail during the later part of the report. Incubators under this model will usually invest in the form of angel investments in startups in the sectors of mobile Internet, e-commerce, cloud computing and other new digital media. Normally, incubators under this model will group together a management team of angel investors and managerial professionals who had prior experiences in high-tech firms such as Google, IBM etc.

“Centralized Platform + Union” Model

This type of incubator model focuses on bringing all the startups in a particular industry together. With all the relevant companies in a particular location, incubators under this model provide all the facilities and professional services particularly in the research & development area. This forms a self-sufficient ecosystem in a way under this type of incubator model and once the scale becomes bigger, the entire ecosystem may form a union for that particular industry. HuiLongSen International Business Incubator (汇龙森科技企业孵化器) is one such incubator adopting this business model.

“Mentoring + Equity Stake” Model

The critical factor of this incubation model is the management team of the incubator. The management team is made up of qualified professionals acting as a mentor for a particular startup. On top of mentoring, the mentor will hold equity stake in the startup that he or she is mentoring. This will align the mentor’s interest together with that of the startup, be it facing the possibilities of failures and losses and reaping the benefits of a possible successful venture. An example of an incubator adopting this model is 博奥联创科技企业孵化器. A few successful firms coming out of this incubation model includes Lepu Medical (乐普医疗) and Sanyouhuizhi Bio-Tech (三友汇智).

“Demo-day Competition + Angel Investment and Mentoring” Model

This model focuses on organizing events to attract participants to pitch their day. To put it simply, it is a direct demo-day for aspiring startups. Most commonly in the form of a competition, participants will pitch about their ideas and lay out their business plans. Successful participants may garner possible angel investments or mentorship. One such example of this model is by Lenovo where a fund of RMB 400m is set up to organize “联想之星创业CEO特训班”.

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China’s Incubator Trend

As mentioned previously, there is an increasing incubator trend in China and we expect it to stay this way in the near future. The number of Business Incubators (BIs) in the Science and Technology sectors increased from 131 at the end of 2000 to more than 1000 incubators nationwide by 2011.

Source: China Torch (2012)

Spring of Private Incubators in China

There is limited data on the number of private incubators. Out of the limited data we found, there are two sides being presented based on the secondary research materials that we benchmarked against. The first research study shows that there are only a handful of private incubators (for-profit) in China. This signifies the risk-adverse model in contrast to the American model as a typical conservative Chinese government venture fund still couldn’t accept the idea of 10-20% success rate of portfolio companies (Harwit, 2002). Another source stated that about 30% of the incubators in China are private incubators (Yan L. , 2012).

We have taken into account the time period of the studies conducted, and have incorporated some assumptions in the following analysis. In a span of 10 years, the number of private incubators has grown at an astonishing pace. By assuming that about 10% of incubators in 2002 are private incubators and 30% in 2012, the number of private incubators has grown at a CAGR of 37% during the period of 10 years. If we moderate the growth rate to 10% till 2017, there should be about 500 private incubators by then.

The increasing trend of private incubators only serves to reinforce the integration of incubators, venture capital and profit motivation. De-aligning the incubators from the public hand will only allow the incubation system to move towards a more risk-tolerant model without being restricted by obligations of careful handling of government’s fund. We believe that as private incubators play an increasingly major role in operating and financing incubators, China will begin to reap the full risk and reward benefits that private capital flows can offer. In the later section of this report, we will be discussing in-depth on some of the private incubators in China.

Incubators’ Efficiency Level in China

We define incubators’ efficiency level as the incubators’ ability to advance the startups to the next level in terms of garnering funding. Funding can come in the form of Series A funding and to the most optimal case of Initial Public Offering (IPO). We have managed to gather some brief information to give a better understanding of how incubated firms in China are performing and these statistics will serve to indicate the effectiveness of Chinese incubators.

From the charts, we can see that only 1.47% of the total number of firms incubated in China managed to exit. The exit statistics pale when compared against the percentage of firms that exited after going through accelerator programs abroad.

This data includes both for-profit and non-profit incubators and due to limited data, it is generally hard to segregate the effectiveness of for-profit and non-profit incubators at a macro-level. However, we will perform a micro analysis at a firm level for a selected few private incubators in the later part of the report. We will move on to discuss the role of China’s government in the incubation scene to further evaluate the incubation scene.

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Role of China’s Government

Comparatively, government involvement in the incubator scene is very high in contrast to the role of the US government’s involvement in the incubator scene. The Chinese government is very influential in the aspects of organization, funding and strategy for the incubators (Scaramuzzi, 2002). Research has shown that government involvement is negatively co-related with incubators’ market orientation and entrepreneurial proclivity (Aruna Chandra T. F., 2009). This means that with higher government involvement in an incubator, related investors will tend to be more risk-averse and tend to make less risky investment in their client firms. This is supported by the fact that incubators in the southern regions (Shenzhen etc.) tend to embrace risk more than their counterparts incubators in the northern regions as a result of higher government involvement with arm’s length financial relationship with their incubatees (Aruna Chandra T. F., 2009). We have come up with a simple matrix to signify this relationship.

From the simple matrix, we can see that not just in China’s context, as the government’s involvement in an incubator increases, the benefit gained from potential government subsidies is higher at the expense of the higher potential opportunity costs involved with less risky investments. Moving forward, there is definitely an increasing trend of moving towards a private/mixed ownership incubator structure. We reiterate that there is a need to move forward in this direction. Even for incubators currently funded by the government, their investment thesis shouldn’t be bounded and built around the objective of not losing the government funding. This would only promote the current lack of risk in contrast to the West. Rather than being obliged to avoid “losing” the government resources, incubators should start to embrace risk and increase start-ups’ access to funding.

With little international academic literature covered in the field of accelerators, we feel that it will be interesting to include a section to discuss what an acceleration program is and also the progress of acceleration programs in China.

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Accelerator’s Model for China in the Future?

An accelerator derives most of its characteristics from a typical business incubator. Acceleration programs developed from a conventional incubation program as a new way of incubating technology startups in particular (Lisa Barrehag, 2012). We hold the viewpoint that soft start-ups, such as web or mobile related products, are more suitable than any other industries for an accelerator model as it is not as stigmatized as an incubator model. Thus, as the number of acceleration programs increases, most of them will still be concentrated in the field of web or mobile related products requiring relatively lower development costs. We will list out some of the key characteristics of an accelerator model below:

1. Highly Competitive Open Application
2. Preference for small teams over single entrepreneur
3. Short and fixed-duration program
4. Program participants “graduate” in batches

Network and connections to investors are critical aspects for long-term success for startups, as such; one of the main objectives of an accelerator is to ensure that a startup that graduated from its program secure funding from investors. Only with funding will the startup be able to further develop their product after the accelerator program (Christiansen, 2009). An increasing number of startups require more than just value-added services from Phase 2 incubators in China. They want programs tailored to increase their possibility of securing funding. Thus, there is an increasing demand for accelerators programs in China, which brings us to the point of the possibility of going onto the next phase of incubation, seeing the rise of accelerators model in China in the future.

Accelerator’s Trend in China

With limited information on privately held accelerators, we would be discussing China’s accelerator trend based on the data provided by government organizations. There are two phases involved in the accelerator scene in China as well, Early Phase (2000-2005) and Development Phase (2006 -2009). During a span of 9 years, China became the second biggest country in terms of the number of business accelerators with 23 in total after the US (47 business accelerators) (HE Kefang, 2012).

 

Looking at the data, we can see an increasing trend of business accelerators. As seen from the chart, from 1 accelerator in 2000, the number has increased to 23 in 2009. This represents a CAGR of 41% and if this growth rate remains for the next 5 years, the number of accelerators in China will reach 45 by 2018. As a result, we believe that there is a huge potential for the commercialization of accelerators in China.

Geographic Distribution of Accelerators in China

Not surprisingly, the accelerators in China are congregated in the Northwest and Southeast regions as shown in the figure above (HE Kefang, 2012). This could be due to the fact that technological resources are easier to access in these regions as compared to the central regions, which lead to higher demand for accelerators. Out of the 23 accelerators in China, 10 of them are located in Zhusanjiao, Changsanjiao and Zhongguanchun area. In a way, this reflects the economic development strategy that is implemented by the Chinese government; primarily focusing on certain areas.

We have covered the incubation and acceleration scene at a macro level. In our next section of our report, we will proceed to analyze China’s incubation and acceleration scene at a micro level. We intend to perform an in-depth analysis on selected incubators and accelerators in China.

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Accelerators and Acceleration Programs in China

In this section, we will take a look at some of the incubators in China and give our thoughts and analysis on each of the incubators or accelerators. In this section, we will present our evaluation on these incubators based on metrics that we have derived (Appendix 1).

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Innovation Works (创新工场)

Innovation Works was established by Dr. LEE Kai Fu in September 2009 to encourage entrepreneurship among the young Chinese people community. At the point of initial introduction, they represent a novel type of business model incorporating elements of Angel Investment, Business Incubators and Mentoring. As of September 2012, Innovation Works has invested in 50 startups, with 18 of them garnering Series A funding and 1 securing Series B funding (上方文Q, 2012). We present a brief summary of the Innovation Works Acceleration Program.

The figure above indicates the relative effectiveness of the Acceleration Program in Innovation Works. Being one of the more popular accelerators in China, these figures will be utilized later on to evaluate the rest of the incubators.

Accelerator Cycle

This section will touch on the cycle of the acceleration program in Innovation Works. The analysis will provide an understanding of the process of the six months program.

Teams

For the secondary research materials that we have gathered, Innovation Works does not have a fixed cycle for an acceleration program. Any application sent in to their designated email will be considered. This is a typical source of deal flow for a venture capital firm and Innovation Works seems to be heading towards a VC direction.

Since its inception in 2009, Innovation Works had received more than 5000 applications and only invested in 50 out of these applications (上方文Q, 2012). This translates to a mere 1% acceptance rate into its acceleration program. However as compared to Y Combinator’s acceptance rate of 6.5% (Chapter 2.1), one might be inclined to think about the huge disparity in the acceptance rate. Does the 5.5% difference signify the opportunity cost lost due to lesser tolerance for risk? This ties in with our previous discussion of a lower risk tolerance level in China. However, it would be unfair to say that Innovation Works is risk-averse as the low acceptance rate could be due to a lack of ideal business plans fitting their investment thesis.

In the team aspect, we feel that Innovation Works can improve by increasing its acceptance rate into its acceleration program as 50 incubatees in 3 years is certainly too little to satisfy a growing market in China.

Innovation Works targets startups in the area of mobile internet, e-commerce and cloud computing (百度文库, -).

Innovation Works is looking for startups whose founders are equipped with some experience in the field relevant to its product offering. The founder can be a first-time or serial entrepreneur, but the team must be able to display knowledge and a clear vision of how the business should progress within a certain time frame.

Program

Like any other acceleration program, Innovation Works provides a common working space and valued-added services such as funding, business plan optimization, technology guidance, marketing, human resources and legal assistance. But the main drawing point of Innovation Works’ program is its network.

Being backed by an elite group of investors including Fortune 100 companies and prominent venture capital funds, this provided a solid network for participants in Innovation Works’ program. We feel that intangible services like networks are critical in today’s incubation and acceleration scene as it determines a startup’s possible exit routes and potential additional resources. In this aspect, Innovation Works’ program definitely offers participants one of the most important services; networks.

Accelerator Organization

In this section, we will touch on the different building blocks that make up the accelerator program, such as the details of startup financing and the networks of Innovation Works.

Financing the Startups

In the most recent interview with China Business Journal, Lee Kai Fu responded to this question by stating that Innovation Works normally take a 15-20% equity stake in participating startups. (YANG, 2012). As compared to the equity stake Y Combinator is taking, Innovation Works tend to be taking a higher equity stake. The higher than average equity stake as compared to conventional angel investors might put off some entrepreneurs and this represents some opportunity costs.

Networks and Mentors

Innovation Works selection procedure means that startups would have their existing networks should any problems be encountered. However, Innovation Works has a strong full time employee base who will be there to assist the startups whenever necessary.

Conclusion

Innovation Works started out as a fresh concept of combining elements of angel investment, business incubators and mentoring. Today, one may be more inclined to think of them as an investment firm after the closing of their second fund, Innovation Works Development Fund II.

Even with a fund, if the acceleration equation is adopted, Innovation Works is considered as an accelerator as it provides common working spaces and value-added services (incubator) and offers an acceleration program for its incubatees.

There are some slight concerns over the higher-than-average equity stake and low acceptance rate. Even with these slight concerns, for an accelerator, Innovation Works has performed very well in terms of providing the incubatees with the most important resources, the network to grow. This is definitely an area that other business incubators or accelerators find hard to emulate.

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Chinaccelerator (中国加速)

Based in Dalian, Chinaccelerator is founded by Sean O’Sullivan and Cyril Ebersweiler. Chinaccelerator launched its first acceleration program in 2010 and there are 23 startups across three batches to date. The program will normally take place between August to October annually.

Accelerator Cycle

This section will touch on the cycle of the acceleration program in Chinaccelerator. The analysis will provide an understanding of the process of the three months program.

Teams

What is the percentage of successful applications for each program cycle?
Chinaccelerator will take in about 5-10 startups for every batch annually (Chinaccelerator, 2012).

What industrial sectors are targeted for their incubation/acceleration program?
They are targeting web-based and software startups with a preference for disruptive technology solutions with a small amount of startup capital (Chinaccelerator, 2012).

Who are they looking for?
They are looking for founders with an idea to create an impact in the current technological state. The team must be equipped with the necessary business and technical skills to move the product offering forward (Chinaccelerator, 2012).

Program

What are the benefits of the program?
Chinaccelerator is banking on its wide network of mentors as its main drawing point. The main benefit that is constantly being emphasized is the connections and advice garnered from intense mentorship during the program. A quick look at their corporate webpage shows that Chinaccelerator did not even raise up the benefit of value-added services like legal services etc. Just like Innovation Works, the tendency to market your accelerator with your network must depend on who your backers are. Chinaccelerator is a member of Techstars network and Global Accelerator network.

Accelerator Organization

In this section, we will touch on the different building blocks that make up the accelerator program, such as the details of startup financing and the networks of Chinaccelerator.

Financing the Startups

In terms of equity stake, what is the average equity stake taken in the incubatees?
Batch 1: CNY 40,000 for 4 – 8% equity stake (Chinaccelerator, 2012).
Batch 2: USD 10,000 for 4 – 8% equity stake (Lim, 2011)
Batch 3: USD 12,000 for 5 – 8% equity stake (Chinaccelerator, 2013)

From the three batches, it seems that funding size has increased while equity stake demands stayed the same. This just means that either valuation had gone up or Chinaccelerator decided to invest in companies that are slightly more mature.

Networks and Mentors

From their webpage, Chinaccelerator has about 60 mentors giving guidance to their startups. However, most of the mentors are not based in the accelerator itself but stay connected virtually with their mentees.

Conclusion

Apart from the mentorship and network that Chinaccelerator is marketing itself on, there are no prominent areas that Chinaccelerator is marketing itself on to help the startups. Important intangible services like networking and mentorship sessions may be, but there could be a little bit more emphasis on value-adding business services.

Also, there are concerns over the geographic location of Chinaccelerator. Locating it in Dalian might not be the most strategic in the long run. Certainly, start-ups can focus solely on their startups throughout the program and also there are technological resources in the area. However, as more and more batches graduate, will graduates of Chinaccelerator’s program stay on at Dalian or would they move on to Zhong Guan Chun in Beijing? There is a higher possibility that the startup will move on to Beijing in order to be closer to the more developed startup ecosystem in Beijing. This points out the problem of accessibility to alumni resources in the future. For example, if Chinaccelerator requires certain help from a certain alumni based in Beijing, would Chinaccelerator find it easier to get help from their alumni if they were based in Beijing rather than Dalian?

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Tisiwi (天使弯创投)

Tisiwi was founded in 2010 by Pang Xiaowei. Tisiwi currently manages two venture capital funds and is based in Zhejiang. They are planning to invest around USD 80m in the Internet sector for the next 5 years (Tisiwi, 2012).

There are two types of products offered by Tisiwi, pure angel investment and acceleration program termed as 聚变 program. We will focus on Tisiwi’s acceleration program. The program is held twice per annum during spring (March – May) and autumn (August – October). The length of the program is three months and held in Zhejiang. Below is a brief summary of the program:

Accelerator Cycle

This section will touch on the cycle of the acceleration program in Innovalley. The analysis will provide an understanding of the process of the three months program.

Teams

Tisiwi will take in 10 startups for every cycle, the actual number of applications cannot be determined (Tisiwi, 2013).

Similar to the previous two accelerators, Tisiwi focuses on the TMT sector and only invests in startups with product offerings in the area of mobile internet, online gaming and e-commerce for example (Tisiwi, 2013).

Program

Tisiwi provides common working space and intangible services like networking sessions, sharing sessions and mentoring hours on top of regular business services provided. Tisiwi’s main marketing point revolves around being part of the Tisiwi’s family throughout the 3 months program. There’s a particular component that is being highlighted in Tisiwi that previously discussed accelerators failed to bring to attention, which is the interaction between current and previous batches of the acceleration program.

Tisiwi termed this component as entrepreneurship debug and it involves discussions on the difficulties the current batch is facing. This also serves as a session for the startup to update on their progress. This is certainly an important component program that differentiated Tisiwi from the other competitors in the market. (Tisiwi, 2013).

Accelerator Organization

In this section, we will touch on the different building blocks that make up the accelerator program, such as the details of startup financing and the networks of Innovalley.

Financing the Startups

In terms of equity stake, what is the average equity stake taken in the incubatees?
The equity stake required from Tisiwi stands at 8% with an infusion of approximately USD32,000 capital (Tisiwi, 2013).

Networks and Mentors

Tisiwi has a mentor base of around 30 people experienced in the technology sector. From the mentor base, most of them are Chinese entrepreneurs.

Networks with investment firms are not restricted to early-stage VC firms but also include firms such as IDG that invest in later-staged startups.

Conclusion

From the discussion of Tisiwi, it definitely stands out as one of the accelerators who differentiated itself from the list of accelerators in the industry. Differentiating themselves by marketing on a provision of a collaborative environment is definitely a strategic choice. By encouraging interaction between current and previous batches, participants in their acceleration program might gain perspectives they would never have if such sessions had not been organized. This is one aspect that Tisiwi performed well.

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Innovalley (创新谷)

Founded less than a year ago in June 2012, Innovalley envisions becoming the next powerhouse in the accelerator business. Based in Guangzhou, Innovalley is founded by ZHU Bo, who IPO-ed NeTrue in the US and founded Cgogo in China (Baidu, 2013). The acceleration programs are organized twice annually during Spring (April – June) and Autumn (October – December).

Accelerator Cycle

This section will touch on the cycle of the acceleration program in Innovalley. The analysis will provide an understanding of the process of the three months program.

Teams

There is no clear indication on the number of applications received, but what we do know is that the number of startups for each acceleration cycle is 20 (Innovalley, 2013).

Innovalley focuses solely on the TMT and mobile internet sector.

The product can be early-stage but there must be an existing prototype and team structure.

The team size can range from 3 – 10 people and they are required to move to Guangzhou for the duration of the acceleration program.

Program

Innovalley offers value-added business services such as legal services and human resources needs etc. The program also includes networking and mentoring sessions. However, Innovalley stressed that the mentoring component is a one-to-one physical mentoring with a subject matter expert in a particular industry. This proves to be a differentiating factor for Innovalley as most accelerators host virtual mentoring.

Accelerator Organization

In this section, we will touch on the different building blocks that make up the accelerator program, such as the details of startup financing and the networks of Innovalley.

Financing the Startups

It is not stated how much equity stake is acquired for approximately USD 24,000, but it is estimated to be in the range of 5 – 10%.

Networks and Mentors

It is expected that Innovalley’s network will consist of Chinese entrepreneurs in the mobile technology sector.

Conclusion

From an operator’s perspective, it can be clearly seen that Innovalley is targeting startups in earlier stages. Unlike Innovation Works, more focus is put forth on mentoring as seen from the physical one-on-one mentoring component in Innovalley’s program. Even with a physical mentoring program, it does not mean that the program is superior. What makes Innovalley stand out is that their team is built around experienced entrepreneurs who have been through the path of entrepreneurship and experience exactly what their program’s participants are experiencing now. This aspect is definitely one that Innovalley can pride itself on.

However, by focusing on earlier stage startups that solves niche problems, Innovalley might be limiting itself to potential opportunities.

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Microsoft Cloud Accelerator (微软云加速器)

Microsoft Cloud Accelerator is the first accelerator in China set up by Microsoft APAC in July 2012. The main objective of this accelerator is to enable Microsoft to play a bigger part in the startup ecosystem and also to encourage participants to utilize Microsoft’s platform such as their Windows Azure cloud services. The program lasts for 4 month. LIN Weiqian currently manages Cloud Accelerator and has 21 years of experience in the IT sector.

Accelerator Cycle

This section will touch on the cycle of the acceleration program in Microsoft. The analysis will provide an understanding of the process of the 4 months program.

Teams

There will be 15 successful participants in each cycle of Microsoft’s acceleration program (Microsoft, 2013).

Although there is no specific sector mentioned, a look at their previous batches of participants suggest that the program is targeting startups providing their services on the Internet (Microsoft, 2013).

They are looking for start-ups with a technical expert within the founding team. The product offering has to be innovative and the firm has to utilize cloud services from Microsoft.

Program

Although no monetary funding will be provided, the acceleration program will provide a common working space and intangible services such as mentoring, networking sessions and access to potential funding.

Accelerator Organization

In this section, we will touch on the different building blocks that make up the accelerator program, such as the details of startup financing and the networks of Microsoft.

Financing the Startups

There will not be any equity stake taken in the incubatees.

Networks and Mentors

Leveraging its network, Microsoft’s acceleration program provides a mentorship base consisting of thought leaders, entrepreneurs and in addition technological experts within Microsoft APAC.

Conclusion

An acceleration program by Microsoft is definitely a signal of intent to play a more integral part in China’s startup ecosystem. The main objective of this accelerator program is to associate Microsoft with entrepreneurial activity in China, as such, more startups will consider to utilize Microsoft’s products in the future and also open up a market of new paying customers. We believe that in terms of intangible services like mentoring and network, Microsoft Accelerator definitely provides one of the best stepping stones to expand a startup’s network. Initially, there are concerns that the lack of incentives by taking equity stake in the participants may stop Microsoft from going ‘all-out’ to help the startups in the program. But this concern is erased with the incentives of a potential market of new paying customers.

We have just gone through some accelerators in China, we will move on to discuss the various acceleration programs in China which don’t provide an incubation space, hence, they are termed as acceleration programs.

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IBM SmartCamp China (创业家全球训练营 －中国)

IBM SmartCamp China is a program bringing together the brightest startups in China. SmartCamp is a platform for IBM to engage with entrepreneurs and startups. It starts with the selection process in a region and the region winner will compete against other winners at the overall SmartCamp competition in the USA. The winner of the SmartCamp program will be able to embark on a three months accelerator program tailored to the team’s needs.

Acceleration Program Cycle

This section will touch on the cycle of the acceleration program. The analysis will provide an understanding of the process of the 2 days program and also the benefits of it.

Teams

For IBM SmartCamp 2012, there will be only 7 successful participants from China out of a list of 30 startups (IBM, 2012).

SmartCamp targets early-stage and growth-stage IT companies focusing on providing IT solutions to energy, healthcare, telecommunication sectors etc. (IBM, 2012).

Startups can be early-stage or growth-stage. Most importantly, the product offering of a startup must have a product form and not just an idea. As competition is high, IBM SmartCamp is looking for startups with a vision aligned with IBM on empowering the world with better technology (IBM, 2012).

Program

Although no monetary funding will be provided, the main benefit of the SmartCamp program is its intangible services. Participants in this program will expect close interaction with high profile executives, investors and mentors. This signifies that participants of SmartCamp are right away fast forward to the “Demo Day” component of a program in an accelerator and prove to be a huge drawing factor for participants.

In addition, there will be 5 winners. The champion of SmartCamp will be able to go through another 3 months acceleration program tailored for them by IBM. The 3 months acceleration program will include relevant mentor pairing, technical training and marketing of the startup’s product through IBM’s network (IBM, 2012). The rest of the 4 SmartCamp’s participants will automatically gain admission into IBM Global Entrepreneur Program.

Accelerator Organization

In this section, we will touch on the different building blocks that make up the acceleration program.

Financing the Startups

There will not be any equity stake taken in the program participants.

Networks and Mentors

Leveraging on its network, IBM will invite prominent names in the IT and venture capital industry. The most recent attendees of SmartCamp Asia 2012 include people from IBM (Jim Corgel, Windy Lung and Claudia Fan Munce etc.), IDG (LI Fung) and GGV (Jenny Lee). QuestVC also participated by being a part of the roundtable discussion segment.

Conclusion

With a similar intention as Microsoft to play a more integral part in China’s startup ecosystem, IBM SmartCamp’s main objective is to associate IBM with entrepreneurial activity in China. SmartCamp provides startups with a fast-track program to Demo-Day. In terms of intangible services like mentoring and network, IBM definitely fast tracks a startup and raises their profile among potential investors.

However, the only downside of the SmartCamp program is that the number of startups that have a chance to participate in the program is too limited with just 7 slots. This lowers the chances of a Chinese startup of taking part in the program. As a result, the effectiveness of IBM’s SmartCamp on growing China’s startup ecosystem is somewhat limited.

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SAP Startup Forum (新创论坛)

Just like Microsoft Accelerator, SAP Startup Forum incentivizes startups to join their program by providing them with its HANA database. In this way, SAP will get a growing set of third party solutions coming from startups that use SAP HANA database. The forum lasts for a day where interested startups make a pitch on how they intend to make use of SAP’s HANA database to build, enhance or complement their product offering. From this startup forum, about six to ten promising firms will be invited to join a development accelerator to develop the product.

In April 2012, SAP Ventures also announced the establishment of a USD 155M SAP HANA Real-Time Fund. This fund means that any startups invited to the development accelerator will have the chance to get funding from the SAP Fund (Nicole O’Malley, 2012).

Acceleration Program Cycle

This section will touch on the cycle of the SAP event. The analysis will provide an understanding of the process of the one-day program and also the benefits of it.

Teams

There are no figures given about the number of participants in SAP Startup Forum Beijing, but there are a total of 40 startups for the one held in Silicon Valley (QQ, 2012). Thus, the number of participants is estimated to be about the same as the one in SV.

There are no particular industrial sectors that SAP is targeting as long as the participants build a viable product offering using SAP HANA database.

SAP selects their participants for the startup forum based on how desirable the product offering is, how feasible the product is with SAP Hana platform and how viable the product offering is (Nicole O’Malley, 2012).

Program

Just like Microsoft Accelerator and IBM SmartCamp, although no monetary funding will be provided, the main benefit of the SAP Startup forum is its intangible services. Participants in this program will expect close interaction with executives, mentors and SAP HANA Fund. On top of intangible services, the tangible service comes in the form of the free provision of SAP HANA platform.

6 – 10 promising startup firms will be selected to join a development accelerator out of all the participants of the Startup forum.

Accelerator Organization

In this section, we will touch on the different building blocks that make up the acceleration program.

Financing the Startups

There will not be any equity stake taken in the program participants.

Networks and Mentors

As the main objective of the SAP Startup Forum is to create as many quality solutions that use its HANA database, the main network that would be provided to the participants of the Forum will mostly be from SAP. However, SAP will assist to market the products of promising startups as the endorsement of these promising startups will open up a market of new paying customers.

Conclusion

From SAP’s perspective, with virtually the same objective of a potential market of new paying customers as Microsoft Accelerator, SAP is incentivized to help to commercialize the product offering of the participants that take part in the SAP Startup Forum.

From the startup’s perspective, if SAP HANA platform is one of the building blocks of the product offering, then startups would be incentivized to join the SAP program. However, if the startup has to build its product offering around the SAP HANA platform at the expense of their product offering, then it might not be the most ideal program for them.

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Startup Leadership Program (SLP)

SLP is a six months program with 60 hours of classroom activity aimed to equip prospective startups with the hard and soft skills of entrepreneurship. SLP has clarified that it is not a typical boot camp or acceleration program and the main purpose of the program is to ensure that participants are well-trained (SLP, 2012).

Acceleration Program Cycle

This section will touch on the cycle of SLP. The analysis will provide an understanding of the process of the six months program and also the benefits of it.

Teams

There were 29 successful applications for the first cycle and 12 for the most recent second cycle (SLP, 2012).

Focus areas: Technology, life sciences, clean technology and social enterprise.

Aim: SLP wants capable leaders with a visible passion for SLP and willingness to play a part in SLP’s community (SLP, 2012).

Program

Participants can expect to gain theoretical knowledge of the entrepreneurship process and gain access to possible funding with SLP’s partners. In a classroom-based learning environment, participants will be able to take modules regarding business plan evaluations, lean startup strategy and term sheet competition etc.

Accelerator Organization

In this section, we will touch on the different building blocks that make up SLP.

Financing the Startups

There will not be any equity stake taken in the startup of the program’s participants as some of the participants do not even have a product offering.

Networks and Mentors

SLP markets itself on its extensive network of SLP Fellows. There are about 12 venture capital partners (SLP, 2012).

Conclusion

Still situated in its infancy stage, SLP Beijing Chapter has not gained as much publicity as it had wanted since the launching of the Beijing Chapter. In addition, the missing component of unwavering focus on product development questions the effectiveness of the entire model. In short, SLP is not considered as an acceleration program, but rather an educational program to equip current and aspiring entrepreneurs with the skill sets to succeed in China’s startup scene.

The six months program is not the entire duration of the program, but rather the program spans over six months with 60 hours of classroom learning. This means that throughout these six months, participants can still hold a full-time job and do not need to focus on the startup or the idea that he or she has. At the end of six months, a demo day will be held.

This model can be successful, but in order to be a hit in China, it has to be run well. QuestVC attended the demo day for Cycle 2 and was on the judging panel. There are two things that we feel SLP could improve from our perspectives.

1) The participants in the program need to set China as their primary market, so SLP will need to find more participants with China as the target market. This will increase the interests among China-based investors.

2) The program need not be spanned over such a long period of 6 months. The participants need to feel the intensity of the program and a 60 hours classroom activity program can definitely be compressed to a shorter time span.

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Moving forward

Before we begin this chapter, it will be a good time to bring up the Accelerator Equation again:

Accelerator = Incubator + Acceleration Program

In the previous chapter, we went through a couple of accelerators and acceleration programs. From the discussions, we can generally see the trend of the incubation scene in China. More and more incubators are offering acceleration programs and becoming accelerators. Even for those not offering common working spaces like incubators, they are offering acceleration programs. From QuestVC’s perspective, the following factors are those required of a good accelerator.

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What Makes Up a Good Accelerator

Reasonable equity stake

Higher-than-average equity stake may discourage startups to join the accelerator. Thus, a reasonable equity stake around that required from an angel investor would be a good gauge for any accelerators.

Focus on Intangible Services

There must be special focus on important intangible services like networking and mentorship sessions. In addition, value-adding business services should remain one of the critical components of an acceleration program as accelerators should complement the business needs required from the startups that most commonly lack. More often than not, we see too much focus on networking and mentoring sessions, yes, important they may be, but accelerators also need to remind themselves that startups require business support in order to fill up the knowledge gap they lack to move forward during the growth phase.

Continued Interactions Between Previous and Current Batch of Program Participants

Continued interaction with past graduates of the same program will enable the current batch to gain new perspectives on their product offerings and also to update on their progress. However, these types of sessions may exist at the risk of “the blind leading the blind”. The problem is that just because a startup has graduated from this program doesn’t mean that they are correct in how they handle certain issues. Nonetheless, having such sessions is better than not having. Accelerators just need to make sure that their current batch of participants does not follow blindly.

Physical Mentoring

We shouldn’t rule out the influence that physical mentoring provides as compared to virtual mentoring. Physical mentoring requires the presence of the mentors in the accelerator, this may prove to be a stumbling block for accelerators to incorporate the physical mentoring element into the acceleration program. For a mentor to be physically present in the accelerator, either the mentors work full-time in the accelerator or the accelerator is easily geographically accessible to partnering mentors. The first alternative is especially costly to accelerators and the latter would prove to be a more viable alternative. This highlights the importance of geographical location once again which we will touch on next.

Geographical location

As touched on previously, geographical locations are critical in order to retain resources for both mentors and alumni. Geographical location comes as an issue of balancing what matters most to the accelerator, cost-saving or close proximity to a more strategic geographical location. In truth, especially in China, it would be beneficial to locate the accelerator within areas that are earmarked by the government for intensive economic development. These areas are Zhusanjiao (珠三角), Changsanjiao( 长三角) and Zhonguanchun (中关村).

Accelerators/Programs Must be Incentivized

We must reiterate this point even though it might be common knowledge in the industry. The reason for emphasizing this is due to the rise of acceleration programs not taking any equity stake in their program participants. This type of acceleration program is often organized by large corporations with the sole objective of marketing their products. In a way, large corporations are incentivized to organize these acceleration programs. With incentives, both accelerators and incubatees will be motivated to perform at their most optimum.

Accelerators Management Should Ideally Come From an Entrepreneurial Background

You might ask, how relevant is this aspect to the success of an accelerator? Even if it’s not relevant, we cannot deny the fact that it’s a plus point for any accelerator whose founders are from an entrepreneurial background. Let’s take a rhetorical question for example: Would you trust someone with in-depth recipe knowledge but no cooking experience to groom you into a top chef? Of course, there are exceptions. But, the point here is that it’s beneficial to have a management coming from an entrepreneurial background as incubatees can tap onto their experiences when the unexpected occurs.

Integration with Chinese Government

The path of entrepreneurship is tough but the path of entrepreneurship in China is made tougher given the unique role the Chinese government plays. Moving forward, as the ownership structure progresses towards an increasingly private/mixed structure, it will be beneficial to observe whether the accelerator is moving with the government’s intended direction. In this section, we present some cornerstones of the government’s three-year plan for the entrepreneurship scene. Some of the objectives are as follows:

1. Fund size of 40 million RMB funding 300 start-up
2. Building up a network and database of 500 mentors and 5000 start-ups , 500 investors
3. To publish an annual research report on entrepreneurship educational materials

Source: QuestVC’s Internal Research

The Chinese government aims to achieve these objectives via 10 channels as follows: Organization, Policy, Funding, Training & Development, Human Capital, Intermediaries Platform, Marketing, Patent, Incubation and Acceleration.

Conclusion

Writing a report on China’s incubation scene has really deepened QuestVC’s understanding on the incubation and acceleration scene in China. From QuestVC’s perspectives, we have come up with a few key takeaways that could potentially shape our activities for 2013.

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Upcoming trends

Self-Organized Acceleration Program Should Be The Main Deal Source Channel for Venture Capital Firms

Yes, we have recognized the need for a venture capital firm to host its own acceleration program as the main deal source channel instead of sourcing for deals in other acceleration programs or events. A VC firm typically combines all the elements of a good accelerator from our own perspective.

2013: A Good Year for Accelerators

Given the lackluster performance in venture capital investments in 2012, 2013 looks to be a good year for deployment of accumulating dry powder in the industry. For accelerators, this is positive news as the exit route is clearer.

From Accelerators to Acceleration Programs

One question we asked ourselves during the research process, is there a need for common working space? Yes, startups need to be situated in an entrepreneurial environment, but is common working space really that critical?

In the venture capital industry, it is common knowledge that one of the most important aspects of the due diligence process lies with the evaluation of the team structure of a prospective startup. We know that more often than not, the problem lies not in the idea itself but on the execution of the idea. Thus a committed and driven team is what we’re looking out for. If a startup fits this criteria, we need not situate them in an pro-entrepreneur environment for them to stay driven. Provision of intangible services are still essential, as such, we believe that there will be a movement of accelerators to acceleration programs.

Finally, to wrap up the report, we thank you for your time in reading this report. We hope that you have gained a deeper understanding of China’s Incubation Landscape through this report.

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Citations

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