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E-COMMERCE: How Angel Capital picks promising companies?
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In 2011, China became the world’s second largest Venture Capital/Private Equity (VC/PE) market behind the United States, surpassing the United Kingdom. From 2002 to 2012, the amount of investments and deals made increased exponentially (Picture 1). With this, both society and its government are creating a better environment for startups in China, which results in more and more entrepreneurs and innovative projects, which, in turn, is resulting in more entrepreneurs and more innovative projects. How can investors pitch the promising projects correctly? Generally, four important aspects of this pitching process should be taken into consideration. 

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A scalable business 

 

Most projects we have found are self-employment projects. One of our most important tasks is to convince many entrepreneurs that they do not need money at all. For example, if you have a product or service of which you are selling $10,000 per month and you aim to sell $50,000 a month, that's not a business plan for an investor. Actually that is simply "sell more and better." It is better for the owner to think about how to do this and negotiate with the bank to cover the negative cash flow from time to time.

 

Angel Institutional Investors only invests projects that have ambition and could provide strong growth. A company that is going to sell $3 million in five years is the limit of what we may be interested in, but if, and only if, we understand that those $3 million could multiply by expanding the customer base. A company that aims to focus only in the niche market and sell $500,000 in the third year is not interesting for an investor.

 

Disruptive Business Model 

 

A company’s business model determines how that company can earn profits. Investors highly value projects that can generate explosive growth.  

 

altWhen doing angel investment in an emerging market, business models already proven to work can attract more investors’ attention due to their low risk because the business models that these companies copy have already proven to be successful. These Chinese companies then add a Chinese flavour to make their businesses successful in China. Some examples of C2C Chinese companies are Dangdang (Amazon), Renren (Facebook), and Lashou and Meituan (Groupon). They all have experienced explosive growth, and most of them have already gone IPO.

 

“Are copycats the only ones successful?” The answer is NO. Some innovation in China is also promising, as they can also succeed in competitive markets. Alibaba, founded in 1999, is the world’s largest online business-to-business (B2B) trading platform for small businesses.  One of the most important reasons why Alibaba succeeded is because of a large amount of Small and Medium Enterprises (SMEs) here in China.  This is why Alibaba and SMEs both win in this situation. Another case is Focus Media, founded in 2003, a Chinese outdoor TV advertising network operator. Focus Media implemented televisions in buildings, marketplaces, buses, subways and taxis before the rest of the public knew about this plan. It also combined ordinary outdoor print advertising with traditional television advertisements to create a completely new industry which undoubtedly has a potential for strong growth.  Alibaba has gone IPO in 2007 in Hong Kong, while Focus Media entered Nasdaq in 2005.

 

altKnow about your competitors

 

If there is a profitable market, there will surely be competitors. Even in infant industries, there will be competitors.

 

In a new industry, try to avoid companies with a large amount of resources, because they can copy tour products quickly and promote their products in their mature channels. For example, Miliao was the first free instant messaging tool in the mobile terminal industry, but similar products such as Tencent’s WeChat and China Mobile’s Feiliao appeared shortly after. Due to Tencent’s huge QQ resource in PC terminal, WeChat has become the leader in this area. 

 

In a mature industry, paying attention to avoiding intense competition and seeking segment markets are good ideas. Today in the online travel industry, there are mature companies like Ctrip and eLong, which already have millions of registered members. Thus, there will be no advantages if we enter this field to compete with them directly.  However, you can enter the market in an unorthodox fashion. For instance, Qunar is a travel search engine for online travel services. It collects all the information related including air tickets, hotels, holiday products and so on, to help people make better travel decisions. This is a perfect case of approaching the market differently to do well in an otherwise competitive industry, by making companies, which would otherwise be competitors, partners.

 

Take women’s online shopping as an example. There have been so many one-stop shopping platforms, but they were not consistent in providing good services for women eager to share and communicate.  Then, sites like Meilishuo and Mogujie came about.

 

Meilishuo, founded in 2010, is a community-based fashion media for women, whose nature is social e-commerce. Users can communicate beauty, shopping, as well as clothing, and the pictures posted will link to online shops. Meilishuo makes money from brand advertising and online shops. Mogujie, founded in 2011, is also a social e-commerce community for women’s shopping. Mojujie has a Click-per-cost (CPC) business model, which is different from Meilishuo’s. She leads traffic to Taobao and earns commission according to the turnover. So far Meilishuo has closed 3rd round financing, got more than 15 million registered users while Mugujie has finished 2nd round financing and got more than 9 million registered users.

 

altEntrepreneurs

 

Entrepreneurs are the ones who launch a new venture or enterprise, and they will accept the full responsibility for the outcome. Most entrepreneurs have something to prove to the world, and there are a few who don’t usually want to change it. However, according to the limited experience, entrepreneurs can be divided into 5 types:

 

Type#1: They are the ones in love with the industry without formal training. There are many subtypes of them, but most are people who have learned how to program, and when they discovered the specific industry, they decide to work by themselves, become independent and focused on something they love. 

 

Type#2: Wrong career. Many young people find that the degree they earned in college, more or less to meet their parents’ will, is not what they would really like to do, and they do not want to work on anything related to what they have studied. 

 

Type#3: They are born to be entrepreneurs. There are people like this. You talk to them and do not know why, but you are convinced that this person is capable of following through with what they say even if it does not seem to make much sense. It's the glow in the eyes, their enthusiasm and, sometimes, all of the above plus good education and an innate ability to manage teams.

 

Type#4: The experienced manager. Many managers in large companies end up tired of having to adapt to the company’s rules and organisation. They dream of "being their own boss". Most have experience of leading departments with hundreds of employees, and they wonder, especially after an MBA, if in fact they are wasting their time and should be starting up their own business. 

 

Type#5: The techies. They spent their whole time at their university learning relevant knowledge, and they are sure they can make something different or at least improve something with which they are familiar. Their problem is they have no experience in sales, and they have not thought about who will be responsible for ensuring the achievement of their Business Plans.

 

Generally, investors will favour Type#3 and Type#4:

 

altType#3: Their only weakness usually comes from the lack of criteria in selecting the team they need. They are able to sell the project to anyone, but they have a natural tendency to do it with the people close at hand, who are hardly ever the most suitable. 

 

Type#4: Entrepreneurs have a deep understanding of the industry and have formed their own awareness, which will have a great positive impact on the project they start.

 

Generally, investors would prefer not to see these types of entrepreneurs:

 

Type#1: They are not a target for an investor. Eventually, investors can just buy “their invention”. 

 

Type#2: In some cases, they have hit the nail on the head and the idea presented is attractive, but they do not have a credible team to carry it out. Their natural tendency is to surround themselves with people similar to them, which does not solve the problem of having a balanced management team. 

 

Type#5: They need to complete their teams with experts in commercial and financial areas, and not all of them are willing to give shares in exchange, even if they are a necessity in order to carry out the project.


 


By DaD Asia 

 

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