You Must Be Exceptional appworks

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Fen-Hui Lin & Yu-Ting Hsiao

You Must Be Exceptional – appWorks

(Received Sep 15, 2012; First Revision Dec 17, 2012; Second Revision Feb 1, 2012;

Accepted Mar 17, 2013)

Case Description

Jamie Lin and the appWorks Start-up

1 “The market will be the final judge.” When Jamie Lin started appWorks in 2009, he had already co-founded Hotcoll.com selling computers through the internet. At that time, Lin was a junior at Taiwan University. As the company gradually transformed into a software vendor, branching out to China, Lin worked in China for two years. Then he left for the United States to study an MBA pro-gram at the NYU Stern School of Business. After gradu-ating, he worked in the venture capital companies of HSS Ventyres and All Asia Partners. While working in the States, Lin founded a virtual community website for travel discussions and experience sharing named “Sosauce.” He also founded another 3D internet game production com-pany called “Muse Games.”

When the internet bubble burst and destroyed peo-ple’s confidence on it, Lin saw the internet as having enormous business opportunities. He wrote blogs in Chi-nese to share his experiences, insights, analyses and sug-gestions for the sector to Mandarin Chinese speakers. Lin emphasizes that there are always new websites or newer and better internet applications. Internet companies must not be afraid of competition. The best strategy is to focus on a specialty and become outstanding in this field. This can be an innovative service integrating internet technol-ogy with creativity.

While Lin worked in the States, he noticed a seed-stage start-up funding company, “Y-Combinator”

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(YC). The company funds start-ups in two batches every year since 2005. Each chosen team needs to move to a YC office for the three-month incubation program, receiving seed funding of $11000, plus $3000 for each team member. YC gets from 2 to 10% of the shares in return. At the end of the period, the teams present their plans on Demo Day to a large audience of investors. Since 2005, YC has funded more than 200 start-ups [1]. Some have become well-known such as Dropbox, Airbnb, Scribd, etc. YC has set up an effective incubation model for website busi-nesses. Inspired by this start-up accelerator, Lin decided to found a super angel investor and incubator in Taiwan.

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Fen-Hui Lin is Associate Professor of Department of Infor-mation Management, National Sun Yat-Sen University. E-mail: fenhui.lin@gmail.com

Yu-Ting Hsiao is Ph.D. Candidate of Department of Informa-tion Management, NaInforma-tional Sun Yat-Sen University.

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. Y-combinator (accessed March 04, 2013), [available at http://ycombinator.com/ab out.html].

Lin’s blog attracted like-minded friends who finally became co-founders and associates of app-Works. In 2009, Lin and IC Jan raised NTD 320million from Cathay Financial Holdings, Phison Electronics, United Daily News Group and the CID Group and founded the venture capital company they called “appWorks.” The plan is to invest in 100 Tai-wan internet start-ups in five years.

The Incubator Program

appWorks hosts a full-time six-month incubation program for chosen start-up teams comprising team progress demos, case discussions, financial counsel-ing, elite speeches, bar night and happy hours. All teams share a 200 square-meter office. The program brings together the start-up teams to share their de-velopment experiences and polish their business plans. In the end, these teams present their business plans on Demo Day to a large audience of up to a thousand people, including entrepreneurs, investors and potential start-ups. appWorks has the first option to investment in the start-ups in their first year after the graduate. The investment was from NTD 500K to 15 million in exchange for 5% to 15% of the shares.

Since 2010, appWorks has hosted five sections and incubated over 120 teams by 2012. Jan explained that they focus on four criteria when choosing the start-ups, including business insights, communication skills, commitment to found a business and pro-gramming skills. In addition, the most important fac-tor for a start-up to make a successful business is the strong determination behind it, said Lin. This will happen if the people behind the start-ups decide that they will be eagerly looking for customer opinions, endlessly improving on their products or services, and trying everything to build up their business.

Sun who joined the 2012 incubation has run a small software company for seven years. He shares what he has learned with appWorks in two ways. (1) The other twenty-some teams become his

busi-ness counselors and partners who help him ex-amine his idea, test the prototype products and provide suggestions.

(2) Because of the high profile of appWorks in the Taiwan internet sector, Sun found that his busi-ness plans received more public attention as well as the opportunities to meet or connect with other investors.

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Management Review, April 2013 198

Graduation Teams

More than 120 teams have graduated from appWorks and at least 58 teams have registered their companies and started operations. Fifteen of them obtained an investment from appWorks. Some of the graduates have achieved a very stable position and have kept on growing. The fol-lowing three companies are presented as examples. (1) 5945.tw

The founder of 5945.tw joined the first incubation batch of appWorks in 2010. The website recommends carpenters, plumbers or decorating agents for housing renovation or decoration projects. In order to minimize the information asymmetry caused by the non-transparent pricing system for housing renovations, 5945 has pro-duced about 300 videos, in addition to graphic articles, to provide as much knowledge as possible that is related to housing work. Their revenues by 2012 were over NTD 100 million.

(2) EZTABLE.com.tw

EZTABLE provides an O-to-O (online-to-offline) restaurant booking service. Customers can buy discount meals or book a chosen restaurant from the EZTABLE website or a mobile app. The booking service has been extended to Shanghai since 2011. The 2012 revenues amounted to over NTD 80 million .

(3) QLL: Quick Language Learning Inc. Ltd. This start-up belongs to the 2010 first batch of app-Works. They focus on developing language learning con-tents and mobile apps and have received the 2011 Red Herring Top100 Award in Asia. Among the more than 100 language learning apps issued by QLL, the Chinese learn-ing apps have been sold to over 150 countries and the English audio books have reached over four million downloads.

Other Seed or Angel Funding

TMI-Labs and Start-up Labs provide seed funding for internet start-ups in Taiwan. One cofounder of TMI-Labs is Kai-Fu Lee who used to be the vice president of Micro-soft and the founding president of Google in China. Lee is now a venture capitalist and a famous blogger in China. Started in 2011 in Taipei, TMI-Labs provides angel fund-ing from 100K to 300K NTD. Another incubation program is Start-up Labs that is cofounded by Clint Nelsen and Arkady Moreynis in 2011. The plan is to tour one hundred cities around the world, searching for start-up teams for cooperation and investment. They chose five start-ups teams to demo in Taipei, the first tour city. The start-up teams will accept twenty-two days of counseling to accel-erate the product and business model development.

Since 1997, there have been 130 incubators in Taiwan sponsored by the Small and Medium Enterprise Admini-stration Office of the Ministry of Economic Affairs (Moeasmea incubation centers). Operated by universities, institutions, foundations or local governments, these incu-bators provide various services for small and medium en-terprises or start-ups, including reduced office rental,

fi-nancial or legal advice or general business operations counseling. Their roles are as incubators and accel-erators but not as venture capitalists because they do not provide direct investments in the companies.

The Challenges of appWorks and

internet start-ups

Jan expressed his worries about the lack of venture capital companies that focus on the internet industry and who are willing to invest on further rounds of start-up graduates from appWorks. The second prob-lem is that the seventeen million internet users in Taiwan is not yet on a large enough scale when com-pared with its neighbors in China or Japan. Will the user number limit the business opportunities for internet start-ups in Taiwan and further influence appWorks investment performance?

Teaching Notes

Introduction

This case makes use of the super angel investor “appWorks” to demonstrate the start-up process and the incubation model. It is written for the two fol-lowing teaching objectives:

(1) for students to understand the start-up process and the incubation model of angel investors. (2) by using appWorks as the exemplar discussion,

the students can learn how to analyze a business model.

The Teaching Plan

This case study is suitable for e-commerce, entrepre-neurial management, internet marketing, management information system, business management, etc. The case is suitable to be conducted during the last half semester after the students have learned website business and technology. We designed four questions that will need 80 minutes of class discussions.

Discussions

Warm up (10 minutes)

For undergraduate students, the incubation program or the venture capital issues might be distant from their experiences. The instructor can make some cold calls to briefly review the case. However, the EMBA classmates might have more investment ex-periences. The instructor can ask students: “Will the incubation model of appWorks work in the Taiwan internet sector? How is the incubation model different from the existing venture capital companies or seed angel funds?” Let one or two students express their opinions or experiences as the warm up exercise.

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Figure 1 appWorks Business Flow Chart

Investments

Investors AppWorks Start‐up Teams

Recruitment training Investments Company operations X

Go‐to‐market and Company

operations Company profits of start‐ups

Share profits

Dividends

Selling company shares sold

Investments

Recruitment training Investments Company operations X

Share profits

Dividends

Investments

Recruitment training Investments Company operations X X

Share profits

Dividends

Question 1. Explain the business process of appWorks Lin said that he and his partners are working on proving that the business model of the super angel fund works in Taiwan. appWorks is a start-up, too. This question is for the students to understand the business flow and operation of appWorks.

Question 2. Compare the incubation programs for in-cubators described in the case, including TMI-Labs, StartUp Labs, YC and Moeasmea incubation centers. A comprehensive comparison about the incubation pro-gram among them is summarized in Table 1.

Question 3. What is the business model of appWorks? The business models have been examined by many schol-ars from various dimensions (Chesbrough and Rosen-bloom 2002; Johnson, Christensen, and Kagermann 2008; Mahadevan 2000; Osterwalder and Pigneur 2010; Zott, Amit, and Massa 2011). The authors suggest that the business model of Johnson, Christensen, and Kagermann (2008) be used as the discussion reference for concept clarity and dimension frugality. They articulate the four dimensions that comprise the business mode. The follow-ing briefs present the analyses of appWorks operations referring to the four dimensions.

(1) Value propositions

 Target customers: internet entrepreneurs

 The needs of the target customers: assuring the business model, building the organizational struc-ture, obtaining financial support or investment, op-erating the new business and managing finances well.

 appWorks can provide: incubation program (the full-time organized events), bundling the networks among the start-up teams, hosting Demo Day to connect start-ups with venture capitalists or outside resources.

(2) Profit formula

 The revenue streams: the investments of app-Works on start-up teams can be recovered after appWorks sells the shares of those teams after growing to certain scales.

 The cost: there are two main cost items. (1) fixed costs including the office rent and facili-ties, employees, activities; and (2) the man-agement costs spent on investment related ac-tivities.

(3) Key resources

 Human resources: the three partners having years of internet business and investment, in addition, the two managers’ passion and hard work.

 appWorks becoming a brand: two reasons to be addressed. First, Lin and Jan have become popular bloggers in the last two years in Tai-wan. Second, some start-up graduates have reached a hundred million NTD revenues in 2012.

 Networks among start-ups: the networks among start-up teams not just for those teams in the same six-month section, but also for the more than 120 start-up teams that have gradu-ated.

(4) Key processes

 Attracting more applicators

 Enhancing the business plan evaluation process

 Incubation model: creating an environment that start-ups learn from others, helping others, and listening to the market

 Bridging the start-ups and other investors: hosting the Start-up mixer and Demo Day

 Writing blogs: Lin and Jan have become well-known bloggers in Taiwan. Their blogs help raise the visibility of appWorks to poten-tial start-ups as well as those start-up gradu-ates.

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Management Review, April 2013 200

Table 1 Comparison of appWorks with other Incubators

appWorks TMI-Labs StartUp Labs Y-Combinator SME Incubation Center

Host and train

the teams 1. Free 180-day incubation pro-gram 2. Scheduled weekly training programs 3. Start-ups net-working and community building 1. Incubation program: 60 days in Taipei and 60 days in Beijing. 2. Technical support for start-ups 1. Free 22-day boot camp 2. International mentors for counseling

1. 90-day boot camp 2. One-on-one mentor program

3. Bridging venture capi-talists or other investors with start-up teams

1. Start-up companies stay in incubation centers with low rents and other sup-ports to three years 2. No fixed training pro-gram

3. Providing financial, legal and management counsel-ing

4. assist in applying for government grants The way of investment _{1. appWorks has}

the first option to invest in the start-ups in one year 2. Seed funding of NTD 500K to 15M in exchange for 5 to 15% of the shares 1. NTD 350K seed funding in exchange for 8% of the shares 2. NTD 3M to 10M direct in-vestments in stable compa-nies

Top five teams get NTD 1 M in exchange for 8% of the shares

Pre-seed funding of USD 11,000+N*3000 (N is the total number of team members) in exchange for 2-10% of the shares

Not able to invest in com-panies Fields or Industries Online business or mobile appli-cations related to Mandarin

Online business Online business Online business. No limitations, mainly to promote new businesses, new products or new technologies, and as-sist SMEs to grow and upgrade

Question 4. The opportunity for internet entrepreneurs (15 minutes)

The internet users group in Taiwan is small compared with China, Japan or the United States. Is there still much op-portunity for internet start-ups? This question can be dis-cussed from two aspects: (1) the possibility for start-ups to see the business gap not provided by any websites (for example, 5945.tw provides housing-repair matching ser-vices). (2) Looking toward the global internet market in-stead of being limited to Taiwan (for example, QLL sells apps to other countries).

Conclusions

It is easy for skillful programmers to imitate a website or apps that might have taken the start-ups months or years to put into practice. As Lin opines, start-ups need to move faster and provide better products than their imitators. For the invisible part, start-ups need to establish solid business operations and an effective go-to-market plan. Always being faster and better can make the internet start-ups be-come stronger.

REFERENCES

Chesbrough, Henry and Richard S. Rosenbloom (2002), “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation's Technology Spinoff Com-panies,” Industrial and Corporate Change, 11 (3), 529-555.

Johnson, Mark W., Clayton M. Christensen, and Hen-ning Kagermann (2008), “Reinventing Your Business Model,” Harvard Business Review, 86 (12), 57-68.

Osterwalder, Alexander and Yves Pigneur (2010), Business Model Generation: a Handbook for

Vi-sionaries, Game Changers, and Challengers,

Hoboken, NJ: John Wiley & Sons.

Ries, Eric (2011), The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to

Create Radically Successful Businesses, New

York, NY: Crown Business.

Zott, Christoph, Raphael Amit, and Lorenzo Massa (2011), “The Business Model: Recent Develop-ments and Future Research,” Journal of Man-agement, 37 (4), 1019-1042.

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