(or, some things I’ve learnt this week)
It’s been quite a week.
I’ve interviewed 18 people in eight days in Beijing and now have close to 14 hours of recorded material as part of my Starting up in China research.
I’ve been back to 3W Coffee, spoken to VCs operating in both the US and China, met ex-pat, sea turtle and China-educated entrepreneurs, talked with a number of lawyers about Chinese IP – amongst other things – and met with some big internet companies too.
I’ve now arrived in Shanghai and before my final week of research kicks in, I’ve been digesting what I’ve seen so far.
I’m not sharing names on here as some of the insights I’ve been given were under the condition of anonymity. However, below are a few things I’ve found interesting.
1.) Chinese entrepreneurs are more likely to have experience in big companies
My view of innovation and entrepreneurship has been coloured by living in the US. The Facebook IPO is the culmination of the archetypal American entrepreneurial journey; the college dropout makes it big in their early 20s as a visionary founder.
When I started this research, I have to confess I was looking for the same thing in China.
But I’ve learnt that Chinese entrepreneurs are a bit different. From the people I’ve met so far, the ones setting up companies in their early 20s with no previous work experience are the ex-pats. They are often Chinese extraction and speak the language, but have grown up and been educated outside of China.
In terms of the Chinese entrepreneurs – both those who have lived and worked all their lives in China and those who have received foreign graduate educations or work experience – they seem to be more likely to have had experience in big tech companies such Baidu, Tencent, Sohu or the Chinese arm of American firms like Amazon, Yahoo!, Microsoft or – previously – Google.
I won’t delve into the reasons for this in a short blog post, but I think it’s partly educational, partly cultural and partly about the current state of development of the Chinese internet. These three factors have also become a recurring theme in what I’m learning.
2.) ‘Copy 2 China’ involves innovation because the Chinese market is different
Functional literacy in the Chinese language involves knowing 3,000-4,000 characters. There are a number of different ways to type Chinese characters, but the easiest is in Pinyin – using the Roman alphabet to spell out Chinese characters phonetically. (This Slate article gives you an idea of the complexity of this problem). Although the Chinese school curriculum now requires all children to learn the Pinyin system, this still means that typing words into search engines is a real pain.
This affects the way Chinese netizens want to use websites; long list-based webpages are popular because you only have to click through to the next link, rather than type something – the Sohu homepage is a nice example. This is just one way in which US users and Chinese users are different.
Securing revenue from Chinese users is also different. Simply put, compared to the US, China has fewer people with large disposable incomes, but a vast lower and middle-income consumer base. I’m yet to meet anyone making revenue from selling apps to Chinese users – the business models of my interviewees have all either been ad-based, take a percentage of an e-commerce transaction or use micropayments (a few RMB for virtual goods in online games).
This is a fascinating and complex topic and I’m looking forward to finding out more about how Chinese and Western netizens differ in usage patterns. It also has implications for the copy-cat story in China: a site might initially look like a clone of something else, but its users are different and the features that really take off in the Chinese market are different.
3.) Big companies can be both a threat and a potential opportunity for startups
It’s really tempting to compare what’s happening in China to Silicon Valley and just dismiss the former because it’s not reached the same level of maturity as the latter. But the important thing is that China is still developing – it’s the direction it’s moving in that’s interesting, not just where it is now.
One of those areas which seems to be in development is the relationship between well-established technology players and the little guys. As I’ve said, it seems that the profile of a Chinese entrepreneur is more likely to include big company experience. A number of prominent Chinese angel investors have also made their money through Chinese IPOs. But many Chinese founders of the big internet companies are still running the companies they started, rather than supporting the next generation of entrepreneurs at the moment.
The other area which is developing in this respect is big company investment and acquisition of startups. There’s definitely at least the perception that if a small company comes up with something new, the big guys will just copy the product and ship it to their existing users, thus squashing the startup. But there seems to be the beginnings of a more collaborative relationship between the internet giants and Chinese entrepreneurs.
Again, however, even if the Chinese market has the potential to develop in the same direction as Silicon Valley, with a strong culture of investment coming from those who made their money as entrepreneurs themselves and a healthy acquisition market, who’s to say that the role of big companies in the Chinese startup ecosystem might turn into something different altogether?
4.) American tech companies don’t seem to be nurturing Chinese talent in-house
I need to look into this one more, but it’s been interesting to hear repeatedly an entrepreneur describing being at the top of their game in the Chinese arm of a large American company then moving to the American arm and feeling like there is a ‘glass ceiling’ – they think that the American firm doesn’t give them adequate responsibility or opportunity and so they leave, frustrated.
I haven’t worked out why this is, but it doesn’t seem to be altogether a bad thing for entrepreneurship in China – the people I’ve spoken to are starting companies instead. But if I was a big US tech firm serious about the Chinese market, I’d be asking myself whether there’s a problem here and if so, why it exists.
5.) Hiring talent is a big challenge for Chinese startups
This has been the number one challenge given by the entrepreneurs I’ve interviewed. Some also mentioned raising money, but I think talent has been a bigger theme. Interestingly, I think you’d hear the same from Silicon Valley founders right now, although the reasons are different.
Hiring Chinese talent seems to be particularly hard for a startup in part because engineers can make a lot of money in a big company and Chinese employees are more risk adverse. But there also seems to be an educational element to this: the founders I have talked to said they hired both recent graduates and those with big company experience, but they often talked about the need to train their employees. There’s still an educational/training gap here.
Other challenges included the bureaucracy of legally registering a Chinese entity – you need quite a large amount of cash in the bank to do it, it takes a long time and ultimately a foreigner can only own a certain percentage of a Chinese firm which restricts or complicates investment deals (it’s not one set percentage, but differs between industries and results in VC firms often having both RMB and $ funds together with complicated foreign ownership structures).
I think it’s striking that in the conversations I’ve had with people who don’t know China well, the first thing they want to talk about is how the legal and governmental framework isn’t conducive to doing business. This isn’t the first thing people actually operating here talk about as a challenge. Maybe it’s because it’s a given that you just have to work through. Challenges like hiring good people are perhaps ultimately more complicated to solve.
There’s lots more, but I’ll leave it here for now.
Writing half-finished, half-researched findings down before you can see the full picture is a risky business.
If you think I’m way off or have any suggestions, please do let me know. A bit of crowd-sourcing ideas never does any harm!