Entrepreneurship & Innovation

Chinese Startups: Playing Catch-up and Adapting

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China's tech scene is a relatively young one with enormous potential. The talent pool is deep, and in a country whose burgeoning middle class is almost as big as the entire U.S. population, investor interest is high. Chinese tech giants are some of the most valuable companies in the world — Alibaba, Tencent, Baidu — giving entrepreneurs who hope to create the next big company a model to aspire to.

Despite having the most developed tech scene in Asia, in many ways, entrepreneurs in China are still in catch-up mode: the Chinese economy has expanded tremendously in the last three decades, but the country has only recently focused on boosting its service sector, and its tech infrastructure still lags behind that of the U.S. and other western markets. With so much homegrown talent, competition is intense and can dampen creativity, but Chinese companies have been nimble in adopting technologies made popular in the U.S. and adapting them for the local markets, generating value in the marketplace and making themselves attractive to investors.

“There are a lot of opportunities in things that haven't been built out," said Paul Orlando, co-founder of AcceleratorHK and professor of entrepreneurial studies at the University of Southern California. In the West, basic issues like payment systems and building customers' trust with e-commerce have already been solved, but these aspects are still being worked out in China.

“Even something like delivering the physical product. In the U.S., there's already been a couple of decades [of experience] and companies have come along to help solve those problems," Orlando said. But lack of infrastructure can also prove to be an opportunity in China, and companies have found innovative ways to deal with these issues. “Not every place has the same toolset, the same infrastructure. If you look at things that need to happen but haven't happened yet, that can be opportunity," he added.

An abundance of young talent is also the breeding ground for hyper-competition, where Chinese entrepreneurs are constantly coming up with business ideas and starting new companies, often similar to those of their peers. There is a temptation to work off business models for products that are already proven successes — and to tweak aspects of those — instead of creating something new.

Matt Li, founder of a Hong Kong-based startup called Branch8 that received seed capital from Y Combinator, said that invention was less encouraged in China than in places like Silicon Valley, which put a higher focus on creation and coming up with a quality product.

“When I first landed in America, I saw a lot of the differences [between the U.S. and Chinese tech environments], being that the U.S. was very focused on innovation. Y Combinator hounds you on the idea that you need to build a very, very good product. They're not very concerned about competition. They don't worry too much about how you charge for a product," he said. Price is not an issue "once you make a really good product."

In contrast, Chinese companies are often concerned with the defensibility of their products and with fending off competition, worried about their ideas being stolen and copied. This can make them a little skittish about taking big innovation risks, when making a practical and widely-used application offers more of a guarantee.

“There's less premium on innovation in China, mostly because the Chinese market in some aspects is a bit behind compared to the U.S. It's not just entrepreneurs, but many [companies themselves] are very pragmatic: if something already works somewhere else, then the risk is lower," said Benjamin Joffe, an expert on Asia's tech scene and general partner at HAX Accelerator.

That's not to say that there isn't creation at all in China — far from it. While the perception is that many brands are known for being the “Chinese version" of an American product, the reality is that these are companies that have been successful at adapting overseas products and improving on them for domestic consumers. The distinction, as Joffe noted, is in the details.

Take Tencent's WeChat. One of the world's most popular messaging clients, it has a built-in social media platform that allows users to post status updates, share photos, play games, and meet locals. It has become one of the most important social media platforms for brands to communicate with consumers. While on the surface, WeChat doesn't seem much different from other messaging apps, but a closer look brings out more details that separate WeChat from its competitors, making it worth close to $60 billion, according to analysts.

In the adaption of foreign concepts, there's plenty of creativity because most things need to be tweaked for the local ecosystem. Infrastructure differences force "a lot of modifications of initial models to the point where the original model doesn't work, and the local model is thriving," said Joffe.

Tencent was born from ICQ [an instant-messaging program developed in the '90s] and adapted the business model to become very successful. More recently, WeChat has adapted and improved on messaging apps to the point where it is the world's most advanced, and integrated with numerous services from taxi booking to e-commerce," he said.

Competition is also fierce because getting a company started is relatively easy in China. Barrier of entry is low because costs are low — companies don't pay engineers nearly as much as their western counterparts do in Silicon Valley, and the government encourages startup creation. There are tech “parks" in cities that act as innovation hubs, and the government offers subsidies. In addition, the government also has a dedicated startup fund to the tune of $6.5 billion that will help establish more high-tech parks, where incubators enjoy tax benefits.

Despite a recent downturn in the Chinese stock market, investors are still pouring money into Chinese startups. Intel recently announced that it would invest $67 million in eight companies, and startups announce new rounds of funding every day. Investors make decisions quickly and there is much more early-stage and late-stage capital available for young companies.

“The environment has been changing very rapidly. Now it's quite easy for startup companies to raise money. People actually say there are more investors than entrepreneurs in China," said Wang Tianxiong, product developer of Beijing-based Papaya Mobile. “If you have an okay business plan, you don't need to find any investors — investors will find you. That's a good thing for entrepreneurs."



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Benjamin Joffe
HAX
General Partner
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