My Views On Why Startups Thrive In China And Not So Much In Korea and Japan
From time to time journalists ask me about my views on this or that ecosystem. Often it’s about China, as it now has the world’s second largest contingent of unicorns.
A few weeks ago a journalist from Chosun (#1 economic newspaper in South Korea) asked me detailed questions. My answers were translated and published in Korean so I reproduce them here in their original form — with permission. It contains some of my most recent ideas on startup safety nets.
Q1. Chinese IT companies such as Baidu and Alibaba are growing rapidly. What do you think their secret is?
Alibaba, Baidu and Tencent are quite old companies — 20 years old for Alibaba. They are now established giants, who keep pushing toward excellence in technology and business practices. They now benefit from the growth of China’s economy and online population.
They were initially inspired by overseas services, (ICQ for Alibaba, Google for Baidu and… nothing so clear for Alibaba, though General Electric inspired their corporate culture, and eBay inspired Taobao later).
All found a way to adapt to the unique conditions of China’s ecosystem by evolving their service, business model, marketing methods and technology. In some cases, they had no choice but to adapt the business model or fail.
In addition to in-house innovation, they keep an eye on what happens in U.S., Japan, South Korea and adapt what they learn. Tencent’s revenue is mostly from online games with micro-transactions, which scaled first in South Korea.
Q2. American venture startups are doing business in China instead of Silicon Valley. What advantages do China’s Shenzhen and Beijing have over Silicon Valley?
I don’t see many U.S. startups succeeding in China.
The reason is that their playbook does not work in China’s vastly different ecosystem. In addition, founders of those startups are generally unfamiliar with Chinese consumers, business practices, and are not “on site” to drive their expansion.
The few that try are often very large companies — in the unicorn club — trying to expand their markets. However, most fail.
Beijing is often a location of choice for internet companies due to the large pool of talent available. It does not have an “advantage” over Silicon Valley — it is just the first choice for a company targeting the Chinese market.
For hardware startups — our specialty at HAX — the Shenzhen ecosystem is unparalleled in the world for prototyping and manufacturing. Founders tell us that in terms of execution speed, a week in Shenzhen is like a month anywhere else.
Q3. It is also argued that the Chinese start-up boom was possible simply due to the large population and huge domestic market. What do you think about this claim? What are your views on the technological competitiveness of Chinese companies and their talents?
It’s a combination of factors.
If you read this article I wrote some time ago, I explain that the six key characteristics of an ecosystem are market, capital, talent, infrastructure, regulations and culture.
As China’s economy, level of education and infrastructure improved, it naturally attracted capital. Today, China is a strong contender in almost every technical field. It is likely to lead soon in robotics and manufacturing and and is seen as a potential global leader in A.I.
Check the “China” chapter of our latest trends report here.
Q4. When will China overtake Silicon Valley?
It depends on the metric you consider.
- If you consider patents, China might be #1 by the end of this year.
- If you consider the number of unicorns, China is #2 and growing fast. It might still take a decade.
- If you consider VC funding, China is growing fast too, and might overtake the U.S. within 5 years.
- If you consider nominal GDP, China still has some way to go to catch up to the U.S., maybe a decade?
- If you consider the number of startups — China might have already comparable numbers, though it’s difficult to confirm.
- In terms of fundamental science (not simply consumer tech), U.S. still enjoys the world’s best learning institutions. Many Chinese students go there every year, and due to visa restrictions and growing opportunities back home, generally come back. So talent is growing fast in China too, though it is focused on applications rather than pure research. Chinese universities are also trying to attract top professors and paying big money for it. They are much more open than the U.S. for this.
For more, see the “China” chapter of our recent trends report
Q5. The Chinese government has a strong regulatory policy on the Internet. How will these regulations affect the growth of China’s IT industry?
Judging from the current state of the industry, it doesn’t seem to have affected it that much.
It is a constraint to all companies, local and foreign, but local players know the rules, while foreign ones have trouble adapting — in particular companies dealing with content and communication — as they have to answer to the legal, moral and ethical standards of China AND their home country.
Q6. What difficulties do China’s IT industry and start-up business have to grow?
In addition to being quite a different ecosystem, the Chinese market is extremely competitive and most founders lack the time and knowledge to expand globally.
For internet companies, some Chinese startups are looking at countries with ecosystem similarities like India or Indonesia, but they tend to be cautious as they learned from the failures of foreign companies in China.
The notable exception is consumer hardware and IoT startups, whose products are more able to travel across ecosystem barriers. DJI is the world’s leader in consumer drones, and only the first of a wave of innovative and global Chinese startups. Among up-and-coming ones are Ninebot (who bought Segway), Makeblock (STEM toys), and Insta360 (360 cameras)
Last, many Chinese companies are expanding by investing in or acquiring foreign companies, which is often a lower-risk strategy than trying to start a branch overseas. For example, Tencent acquired both the makers of popular games Clash of Clans and League of Legends. The fact that most users are not aware those companies are now Chinese-owned is a testimony to the pragmatism of Chinese tech leaders. See this article I wrote for more info.
Q7. IT companies that start in China are having difficulty entering the US or European markets, and Silicon Valley IT companies are having difficulties entering the Asian market. Is this phenomenon going to continue?
Yes. As I explained above, the ecosystems are very different, and China is the most competitive you can find.
I think Chinese hardware startups have a good shot at becoming global leaders, though, if they can include foreign or bi-cultural executives in their team.
Q8. Are there any companies that you are interested in among China’s start-up companies?
There are too many to count!
At HAX our main interest is hardware and IoT. We are investing more and more in China — about 10–20% of our global investments now.
The companies we look for have an early prototype, so they won’t be noticed by the general public for 2 or 3 years. In a way, we get to see the future before others.
Q9. Korea is an ICT country, but the start-up ecosystem is insignificant compared to China. Do you have any advice on policies or systems for establishing a start-up ecosystem in Korea?
I am not an expert, but I think compared to the size of its economy, Korea’s startup ecosystem is quite vibrant.
Yet, I think that it is irresponsible to encourage startup activity without looking at the downsides for founders in case of failure.
Most startups fail, so what happens to founders if they try and fail?
Are there safety nets for both trying and failing? Silicon Valley recycles talent very fast, so that’s the number one safety net.
In France, you can take a sabbatical (and get your job back), or receive unemployment benefits for up to two years if you start a company. France’s startup ecosystem is booming now and I think a key reason is that corporations startup hiring people with startup experience. They have realized they needed energetic and creative startup talent to build internally, or connect with external innovation, and avoid becoming irrelevant.
You can read this article I wrote for more info.
Here are a few questions to assess the situation of “startup safety nets” in Korea:
- Will founders face personal bankruptcy?
- Will they be able to find a good job in another startup or in a large company?
- Will their experience be valued highly?
- Will they be able to go back to their previous job?
- Will they have health coverage or unemployment insurance when they start, or when they fail?
And of course, as entrepreneurship is a learning journey:
- Will they be able to try again? :)