When thinking about start-ups in China all the big success stories like Xiaomi (an electronics company), Didi (a ride-hailing company) or Alibaba (a e-commerce company) come to our minds. China is a huge market with increasing wealth and investor money, which sounds like an awesome soil to start the next uni- or multicorn. However, as with start-ups all over the world, the truth is that the vast majority of start-ups fail within their first few years. In fact 9 out of 10 start-ups do not survive the first 12 months in China. Ella Bee, a successful Chinese female founder, who has started her second company three years ago, shared her experiences and insights about running her own travel and jewelry businesses in China.
Short Biography of Ella Bee
Ella was born and raised in Yunnan Province in Southwestern China and throughout her educational and professional career has lived in several cities across China. After graduating in Japanese from the Guangdong University of Foreign Studies in 1992, Ella worked for various international brands in leading positions in the marketing departments in Asia before starting her MBA at Fudan University and University of Washington in St. Louis in 2004. As soon as Ella graduated she founded her first venture Mangocity.com together with three friends. Following her decision to leave her own company already after the first year, she joined a multinational enterprise in the travel industry to lead the marketing & sales department for the Asia Pacific region until 2011. After gaining experience as VP for global consumer marketing at one of the most well known luxury brands in the world for 3 years, Ella has founded her second and current company ebeestudio.com.
With her vast experience in marketing & sales in various companies and industries Ella is a true marketing expert. Furthermore, after founding two companies and also having many entrepreneurs as friends, she has extensive knowledge about entrepreneurship in China. As a mentor at Fudan University, Ella enjoys sharing her knowledge and expertise with bachelor- and master students.
To start may I ask you to first give us an introduction about your story as an entrepreneur? What kind of companies have you started an when?
The first company that three co-founders and I started together in the early 2000s was a travel booking platform called MangoCity.com. After some discrepancies with the investors, who at that time owned 70% of the equity, the other co-founders and I left the company. I then decided to work for a multinational corporation as marketing director for Asia Pacific for some years. When I then left the corporation after several years I had some spare time due to a non-compete clause in my contract. During that time I have started to design my own jewelry as a hobby. As demand for my jewelry was quite strong, I have decided to start my second company and build up my own jewelry brand.
You are close to celebrating your three year anniversary of your second company ebeestudio.com. What are the three biggest challenges you had or entrepreneurs in general in China have to overcome?
I would say the three main problems when starting your own company in China are the high costs you face at the beginning, the struggle to find talent and to get funding. Now in my second company I have decided to grow organically and have a small team which allows me not to compete in the war for talent and to be dependent of investors.
In which way are costs in China higher than in other countries like the US?
The two biggest areas of cost are related to office space and labor. While in the US many of the biggest success stories were started in garages we don’t have garages in China (laughing). But all jokes aside, the majority of companies in China are founded in the big cities like Beijing and Shanghai. In these cities real estate prices have been soaring over the last decade. For a start-up, which is normally short of money anyways, that is a big problem. What is more, the office size is a symbol for success and prestige in China, so young founders want to have a proper office rather sooner than later. With regards to labor, the majority of talent in China is not dreaming about a career in a start-up, thus to get talent on board you have to compensate them competitively.
Why do young talented people in China not want to work for a start-up? In many European cities like London or Berlin many people dream about the cool start-up life.
Talent in China wants to either work for large state-owned enterprises or the government. The reason for that is the risk involved in entrepreneurship. At home, young people are being told to get a job that has a secure and stable income now and in the future. The education in China does not really encourage to take risks. My parents also still do not quite understand why I have swapped my corporate life with company car and driver for running my own business, bearing all the risks associated with it and taking a mobike to get to my meetings. In China we are using the idiom 铁饭碗 (“tiě fàn wǎn“) which means “iron rice ball”. The term refers to an occupation with a steady income and high job security. If you drop an iron rice ball, it will not break.
The third obstacle you mentioned was the way start-up funding works in China. What is the difficulty when getting the necessary funds you need to run your business?
Nowadays investors are only looking for the next unicorn, the next big thing that returns the whole fund. The amounts that are being invested are extremely high, the valuations often are not reflected in the business case at all. Maybe that is the same in China and in the US. But in China these investors aim for a majority stake in the company. Consequently, they have more power than the founders themselves. As already mentioned before in our first start-up the investor gained 70% of the equity. Otherwise we would have not received the funding we required for the company. As a result they made the strategic decisions in which direction the company has to develop to. We basically lost control over our baby.
In addition, the investors are looking for companies that are highly scalable. If you cannot show the potential for scaling quickly enough, you will probably not get any funding. To achieve fast scale they then want you to build up a huge team in a short amount of time. Many of my entrepreneur friends have teams of 300-500 employees, but if I ask them what the business model looks like, how they make money, they don’t have an answer. The business case question is an absolute conversation killer here in China, never ask that question an entrepreneur you meet here. (laughing) In the first start-up our sales team consisted of 100 employees only 3 months after receiving the funding and as marketing head I got a multimillion RMB budget which I had to spend within 6 months, but our product was not ready for being promoted like that. On the contrary, if you do not want to scale like the investor wants you to scale from the very beginning, your only sources of funding are angel investors that are close to you. To put it in other words, you have to borrow money from your family and friends.
What would you say is the biggest opportunity for start-ups in China in addition to being one of the largest markets in the world?
Start-ups can achieve traction incredibly fast in China, due to the curiosity of Chinese consumers. Chinese customers tend to try new brands and products very quickly without the need of large marketing spending. If you would for example start a company like mobike and simply put some bikes on the street, people will very quickly start trying it out and you will suddenly have your first paying customers. Another example was the adoption of DVDs in China. While in the US the transition from tapes to DVDs was a long process of educating consumers, in China tapes disappeared within six months. However, even though this high curiosity and open mind for trying out new products and brands in a market with 1.4bn people is a great opportunity for start-ups it also imposes a threat. Customer loyalty is very low. In the case of the mobike example many people will quickly try your product or service, but if they don’t like it, they will never use it again. Also if someone else enters the market and offers a similar product with better consumer benefits, the consumers will switch immediately. I was also surprised by how much demand my designed jewelry created even though it was a completely new brand with basically no marketing. Luckily the vast majority of my customers also stayed loyal and have been purchasing repeatedly.
That leads me to my final question: What are your future plans for ebeestudio.com?
I actually like the fact that I am running a small business with a small team. That allows me to stay very flexible. Others do not really see me as an entrepreneur anymore because I am not trying to scale quickly but rather grow organically. But I am now planning my three year anniversary party while the majority of other companies die within the first 12-24 months after founding date, so I think I am on the right track. I have no rush to grow quickly, so I am moving step by step. Investors have already approached me, but I am cautious as I do not want to lose control over my company again, I rather prefer keeping it as a family business. Nevertheless, I am planning to expand and grow the business of course.