As elaborated in an earlier piece, ten years ago, there were a number of foreign founders with quite some success in China but the recent generations of founders in China are struggling to replicate their success. Indeed, everyone knows that starting a business is tough. Starting a business as a foreigner in China is even tougher.
Having co-founded a 2C-focused big data start-up in the entertainment industry and an ed-tech startup, aiming to build and scale student-centered bootcamps in fields such as AI and language learning over the last two years, I scratched the surface on how brutal the Chinese entrepreneurial landscape is. I experienced firsthand, how difficult it is to adapt and integrate into the Chinese ecosystem, which though reckless, has a lot to offer once you learn to leverage your network. I experienced the differences with the Western landscape and how it affects businesses to operate, build products, and compete. This piece focuses on my experiences and lessons as a foreign entrepreneur in China.
The past, present and future of foreign entrepreneurship in China
Globally, while approximately 90% of western start-ups fail and, as a result, only one out of ten turns into a prosperous and sustainable business, these numbers look even grimmer in China. Looking at data over the last few years during which venture capital investments in China hit a new high with $70 billion in 2018, only a staggering 4% of Chinese start-ups successfully reached the D-Round and only 2% went public. More stunningly, none of these start-ups were founded or co-founded by a foreign entrepreneur. Foreign founders were at the forefront of Chinese Tech until 2010, with prominent success cases such as Tudou.com, a video-sharing platform acquired by competitor Youku for over $850 million in 2012. Qunar, an online travel platform IPO’ed in 2013 and was delisted and privatized through an acquisition of $4.0+ billion in 2017. Gaopeng, the group-buying website and joint venture between Tencent and Groupon, at least started with high hopes and then failed within three years. Over the last 10 years however, foreign entrepreneurship in China has lost its momentum. Expat business owners that found success in the early 2000’s are returning home due to a lack of opportunities, soaring costs, creeping taxation, tightening political control and capricious regulation. In a China business report by the American Chamber of Commerce in Shanghai in 2018, business owners highlighted the increase of labor costs, policies such as the Cybersecurity Law introduced in 2017, tightening competition and government favoritism to local companies and retaliatory tariffs as the main challenges.
Only rare exceptions, such as Grant- and Delphine Yip Horsfield’s “Naked Hub” that was acquired by WeWork for reportedly $400 million in 2018 or Tantan’s rise as the leading dating app in China founded by Beijing-born Swede Yu Wang in 2014 give hope for the resurgence of foreign talent to again play a meaningful role in the Chinese start-up scene. Considering my own experience in the field, I believe that within the next few years there will be another wave of foreign entrepreneurship in China with the first foreign-founded unicorn to arise.
What are the opportunities and challenges uniquely for foreign entrepreneurs attempting to build a successful business in the Chinese market? What makes the Chinese market different from the Western market(s)?
At the nomination as one of the 30 Foreign Entrepreneurs in China 2020. Source: Equal Ocean
The unique aspects of the Beijing ecosystem provide many resources that foreign founders have to spot and seize
One of my important learnings was the understanding that China is pushing for more entrepreneurship from within, which concurrently also provides more opportunities and resources for foreign founders. Being one of the few founders in China, being able to spot and seize such opportunities plays a pivotal role in defining the success of your start-up. In time of scarce resources, founders need to be equipped and ready to take advantage of the ecosystem they are in. That is in particular in the case for Beijing.
In 2014 Li Keqiang, premier of the People’s Republic of China, sparked China’s efforts in mass entrepreneurship and innovation. With the support of the central government for direct and effective policy the provincial and local governments have implemented substantial reforms to attract and promote entrepreneurship. Because one of my start-ups was founded and registered in Beijing´s Zhongguancun, widely known to be China’s start-up hub, I was lucky enough to experience and take advantage of the various benefits that were offered to attract foreign founders to register there.
Due to the start-up friendly environment, various accelerators, incubators and other organizations provide free office spaces. A few hubs such as the Haidian Pioneer Park (HPP) specifically focus on supporting oversea returnees and foreign entrepreneurs. Combined with the resources of the Tsinghua x-lab, a start-up incubator of Tsinghua University, we never even once had to pay a single Yuan for any kind of office space in prime location, while reaching a team size of 13 people over the duration of nearly two years. That relieved a lot of financial pressure that particularly early stage start-ups want to avoid. In addition, a unique 1-year Entrepreneur visa that was pioneered in Zhongguancun in 2018 and later made available across China, provides a reliable visa option for foreign entrepreneurs. With a fairly reasonable application process considering timing, requirements and costs of about RMB 800 it was the go-to visa for all founding partners. Moreover, various local accelerators and incubators have tailored their programmes for foreign entrepreneurs to provide guidance, mentorship and also funding. To mention a few, Chinaaccelerator and XNode have done fantastic work to make the market more accessible for foreign founders. With that, participating in many competitions and other start-up related events can pose as effective methods to network, establish business development channels and take home subsidies. As local governments want to attract foreign start-ups to open up an office in their region, they sometimes pay participants to attend events with a guarantee for price money.
At last, the Beijing ecosystem is also home to many investors and the best local and foreign tech talent which is something I will dive in deeper towards the end of the article.
Founders Lunch organized by StartupGrind Beijing
Understanding the unpredictability of the regulated landscape helps to navigate and prioritize
Aside from the wealth of opportunities and resources, however, the unlevelled and complex regulatory landscape made operating a company difficult. Chinese start-ups often operate in a grey area where regulation is yet to be defined. Cases such as Apple suddenly purging 3,300 games from the China App Store within 2 days and later up to 36,000 games this year in order to comply with a strict gaming regulations introduced by China’s National Press and Publication Administration a long time ago in 2016 are common. The internet ecosystem is heavily regulated, but these capriciously introduced regulations and rules are not necessarily enforced. The unpredictable and yet heavily bureaucratic ecosystem leads to an uneven playing field in which all start-ups play the game differently and no one knows who is going to be hit first. This again makes the situation extremely complicated as start-ups have to wager fulfilling numerous requirements against reducing the time-to-market by half in order to compete and then hope for the best.
Especially as a foreign start-up this proved to be a big challenge as the potential backlash of not following the multiple existing and newly introduced business requirements could mean the end of the company. Understanding this and being able to walk the fine line under such circumstances, ultimately helped us to better navigate and prioritize. Effective communication with other start-up companies within the same industry and the right contacts within the responsible government departments is necessary.
The software ecosystems controlled by China’s tech giants are becoming additionally close and exert more and more dominance and dependencies
That the winners of the internet´s winner-takes-all markets are building near-monopolistic economies is no secret. Similarly to Google, Amazon, Facebook, and Apple (GAFA) in America, Alibaba, and Tencent and at a slightly smaller scale ByteDance are estimated to directly or indirectly control over 70% of the internet business and transactions in China. Every big player in China is attempting to build its own copy of a closed ecosystem that locks customers in. And with that, the amount of dominance and control these ecosystems exert belittles even GAFA in the US. The initial vision of Web 2.0 to promote interoperability, has ended in China.
Having first-hand experience in utilizing the software ecosystems of Alibaba, Tencent and ByteDance, it has been increasingly difficult building products on top of any of these dominant ecosystems. API access across platforms such as Douyin (Chinese TikTok), Taobao and WeChat is limited and third-party access in order to integrate applications is prohibited with only a few selected partners to be enabled to do so. This heavily limited us in our product development and required a lot of research. Such platforms that pool massive amounts of customer traffic and potentially pose as an effective and efficient sales channel are becoming increasingly restrictive. Moreover, China’s giants’ access and control of key resources such as cloud servers and data increase their reach and dominance. Thus, start-ups in China, while very much dependent on such channels are at the same time also heavily restricted.
Center for startups of foreign and oversea returnees in Zhongguancun.
Foreign startup founders in China, that intend to integrate their company within these massive ecosystems must understand that, in order to succeed, exclusive partnerships with any of these major ecosystems to acquire exclusive data channels, access, and interoperability are crucial. These partnerships, however, generally come in form of a strategic investment as the first step to ultimately be swallowed and become part of the ecosystem. Historic strategic investments to show such strategies include MeituanDianping (Tencent owns 20% pre-IPO), Pinduoduo (Tencent owns 17%), JD.com (Tencent owns 20% post-IPO), Youku (Alibaba acquired 17% in 2014 and the rest 83% two years after), Neusoft Holdings (Baidu invested $200 million). By accepting an investment, the invested company has essentially taken sides and is indirectly involved in the war among the giants. Only in rare cases have more than one of the China’s internet giants invested in the same company. And it does not stop there. It is not uncommon for either Alibaba or Tencent to invest into you and your competitor to see what company ultimately survives, to then acquire the winner and to further build dominance. And that is exactly for what they are striving for: ultimate control across industries. It has to be noted however, that the success story of ByteDance demonstrates that it is possible to outmaneuver Alibaba and Tencent which shows promise for future start-ups.
All opinions expressed in this essay represent my personal views only.