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Chinese Startups: An evolving landscape of innovation and change

muru-D

Posted on June 22, 2017

10 min read

The world of Chinese startups has been evolving and growing rapidly in recent years. To get a holistic view of the Chinese startup ecosystem, I spent time with Chris Pu, Partner, Head of greater China at Telstra Ventures and Ben Sand Entrepreneur in residence at muru-D Sydney, to discuss technology trends in China, industries that make them excited and the most memorable advice from their mentors.

How would you rate the current startup environment in China?

Ben Sand: In my experience, mainly from spending time in Shenzhen, the startup environment in China is very exciting. People work extremely hard, and the ability to execute, especially on the hardware side is phenomenal. There is a truth behind the saying: “Whatever you can do elsewhere in 12 months, you can do it in 3 in Shenzhen.” Sometimes even just feeling some of that energy or having people around you moving at such fast pace can positively influence you as well.

Chris Pu: Very interesting and very diverse. There are clear differences between the 3 startup hubs in China – Beijing, Shanghai and Shenzhen. I think Beijing is the most vivid one. There is plenty of good talent, opportunities and capital, and for any startup these are the most important ingredients. Also, in Beijing, you can feel that companies have the ambition to build nationwide or even globally around a strong and transformative idea. Companies in Shenzhen, due to their heavy focus on hardware and consumer electronics, seem to be a lot more practical in terms of running a business and eventually driving sales.

What do you personally find exciting about China startup environment? 

Ben: I think it is the pace. The combination of the energy and the real thirst from people to be internationally and locally relevant, start companies and businesses and eventually succeed. I’ve never seen that level of thirst and speed before.

Chris: I would echo what Ben said. I would say both the atmosphere and the passion for driving a startup are very exciting. Chinese people are known for their hard work. But nowadays they not only work hard but also work smart. And that’s really important in a startup environment. Another exciting element from my point of view is the Government’s support for startups, especially in the last 2 years.

Is there enough support for the startup ecosystem locally?

Chris: China has a very supportive environment for the startup ecosystem today with a lot of support on a policy level from the Government. At 2015, during the 12th National People’s Congress meetings, Chinese Premier Li Keqiang urged local governments to implement policies encouraging “mass entrepreneurship and innovation” and to promote the growth of startup companies. Since then, the state has set aside more than RMB 2.1 trillion (US$320B) to invest in supporting emerging entrepreneurs in the technology sector. However, you can see that the Government understands that it’s not just about the funding: in the last few years, the State Council has introduced new measures to cut red tape and make it easier to register new companies.

Two more elements that are crucial for a healthy startup ecosystem are VC funding and access to talent. China is the second largest venture capital market in terms of aggregate deal value after North America. And Chinese universities are well-known for producing great engineering and technical talent that, very often, ends up joining local startups. Because of these elements the local startup ecosystem is flourishing today.

What are some of the challenges local companies face?

Ben: I think one of the challenges local companies face, especially if we talk about global ambition, is challenges around “cultural translations”. When the product is “simple” and doesn’t require any cultural translations, it is much easier to scale it to other markets. For instance, when you look at something like DJI drones, you get the controller, read the manual and you can pretty much fly the drone. But when you look at something like WeChat, you have to understand the culture in order to really get the interface and start using all the functionality. Sometimes there are also data-related challenges. If you work in healthcare or fintech, there are some restrictions on moving the data across borders, which make it much more difficult for companies to scale outside of China.

What industries or sectors look particularly interesting in China?

Ben: I’m very intrigued by fintech startups. Most people in China don’t have a credit rating so there are a lot of companies trying to come up with solutions to increase people’s capital. I’m also following education startups – there are a few companies using AI to teach children. The needs in the healthcare sector also offer many interesting opportunities for startups in China. In terms of what China can do for the rest of the world, I think the hardware companies are definitely going to be impactful on a global scale.

Chris: I would say on a broader level, consumer apps will create a lot of interesting use cases and new business models. Not only because China is the largest smartphone market in the world, but also because users are adapting to the new usage model in China and there are some interesting business models being created locally. The other area I think which has good future potential is enterprise software. First of all, there is just a lot of room for improvement there. But also as the user interface and behaviors are quite different in China, many Western solutions don’t really scale locally. This offers a lot of opportunities for local companies. Another area that looks particularly interesting is Artificial Intelligence (AI). A few of the leading AI scholars and researchers are actually from China. I believe that China is going to have a major AI development, and also find a way to use it in real-life applications, like Autonomous Driving.

How would you describe Chinese model of innovation?

Chris: I’ve been doing investments in China for 18 years, and can say that the local innovation model is evolving. Before, Chinese entrepreneurs were focused more on improvement. The original idea might have been from the West, and they would just focus on making a product better and adding different functionality that makes sense locally. Nowadays, the younger generation’s mentality is so much more open that they start thinking about, and more importantly pursuing, some very disruptive ideas. Mobike is a perfect example of that.

Ben: There is a famous saying in Silicon Valley used by many people – ‘move fast and break things’. Such a saying becomes famous because people feel that they need to do it, but most don’t. In China, I didn’t hear people say something like that because they just do it. There is no reason for such quote to exist – entrepreneurs just keep going and get on with it. From my point of view, this describes Chinese innovation. Local companies collect data by getting things done in different ways and trying different approaches. People here keep trying and see what happens rather than just planning everything out.

From your perspective, which sectors are not getting enough attention from local entrepreneurs today?

Chris: I would say consumer apps will remain the main driver at least for entrepreneurs and venture capital. But one area that doesn’t get much attention is enterprise software. There are so many opportunities there, not only to change the existing way of doing things but also to re-think some of the solutions and add a local “flavor” to it.

Ben: The most interesting area from my point of view is machine vision or computer vision. Especially how computer vision applies to the robotics and real-time scenarios. This technology is what makes it possible for robots to interact and understand the environment. And applications of this are huge. From self-driving cars to manufacturing and medical diagnostic (robotic surgery).

What are some tips you can give to local entrepreneurs thinking about starting a company? 

Chris: For young entrepreneurs starting new companies in China I want to advise them to be ready to share. Starting a company is extremely hard. So, it’s important to know your limitations and be able to share not only responsibilities but also the amount of capital you allocate to your co-founders and early employees, as these people will be a lot more motivated to make the company successful.

My second piece of advice would be to think differently. Don’t just copy existing ideas from other regions – instead try to come up with a better and more locally relevant product. My final advice is to be ready to embrace the challenge. As mentioned earlier, starting and running a company is extremely hard. This is especially true for post 90s generation, as the environment they grew up in was a lot nicer compared to previous generations who faced all sorts of challenges before.

Ben: I think the most important thing is to really focus on working with people who have a common goal and the same outcome in mind. If you pursue a personal financial outcome, then find someone who has the same goal in mind. If you feel the urge to build new things, go and find someone who will accompany you and help bring new things into the world. If you want to build up an empire like Alibaba, then find someone with the same goal in mind.

There are as many different types of the companies, as there are different types of founders and investors that are willing to back them up. People and companies have different motivations, and that’s okay. From my experience, the biggest cause of failure for a startup is co-founder breakup. One of the most serious reasons that people stop working with each other is that their core motivations are not the same. So, make sure you have people around you who share your core motivation and values. When you look for investors or business partners, make sure that they share the same values too.

What is the top advice that you received from your mentor in the past?

Chris: I started working in VC 18 years ago, and the most important advice I got from my mentor who brought me into this business was: “Don’t try to make all the money in the world because you just can’t. Instead, focus on finding a great idea and backing a great team. If they succeed, you will be successful too.”

Ben: I really like the advice I got from Garry Tan about how to form a company. He said: “The first step is to find a group of people with a common problem. Step two is to spend more time with them than anyone else. Step three is to approach it with a mindset on how to automate the solution.” Many people think that to launch a startup you need to come up with a brilliant idea. What I really like about this advice is nowhere he talks about the idea. What you need to do is to find a group of people to work on the same problem and then spend more time trying to solve it than anyone else. And that’s how you win.