The rise and rise of entrepreneurship in China has meant the country has become the second largest venture investment market in the world and is increasingly competing directly with the United States as the world’s centre of technology and innovation. Chris Pu, Partner and Head of China at Telstra Ventures, shares some insights on the Chinese startup boom.

If you go back 17 years when I first started working in the venture capital industry, not many people talked or cared about startups in China. Today, sustained economic growth, an explosion in the number of tech savvy consumers and success stories like Alibaba, Tencent and Xiaomi have resulted in China becoming a magnet for attracting entrepreneurs and venture capital from all over the world.

China’s next growth engine

China’s domestic startup scene is thriving. Part of this is simply a function of the success of the Chinese economy overall. The often referred to ‘economic miracle’ in China has seen GDP exceed US$10 trillion in 2015. While growth has eased recently it is still at 6-7% per annum and many regions, in particular rural ones, still have huge growth potential.

There is also just the massive size of the market given a population of more than 1.3 billion. So while internet penetration is less than 50% of the total population of China, still at around 600 million internet users this is twice the size of the entire population of the United States. Clearly a market of this size creates many opportunities for new businesses, especially those involved in e-commerce and communications.

More recently, Chinese entrepreneurs and startups have started receiving a boost from the Government, which sees technology and innovation as being important in helping the country successfully complete the structural transition that is currently underway from growth led by exports and infrastructure investment to a services oriented economy.

For example, Chinese government-backed capital for innovation tripled to 2.2 trillion yuan (US$338 billion) in 2015. This enormous pot of capital is probably the largest single source of funding for startups in the world that benefits all kind of business in the society.

Home grown innovation

Many Chinese entrepreneurs draw inspiration from successful American technology companies and leaders, but the startup scenes in Shanghai, Beijing or Shenzen are not mirror images of Silicon Valley.

One of the reasons for this is the different market fundamentals. Some parts of the technology market in China, such as infrastructure, are subject to tight regulation and this can limit opportunities for innovation and new business models. But other areas are relatively open and in some industries there are fewer well established incumbent practices, so adoption of online alternatives are more advanced and are outpacing the West.

For example, WeChat Wallet and AliPay have a much deeper penetration in China than Apple Pay’s penetration in North America. Also the all-in-one social platform WeChat, which integrates multiple technologies such as instant messaging, Voice over IP, ecommerce payments, fintech, and social media, is yet to be replicated in the West.

This is also a deeply engrained mentality in China that encourages entrepreneurship and a willingness to experiment, as well as a business culture where leaders are expected to start their own companies. On global terms, this has not always produced radical new innovations, but it has a strong track record of creating highly competitive new market entrants and business models.

These companies often focus on innovation as a form of specialist ‘renovation’ – that is localisation of technology and making it work for the Chinese market. A prominent example of this practice is Xiaomi, which has captured a large slice of the Chinese smartphone market with a high-end product that sells at half the price of American competitors. As author Edward Tse has observed the innovation in Xiaomi’s approach has involved listening to customers through social media and crowdsourcing to tailor a product specifically to Chinese tastes and to build a company that had zero revenue in 2010 to more than US$5 billion in 2015.

Tapping into the huge opportunities

At Telstra, we look to invest in companies providing emerging technologies that can support our growth strategy and help shape Telstra’s future. In China, we are watching closely into four areas: Enterprise Solutions, Mobile Internet, Video and Media and eHealth. We see our involvement in the Chinese startup scene as important not only because this is a key global source of new ideas and technology, but also because China is an important market for our growth agenda.

Succeeding investing and building partnerships in the Chinese startup scene is not easy. It is fluid, hyper competitive and there are obstacles to overcome. You can only succeed if you have a strong in-country presence. Foreign companies without a history in the country or well established network of relationships can struggle. Fortunately, Telstra has operated in China for almost thirty years and in the region for more than sixty, which provides our potential partners with a lot of confidence.

Our most recent ventures activity in China involved an investment in Shanghai based cloud services company Qiniu. With its unique, global-distributed architecture and bi-directional acceleration technology, Qiniu enables enterprise customers to collect, store and analyse huge amounts of data. During 2015, we also invested in Taiwan based video analytics company Gorilla, which is very active across North Asia.

It’s just the start – I believe there are many more high growth opportunities in China for Telstra.

Find out more about Telstra Ventures.