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The China Startup Report

Interested in starting a company in China? Here's a quick report on China through the lens of a Silicon Valley serial entrepreneur.

This 15 min guide by Bowei Gai aims to cover the basics of Chinese market size, opportunity, key players, competition and infrastructure.

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The China Startup Report

  1. THE CHINA STARTUP REPORT A 15-min Crash Course By Bowei Gai October 2011 Updated Nov 14, 2011
  2. ABOUT BOWEI• Born in China, moved to US at an early age• Engineer at Apple, HP & AMD. Strategy at Oracle• Founded Snapture Labs & CardMunch (acquired by LinkedIn)• Had a rare opportunity to look at China’s startup scene from a Silicon Valley perspective (big thanks to the 500Startups network) © Bowei Gai - All Rights Reserved.
  3. WHY CHINA?If China can transform itself from an impoverishedcountry to a world superpower in 20 years...... imagine where they will be in another 50. © Bowei Gai - All Rights Reserved.
  4. MARKET SIZE - IT’S HUGE• 1.3b population, 655m urban (~50%)• 485m with access to internet, 135m more in internet cafes• 800m mobile subscribers between China Mobile & China Unicom• 44.5x growth in GDP since 1985, aim to surpass US GDP ~2020 © Bowei Gai - All Rights Reserved.
  5. US COMPARISON US China Population 307m 1,331m Mobile Users 292m >800m Internet Users 239m >485m GDP $14.12t $4.99tGrowth since ‘85 3.4x 44.5xMillionaires in ’10 3,100,000 500,000 © Bowei Gai - All Rights Reserved.
  6. THE NEW SUPER RICH• 534,000 millionaires• 115 billionaires• 5x per week, Lamborghini sightings (jk, but not really) While there are many super rich, the annual income is still $2,525 © Bowei Gai - All Rights Reserved.
  7. TOP INTERNET PLAYERS $39b $45b $43b games/chat e-commerce search Other names to know:RenRen (Facebook), WeiBo (Twitter), DianPing (Yelp), TaoBao (Ebay), Kaixin (Zynga/FB), TuDou/YouKu (Youtube) © Bowei Gai - All Rights Reserved.
  8. INTERNET CULTURE• Internet in China is self-contained, sandboxed & regulated - You never hear about the Chinese internet companies because it’s geared to only serve the Chinese netizens. Chinese internet companies live in a large, closed off ecosystem that is heavily government regulated.• The fundamental rules of internet do not apply in China -Example 1: there are internet users that have never been exposed to the concept of emails, because they have lived their entire internet life on QQ messenger. China challenges your simplest assumption about internet and it’s impossible to understand why without actually being in China. - Example 2: Chinese websites are always crowded and ugly, which is just mind-boggling to SV entrepreneurs who are used to building sleek web 2.0 sites. The exact reasoning behind this seems to be a mixture of language and habits (see slide #26 for more details). Testing suggests that these “ugly” websites drive higher traffic and better conversion rates than the sexier web 2.0 alternatives. © Bowei Gai - All Rights Reserved.
  9. MORE ON CULTURE• 70%of Chinese users are 30 years of age or below. They are the new generation of “big spenders”. - The Chinese netizens are made up of lots of young people who are extremely savvy internet users. They are used to purchase everything on the internet, from plane tickets to paying off utility bills on the popular ebay clone site This generation of the big spenders is changing the landscape of the Chinese consumer market.• People do not pay for software, only physical goods and games - Microsoft would not survive there, neither would most consumer SAAS companies. Taobao on the other hand has 800m products and is kicking some serious butt in China.• People are super reliant on search engines - Due to language barrier, keyboard switching & laziness, people tend to remember very few website names. Instead of going to people would rather search for on the Chinese search engines to go the website. © Bowei Gai - All Rights Reserved.
  10. COMPETITION• Endless competition, it’s pure insanity - In the US, it is common to have a handful of competitors to any good business idea. In China, there could be many times more. It is rumored that there are 3000-5000 Groupon clones and 100+ Chinese Android stores. The actual numbers may vary, but it gives a very good sense of the sheer amount of competition in China. It is scary.• All are vicious, many are unethical, some are illegal - It’s a dog-eat-dog world in China. For example, companies can buy customers, reviews, and reviews to destroy competitors. Intellectual property protection is something the government is pushing for, but in practice it’s virtually non-existent. Competing in China requires a different mindset which could be tough for some SV entrepreneurs.• Big US Internet giants are simply roadkills in China - Facebook, Yahoo, Ebay, Google, Twitter, Foursquare, Dropbox are all examples of internet services that spectacularly failed in China. To be fair, many failed for reasons beyond their control (e.g. government regulation). However, for each of the failed US service, there usually is a Chinese company that has figured out a way to make the same service work in China. © Bowei Gai - All Rights Reserved.
  11. INFRASTRUCTURE• Setting up a company in China is an absolute nightmare - China’s incorporation process is a mess, especially for foreigners or any company that wants to raise USD funding. The most popular and recommended structured is called Variable Interest Entities (VIE), which involves creating a company in the Cayman Islands that controls a subsidiary in HK, that controls a foreign subsidiary in China, that controls a local subsidiary in China. It’s horribly inefficient. Other pain points include acquiring the absolute must-have Chinese Internet Content Provider license and setting up Trusts for employee in order to grant employee stock options. It’s do-able, but it takes a lot of patience and close guidance from experienced local entrepreneurs.• Startups are severely deprived of online developer services - SV developers take many service for granted, e.g. AWS, Heroku, SendGrid, Twilio, BrainTree, Github and Google Apps. Now imagine how painful development will be if you had to manage your own hardware and write your own email server.• Startup techs are a few generations behind, like .NET behind - It takes time before hot new technology documentations to translate into Chinese. Today, many Chinese startups are still on .NET and php when most of the SV startups are building on Ruby on Rails and Node.js. One exception to this is in mobile software because the development tools are standardized by Apple and Google. This is an area where the Chinese startups can directly compete with the SV startups in the near future. © Bowei Gai - All Rights Reserved.
  12. TALENTS• Midlevel engineer = $1,000-$1,500/month Top level engineer = $2,500+ /month - Both numbers are quoted with very little or no equity. A later slide will explain why equity number doesn’t matter.• Low job loyalty, high bonus expectations - Job loyalty is low due to high demand for top coders. People also expect high bonuses in the form of cash and gifts around holidays as a way to subsidize their salary.• Top tier universities have the reputation of being cocky - It might be worthwhile to recruit from the schools with less of a brand but just as solid reputation in engineering. © Bowei Gai - All Rights Reserved.
  13. STARTUP COMMUNITY• Go to Beijing - Beijing’s talent pool is amazing because Zhong Guan Cun (startup hotspot) is located next to some of China’s best universities. It’s about 10X bigger than the next biggest startup hub, Shanghai. However, many people claim Shanghai has better deal flow than Beijing so maybe that will attract more entrepreneurs in the future.• Great community that welcomes you with open arms - Startup community is great. One startup cafe that even provides an array of test phones for people to use, amazing!• People are very in-tuned with Silicon Valley startup culture - You’d be surprised how many people know about YCombinator and 500 Startups• Foreign entrepreneurs tend to mix less with local ones - This could be language barrier, or maybe there are too many local entrepreneurs so they are less organized © Bowei Gai - All Rights Reserved.
  14. THE ANGEL / VC MARKET• China VC market is big with plenty of money everywhere - China is the biggest VC market outside of US. There is a lot of stupid money being thrown around because of the uptick in the Chinese economy. Raising money in China is not a problem for SV entrepreneurs, as long as you have the right intros.• Lots of angel money, not enough value add - There are lots of rich people in finance, law & real estate getting into angel investing. It seems almost fashionable to invest in tech startups nowadays. While these angels can provide valuable intros to industry/government leaders, they can offer little else other than their money. What China really needs is more “ex-entrepreneur angels” that can provide not only the money but also the technical know-hows to help new entrepreneurs to build great companies.• Very little trust in companies/angels in the wild - Investing in China is purely a relationship based business. Investors do not trust random companies because stats can be made up. Vice versa, companies are afraid of the investors because the source of the money can be questionable. To sum it up, people do not trust beyond their immediate circles. © Bowei Gai - All Rights Reserved.
  15. STARTUP MENTALITY• Go IPO or go lifestyle, forget about other exit opportunities - Unlike SV, talent acquisition is not a popular concept because it is very cheap to hire talents. Lack of intellectual property laws makes it easy to steal ideas, so the big companies rarely acquire startups. Most entrepreneurs aim for IPO or lifestyle business. The landscape is not ideal for SV entrepreneurs that want to dabble in Chinese market for some quick cash.• Most hires would choose high salary over high equity - For the reasons stated above most hires do not have much hope for big exits. It is better for them to ask for high salary over high equity.• People still prefer jobs at big companies over startups - Chinese culture values stability, it is common for the older generation to push new college grads to get stable jobs over risky startups. However, this view is changing as we see more rich internet entrepreneurs in the limelight and becoming idols for the young generations. If this trend continues, we shall see a major boom in the local entrepreneur population in the coming years. © Bowei Gai - All Rights Reserved.
  16. STARTUP SURPRISES• Chinese adults live at home until marriage. Similarly, there are startups with 30-40 employees that are still in incubators.• Startups show their prospect by renting big beautiful offices. A typical SV style scrappy home office would have a hard time hiring in China.• Laboris cheap so Chinese startups tend to over hire. One clone company admitted having twice the number of employees as the original US company. It’s a bit overkill. © Bowei Gai - All Rights Reserved.
  17. YOUR ADVANTAGES• Coming from SV, you will have: • Respect and curiosity from the locals • Relatively easier time raising money • Access to foreign knowledge and funding © Bowei Gai - All Rights Reserved.
  18. YOUR DISADVANTAGES• Coming from the US, you will lack: • Understanding of the language and culture • Ability and know-how to deal with fierce competition • Trustfrom the locals because foreigners do not have the best reputation in the Chinese startup world © Bowei Gai - All Rights Reserved.
  19. ANGEL INVESTING IN CHINA Don’tWhile there are many success stories, China’s startup scene is not yet suitable for the casual SV angel investors.There are 3 big reasons for this:- First, understanding Chinese market takes significant time and effort, it is impossible to do so remotely.- Second, deal discovery is difficult for foreigners. While there are angel groups that can facilitate introductions, whatChina really lacks is an community to crowdsource deal discovery for foreign investors.- Third, investing in China requires lots of due diligence. It is harder to detect fraud and other issues remotely.Succeeding as an angel investor in China requires dedication and hard work. It’s not suitable for the casual SV angels. © Bowei Gai - All Rights Reserved.
  20. CONCLUSIONEntering the Chinese market is like starting yourfirst company. You have no idea what’s going onand everything can seem like the wild west. Theodds are against you, but it gets better if youout work and out hustle your competitors.The difference is that everything is moreextreme in China. There will be a lot more risk,and exponentially more rewards. © Bowei Gai - All Rights Reserved.
  21. STILL WANT TO GO?• Lower the American ego, be humble, be curious• Learn Chinese, learn Chinese culture• Partner with Chinese firms/entrepreneurs © Bowei Gai - All Rights Reserved.
  22. QUESTIONS? COMMENTS? I’d love to hear from you © Bowei Gai - All Rights Reserved.
  23. SPECIAL THANKSThank you for your help to get me started on this journey:- Chris McCann, StartupDigest (500S)- Jay Weintraub, DailyDealSummit (500S)- Cyril Ebersweiler, SOSVentures (500S)- John Fan, CardinalBlue (500S)- Jonathan Lau, (500S)- Edward Tsai, DCM Capital- Prasanna Srikhanta, Clarium CapitalAnd another big thank you to all of the great Chinese entrepreneurs/angels/VCs/journaliststhat took time out of their day to speak with me. © Bowei Gai - All Rights Reserved.
  24. CITATIONS•••••••••• • *incomplete list of citations. © Bowei Gai - All Rights Reserved.
  25. CHINA RESOURCES © Bowei Gai - All Rights Reserved.
  26. FURTHER READINGS patterns-how-and-why-theyre-different © Bowei Gai - All Rights Reserved.