Minding the Borderlands

Mark Koester (@markwkoester) on the art of travel and technology

Metrics for Rating China’s Startup Community

It’s difficult to summarize the state of startups in China. There is media about China’s startup amazing-ness. Yet it’s not easy to see it as a whole.

China is pumped up for its potential “threat” to Silicon Valley or it’s degraded for its corruption and weakness. Both typical observations for people new to the China’s Startup Scene.

There are a lot of stories and little reliable data. “Startup Powerhouse” China was absent from Compass’s 2015 Global Startup Ecosystem Ranking which is notable considering its importance both regionally in Asia-Pacific and globally.

I’d like to provide some context and metrics for a conversation about China’s startup community and startup scene.

Let’s get things in context before looking at China’s place in perspective.

In Context: China’s Startup Community

China’s economic growth has slowed and its stock markets are getting slammed. There is a huge financial and human flight But at the same time, entrepreneurial activity in China remains hot. Big deals and investment are still happening, though some of the earlier stages have slowed.

China’s economy is shifting focuses. A new planned economy is being unrolled. An economy of creativity and innovation.

We can view the intensity of China’s startup scene through various metrics. There are a lot of things going on in China, from accelerator programs and funding rounds to increasing number of startup events, capital raised and even the number of “entrepreneurs”. All of which contribute to the general growth of the startup scene.

Yet to my eyes, China’s startup community remains fragile, insidious and lacking in good mentorship. These are barriers to at least how Western models of Startup Ecosystems typically function.

Questions remain: How can we classify and “rank” China’s startup community? How does it stack up? Where is it strong? Where are there weaknesses? And ultimately which areas can we focus on for improving the efficiency of creating and sustaining new, innovative companies?

On a metalevel, we might even derail much that is said about China by saying that parallels to Western models and examples don’t fit for China. This typically said about China’s economy historically. But considering how consciously China is adopting and modifying Western models, comparisons seem merited.

Beyond these simple and meta- questions, a more haunting one sticks out in my mind: Can (and should) we be using Western models when we study or rank China’s startup scene? China’s past re-planned economy in the 1980s and 1990s would indicate the limit of any complete parallel between the Western examples and China.

Over the last several years I’ve taken on several roles and run various programs, including working with both local and international organizations.

In my previous roles at Techstars and Startup Weekend, we spent several years running programs and engaged with local players. Combining business and program development, I criss-crossed this amazing continent in search of opportunities. From typical startup hubs like Beijing, Hong Kong, Shenzhen and Shanghai to less-known but mature ecosystems like Taipei and Hangzhou to smaller but active cities like Chengdu, Xi’an, Qingdao, Ningbo, and Chongqing, I’ve met a lot of elements involved in the creation of China’s turbulent startup quagmire.

The side of effect of educating first-time entrepreneurs is an understanding of the startup ecosystem. I’ve engaged with hundreds of people and dozens of institutions hoping to “launch” their startup scene.

Sociological models, by definition, do not reflect everything going on in a societal process. Instead, they are a simplification used to highlight how something works.

One model for understanding a startup scene is the 5 key ingredients of a thriving startup ecosystem. This model focuses on talent, density, culture, capital and regulation. They are considered the key parts of what makes a good startup community work.

To summarize about China: For talent, capital and regulations, China is strong. Density also is quite positive though there is a tendency towards silos. Overall the biggest weak point remains culture. China lacks a mature, startup culture of open, risk taking, community and collaboration.

In this post we are going to look at these key metrics in China. We will classify and rate the status of China’s Startup Community.

Quick Summary: 5 Ingredients of a Thriving Startup Ecosystem

There is an insightful White Paper by UP Global on the 5 Ingredients for Fostering a Startup and Innovation Ecosystem.

In short, this white paper highlights 5 key aspects of a startup community as drivers of innovation: 1. Talent, 2. Density, 3. Culture, 4. Capital, and 5. Regulations. These are help in the success of an underlying startup community.

Talent: You can’t have innovative business without talented people. These are the skillful and experienced people that drive and support business growth. We develop this human capital through education and a fostering workforce.

Density: Bringing people together in clusters and physical hubs creates opportunities for innovation. Proximity is a key driver of this.

Culture: Culture or how people act together is a key part of creating a strong innovative cluster. By promoting a culture of open risk taking and collaborative learning and by bringing together entrepreneurs as role models and teachers , you create positive feedback loops for business success.

Capital: At any stage of the entrepreneur’s journey, capital can be critical for success, especially experienced capital. From seed to growth to scale, private and institutional investors help fuel startup success as well as provide important mentoring. You cannot grow and you can compete in many tech businesses without money.

Regulatory Environment: Governments and legal systems help create a stable, predictable and supportive environment for entrepreneurs and investors. From ease of starting (and closing) a business to tax policy to intellectual property, a transparent and business-friendly regulatory system removes the barriers for business development at any scale.

Now that we got a model for discussion, how does China’s startup community stack up?

(NOTE: For the sake of argument, I am largely looking at China as a whole instead of city by city or even neighborhood by neighborhood. There are obviously huge differences in different cities, places and regions. My focus is quite wide and on a meta-level. Others might better speak to city spcifics. Since I have heard these observations in multiple places by numerous participants, it is noteworthy and thus I am focusing on Mainland China as whole.)

China’s Got Talent:

With a population over 1 billion, there is plenty going on in China. The entertainment talent show “China’s Got Talent” is a great example of local talent. Each episode features someone with some out-of this-world talent or skill. China’s population is highly skilled and diverse.

In the tech, startup and business sphere, China is a huge producer of talent. We see this both in and out of China itself. Chinese researchers and students flood schools and labs around the world. While China’s universities do not fall into the World Top 25, its educational system is geared towards high achievement in math, science, engineering, finance, etc. Base skills are strong.

There are some weaknesses in critical thinking and entrepreneurial, innovative aptitude. Too much of the educational system pressures students into immediate results, creating an imbalance between higher-level skills (systems thinking) and computational skills (STEMs), of which one is more readily cultivated in modern Chinese education.

Beyond the university, many job environments in China do not effectively train talented Chinese workers for the current world conditions. Bosses and managers are less people focused. They miss opportunities to better train and prepare their workers for today’s innovation economy.

Overall, China’s human capital pool is well-educated, motivated and growing.

China’s Density Problems: Big Cities, Bad Traffic, Hubs and Silos

China’s startup communities are working to create density. They are bringing startups and startup leaders into proximity. This happens in both hubs and co-working spaces. There are also government and privately created clusters as well as real estate developments.

Unfortunately there are two nuanced problems with density in China: bad transportation and silos.

Transportation inside nearly all China’s major cities is quite bad. This means that in a city like Beijing or Hangzhou it is hard to travel between two different areas of the city. Entrepreneurs end up in different spheres in the same city. In several cities, universities are far from the high tech and software parks. Combine bad traffic with this separation of hubs and schools and young students miss opportunities to intern at up-and-coming startups. Companies don’t find hires in the “neighborhood” like they do elsewhere. Future and current subways systems are helping.

Due to a strong clan culture, trust is a big problem in China. This lack of trust and tendency to only work with people you do trust often leads to “siloing”. Startup supporters create copycats and competing startup silos in the same startup communities.

By silos, I mean that ideally different groups should work together for innovation and community. Instead they are creating parallel and non-interacting “circles.”

Instead of working together towards one community, groups end up forking. Competing programs are developed instead of focusing on unique offerings. Too many groups end up doing the same things, instead of working together to fill in missing gaps.

Unfortunately this tendency gets reinforced by a highly competitive market. Various startup supporters (venture firms, event companies and co-working spaces) compete instead of collaborating.

In spite of these two problems (poor transportation and siloing), there is density. Chinese, municipal governments have been creating clusters, high tech parks and incubators. While these are not a panacea for creating innovation, they combine with pro-business regulations to effectively “spark” various businesses.

Zhongguanzun in Beijing and Chengdu’s Software Park are both good examples of innovation clusters. Nearly every Chinese city has created its own High Tech Zones with varying degrees of success. Baseline resources are there, if you can get startups there at different stages, instead of clustered at both extremes (super early stage) and (super late stage).

Without a doubt, co-working, accelerators and other innovation clustering institutions are a fad today in China. Many will fail. They take government space and subsidies but don’t have a reliable business model. They have to deliver on government metrics but aren’t independent to help startups in their own way. They can’t build a business of helping business.

These spaces are still important in how, through serendipidity, they bring together and build connections. These connections are a key component in new businesses. I expect to see more and more efforts at creating density in the coming years.

Overall, density is a component we see in China’s startup world.

China’s Biggest Startup Challenge: Culture

From going around the country and discussing with entrepreneurs and business leaders, there is one comment I hear the most. The biggest weakness in China’s startup scene is culture.

It is difficult to tease out what everyone means by a startup culture. I think for many in China this weakpoint hinders on a strong distrust of others. China’s business culture is not built on the same foundation of transparency and working towards common goals as we see in the West. Unlike the US or Europe, there is a civil society where citizens work to build they work they want their kids to live in.

Chinese business interactions are “darker” and harder to discern. They tend to be more driven by personal win’s over collective wins. Many deals seem imbalanced on a me-win, you-lose scale.A strong survival instinct drives individuals to compete at all costs. Personal gains trump collective gains. As such, it is no surprise that these same aspects are witnessed in the startup community.

For many Chinese, culture also relates to a deeper understanding of how you approach spurring innovation. They view America and Silicon Valley as emblematic of a collaborative, risk-taking place. Their hope is that this can be part of China’s startup culture. too. You see this in Chinese entrepreneurs who have lived, studied and worked in the US. You regularly see these individuals come back to China and attempt to create a meetup, incubator or some other program highly styled and influenced by American examples. While some end up persevering, I’ve seen many that last only a few months as the founder fails to build a true community of equal collaborators, as exists in the US or Europe.

Mentorship is a key ingredient of a positive startup community too. This is where culture is quite weak in China. China doesn’t have a strong history of entrepreneurs giving back as mentors. Actually few do outside of the US.

Chinese tend to deify business success stories and, as such, tend to only want to work with the “saints” and “saviors.” Startups ask for teachers instead of mentors. This can lead to normal, successful entrepreneurs not consistently coming back to help. They think they are not quite up to it, not quite successful enough. Younger startup-ers expect and demand only a certain elite mentor.

Having more and a wider range of mentors would be the best way to improve the sustainability of the startup scene. Mentors also need to be more honest about their specific expertise and areas where they can help young startup companies, instead of acting like a “godly” CEO who knows all.

At Techstars, we view ourselves as engaging in mentorship-driven innovation programs. Beyond capital, our accelerator programs provide a network of connections and mentorship. Startup community events like meetups, hackathons and Startup Weekends are mini-versions of what we hope to see in wider practice: mentors giving back, entrepreneurs learning by doing.

Whatever the program (yours or your competition’s), the end goal is for the founders. All startup supporters and brands should work together to build a positive culture of entrepreneurship. We are all here trying to grow our own and others’ business projects.

Culture is by far the most repeated element I hear when we discuss these 5 Ingredients. If and how startup culture changes in China could be a strong indicator of the overall startup trajectory.

Show Me the Money: China’s Got Capital

Like it or not, investor money is the most discussed characteristic in a startup community. We tend to forget that a startup community is more than the sum of its investors and VC firms. Entrepreneurs tend to consider capital alone as the benchmark of a healthy ecosystem. Without a doubt, it is critical but we should be aware of its place and time.

In Asia, capital investment numbers tend to lean more and more towards China. The US remains the king of venture capital. Yet, China is fast becoming an important destination for everyone seeking to find investment.

We see this trend in the recurring waves of Asian and Western startups and accelerators visiting China. Some are even setting up shop. We’ve worked with groups from Australia, Malaysia, US, etc. over the last year helping them on their China’s tours. We’ve seen YC, PlugAndPlay, 500 Startups, Muru-D, etc., looking more and more at China.

Recent stock market problems in and from China have left some doubts. Decreased liquidity in public markets can hurt tech investments at lower stages. Some well-known investors hesitate about the health of venture capital in China going forward. At the same time, numerous other factors indicate that cash is still around (even if slowing) and Chinese tend to be gamblers in future business opportunities. Access to capital may not be as easy, but new and old Chinese tech investors are here to stay.

Startups around the world all complain that there isn’t enough investment in their city or country. China is no different. Complaints like these are more about problems with that individual startup or entrepreneur. An individual founder’s failure to raise often is more about their company’s problem than a reflection on available capital. Capital to build and fuel a startup is more present than ever before.

China’s investment numbers have always needed to be taken with a grain of salt. As one TechInAsia article strongly suggests, “China’s Startups are Lying”.

Yet in spite of the difficulty of knowing true numbers, China startups have access to capital. There are a lot of examples of past, present and future investment for startups in China.

The tendency of Chinese to invest in a broad range of businesses and ventures is a strong indicator for the future of China’s startups. Capital situation is good for startups in China.

Crazy Laws yet China is well-regulated for certain kinds of businesses

Surprisingly to many foreigners, regulations for local businesses and startups are good. China has a strong, pro-business legal system. At least internally.

While there are huge difficulties for certain kinds of businesses and for foreigners doing business and investing in China, the legal system is good for the startup community.

Depending on where you live, Chinese locals are able to work with a local tech or business zones to register their business. These locations make it easy to get your proper license. They try to largely stay out of the way of you doing your business.

The nature of China’s government does create limitations to some kinds of businesses you can do. You have to ask permission to operate in China. For example, educational and internet projects are typical examples where you need to jump through extra hoops before you can launch.

That said, current Chinese president Xi Jinping is aggressively working to clean up the system for proper, above-the-table companies and industries. Corruption is down. Unfortunately, compared to before, this “above-the-table” business practices has made certain businesses less profitable.

For foreigners trying startups in China, regulations are also improving, though it is still hard and hazardous as a foreigner doing business in China. Visas are easier. Business licenses are cheaper. (The weakness lies when you at a foreigner may want to move money out of China later.)

Overall, regulations in China tend to be moving in the right direction for a healthy ecosystem for startups. I don’t expect this to change, since economic progress is the huge driver of Chinese society. People expect government to let them run their businesses.

Conclusions:

Right now, China is trying to pivot from a manufacturing economy towards an innovation one. The slowing of this production economy has resulted in many factories closing down and unlikely to reopen. Certain kinds of businesses are moving elsewhere.

Parts of this transition are planned and results expected, though the shift in economy styles can be painful and hard (or impossible) for some to adjust.

China wants to be a dynamic innovation economy (and they want it now). We’ve been hearing about this for years in China. It’s nothing new and no suprise to anyone who has been watching China. Models of innovation from the US, Israel, Singapore and other places have been studied for decades.

China’s economy is changing, and China’s startup scene “hype” is intentional.

Deng Xiaoping is famously associated with China’s economic rise in the 1980s and 1990s and the new models used. “Cross the river by feeling the stones” (摸着石头过河) is Deng’s aphorism for how him and his team reached their model for growth and economic development. The societal pivot that was unloaded took many years to happen. Various research trips, proposals and experiments resulted in a dramatic China turnaround. It become a dogma, but it was highly pragmatic at its core.

The current shift towards an economy of innovation must be understood as a product of this pragmatism and past approaching to re-engineering economic models to fit China. A new wave of delegations were brought in. Research trips abroad were undertaken. Various models were explored. New principles have been derived and experiments are underway.

Like the model of 1980s and 1990s, Western parallels of innovation fail to grasp entirely China’s innovation models. This is again “crossing the river by feeling for stones” except the stones are about disruption, technology and innovation.

As such, a model like “startup communities” or an “entrepreneurial ecosystem” might not be our best model for understanding China. There are elements though that strongly indicate that the effects of a startup community are highly desired in this new innovation economy, even if “community” isn’t exactly the goal in and of itself.

Like past projects, government and private money are throwing money at this new innovation economy. Various receivers of this “investment for innovation” cash are creating all kinds of startup support structures including co-working spaces, incubators, funds and events.

Ultimately the key factor is people. Can China come up with enough talented people for this shift to the innovation economy? Can they train the next generation to be job creators?

Public and university programs are pushing more and more young people into trying startups, over traditional jobs. As one report indicates, “In 2015, 12% of new Peking University graduates went to start ups versus just 4% in 2005.”

Our early stage startup programs like Startup Weekend continue to see a strong participation rate. The number of copy cats of this model and other programs is never ceasing. These indicate growing push towards startups in China.

In this post, we tried to go beyond the typical factors in how we understand and judge China’s startup economy. People and capital tend to be the main points of discussions. A startup ecosystem’s health is about broader forms of help and support.

For us, we are strong believers in a thriving ecosystem (both locally and globally). It’s a key driver for startup and founder success. It’s hard to succeed alone. Programs, mentors, and cash do improve the rate of success for startup companies.

In looking at China’s startup communities, we looked at an integrated model of five factors (talent, density, culture, capital and regulation) for a thriving startup community.

It’s impossible to summarize everything and everyone in China’s startup ecosystem through such a broad generalization. Yet these models we can help us highlight areas for further study and future development.

In the case of China, regulation and the increasing number of hubs and clusters (i.e. density) have created a solid foundation for new businesses. Education has created the first stage of a talented and educated workforce. Secondary opportunities should (and hopefully will) provide means to further develop the talent pool.

Chinese startups aren’t entirely honest about their investment rounds. Yet, unlike some of its neighbors, China has a strong pool of capital to empower its founders in all stages from idea to growth to IPO. Capital is here.

Ultimately the final piece of China’s startup puzzle is culture.

Does China have the right culture for highly innovative yet highly risky startups? Will local Chinese follow the Western startup cultural models or strike a new path? Will societal mistrust and China’s past business practices hinder or be thrown off by new, young founders? How will China’s culture adapt?

As many tell me and I have witnessed personally, “startup culture” is where confidence in China’s startup success tends to weaken. It’s not #givefirst in China. Mentors are lacking. Collaboration and openness are not the norm. Older, more experienced workers tend to be more risk averse. Yet, like the economy as a whole, perhaps China’s culture is also changing.

Ultimately the next chapter of China’s startup successes is a story to still tell. Its unique ecosystem is strong yet immature. I see good evidence to expect China as the continuing nexus for current and future business successes.

Chinese startups are here to stay and they are hungry.

Comments