Why You Might Build Your Start-up in China over Silicon Valley 🇨🇳🇺🇸

Differences between the tech ecosystem in China vs. the US, from the perspective of a founder that lived in the Bay Area for the last 10 years.

Location matters. There’s a reason that talent from across the world congregated in the 50-mile stretch of land spanning San Jose to San Francisco. (You might be interested to check out Steve Blank’s Secret History of Silicon Valley, a wonderful talk on how this place came to be.) In this decade, though, China and its tech centers — Beijing and Shenzhen — are emerging as the Valley’s counter-weight in Asia. Different and full of opportunities. Looking forward 20 years, China will be an epicenter of technology, no doubt about it.

Personally, my next big decision is where to pursue my next venture — Silicon Valley or China. Through this lens, I embarked on an 8-week trip to China, meeting with friends, entrepreneurs, CEOs, and investors across Beijing, Shanghai, Shenzhen, and Hong Kong. I wanted to learn from their first-hand experience what it’s like to do a business — do a tech business — in China. Some of these are native-born Chinese; some are Chinese returnees; others are expats.

These are my findings.

It’s not too different. 1) mini-golf on the rooftop of a startup; 2) catered lunch; 3) a startup office park in Shenzhen; 4) a cafe / coworking space in Beijing

For a perspective on how it’s like to live in China, check out my previous post: Where Technology Meets Culture: Week 1 of Living in Beijing.

China and its businesses are actively embracing technology

First, macro trends.

Chinese enterprises are wholly embracing technology, across industries. It’s happening across industries, no matter if it’s a traditional or state-owned enterprise, or even how knowledgeable company leadership is about technology.

It’s widely accepted that adopting technology — especially artificial intelligence — will “upgrade” the company.

Of course, there are gaps in understanding technology across traditional industries and the tech industry, let alone true understanding of AI (which is used more or less synonymously as big data in China). This leads to partnership opportunities, whether by leveraging existing solution such as e-commerce, social networks, or by creating new solutions. There is particular appeal in Silicon Valley technology based on conversations I’ve had with management and investors.

Granted, many of these planned partnerships may be shallow and more of a PR stunt in the near-term, but the foresight and determination of a country and its businesses to up-level and willingness to embrace technology cannot be underestimated. The central government is hugely supportive, and AI now plays a prominent part of the government’s current five-year plan (Economist article link).

Industrial applications per the Fourth Industrial Revolution, just one area where traditional industry is eager to adopt digital technology to “upgrade”. Source: World Economic Forum

In the near-term, this presents ample opportunities for creative product managers to bridge business needs with tech solutions.

AI is white-hot

New York Times posted this in a May 2015 article: (link)

“It’s a race in the new generation of computing,” said James Lewis, a senior fellow at the Center for Strategic and International Studies. “The difference is that China seems to think it’s a race and America doesn’t.”

I think that sums up the attitude in China towards AI. If you think Artificial Intelligence, Machine Learning, Deep Learning are overused words in the valley, try going to a business meeting in Beijing, or even just turn on the TV. True, compared to tech people in the valley, many people probably barely (or not even) understand how it works, but that doesn’t diminish its influence. China is seeing AI as the first tech arena where it can actually compete head-to-head with Silicon Valley.

And folks in Beijing may just have an advantage in language. Think about it this way: most engineers in Beijing can easily understand and have access to English-language papers on arxiv. How many engineers in the valley can/will/want to get access to research and discussions made in Chinese in Beijing? In 2017, there were more accepted papers about AI by Chinese authors than American authors.

Less than glamorous, but real application. Facial recognition used to dispense toilet paper at public restrooms, so people don’t take the whole roll.

Talent, talent, talent

Hiring is hard. That’s almost universal. It’s true in China too.

First, let’s talk demand. Take this number: 15,000 companies are formed every day in China. Just think about the demand for talent!

Then, let’s talk supply. Yes, China has a lot of people and a lot of college graduates, domestic and returnees from study/experience abroad. However, skills vary. While the education system is reforming and graduates are more and more capable, there is still a gap in the average graduate’s ability to work independently and creatively. It takes time to find a qualified candidate.

Finally, competition. For a startup to out-compete BAT (Baidu, Alibaba, Tencent), they have to offer the whole package: growth opportunity, equity, and higher salaries. Many people simply don’t care about stock options and prefer cash-in-hand. Compared to valley where entrepreneurial engineers will sacrifice salary to join a startup, the culture in China trends conservative. Here’s a glimpse at the comp levels (Zhihu link).

All these lead to the fact that competition for talent is fierce. Some of the best talents are poached, oftentimes very aggressively, from other companies. While the best (or most connected) startups are able to build teams full of returnees and top talents, others are less fortunate.

Startup culture is driven by a reality of needs

To understand startup culture, we need to look deeper at the motivation for the current generation of 20- and 30-somethings.

Lecture 1 of YC Startup School (YouTube link) tells, essentially, “don’t do a startup for the money” because joining a “Facebook” in the early stage leads to much better financial outcomes. But the calculus behind that is different in China.

We need to talk about housing. Let’s do some back of the envelope math. An average “starter home” costs about $1MM both in San Francisco and in Beijing.

Beijing, where making a living is a real concern. 1) these nice looking buildings are out of most people’s range. 2) rush hour subway. 3) a condo inside 4th ring, 2br for US$2M

In a country where housing prices are stratospherically high, many young adults simply can’t afford a home in their lifetime. Let’s do some simple math. Couple this reality with the rags-to-riches stories of Alibaba, JD, Xiaomi — essentially all the tech giants — that are showcased in spotlight, many entrepreneurial folks decide for themselves that the only way to make it is by starting a company. One may say the economics of it forced their hands.

And this is the culture in which the tech ecosystem lives in.

And to talk about culture of tech companies, we have to talk about the culture of the people in general. The culture of a company to an extent is dictated by the culture of its customers, and to serve the 1.3 billion local Chinese customers, a company needs to appreciate the local culture. Put in product terms, that’s appreciating the local user behaviors and adapting your product to it, rather than expecting your users to change so they can use your product. When first introduced, Uber was credit card only. In a cash society where only the elite had credit cards (this was pre-mobile payments), Uber was relegated to only the white collar workers and foreigners, while Didi built a strong local base.

Differences in customer expectations.

Western infrastructure is developed. After all, it’s called “developed” nations for a reason. China’s is not. That presents opportunities to perceptive eyes. But there’s a common string among everyone that capitalizes on those opportunities — they’re ingrained in the local culture. Just as you don’t expect a Chinese student who went study abroad in the US for college to found the next Facebook, you also can’t expect a foreigner, expat, or recent returnee to found the next disruptive company in China. Not alone, at least. The founding team needs to have local *context*.

One example I’ve seen is that SaaS companies targeting SMB needs to have a local, offline sales (not customer success) team. What?! Because local consumers expect the guidance for certain services to be done in-person. After all, they’re used to it, because/and labor is so cheap.

Blending Silicon Valley and China

More and more Chinese nationals are coming back from the US (and in particular from Silicon Valley) to start companies. The companies they found is a blend between the Valley and China.

The Valley is often seen as a place of technologists, idealists, and purists. It’s accepted when it comes to hard tech, algorithms, and emerging technology (AI, VR/AR, biotech, etc.), Silicon Valley is the place to go. The Valley is also seen as a place where people are chasing idealistic dreams of “changing the world,” where people do things the proper way.

On the other hand, entrepreneurs see China as a place that’s real, down to earth, and practical. People care about the application of technology; as a result some of the best product managers grew up in China. Founders and investors care more about cashflow and making a profitable company, and are less patient for pay-off in the long run.

Culture adjustment takes 18 months

A founder needs to respect the reality of operating a company in China. On average, founders have told me it took them 1–2 years after they moved from the US to China to fully appreciate and adapt to the macro culture.

The best companies run product and engineering like a Silicon Valley company, things like agile, design, collaboration, fail fast, etc. They run operations like a pure blood Chinese company, knowing how to handle government, local partnerships, and veer into the gray areas as needed.

Operations is highly efficient

If there’s one word I’ve heard over and over that describes running a tech business in China is efficiency. Capital efficiency, time efficiency, resource efficiency. Translated differently, it’s the rallying cry of startups: move fast, and be scrappy.

Labor costs are cheaper.

This is true both for skilled labor and unskilled labor. A senior engineer at Baidu makes a base of ~US$40k (source), about a quarter of the costs in Mountain View. If fundraising in the US, that means the same capital now affords you many more engineers.

A popular myth is that local talent isn’t as “good” as US ones, but think about it: China is a country of 1.3 billion people, and a country that highly values education (and that’s an understatement). Many graduates go on to study abroad to get a BS, MS, or PhD. There are talents, but just like people anywhere, you have to hire and manage them well.

On-the-ground logistics team of bike sharing companies

Having access to cheaper unskilled labor can potentially make an even bigger difference in how a startup operates. Many tasks may not need to be automated at an early stage, but rather handled by people. This allows a company to be more nimble and flexible. It may also directly factor into the business model. To an extent, bike sharing works in China because Mobike/ofo can afford to hire on-the-ground operations team to organize bike parking at every subway station, and shuttle bikes around.

9–9–6 / 9–9–7

This stands for “9am-9pm, 6/7 days a week.” It’s the modus operandi for most early stage startups in China, both founders and early employees. It’s possible because of a generation of young, hungry workers wanting to make something out of their lives.

Something magical happens with this round-the-clock cadence. A company moves fast, either iterating quickly towards success, or fails quickly. Either way, no time is wasted; a year feels in China feels like many years elsewhere. Time efficient.

💩 or get off the pot

Putting it altogether, it makes the case that building a company in China is actually very efficient. A VC once told me that you can generally tell whether a company is going to make it based on just one month after investment.

This is seen time and time again. While a Kickstarter project may be seen as fast if it ships within 6 months, a hardware project is considered late if it doesn’t ship after 2. Each successive round of funding is expected to take place after 6 months.

(As an aside, when someone first told me about bike sharing being the hottest thing in China last year, I acknowledged her intellectually but didn’t think much about it. It blew my mind seeing it and trying it in person. Goes to say how much of, literally, legwork is needed to truly understand a market.)

SaaS is still in its early days

The biggest tech companies in China have all been B2C businesses, BATJ, gaming companies, etc. It makes sense — there’s a huge consumer base and consumption demand. However, it was curious to note the absence of B2B SaaS companies, which constitute a large part of Silicon Valley’s ecosystem.

My conclusion after many discussions boils down to this: China hasn’t yet built a habit for buying software. Whereas in the US, people and businesses are happy paying for the value delivered by software, China is coming off two decades of rapid tech adoption marked by rampant piracy.

Today’s decision makers aren’t used to paying for a purely digital software without a human touch — SaaS in the vein of Calendly, Gusto, Pipedrive. They didn’t build this habit as consumers, and similarly SaaS never became a trend in the business world. An interesting analogy is in gaming. China is the #1 market for digital games, but it all comes from in-game purchases. People are more willing to buy things in-game (services) vs. the game itself (software).

However, this is changing. The youth in this generation is growing up in an environment of digital payments, and are starting to be introduced to subscription models. For example QQ, iQiyi, and Tencent Video all have VIP member options, similar to Spotify and Netflix. This generation’s consumer habits will eventually filter into the workplace.

Increasingly, startups are coming to fill this space. A CRM offering Xiaoshouyi has raised over US$50MM. There’s a Google Drive clone in Shimo. Alibaba’s DingDing is a successful Slack clone. It’s only a matter of time before the market of willing-to-pay businesses expands.

Conclusion

One thing I’ll conclude with. This trip showed me how blinded about China. It’s no longer simply chasing after the US; rather, China and the US have forked in their developments. If you’re at all interested about China, I’d urge you to look out, pay attention, and visit if you can. It’s an exciting world there.

Thanks to everyone that I spoke to for their generous sharing of time and insights, and letting me have an inside glimpse into the market.

If there’s anything I missed our got wrong, please let me know in a reply. If you like the post, please show your ♥ :)