The China Startup Report

THE CHINA STARTUP REPORT
A 15-min Crash Course By Bowei Gai
October 2011

Updated Nov 14, 2011

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.

WHY CHINA?

If China can transform itself from an impoverished
country to a world superpower in 20 years...

... imagine where they will be in another 50.


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


US COMPARISON
US China
Population 307m 1,331m
Mobile Users 292m >800m
Internet Users 239m >485m
GDP $14.12t $4.99t
Growth since ‘85 3.4x 44.5x
Millionaires in ’10 3,100,000 500,000


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


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)

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.


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 Taobao.com.
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 www.apple.com people would rather search for on the Chinese search engines to go the website.


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.

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.

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.


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


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.


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.


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.

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


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


ANGEL INVESTING IN CHINA

Don’t
While 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, what
China really lacks is an angellist.com 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.


CONCLUSION

Entering the Chinese market is like starting your
ﬁrst company. You have no idea what’s going on
and everything can seem like the wild west. The
odds are against you, but it gets better if you
out work and out hustle your competitors.

The difference is that everything is more
extreme in China. There will be a lot more risk,
and exponentially more rewards.

STILL WANT TO GO?

• Lower the American ego, be humble, be curious

• Learn Chinese, learn Chinese culture

• Partner with Chinese ﬁrms/entrepreneurs


QUESTIONS? COMMENTS?

I’d love to hear from you

http://www.linkedin.com/in/boweigai


SPECIAL THANKS

Thank 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, Wednesdays.com (500S)
- Edward Tsai, DCM Capital
- Prasanna Srikhanta, Clarium Capital

And another big thank you to all of the great Chinese entrepreneurs/angels/VCs/journalists
that took time out of their day to speak with me.


CITATIONS
• http://www.internetworldstats.com/am/us.htm

• www.google.com/publicdata

• http://en.wikipedia.org/wiki/List_of_mobile_network_operators_of_the_Americas

• http://en.wikipedia.org/wiki/Historical_GDP_of_the_People's_Republic_of_China

• http://www.usgovernmentspending.com/us_gdp_history

• http://www.usgovernmentspending.com/us_gdp_history

• http://www.marketwatch.com/story/chinas-gdp-overtake-us-early

• http://usa.chinadaily.com.cn/business/2011-06/24/content_12768324.htm

• http://digicha.com/index.php/2011/09/reuters-china-vie-company-structure-under-threat/

• http://www.beijingtoday.com.cn/tag/garage-cafe

• *incomplete list of citations.


CHINA RESOURCES

http://en.chuangxin.com/

http://chinaccelerator.com/en/

http://geeksonaplane.com/destinations/east-asia/


FURTHER READINGS

http://disrupt.techcrunch.com/BJ2011/

www.slideshare.net/evdemon/startup-in-china

www.slideshare.net/cxpartners/chinese-web-design-
patterns-how-and-why-theyre-different


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