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The tech start-up boom

China’s technology start-up sector is making the country a global hotspot for venture capital investments. Nicky Burridge finds out how Chinese start-ups are increasingly stepping out of Silicon Valley’s shadow.

Caught in the rain without an umbrella? No problem. You can hire one with a few swipes of your mobile phone.

Sharing E Umbrella, which has distributed 300,000 umbrellas across the southern city of Shenzhen, is one of a number of companies across the country hiring out umbrellas that can be found and unlocked from a machine through a mobile app. The start-up recently raised US$1.5 million and has plans to roll out 30 million umbrellas at home and abroad during the coming year.

Chinese start-ups are increasingly stepping out of the shadow of those in Silicon Valley as they become world-class innovators in their own right. In 2015, the value of venture capital investment in Chinese Internet start-ups exceeded United States-based start-ups for the first time, in a sign that the centre of gravity in the global digital economy was starting to shift.

Venture capital investment in China totalled US$3.6 billion in the first quarter of 2017, as the country’s vibrant start-up community continued to catch the eye of investors, according to a recent study by KPMG.

Four fundraisings by Chinese start-ups made it into the top 10 biggest venture capital deals globally during the quarter, including the US$450 million raised by ofo, the biggest round of investment on record in the bike-sharing industry. China now accounts for one in five unicorn companies – start-ups with a valuation of more than US$1 billion – boasting big names such as hardware manufacturer Xiaomi, which set a world record last year when it sold 2.1 million smartphones online in just 12 hours, and DJI Innovations, which makes 70 percent of the world’s drones.

Meanwhile, a survey of more than 800 global tech leaders carried out by KPMG found 26 percent of them predicted Shanghai would be the world’s next leading technology hub within four years.

Tom Birtwhistle, Senior Manager of China Digital Strategy at PwC, believes China’s start-up sector already rivals its U.S. counterpart. He claims start-ups in China are on the same level as their Western counterparts in terms of scale, value and innovation capacity, adding that Chinese technology giants such as Baidu, Alibaba and Tencent, rival their U.S. counterparts like Amazon and Facebook.

“The investment money is now shifting to China,” Birtwhistle says, pointing out that while in the past people looked to Silicon Valley as the centre of innovation, they are now looking at China.

William Chou, Deloitte China TMT Industry National Managing Partner, agrees that China has already stepped out of the shadow of Silicon Valley. There are 4,000 new start-up companies created in China every day, nearly double the number in the U.S., while seven of the top 15 Internet companies globally by market capitalization are Chinese, he says.

Qi Lu, Tsing Capital’s Strategy and Research Partner, adds that China has pulled ahead of the U.S. in the areas of Internet companies, mobile businesses, smart consumer hardware companies, integrated solution providers and manufacturing engineering capabilities.

Market advantages

China’s surge in the start-up rankings is unsurprising as it enjoys significant advantages over the U.S., not least of which is its massive domestic market.

With approximately 900 million Internet users, Birtwhistle at PwC says China is a market on a “colossal scale.” To put the size of the market into context, he points out that more mobile transactions were carried out through Tencent’s WeChat app during Chinese New Year than were done on PayPal in the whole of 2015. “It is one of the few countries where you can be a global leader but never have to leave your own market,” Birtwhistle says.

Chinese consumers are mobile-first, they are willing to embrace new technologies and payment methods and they have a high level of trust handing over personal data.

Egidio Zarrella, Partner, Clients and Innovation at KPMG, says Chinese consumers also spend more online than their U.S. and Europe counterparts put together. “It is going to be one of the most technology–driven countries in the world,” he says.

The fact that China is a developing market also provides opportunities for start-ups operating there. “There are a lot of innovative products that can solve an empty space in the market because we are a developing country. There are a lot of demands that have not been met,” Xiao Wang, CEO and Chief Fire Starter at U.S.-China accelerator InnoSpring Silicon Valley, explains.

But Lu at Tsing Capital does not attribute the success of Chinese companies just to the scale of their home market, but also to their efficiency in responding to that market. “The time for Chinese companies to develop a prototype is usually only 20 percent of the time used globally.”

This focus means work-life balance in China is non-existent, she adds. “In China, there is a company work culture at start-ups called 9/9/6. It means that regular work hours for most employees are from 9 a.m. to 9 p.m., six days a week.” Government support As China’s economy rebalances, startups have benefited from a raft of government support, including office space, tax incentives, grants and funding.

One of the most significant schemes has been the China Torch Programme, which has been dubbed the most successful entrepreneurial programme in the world. Major components of the scheme include the setting up of innovation clusters, technology business incubators, access to seed funding, and a venture guiding fund, to support start-ups throughout the whole investment cycle.

Companies are also being encouraged to apply innovation to more traditional businesses. “An example of this is where technology and hardware are being combined, such as through China’s bike-sharing schemes,” Chou at Deloitte explains.

Mobike and ofo are the big names in the sector, with business models that enable consumers to use their smartphones to find and unlock a bicycle parked nearby, and pay for it through their mobile. But innovation does not end there, with the so-called sharing economy now extending to umbrellas, basketballs and even mobile phone chargers.

A wealth of funding

Unsurprisingly, given its potential, money is flooding into the technology sector. Funding is available both internally and from abroad, from private individuals, companies and the government.

Chou explains that many employees who were instrumental in the launch of successful Chinese Internet companies, such as Alibaba, Tencent and Baidu, have now become angel investors.

Major U.S. venture capitalist funds, such as Sequoia, Northern Light and IDD Capital, have been active in China for around 15 years, and they have recently been joined by domestic venture capitalist funds.

“Money comes from everywhere. We are seeing more private equity, venture capital and angel investors. China has more millionaires and billionaires than ever before and they want to take a bet on start-ups. The demand to put money in exceeds the supply of companies,” Zarrella at KPMG says.

The support does not end with money. Lu at Tsing Capital points out that companies such as Tencent and Alibaba are famous for providing strategic resources, while venture capital funds will also help introduce partners.

As money piles into the Chinese start-up sector, there are concerns that a bubble could develop. “As China’s economy slows the government is going to encourage more people to start their own business, so we may see some bubble forming in the industry,” Chou at Deloitte says.

But Birtwhistle at PwC does not think this is necessarily a bad thing. “In the early days, inherent of any type of market going through that type of growth you are going to see industry shakeout and consolidation,” he says. Zarrella agrees, pointing out that start-ups are always fraught with risk.

Stepping out of the shadow

Meanwhile, a shift is taking place in the way multinational companies view China. Birtwhistle explains that around four years ago multinational companies started to recognize that they needed an “in China for China” strategy. But he says another shift is now occurring as these companies realize China is leading in many Internet areas, particularly business models at the intersection of social, mobile and e-commerce.

As a result, companies are moving their global innovation hubs for digital and e-commerce out to China. “We are seeing companies pivoting to what we would call a ‘China for the world’ strategy, where they build their innovation hubs here, launch new products and services in China, and then export those business models back to international markets,” he says.

There are more than 1,500 innovation facilities in China operated by multinationals, with big names such as Dyson, Apple and Axa all setting up research and development offices there. “In the past people would go to the U.S. for ideas and then fly back, but now people are getting ideas from the Chinese and people are putting them into their own markets,” Zarrella says.
Intense competition

Innovation in China is being continuously spurred on by intense competition. “I have worked in 20 different markets and China is the most competitive in the world in the Internet sector. Innovation and radical change is part of daily competitive life there,” Birtwhistle says. “They see what their competitors are doing, match that, and then do something different literally on a weekly basis. This competition spurns lots and lots of innovative business models.”

But while the Chinese start-up sector may no longer lag that of Silicon Valley, Zarrella thinks it is wrong to think of the two places as being in a head-to-head competition. “It is not rivalry, it is a good thing. If you look at all the stuff the world has got to do, you can’t put the load on just one country,” he says. “It is not a competition, it just raises the game.”

This article was originally published in the July 2017 issue of A Plus. You can also read the digital edition.