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The feature below is the abridged version of the original articles published on China Tech Blog on 9 and 23 February 2021. John Kaller is a foreign Founder in Beijing, who founded unpackAI and StartupYard, a zero-to-one Bootcamp for international entrepreneurs to kick-off their Tech-Startup in China. In this article, he shares some of the challenges and opportunities that foreign founders face within the Chinese ecosystem, and concludes by observing how foreign founders can pursue to raise funding and build a talented team around themselves.
Foreign Entrepreneurship in China
Globally, while approximately 90 percent of western start-ups fail and only one out of ten turns into a prosperous and sustainable business, these numbers look even grimmer in China. Looking at data over the last few years during which venture capital investments in China hit a new high with $70 billion in 2018, only a staggering 4 percent of Chinese start-ups successfully reached the D-Round and only 2 percent went public. More stunningly, none of these start-ups were founded or co-founded by a foreign entrepreneur. Considering my own experience in the field, I believe that within the next few years there will be another wave of foreign entrepreneurship in China with the first foreign-founded unicorn to arise.
The Unique Aspects of the Beijing Ecosystem Provide Many Resources that Foreign Founders have to Spot and Seize
One of my important learnings was the understanding that China is pushing for more entrepreneurship from within, which concurrently also provides more opportunities and resources for foreign founders. In times of scarce resources, founders need to be equipped and ready to take advantage of the ecosystem they are in. That is in particular in the case for Beijing.
Because one of my start-ups was founded and registered in Beijing´s Zhongguancun, widely known to be China’s start-up hub, I was lucky enough to experience and take advantage of the various benefits that were offered to attract foreign founders to register there.
Due to the start-up friendly environment, various accelerators, incubators and other organizations provide free office spaces. A few hubs such as the Haidian Pioneer Park (HPP) specifically focus on supporting overseas returnees and foreign entrepreneurs. Combined with the resources of the Tsinghua x-lab, a start-up incubator of Tsinghua University, we never even once had to pay a single Yuan for any kind of office space in prime location, while reaching a team size of 13 people over the duration of nearly two years. That relieved a lot of financial pressure that particularly early stage start-ups want to avoid. In addition, a unique 1-year Entrepreneur visa that was pioneered in Zhongguancun in 2018 and later made available across China, provides a reliable visa option for foreign entrepreneurs. With a fairly reasonable application process considering timing, requirements and costs of about RMB 800 it was the go-to visa for all founding partners. Moreover, various local accelerators and incubators have tailored their programmes for foreign entrepreneurs to provide guidance, mentorship and also funding. To mention a few, Chinaaccelerator and XNode have done fantastic work to make the market more accessible for foreign founders. With that, participating in many competitions and other start-up related events can pose as effective methods to network, establish business development channels and take home subsidies. As local governments want to attract foreign start-ups to open up an office in their region, they sometimes pay participants to attend events with a guarantee for prize money.
Understanding the Unpredictability of the Regulated Landscape Helps to Navigate and Prioritize
Aside from the wealth of opportunities and resources, however, the unlevelled and complex regulatory landscape made operating a company difficult. Chinese start-ups often operate in a grey area where regulation is yet to be defined. Cases such as Apple suddenly purging 3,300 games from the China App Store within 2 days and later up to 36,000 games this year in order to comply with the strict gaming regulations introduced by China’s National Press and Publication Administration a long time ago in 2016 are common. The unpredictable and yet heavily bureaucratic ecosystem leads to an uneven playing field in which all start-ups play the game differently and no one knows who is going to be hit first. Understanding this and being able to walk the fine line under such circumstances, ultimately helped us to better navigate and prioritize. Effective communication with other start-up companies within the same industry and having the right contacts within the responsible government departments is necessary.
The Software Ecosystems Controlled by China’s Tech giants are Becoming Additionally Close and Exert More Dominance and Dependencies
It is no secret that the winners of the internet´s winner-takes-all markets are building near-monopolistic economies. Alibaba, Tencent and at a slightly smaller scale ByteDance are estimated to directly or indirectly control over 70 percent of the internet business and transactions in China.
Having first-hand experience in utilizing the software ecosystems of Alibaba, Tencent and ByteDance, it has been increasingly difficult building products on top of any of these dominant ecosystems. API access across platforms such as Douyin (Chinese TikTok), Taobao and WeChat is limited and third-party access in order to integrate applications is prohibited with only a few selected partners to be enabled to do so. This heavily limited us in our product development and required a lot of research. Such platforms that pool massive amounts of customer traffic and potentially pose as an effective and efficient sales channel are becoming increasingly restrictive. Moreover, China’s giants’ access and control of key resources such as cloud servers and data increase their reach and dominance. Thus, start-ups in China, while very much dependent on such channels are at the same time also heavily restricted.
Foreign startup founders in China that intend to integrate their company within these massive ecosystems must understand that, in order to succeed, exclusive partnerships with any of these major ecosystems to acquire exclusive data channels, access, and interoperability are crucial. These partnerships, however, generally come in form of a strategic investment as the first step to ultimately be swallowed and become part of the ecosystem. Historic strategic investments to show such strategies include MeituanDianping (Tencent owns 20 percent pre-IPO), Pinduoduo (Tencent owns 17 percent), JD.com (Tencent owns 20 percent post-IPO), Youku (Alibaba acquired 17 percent in 2014 and the rest 83 percent% two years after), Neusoft Holdings (Baidu invested $200 million). By accepting an investment, the invested company has essentially taken sides and is indirectly involved in the war among the giants — only in rare cases would we have more than one of China’s internet giants invested in the same company. It does not stop there; it is not uncommon for either Alibaba or Tencent to invest in you and your competitor to see which company ultimately survives, to then acquire the winner and to further build dominance. And that is exactly for what they are striving for: ultimate control across industries. It has to be noted however, that the success story of ByteDance demonstrates that it is possible to outmaneuver Alibaba and Tencent which shows promise for future start-ups.
To Successfully Fundraise in China, Intelligent Targeting of VC’s and Exceptional Storytelling to Sell One’s Unique Advantage is Crucial
Since there have only been very few success cases (also simply due to the proportionally small number of foreign entrepreneurs in China), Chinese investors might be skeptical of the ability of foreign founders, and might be biased to their own citizens. In particular in our case, as we solely served and focused on Chinese customers, convincing investors of our ability to outperform our Chinese competitors was crucial. We had the pleasure to meet around 20 funds, including purely Chinese funds, global VCs and various 土豪 (tǔháo – generally uneducated individuals with new-found wealth) individuals, all across China. After several meetings, more than a few investors proceeded to conduct due diligence with varying degrees of intensity. Some VCs put more focus on the team and emphasized that by inviting the entire founding team to dinner with a lot of alcohol involved to truly understand the characters and motivations behind the team. Others mainly targeted our CEO and Founder, understanding in depth how the CEO manages and leads the company.
To truly succeed in fundraising as a foreign entrepreneur in China, targeting VCs with a track record of investments in international teams provides greater potential. Not all globally managed VCs fall into that category, thus talking to peers within the industry helps to spot the right Funds. In our case, 2 major Chinese funds with a history of investing into foreign founded startups Cherubic Ventures and ZhenFund were two interesting partners. As a form of good training, it helps to utilize smaller funds to go through the process of fundraising with your team once before shooting for the high potential VCs.
Aside from effective targeting, exceptional storytelling, to double down on one’s foreign identity is very important. How does your background as a foreigner in China further benefit your company to hit the set goals? I have found that blending into the Chinese society, even for ethically Chinese founders is extremely challenging and requires a delicate mastery of the Chinese language.
The Talent Pool in Beijing is Easily Accessible but Internal Procedures are Key to Build a Functioning Team
The job market is highly competitive without a lack for fresh candidates. After utilizing various local hiring platforms such as Lagou, Zhaopin, or Boss Zhipin, we very quickly got bombarded with CVs, but 70 percent of all applicants did not satisfy the basic requirements. With such conditions, hiring and recruitment strategies, internal onboarding protocols and other internal processes became very important in order to build a talented team as quickly as reasonably possible. We paid more attention to the significance of the Project 985 and Project 211, programs initiated by the Chinese government that contain and fund the best universities in China or the noteworthy difference between a bachelor degree (本科) and an associate degree (大专). Moreover, we also realized that utilizing the hiring platforms named above helped with recruiting junior talent (1-3 years) but are not an effective solution to find senior talent. For that, headhunters or utilizing your personal brand and network are two effective ways.
I once again started to appreciate Beijing and Zhongguancun as a prime location for our company. This is because a lot of talents from second and third tier cities are willing to sacrifice high salaries and dedicate their entire life and time to set foot and start a career in Beijing, often renting apartments in Beijing with a 1-year lease. All that creates the environment of a dynamic and throbbing job market, that when handled with care, procedure and patience can produce a top team.
It is noteworthy that foreign founders are not yet receiving the attention they deserve, mainly due to language barriers, required visas and a lack of network. This provides a huge opportunity for foreign founded startups to recruit highly qualified candidates who are dependent on the company to provide a working visa and are willing to accept a relatively low salary. Such talents can be identified and recruited through foreign student associations at the various universities in Beijing or by attending local startup related events that have been organized by international communities such as Startup Grind.
Even though regulations and local support is essential, I have learnt that one has to adapt and understand the local culture, local management practices and differences in mindset. Stubbornly persistent to Western best-practices and not keeping an open mind will ultimately result in failure. Just as I experienced, your leadership style will be questioned, others may doubt your market understanding, strategic decisions and internal practices. My advice would be to consult and listen to other local founders, make yourself a part of the Chinese society and expect yourself to be amazed and proven wrong. Only then, the first foreign founded unicorn in China will arise.
Opportunities and Key Challenges for Foreign Entrepreneurs in China
All opinions expressed in this essay represent my personal views only.
China Tech Blog is established by alumni from Schwarzman Scholars at Tsinghua University, London Business School, and Fudan University, working at China’s top technology companies. It leverages its on-the-ground insights to offer readers the latest insights to Chinese tech. Original article: