4.11.24 Mass Incarceration and the New Jim Crow.pptx
China has risen rev 5
1. POST 1 of 5 China – The Sleeper Awakens
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions
of the Startup Owners Manual. In these series of 5 posts, I thought
I’d share what I learned in China. My post about Japan will follow.
All the usual caveats apply. I was only in China for a week so this a
cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin
of Microsoft Accelerator, Frank Hawke of the Stanford Center in
Beijing, and my publisher China Machine Press.
Summary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in New
York, Boston, Helsinki, Santiago Chile, St. Petersburg, Moscow, Prague, and Tokyo, but the
visit to the heart of the Beijing startup world Zhongguancun has truly blown me away.
Each of these clusters has wondered how to become the next Silicon Valley. Beijing is already
there.
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What a long strange trip China has been through. After the creation of the Peoples Republic of
China in 1949, all industry was nationalized, agriculture was collectivized, and the private sector
was eliminated. All companies were owned by the state, all planning was centralized, and the
state determined the allocation of resources. This was the China I grew up with – the one where
private enterprise was a crime and marketing wasn't a profession.
To say China has transformed itself is perhaps the biggest understatement one can make. China
has embraced state capitalism in a way Wall Street can only dream about.
Startups, Venture Capital and the Communist Party: how did this happen in China?
The best analogy to describe the relationship of science and technology and the Chinese startup
scene is to understand its parallels with the United States during the Cold War with the Soviet
Union. During World War II, the U.S. mobilized scientists in a way no other country had. For
45 years - post World War II until the fall of the Soviet Union - the U.S. viewed science and
technology as a strategic asset. We made major investments in it, understanding that establishing
basic and applied science leadership was necessary for us to build advanced weapons systems to
defend our country and deter and if necessary, wage and win a war with the Soviet Union.
These investments took the form of building national research organizations, several for basic
science (NSF, NIH) and others for applied weapons research (DOD, DARPA, DOE, etc.)
Research universities also became an integral part of the military ecosystem as the federal
government pumped billions into supporting science.
Startups, entrepreneurship and commercial applications are happy byproducts of those military
investments. For example, as the semiconductor business started, the largest customers for
Fairchild’s and Texas Instruments new integrated circuits were the Apollo Guidance Computer
and the guidance system for the Minuteman II ICBM.
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2. China is following the same path…
Over the last three decades, to achieve strategic parity with the United States and to construct a
modern military, the Chinese have made massive investments in building their science and
technology infrastructure. China has gone from a land-based army to one that can support its
territorial claims to the South China Sea and Taiwan with anti-access/area-denial weapons. This
evolution required a transition, moving from a reliance on the numerical superiority of its land
army toward a force boasting sophisticated aircraft and naval platforms, precision- strike
weapons, and modern C4SIR (Command, Control, Communications, Computers, Intelligence,
Surveillance and Reconnaissance) capabilities. Its Second Artillery Corps not only controls
China’s ICBMs, but also its short range missiles pointed at Taiwan, Vietnam, Philippines, and
U.S. bases in Guam and Okinawa. And its new terminally guided ICBMs have put U.S. aircraft
carriers in harms way in any regional confrontation. Its air force and navy have gone from a self-
defense force to one that can project regional power effectively to the first island chain and
beyond.
China’s military modernization depends heavily on investments in China’s science and
technology infrastructure, reform of its defense industry, and overt and covert procurement of
advanced technology and weapons from abroad.
Building China’s Science and Technology infrastructure
Science and startups have come a long way since the 1980’s when the Chinese government
owned everything and controlled it through a central planning system. But before startups could
happen, China’s basic science, technology and finance infrastructure and ecosystem needed to be
built. Here’s how a national policy for science and technology emerged.
Beginning in the 1982, China started a series of science and technology programs in five areas:
support of basic research, high technology R&D, technology innovation and commercialization,
construction of scientific research infrastructure, and development of human resources in science
and technology.
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3. The majority of the science and technology programs are driven by MOST (Ministry of Science
and Technology) and NSFC (National Natural Science Foundation). As we’ll see later, the MOF
(Ministry of Finance) also has had a hand in funding new ventures.
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The diagram below from OECD's Report on China's Innovation Policy puts the ministries
involved in science in context. (Note that it does not show the military technology ministries.)
Figure 3.2 Public governance of S&T and innovation in China: The institutional profile Table 3.1 Fu
Program
State Council
Key Technologies
State Council Steering Committee of S&T and Education 973
863
NNSFC
NDRC Knowledge Innovation
COSTIND Other MOC MOF MOST MOE CAS CAE MOP
Ministries TOTAL
Total as a share of total
public S&T expenditures
Oversees State IP Attracts overseas
Office NSFC
defence-related Chinese Scholars,
R&D and Innovation Productivity Provides manages post-doc
military Fund for Small Promotion policy programmes
applications Technology-based Center advise
of commercial Firms Key Technologies
technologies Funds
Defines policy Provides support to basic
on patents and university-related research
other IPR issues R&D, science parks Promote the developme
and human resource of key technologies
development needed for industrial an
Defines and Provides tax reliefs to Supports Conducts social development
implements exports of high tech innovation research and
sectoral R&D products, and preferential in SMEs promotes
policies treatment of FDI innovation through the K
in high tech sectors Knowledge Innovation million RMB (2004)
Program
Total funds raised
Government funds
O Formulates strategies, priority areas, policies, laws and regulations for S&T
Gov. as % of total
O Promotes the building of the national innovation system
O Conducts research on major S&T issues related to economic and social development
O Guides reforms of the S&T system
Main tasks Origin
of MOST
O Formulates policies to strengthen basic research, high-tech development and industrialisation and S
O Designs and implements programmes to fund basic and applied research, to induce firms to
innovate, to create science parks, incubators, etc.
O Develops measures to increase S&T investments
O Allocates human resources in S&T and encourages S&T talents Funds raised (million RM
O Promotes international S&T cooperation and exchanges
% government
O 3 core programs: The National Key Technologies R&D Program; the National % enterprise
Main tools High-Tech R&D Program (863 Program); the National Program on Key Basic Research
of MOST Projects (973 Program) % bank loans
O Two group programs (Construction of S&T infrastructures; Construction of S&T
industrialisation environment) % overseas
% others
NDRC: National Development and Reform Commission COSTIND: Commission of Science, Technology and Industry for National Defence
MOC: Ministry of Commerce MOF: Ministry of Finance MOE: Ministry of Education MOP: Ministry of Personnel
MOST: Ministry of Science CAS: Chinese Academy of CAE: Chinese Academy of NSFC: National Natural Science
and Technology Sciences Engineering Foundation of China
Source: OECD based on data from MOST and other sources.
• Basic research: National Natural Science Foundation (equivalent to the U.S. National
Science Foundation,) ~$1.75 billion budget. The 973 program (National Basic Research
Program) part of the Ministry of Science and Technology.
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4. • High technology R&D: 863 Program (State High Technology R&D Program) headed by ex
leaders of Chinese strategic weapons programs, and the National Key Technology R&D
Program.
• Technology innovation and commercialization: National New Product Program, the Spark
program for rural innovation, and probably the most important one for startups in China , the
Torch Program
• Science research infrastructure: National Key Laboratories Program, and the MOST
program for the construction of research facilities, R&D databases, and a scientific research
network
• Development of human resources in science and technology: Programs for attracting
returnees or overseas Chinese talent: from the Ministry of Education - the Seed Funds for
Returned Overseas Scholars, Chunhui Program, and the Cheung Kong Scholar Program.
From the Ministry of Personnel - the Hundred Talents Program. From the National Science
Foundation - the National Distinguished Young Scholars Program.
Part two the next post, describes China’s Torch Program, the largest government-run
entrepreneurial program in the world.
Lessons Learned
• China is working to build basic and applied science and technology leadership
• Like the U.S. and the Soviet Union in the Cold War they are using science and technology to
build advanced weapons systems
• Unlike Russia they’ve found the path for a thriving system of commerce in between State
Owned Enterprises
• Technology startups are a side effect from these investments
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5. POST 2 of 5 China’s Torch Program - the glow that can light the world
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions
of the Startup Owners Manual. In these series of 5
posts, I thought I’d share what I learned in China. All
the usual caveats apply. I was only in China for a
week so this a cursory view. Thanks to Kai-Fu Lee of
Innovation Works, David Lin of Microsoft
Accelerator, Frank Hawke of the Stanford Center in
Beijing, and my publisher China Machine Press.
The previous post described how China built its
science and technology infrastructure. This post is about the how the Chinese government
engineered technology clusters.
--
The Torch Program
In size, scale and commercial results China’s Torch Program from MOST (the Ministry of
Science and Technology) is the most successful entrepreneurial program in the world. Of all the
Chinese government programs, the Torch Program is the one program that kick-started Chinese
high-tech innovation and startups.
Torch has four major parts:Innovation Clusters, Technology Business Incubators (TBIs), Seed
Funding (Innofund) and Venture Guiding Fund.
Innovation Clusters
Industries have a competitive advantage when related companies cluster in a geographical
location. Examples are Hollywood for movies, Milan for fashion, New York for finance and
today, Silicon Valley for technology entrepreneurship. The early clusters occurred by
happenstance of geography or history. But the theory is that you can artificially create a cluster
by concentrating resources, finance and competences to a critical threshold, giving the cluster a
decisive sustainable competitive advantage over other places. Israel, Singapore and now China
are the three countries that have successfully put that theory into practice.
The Torch program created Innovation Clusters
by creating national Science and Technology
Industrial Parks (STIPs), Software Parks, and
Productivity Promotion Centers.
The first Science and Technology Industrial Park
was Zhongguancun Science Park in Beijing. It
has become China’s Silicon Valley. (This was
the area I visited in this trip to China.) In
addition to the one in Beijing, China has set up
53 additional industrial parks and in them are
~60,000 companies with 8 million employees.
Industry or technology specific versions of these
clusters have been set up; for example Donghu in Wuhan - specializing in optoelectronics,
Zhangjiang in Shanghai - focusing on integrated circuits and pharmaceuticals, Tianjin - biotech
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6. and new energy, Shenzhen – telecommunications and Zhongshan – medical devices and
electronics.
The Science and Technology Industrial Parks contributed 7% of China’s GDP and close to 50%
of all of China’s R&D spending.
In addition to the 54 Science and
Technology Industrial Parks, the
Torch program also set up an
additional 32 Torch Program
Software Parks.
Another key part of China’s cluster
strategy was collaboration between
research and business, as well as
between large enterprises and tech-based small and medium enterprises. It did so by building a
national network of a 1,000+ Productivity Promotion Centers. They provide consulting,
promotion, product testing, hiring, training and incubation services to startups.
Technology Business Incubators (TBIs)
While the Innovation Clusters designated specific areas of the countries where high tech was to
occur, it’s the Technology Business incubators located inside these clusters where the startup
companies physically reside. Much like incubators worldwide, they provide startups with office
space, free rent, access to university technology transfer, etc.
By 2011, there were a total of 1034 Technology Business Incubators across China, including 336
as National incubators, hosting nearly 60,000 companies. (20% of the National Incubators were
privately-run and their percentage is steadily increasing.) In recent years Business Incubators
have developed into diverse models. For example, the Ministry of Education and the Ministry of
Science and Technology teamed up to put 45 incubators in universities. There are close to 100
specialized incubators for companies founded by returned overseas Chinese scientists and
engineers. There are a dozen sector-specific incubators (a Biomedicine Incubator in Shanghai,
Advanced Material Incubator in Beijing, a Marine Technology Incubator in Tianjin, etc.) These
incubators are mostly clustered in the eastern coastal regions, and disproportionately target TMT
(Technology Media and Telecom) and Biotech.
Some of the startups coming out of these incubators have become large international companies
including Lenovo, Huawai, Suntech Power, etc.
Seed Funding (Innofund).
The best analog for China’s InnoFund is the U.S. government’s SBIR and STTR programs. Set
up in 1999, Innofund offers grants ($150 - $250K), loan interest subsidies and equity investment.
Innofund is designed to bridge early stage technology companies that have innovative
technology and good market potential but are too early for commercial funding (banks or VCs.)
Innofund applicants have to be in high-tech R&D, have less than 500 people, at least 30% of the
employees have to be technical and the majority of the company owned by Chinese. The ultimate
goal of Innofund is to get the startups far enough along in technology and market validation so
other sources of financial capital (banks, VC’s, corporate partners) will invest.
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7. Since its establishment, there’s been over 35,000 applications with 9,000 projects approved and
close to a $1 billion allocated.
Most Venture Capitalists in China viewed the Innofund the same way most U.S. VC’s treat the
SBIR and STTR programs – they never heard of it, or they think it takes too much time to apply
for too little money. And with the same complaints; tedious, relationship driven application
process, bureaucratic reporting requirements, and outcomes often measured in quantity and not
quality. However, for startups who have gotten an Innofund grant, it does provide the same
positive cachet as an SBIR and STTR grant – the government has reviewed your technology and
thought it was worthy.
Venture Guiding Fund
In 2007 the Ministries of Science and Finance raised the stakes to get VC’s focused on funneling
more VC money into growing startups – they set up a Venture Guiding Fund. The Venture
Guiding Fund invests directly into VC funds, co-invests with VC’s, and covers some VC bets. It
does this with four programs: 1) A fund of funds, holding < 25% equity in VC firms, requiring
only a fixed rate return; 2) the fund will co-invest with other VC firms matching up to 50% of
other VC firm’s equity investment or a maximum of $500K; 3) Risk subsidies for VC firms,
where the fund will be compensated for the cost and loss of VC firms which have made
investments in technology-based startups; and 4) Grants for portfolio reserves, where the fund
will provide grants for technology-based startups which are being incubated and coached by VC
firms.
Torch Summary
In the last decade Torch managed to break free of China's state central planning bureaucracies.
Of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating
and pivoting as it learned and discovered. This enabled Torch to evolve with China's rapidly
global economy.
Part 3, the next post describes the rise of Chinese venture capital.
Lessons Learned
• The Torch Program is the worlds largest “lets engineer entrepreneurial clusters” experiment
• Torch has four major parts: Clusters, Business Incubators, Seed Funding, and Funds to
support Venture Capital firms
• Torch was the rare government program that was run like a startup – iterating and pivoting as
it learned and discovered.
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8. POST 3 of 5 The Rise of Chinese Venture Capital
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions
of the Startup Owners Manual. In these series of
5 posts, I thought I’d share what I learned in
China. All the usual caveats apply. I was only in
China for a week so this a cursory view. Thanks
to Kai-Fu Lee of Innovation Works, David Lin
of Microsoft Accelerator, Frank Hawke of the
Stanford Center in Beijing, and my publisher
China Machine Press.
The first post described how China built a
science and technology infrastructure to support
advanced weapons systems development. The previous post described how the Torch program
built China’s innovation clusters. This post is about the rise of Chinese venture capital and how it
helped build the countries entrepreneurial ecosystem.
The Rise of Chinese Venture Capital
China’s move away from a state system that solely depended on a command and control
economy started in the 1990s. The first wave of startups began when R&D centers and
universities began to provide the technology and seed capital for new startups that were spin-outs
or spin-offs. This could be a group of individuals leaving a university or research center or an
entire department leaving. For example, in the 1990’s 85% of the start-up funds of the new
technology companies founded in Beijing came from the research center or university they left.
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9. The second wave of technology investors were Chinese banks, who provided the majority of the
later stage investments in the Torch Program. By 1991, 70% of the Torch funded startups were
getting bank financing for expansion and later stages of the new ventures, with local
governments acting as guarantors. Like the U.S. SBIR and STTR programs, the Torch Program’s
funding for new ventures was limited to seed funding the front end. Being designated as a Torch
Program startup gave banks comfort to provide loans to these ventures for technology
commercialization.
Technology zones with Science and Technology Industrial Parks were the third source of support
for new ventures. Inside the zones were Torch Technology Business Incubators with startups
licensed by the local governments. These local governments financially supported the startups
because, by locating in these zones, the new ventures were seen as contributing to local
economic development. This helped the startups qualify for funding from banks and venture
capital firms.
By the mid-1990s, Chinese leaders realized that the Torch program couldn't be the source of all
capital for startups. At the same time neither banks nor local governments had the cash to finance
startups on the scale the country needed. The problem was that in China the government didn't
recognize venture capital firms as a legitimate organizational type. The founding of domestic VC
firms began with the establishment of local government-financed venture capital firms (GVCFs),
followed by university-backed VC firms (UVCFs). (The State Science and Technology
Commission and the Ministry of Finance formed the China New Technology Venture Investment
Corporation in 1986, but it was a government agency supporting national technology venture
policy objectives, rather than a profit-oriented private enterprise. It went bankrupt in 1997.)
A few foreign VC firms like IDG Capital Partners entered China in the early 1990s. Gradually,
from the mid-1990s, the perception of venture capital shifted from its being a type of government
funding to being a commercial activity necessary to support the commercialization of new
technology. But it wasn't until 1998 that corporate-backed VC firms could be established, and
that started a wave of VC funds backed by government, corporate and foreign capital.
A great summary diagram below from OECD's Report on China's Innovation Policy traces the
evolution of China's Innovation Ecosystem.
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11. backed by Renminbi funds, making the investors of these funds one of the main beneficiaries of
the exchange.
Part 4 Zhongguancun in Beijing - China's Silicon Valley and part 5, the Gold Rush and Fire
Extinguishers describe the Beijing entrepreneurship ecosystem.
Lessons Learned
• China’s venture capital system has made a remarkable journey from the “state owns
everything” to the free market
• It’s done it in a series of evolutionary stages, each new one learning from the last
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12. POST 4 of 5 Zhongguancun in Beijing - China's Silicon Valley
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions
of the Startup Owners Manual. In these series of 5 posts, I
thought I’d share what I learned in China. All the usual
caveats apply. I was only in China for a week so this a
cursory view. Thanks to Kai-Fu Lee of Innovation Works,
David Lin of Microsoft Accelerator, Frank Hawke of the
Stanford Center in Beijing, and my publisher China
Machine Press.
The previous post described the evolution of the Chinese
Venture Capital system. This post (and the next) are what I saw and learned in my short stay
exploring Beijing’s entrepreneurial ecosystem.
Entrepreneurship in Beijing
In the few days I was in China I met with several VC’s, angel investors, business press and spoke
to hundreds of entrepreneurs. I was blown away by what I saw in Beijing. First, I was amazed by
the physical impact of the city itself. This was a modern city in a hurry to make a first impression
– think of what Rome looked like in the time of the empire or New York in the 1920’s – now it’s
Beijing announcing that China has arrived.
However if you scratch the surface, you can still find a bit of the old Beijing in the hutongs.
Drive 50 miles outside the city into the surrounding villages and you see the distance China has
to travel to bring the rural areas into the 21st century. In Beijing we hadn’t seen air so badly
polluted since we had been in Agra in India in the winter where I swear there was a day you
could wave your hand in front of you and see traces of it in the air (and their excuse was they
burn dung for heat.).
David Lin and the Microsoft China
Accelerator was gracious enough to host
two wonderful days of events for me. I
trained the Startup Weekend Next Beijing
mentors and instructors, presented to
several hundred entrepreneurs, and had a
great fireside chat with Zhen Fund
founding partner Xu Xiaoping in front of
another roomful of entrepreneurs.
Kai-fu Lee of Innovation Works was
equally generous with his time. We had a
fireside chat with a room full of eager
entrepreneurs. And he was generous in
sharing his insights about the current state
of entrepreneurship and investment in
China. And through it all Louis Yuan my
patient and wonderful publisher from
China Machine Press kept me moving
through the events.
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13. But what made the overwhelming impression for me was finding an entrepreneurial software
cluster on par with the Internet software portion of Silicon Valley. The physical heart of the
Beijing startups is in Zhongguancun in the Haidian District, located in the northwest side of
Beijing. Startups here are primarily in what they call the TMT (Technology, Media and
Telecommunications) segment. Not only does Zhongguancun have Chinese startups, but global
technology companies (Nokia, Ericsson, Motorola, Sony Ericsson, Microsoft, IBM, Sun, Oracle,
BEA, Alcatel Lucent, Google) all have offices here or elsewhere in Beijing.
If there ever was any question about the value of China’s Torch Program walk around
Zhongguancun. It was the first of the 54 Science and Technology Industrial Parks.
China Venture Capital
An entrepreneurial ecosystem is driven one of two ways; either by a crisis (i.e. innovation in the
U.S. during World War II,) or during peacetime by profit. If it’s driven by profit then the
ecosystem needs both entrepreneurs as well as Venture Finance.
China now has plenty of both.
China has the biggest Venture Capital industry outside the U.S. To compare the two, in 2011
U.S. venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967
Internet deals with $6.7 billion.
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14. By comparison, in 2011 Chinese VC’s invested $13 billion in all deals. Out of that total, they
funded 268 Internet deals with $3.2 billion. About 1/3 of all China’s Venture Capital investment
is made in Beijing and the majority of those investments are in the Technology, Media and
Telecommunications (TMT) sector I’ll describe shortly.
As vibrant as the China venture business has been, 2012 was a different story. VC’s pulled back
and only invested $3.7 billion in all deals, funding just only 43 deals with $563 million.
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15. Closed for You, Open For Us
First a bit of context in what the VC’s in Beijing are investing in. China has essentially closed its
internal search, media and social network software market to foreign companies who wouldn’t
play with the government rules on the Great Firewall (China blocks “objectionable” website
content and monitors everyone’s Internet access.)
Google retreated to Hong Kong and Baidu took its place. Facebook was too frightening to
Chinese censors, so Renren is the leading social media player. Email? Working
professionals/white collar use emails, but most users grew up instant messaging on TenCent’s
QQ and most are moving to Weixin/WeChat. Twitter? No, it’s Sina Weibo, and if you want
games with your chat - TenCent. Amazon and Ebay? Nope in China it’s Alibaba’s Taobao
or
360buy.com. If you’re outside of China, you never hear about these companies or interact with
them because they’re geared to serve only Chinese users.
This closed but very large market means that greater than 90% of Chinese software startups
focus exclusively on the Chinese market. (The <10% that decide to go global early do so by
starting outside of China. Another 10% may try to go global when they’re larger and have the
resources for two languages, cultures and regulations. )
This has resulted in a completely different consumer software ecosystem than found elsewhere in
the world. Given the closed market to U.S. Internet companies, VC’s in China have guided
startups to execute the “copy to China” model. Thinking, if it worked in the U.S., copying a
known model is less risky than trying something new and untested. The problem is that this
space is getting really crowded – from the bottom up as everyone tries the 200th clone – and from
the top down, as the major incumbents try to fill every possible market niche.
The table below maps the type of software in China to their global equivalents in each product
category in the Technology, Media and Telecommunications (TMT) sector.
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16. A Huge Market Is Finally Real
For a hundred years the fantasy of global marketers was “well if everyone in China would buy
one…” That day is final here. The numbers of mobile subscribers are staggering - 1.18 billon,
260 million are 3G. Chinese Internet companies live in a large closed, self-contained ecosystem
with 564 million web users with 420 million having mobile web access. 309 million use
microblogs and 242 million shop online. (BTW, market research, financial and other statistical
information are usually unreliable in China, but even taken with a grain of salt these are
staggering numbers.)
The table below from web2asia.com shows the number of users of online social networks as of
2009. Did I mention this is a huge market.
Investment in the Technology, Media and Telecommunications (TMT) sector
The charts below from David Lin, Microsoft Accelerator detail investments in the Technology,
Media and Telecommunications (TMT) sector - almost all of it is centered in Beijing. (Note that
these numbers differ from the Zhen Fund data -welcome to statistics in China - but they both
provide an overall sense of the market size and direction.)
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17. 45% of all Venture Capital Investment in China went into the Technology, Media and
Telecommunications (TMT) sector.
1
• $14.04 billion raised for 219 Venture funds
• 1143 deals totaling $10.57 billion
VC Investments During 2007-H1/2012 VC Investments During 2011-H1/2012 by Sector (1143
12
976 deals)
842
775
728
8.9
14% 2 TMT
8 637
7% Manufacturing
5.9 45%
438 5.5 5.3
8% Consumption & Services
3.9 3.6 Energy
4 10%
167
Healthcare
1.6 Others
16%
0
2006 2007 2008 2009 2010 2011 2012H1
Amounts (USD B) Deals
The number of deals in Technology, Media and Telecommunications more than doubled in 2011
over the previous five years and slowed back down dramatically in 2012. More than 1,600 VC
investments in TMT have been made since 2007, with a record high of 436 in 2011.
Internet investments makes up more than 50% of all the deals in Technology, Media and
Telecommunications made since 2011, while, E-commerce investments, in turn, accounts for
nearly 50% of the investment deals in Internet. Investments in Mobile Internet makes up roughly
11% of all the deals in Technology, Media and Telecommunications, and have been on the rise
since 2011.
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18. Series-A round investments dominates Technology, Media and Telecommunications (TMT)
deals, making up 60% of all.
Beijing, Guangdong (including Shenzhen) and Shanghai came out as the most dynamic spots for
Technology, Media and Telecommunications (TMT) investments
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19. Beijing Venture/Angel Ecosystem
While Beijing has VC’s and Angel investors happy to write a check there aren’t as many
angels/VCs in China versus US per capita. Several VC’s mentioned that there’s a funding gap for
seed stage investments. The Angel/Seed network in Beijing feels fragmented and mostly
inexperienced (as are a good number of the China VC’s). Kind of reminded me of the drivers in
Beijing – they were all driving in a way that made me think they all just got their drivers license
– until I remembered that they did. Car sales in China went from 1 million in 2001 to 14 million
in 2011.
Other Beijing ecosystem issues I heard about were the things we take for granted: the lack of
knowledge sharing (“pay it forward” isn’t part of the culture,) limited mentoring (few
experienced mentors,) and a lack of open source education, and no AngelList model. In the U.S.
it’s easy to share and browse ideas and deals, but in China there’s a long legacy of guarding
knowledge as power, and the justifiable paranoia of someone copying your idea prevents
sharing.
Liquidity
Unlike the U.S. there are almost no mergers or acquisitions in this market segment. It’s much
easier to just steal their ideas and hire their employees. So big companies rarely acquire startups.
Liquidity for most Internet startups happens via IPO’s. 70% of exits in China are via IPO (in the
U.S. on NASDAQ or the NYSE or on ChiNext, China’s equivalent of NASDAQ) compared to
the 90% of exits in US via mergers or acquisitions. Alibaba (commerce), Tencent (games/chat)
and Baidu (search) all have market caps over $40 billion.
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20. The next post, the Gold Rush and Fire Extinguishers – Beijing entrepreneurs, startup culture and
some conclusions.
Lessons Learned
• China has the biggest Venture Capital industry outside the U.S
• For software, the action is in Beijing
• China has closed its search, media and social network software market to foreign companies
• Beijing’s VC’s primarily invest in the Technology, Media and Telecommunications segment
• Liquidity is via IPO’s not buy outs
POST 5 of 5 The Gold Rush and Fire Extinguishers
I just spent a few weeks in Japan and China on a book tour for the
Japanese and Chinese versions of the Startup Owners Manual. In
these series of 5 posts, I thought I’d share what I learned in
China. All the usual caveats apply. I was only in China for a
week so this a cursory view. Thanks to Kai-Fu Lee of Innovation
Works, David Lin of Microsoft Accelerator, Kevin Dewalt, Frank
Hawke of the Stanford Center in Beijing, and my publisher China
Machine Press.
The previous post, part 4, was about Beijing’s entrepreneurial ecosystem these are my final
observations.
Land Rush
For the last 10 years China essentially closed its search, media and social network software
market to foreign companies with the result that Google, Facebook, Twitter, YouTube,
Dropbox, and 30,000 other websites were not accessible from China. This left an open playing
field for Chinese software startups as they “copy to China” existing U.S. business models. Of
course “copy” is too strong a word. Adapt, adopt and extend is probably a better description.
But for the last decade “innovation” in Chinese software meant something different than it did in
Silicon Valley.
The Chinese Social Media Landscape diagram below from Resonance does a great job of
illustrating the players in the Chinese market. (Note that the inner ring shows their global
equivalents.)
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21. The downside is that
with so much venture
and angel capital
available, investors
have been willing to
fund the 10th Groupon
clone. For the last few
years, there really
hasn’t been a demand
to innovate on top of
the ecosystem that’s
been built.
New Rules for China
Not only is the
Chinese ecosystem
completely different
but also the consumer
demographics and user
expectations are
equally unique. 70%
of Chinese Internet
users are under 30.
Instead of email,
they’ve grown up with
QQ instant messages.
They’re used to using the web and increasingly the mobile web for everything, commerce,
communication, games, etc. (They also probably haven’t seen a phone that isn’t mobile.) By the
end of 2012, there were 85 million iOS and 160 million Android devices in China. And they
were increasing at an aggregate 33 million IOS and Android activations per month.
It was interesting to learn about China’s digital divide – the gap between East China and
Midwest China, and between urban and rural areas. Internet penetration in Beijing is greater
than 70% while it’s less than 25% in Yunnan, Jiangxi, Guizhou and other provinces. While there
are 564 million web users with 420 million having mobile web access, 74% of Chinese Internet
users make less than $500/month and are students, blue-collar workers or jobless.
Unlike U.S. websites that are sparse and slick, Chinese users currently expect complicated,
crowded and busy web pages. However, there’s a growing belief that the “design preferences” of
Chinese consumers are just bad design. TenCents WeChat, (designed for an international market)
is the first incredibly popular app in China to dramatically raise the bar for what a good user
interface and user experience looks and feels like. WeChat may change the game for Chinese U/I
and U/X experience. The one caveat about online commerce is that while Chinese users will buy
physical goods online (Taobao is huge), they seem to hate to pay for music or software, and the
model for games seems to be moving to free play with in-app-purchases for accessories and
powers. An interesting consequence of the rigid censoring and control of mainstream media is
that blogging – reading and writing – is much higher than U.S.
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22. My guess is the current wave of “copy to China” will burn itself out in the next few years as the
smart money starts to move to “innovate in China” (i.e. like WeChat.)
Competition If you’re a software startup competing in China, the words that come to mind are
“ruthless and relentless.” The not so polite ones I’ve heard from others are “vicious, unethical
and illegal.” Intellectual property protection is great on paper and “limited” in practice. The large
players like Alibaba, Baidu and Tencent historically would be more likely to simply copy a
startup’s features than to hire their talent. The large companies strategy seems to be to cover
every possible market niche by copying successful models from others.
The slide below from the Zhen Fund shows the breadth of business coverage of each of the
Chinese Internet incumbents. Each column represents a company (QQ, Sina, Baidu, Netease,
Sohu etc.) and the rows indicates their offerings in open platform, group buying, online games,
microblogging, Instant Messaging, BBS, Q&A and E-commerce.
Small startups act the same way, simply cloning each other’s products. Sharing and cooperation
is not yet part of the ethos. I can’t imagine a U.S. company setting up some subsidiary here and
expecting them to compete while they were following U.S. rules. In some ways, the best
description of the market dynamics would be “imagine you were competing with 100 companies
who are as rapacious as Microsoft was in the 1980’s and 1990’s.” Eventually, China’s
innovation-driven economy needs intellectual property rights and anti-trust laws that are
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23. enforced.
Sea Turtles and VPN – the connections to the rest of the world Entrepreneurs in Beijing
were knowledgeable about Silicon Valley, entrepreneurship and the state of software and tools
available for two reasons. First, there are continuous stream of “sea turtles”—Chinese who have
studied or worked abroad—returning home. (The Chinese government must be laughing
hysterically over U.S. immigration policy that’s forcing Chinese grad students out of the U.S.)
Many of these returnees have worked in Silicon Valley and startups or went to school at MIT
and Stanford. (There is a huge difference between the Chinese who have never left and those
who went to school abroad, even for a few months – at least a difference in their ability to relate
to me and have a conversation on the same wavelength. It’s clear why families try so hard to
send their children abroad. It changes everything for them.)
Second, most websites that a non-Chinese would use are blocked including Facebook, Twitter,
Youtube, Google Docs, Scribd, Blogspot, Dropbox, New York Times, etc. Almost every
entrepreneur I met was using VPN to circumvent the Great Firewall. When the Chinese
government censors (run by their propaganda department) shutdown access to yet another U.S.
web site, they create another 100,000 VPN users. And when the government tools to detect
encrypted VPN’s get more sophisticated, (as it did last year), Chinese users just use stealthier
tools. It’s an amazing cat and mouse system.
(Note to Chinese Communist party - the best name for your propaganda department should
probably not be the “Propaganda Department.”)
Beijing’s Academic Hub
Right next door to Zhongguancun are China’s top two universities, Peking University and
Tsinghua University. Northwest of Beijing is also home to other universities, including technical
universities like USTB, BIT, BUPT, and Beihang. Like Silicon Valley, Zhongguancun also has
a critical mass of people who are crazy enough to do startups. Equally of interest is a good
number of them end up in the PLA’s GSD 3rd Department (the equivalent of our National
Security Agency. ) And some of their best and brightest have ended up in the organizations like
the 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations.”
While I didn’t get much time with the academic community, in talking to students, education
seems to still be one of China’s bottlenecks – rote lectures, passive learning, follow the process,
exam-based performance, etc. And while startups and entrepreneurship courses are now being
added to the curriculum, “How to write a business plan” seems to be the state of the art. China’s
education system needs to give more attention to fostering students’ innovative thinking,
creativity and entrepreneurship.
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24. Entrepreneurial Culture
Fear of Failure
Though they’re familiar with technology in the valley, I picked up some important cultural
difference from students and startup engineers I talked to. Even though they’re next to
Zhongguancun, the hottest place for startups in China, there seems to be a lower appetite for risk,
a lack of interest in equity (instead optimizing for a high salary) and very little loyalty to any one
company. The overall culture still has a fear of failure. Most of their parents still tell them to
work for the government or a big company.
Talent
I heard from a few investors that as the startup ecosystem is relatively new, there’s a battle for
experienced engineering talent and lack of experienced C-level execs. The lack of a previous
generation of successful startup CEOs means the current pool of mentors to coach this generation
is almost non-existent.
Because salaries are cheap, startups seem to try to solve every problem by throwing bodies at
it. Startup teams feel like they are 2-5x the size of American teams. There seems to be little
appreciation or interest in multi-skilled people.
Turnover of employees in capital in Beijing is very high. Employees work here for a few months
and are suddenly gone. There’s a noticeable lack of tenacity in young, new entrepreneurs. They
start a project, and if it isn’t a home run, they’re gone. Perhaps it’s the weather. Silicon Valley
has great weather and lifestyle, and nobody wants to leave. Beijing has awful weather and
pollution, it’s a temporary place to get rich and then leave.
Management 101
The board/CEO relationship still isn’t clearly understood by either party. I’ve talked to
entrepreneurs who view the investors as a “boss.” A good number of startups in Beijing seem
driven by the VCs – and not the founders. This might also be a hangover from the command and
control system of a state-driven planned economy. Ironically investors told me that the reverse
has been true as well. Some startups acted like the VC was a bank. They took the money and
then ignored their board. Over time, as investors add more value than writing checks, this
relationship will mature.
Creativity
I was surprised that startup teams ask what seems like the kind of questions Americans learn at
their first jobs.
Team: ”We keep spending money trying to get people to our web site but they don’t come back.
We are almost out of money.”
Me: ”Ok. Why are you still spending money?”
Team: “long…silence…we need people to come to the website.”
On the other hand, for most of them it probably is their first job. And the educational system
hasn’t prepared them for executing anything other than a plan. Iterations and pivots are a tough
concept if you’ve never been taught to think for yourself. And challenging the system is not
something that’s actually encouraged in China.
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25. They also ask questions I just don’t know how to answer. “How do you know how to be
creative? What do we have to do to be creative?” ”You Americans just seem to know how to do
things even if you’ve never done them – can you show us how to do that?” This seems to be an
artifact of the Chinese rote educational system and its current system of government.
Innovation Ecosystem
On the plane ride home I started to think about the similarities and differences between the
innovation ecosystems of Silicon Valley and the TMT segment I saw in Beijing. The motivations
are the same – profit – driven by entrepreneurs and venture finance. And the infrastructure is
close to the same – research universities, predictable economic system, a path to liquidity, a
stable legal system and 24/7 utilities. But the differences are worth noting – it’s a young
ecosystem, so startup management tools are nearly non-existent. But there’s a difference in the
culture of failure and risk taking - the current cultural pressure is to “work for a big company or
the government.” Outward facing Universities are just starting to appear, and while there’s a free
flow of information inside China, it suffers from the constraints of the Great Firewall.
But there are two striking differences. The first is the lack of creativity. The Beijing software
ecosystem I saw it has spent the last decade in a protected market copying successful U.S.
business models. ”Copying, adopting and adapting,” is not the same as ”competing, innovating
and creating” in a global market. Perhaps products like WeChat, designed for an international
market, might be the beginning of real innovation.
The second difference in ecosystems – the lack of freedom to dissent – goes deeper to the
difference between the two systems. In the U.S. entrepreneurs are encouraged to “Think
Different.” Our touchstone for creativity is the Apple ad that said, “Here’s to the crazy ones, the
misfits, the rebels, the troublemakers,… the ones who see things differently — they’re not fond
of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you
can’t do is ignore them because they change things….” This spirit of rebellion against the status
quo got us Steve Jobs. In China the same attitude is likely to get you jail time. Unless you can
speak truth to power, you’ll never have an innovation economy.
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26. Conclusion
China is astonishing. The country has risen. Their economy is the envy of the world. The
entrepreneurial and “can do” spirit reminds me of what the U.S. was known for. Chinese citizens
are proud of their country and believe the world is theirs in the way Americans did in the
1950’s. Their leadership has shown incredible foresight in engineering an amazing economic
engine and formidable military. They come so far, and yet…
To take nothing away from what China has accomplished, a visit to Beijing had all the subtle
reminders that this version of capitalism has come without democracy or justice; the guards in
the Forbidden City armed with fire extinguishers in case more protestors try to set themselves on
fire, the security around Tiananmen Square to prevent protestors from gathering, and the “black
jails” to keep rural petitioners out of Beijing. And of course the “great firewall,” attempting to
keep information about the outside world from reaching inside China.
The bet the government is making is that if they can keep the economy cooking and distract the
masses with ever increasing consumer goods and foreign adventures, maybe it can survive.
All of these are signs of a weak China not a strong one. They are the signs of a leadership
frightened not by external enemies but by their own people.
It usually doesn’t end well.
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