What the West Gets Wrong about Innovation and Startups in China

Every day I see 100 different Chinas.”- Greg, a Canadian serial entrepreneur who has lived and worked in China over 25 years

I have been working with, meeting, and interviewing CEOs and investors from both China and the US for awhile now as a part of my PhD research, and have had the opportunity to work in both contexts. Most recently was a marketing/HR director for a fintech startup in Beijing that has now transitioned into a crypto hedge fund (glad to report they are doing well after a rough patch last year!), and am currently working with investors and consulting/advising tech startups on the side in China and the states.

Below are the most common stereotypes and narratives I hear about innovation and entrepreneurship in China. I’ll discuss why these may be true to a degree, but also why these are not nuanced enough perspectives and are too one-dimensional in capturing the variegated complexities of China.

  1. Level of Openness: “China is too repressed/oppressed”

Almost all Western media articles and academic sources I have read on China inevitably mention “repression” or “oppression” as key words in relation to China. (See the recent NYT series on China—probably their most generous account I have come across thus far—and count how many times this word appears in their series:https://www.nytimes.com/interactive/2018/11/18/world/asia/china-rules.html)

What surprised me as an American stumbling upon the startup scene in Beijing several years ago was the co-working space’s eerie resemblance to Silicon Valley work spaces. I almost forgot I was standing in the heart of smoggy Beijing.

One of many co-working spaces in Beijing. This one is designed by Zaha Hadid.

What surprised me more when I started working in the tech scene in Beijing was the initial level of openness towards innovation and startup development across industries. I’ve seen again and again in China how the government intentionally turns a blind eye for a period of time to give an emerging market or industry time to develop freely, and in this period, entrepreneurs rush in like frenzied shoppers on Black Friday and compete fiercely for market share.

The catch is, the government will likely get involved at some point, but the question for all entrepreneurs and investors is when. And perhaps due to impending time constraints, because you cannot predict with certainty when or if you might get shut down, this is likely one reason why many Chinese startups tend to work around the clock with their 9–9–7 (9 AM to 9 PM, 7 days a week) schedules. (You know it’s bad when a Chinese startup markets itself as “work-life balance friendly,” offering 9–9–6 instead of 9–9–7 hours.)

This was certainly the case for our fintech turned blockchain startup, which managed to raise $10 million USD in a weekend but then got shut down in the aftermath of what is now known as “9/4” (九四), after the government issued a policy outlawing ICOs (Initial Coin Offerings) overnight. The central government had a couple reasons for doing this: 1) They didn’t want capital outflow and 2.) Too many ICOs facilitated scams. Many crypto/blockchain startups ran off with the money they raised after 9/4 (some to Hong Kong and others overseas), but our company was one of the few who returned the funds raised to investors and coinholders.

The shared bike industry (think unicorns Ofo, Mobike) is another perfect example of this. Much of what they were doing was technically illegal; in fact, many startups in China are technically illegal and start out this way. But local and central governments turned a blind eye, or rather, sat back and observed. They gave these bike companies the freedom to do whatever they wanted, including parking and leaving bikes anywhere in the city (which would never happen in the states or Western Europe).

One of the reasons why these companies succeeded was due in part to the sheer convenience of being able to leave your bike anywhere. But then several bike companies jumped into the competition (with some competitors even destroying or vandalizing rival company bikes), and when too many bikes clogged up already horrible city traffic—proving hazardous for daily commuters—that’s when local and central authorities moved swiftly to outline zoning areas for bike parking.

Investors in China accept this reality and even encourage entrepreneurs to take the risks before the central government clamps down and regulates the industry. To this day, many startups still operate in the grey zone. But because the legal system in China is too slow, central government policy “announcements” instead are enacted or changed overnight, and these policy announcements are what constitute rule of law in China. I remember one day suddenly wondering why the wait for Didi cars (the Chinese version of Uber/Lyft) was so long, and then I heard about the government policy enacted overnight, in response to two Didi scandals, and so only certain cars with a Beijing license plate could be on the roads.

In short, it’s fairer to say that China gives startups and entrepreneurs much more freedom to develop than we in the West tend to give them credit for, but we also acknowledge that the state inevitably takes center stage in business/market regulation, no matter how powerful or influential a company has become.

2. The Role of the State: “China over-regulates; the US is the land of the free!”

Related to the above section, while Western entrepreneurs tend to think they have the freedom to do whatever they want in contrast to Chinese entrepreneurs, I would answer in response, “It depends.” Entrepreneurs in neither country are completely free to do whatever they want. As referenced in the first section, the Chinese government is more likely to shut you down overnight on a whim if they chose, but nonetheless, there are significant parallels in market regulation between the two countries.

Take the financial industry as a case study. In both countries, this is one area that is heavily regulated relative to other industries (like the education sector). For a couple years, both governments ignored blockchain and ICOs, but then ICOs suddenly became a popular source of alternative funding, reaching a fever pitch the summer of 2017, and both countries issued regulatory announcements. The SEC responded quickly to ICOs in the states, labeling them “securities,” and so slowed down the growth of ICOs. The Chinese government issued the 9/4 policy, promptly making all token sales illegal, and limiting the average Chinese citizen from participating in token sales.

While these two announcements slowed the explosion of ICOs, they did not eliminate blockchain companies or the application and development of blockchain technology. Several months later, the Chinese government made a 1.6 billion USD investment in the city of Hangzhou, exclusively focused on the development of blockchain technology. Blockchain companies in the US made sure to frame their projects as utility coins functioning in “ecosystems” and not as asset-backed tokens. And in lieu of ICOs, an increasing number of crypto companies around the globe held “pre-sales” aimed at institutional investors.

In the US, the AI industry arguably faces far more constraints in data collection due to privacy laws. (And as Americans, we would argue this is for the best.) But for this very reason, some investors believe that China will outstrip the US in AI development, given China’s sheer volume and unlimited access to personal data.

3. Government Support: “The US is a better place for innovation and startup development”

Many CEOs and startup founders I talk to in both the states and China often tell me they do not think the government obstructs their development. As discussed in the previous two sections, this also varies depending on industry and timing, but in many cases, one could argue that the Chinese government is even more supportive than the US government in offering direct aid to the development and growth of startups.

One US-based entrepreneur/CEO from a data security company I interviewed complained that he sought out funding set aside for small business owners but was unable to get anywhere with local state funding. In contrast, the Chinese government provides subsidies, housing, and seed funding directly to entrepreneurs in certain industries. I’ve visited startup communities in Beijing complete with apartment buildings, a local supermarket, a pharmacy, a day-care center and medical center, all built for and dedicated to helping early stage entrepreneurs and young businesses grow.

One of many communities built just for aspiring entrepreneurs in Beijing

In conclusion, I suggest a couple things:

  1. For the West, we need to develop a more nuanced lens to understand the complexities and inner contradictions that is China. Too often I read blanket generalizations about China, and usually framed in a negative light. (And I understand the political and ideological tensions between the two countries, but I am not an advocate for dehumanizing “the other,” as the Trump administration has too often done.) I believe that a more balanced approach and perspective is needed in the West’s dealings with China.
  2. For Western entrepreneurs and investors looking to break into the China market, it’s important to recognize the pros and cons of the China market and plan accordingly. There are incredible opportunities for expanding in the China/Asia market, but there are different constraints or advantages depending on timing and industry. Future posts will address the “dos and don’ts” of breaking into the China market.

Princeton trained sociologist, Fellow @Princeton @Brandeis, studying & writing on tech entrepreneurship, culture, religion, politics & structural inequality.

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