Snapshot of start-up culture in China

Mon, May 7, 2012, 01:00

China is often seen as a cheap manufacturing base but, while new business ideas are thin on the ground, angel investors are beginning to find a role

We’ve invested in 26 start-ups, and many of them are doing things that are unique. We see a lot of innovation. We see music and literature start-ups

ALL OVER Beijing you can see the banners – “Patriotism, Innovation, Inclusion, Virtue” – a campaign by the Communist Party to distil the Chinese capital’s spirit.

One of these four qualities is proving particularly tricky to cultivate, especially in the much desired tech business, and that is innovation.

Foreign firms are keen to take advantage of China as a low-cost manufacturing base, but few are keen to invest in China as a place to research and develop new products. Ideas are thin on the ground, while piracy and intellectual property theft are a bane.

Angel investors are increasingly finding a role, however.

Xu Xiaoping, one of China’s best-known angel investors, has gone on the record as saying that he does not believe that China will be an innovation hub for at least 20 years because creativity is simply not a mainstream phenomenon right now.

It doesn’t stop him looking however, and focusing on what niche opportunities there are.

Xu’s Zhen Fund aims to provide young entrepreneurs with seed capital to start new ventures focused on the Chinese market. The fund was set up at the start of last year, and within a year had invested in more than 80 companies, including the online dating site Jiayuan.com, which listed on the Nasdaq Stock Exchange in May 2011.

Formerly vice-chairman of New Oriental Education Technology Group, Zhen Fund hooked up with Sequoia Capital China late last year to create a €22.5 million joint venture seed fund.

Zhen Fund’s plan is to invest in about 100 companies within two years, with each investment ranging from around €75,000 to €225,000. About €2.3 million of the new fund has already been invested.

“On the principle that great people are the key to successful companies, we invest in the brightest and most promising entrepreneurs, rather than certain industries or markets,” Xu told the China Daily recently.

Steve Bell, managing director of Trilogy VC, which specialises in funding start-ups founded by Chinese university students, says there is a herd mentality in every country when it comes to investing in start-ups, and this is also true in China.

In China, there is very little in the way of angel investor culture – this is, after all, the first generation to get involved like this.

“There is a real lack of good investors. I am absolutely sure the biggest companies are going to be started by students. My brother is in Stanford and there are 500 guys there looking for investments. Here, at Tsinghua and Beijing University, it’s just me,” said Bell.

“We focus on the very young entrepreneurs. I was with a group of 300 students and it was very clear they don’t hear from people like me. I asked them: ‘How many of you will start a company?’ Two hands went up. The others said: ‘I’ve no experience’.”

He visits university campuses and asks students for their role models – when they mention Microsoft and Apple and Google, he points out how all of them were started by students.

“All that matters is that you can build a great product. They have many ideas. I like start-ups that are doers, people who build a project,” said Bell.

When visiting universities, Bell gathers a large group of students, then gives them one minute to pitch their ideas in front of a large group of their colleagues. Bell gives the student with the best idea 3,000 yuan ($476).

“We’ve invested in 26 start-ups, and many of them are doing things that are unique. We see a lot of innovation. We see music and literature start-ups,” said the Texan.

Bell has been in China since 2006, but has been concentrating on China full-time since 2009.

“We want companies to get big in terms of revenue. We have an equity stake, are active investors generally with a minority board seat. We love to talk product and distribution with the teams but the entrepreneurs run their business. We generally get very involved in helping get ready for the next funding round and making those VC introductions once the product is successful in the market,” said Bell.

Kai-fu Lee, chairman and chief executive of the tech incubator Innovation Works, which invests in mobile internet, consumer internet, e-commerce and cloud computing ventures, believes China will become a tech giant, based on mobile internet growth.

The former head of Google China and a one-time executive at Microsoft, Lee bases his belief on the fact that by the end of last year, China had 513 million netizens, including 356 million mobile internet users, and about 35 per cent of urban Chinese use smartphones.

Lee said mobile internet start-up costs in China are very low. In China an angel investor can buy a 20 per cent stake in an early-stage company for €225,000, whereas a similar stake in the US would cost about €1.5 million.

China is the world’s third biggest smartphone market, with around 35 per cent of urban Chinese using smartphones, compared to Singapore’s 62 per cent and Australia’s 37 per cent, according to a survey in November by Google Inc and the research company Ipsos.

Innovation Works, which he set up in 2009, has so far incubated 47 projects. Of these, 28 are in progress, 13 have completed their first round of fundraising, also known as A-round investment, two have been traded in mergers and acquisitions, and four were failures.

In recent months Lee has also said that he is likely to invest in more online game projects as the sector is “developing very fast”.

This fast development awakened the interest in Ireland. During Taoiseach Enda Kenny’s visit to China in March, Enterprise Ireland announced the appointment of Liam Casey as start-up ambassador for the greater China region, trying to get the Corkman to use his considerable influence to get Chinese entrepreneurs to choose Ireland as the location for their next high-tech start-up businesses.