Five difficulties facing startups in China

There’s a legend about a Chinese monk who, after years of meditating atop a high, isolated mountain, envisioned the world’s first circular disk. Careful to keep his ideas to himself, the monk swore on oath not to speak to anyone until he had completed his invention.

One day, a traveller from the West, fair in skin but foul of heart, passed by a town the monk frequented. He had heard of the silent monk and decided to test him. He managed to get the monk intoxicated enough to reveal his secret of the circular disk. The traveller took the monk’s ideas to be his own and went back to his land in the West, where he called his invention: ‘The Wheel’.

The furious monk, now all sobered up, sent several servants to track down and spy on the thieving traveller. The servants, unable to steal back their master’s invention, instead reported back on how the traveller was making good use of the stolen idea. The wise monk then modified his original idea into an affordable and reliable vehicle industry and sold his invention back to the unassuming Westerners.

After a few years the thief’s business was in tatters while the monk’s was booming and the former relinquished his title as the sole inventor of the wheel, admitting his guilt. The humble monk then handed over half of his business to the traveller to manage in the West and returned to the East where the motor-vehicle industry still booms today.

The story is analogous of existing Asian and predominantly Chinese markets where the current business model is one of clone-copy-distribute. After all, why re-invent the wheel, irrespective of who actually invented it?

This trend has factored itself into every facet of the marketing sphere from motor vehicles to clothing, computer hardware and software to peripherals, television sets, gaming consoles and more. Inevitably it has reached the Chinese internet front as well, affecting startups with a seemingly detached, uncreative web sphere where lack of venture capital and fear of innovation is sorely dampening the aspirations of many entrepreneurs.

Former Google China President Kai-Fu Lee has shed further light on the difficulties facing the internet in China.

Here are a few key points:

1. The Geek Umbilical Cord

The education system, coupled with the conservative lifestyle, is not setup to produce startups. At a college level, students graduate with advanced technical training but lack the marketing, sales and operational and leadership skills needed to advance their own enterprises. In addition to this, a culture of family remains, wherein the immediate family remain sceptical of change, choosing instead the option that would provide a steady income as opposed to engaging risk. This places pressure on the budding entrepreneur who falls victim to the dichotomy of providing for the family instead of following some “whimsical” dream.

2. The Re-Business Model

One of the biggest challenges facing any startup is innovation versus tried-and-tested. It is unfortunate that the majority of western Venture Capitalists prefer the latter approach, lacking perhaps the experience and courage to invest in Chinese specific innovation. It is, after all, much easier for a startup to pitch forward a product based on an existing business model.

The majority of investors are risk-averse and prefer the “Twitter of China” or “Facebook of China” familiarity as opposed to the risky, confusing Chinese internet landscape in which innovation thrives. There are exceptions of course. Companies such as Tencent, Zynga and Shanda have successfully reconstructed the older gaming models from being purely subscription based to free-to-play with additional marketplaces.

3. Overcrowding the Web sphere

“Most of the biggest online categories, such as search, retail and auctions, are already dominated by the biggest names, while niche areas are also crowded with players looking for the next big thing”, said Edward Liu, chief executive of Beijing Fastweb, a startup that provides fast data transfer over the internet.

The same applies to the lesser developed areas such as mobile and application development, despite being a more fertile ground for fresh ideas. A large number of startups are thus easily deterred by the entirety of it all and find the web sphere cluttered by companies old and new and overeager to make money instead of being innovative and original.

4. The Advertising Anomaly

Unlike the U.S. where advertising is the way of the web, most of China’s internet revenue is dominated by online gaming. And most of this revenue is generated by in-game spending on virtual goods (something which has only recently taken off in the U.S.). This trend forces the majority of startups to adopt the gaming angle approach or at least offer an anchor for the user to engage with a virtual marketplace.

The e-commerce model has grown in popularity with sites such as Alibaba but the niche market still lies within gaming.

5. Life without Google

Google pulling out of Mainland China earlier this year affected web owners more than it did their employees and shareholders. A post on Techcrunch on ‘How the Chinese Internet Needs to Up its Game’ has indicated how this placed the country’s second most popular search platform, Baidu, in a quasi-monopoly position where it benefitted enormously by raising user acquisition fees and frustrating the vast majority of web owners and start-ups.