At the macro level, China is currently the world’s second largest economy — about half of the U.S. GDP — but growing at 2–3x faster than the U.S. However, the micro story is even more revealing. Looking within our own focus area, the Internet sector, 50% of the world’s largest Internet companies are now Chinese.
It’s therefore a surprise that so few foreign entrepreneurs are going to China to develop their own judgment on the Chinese tech ecosystem. Perhaps because the majority of the U.S. founders are building an impression of the Chinese market based on a lot of misconceptions, and don’t really know if, when, and how to enter the market there.
Why a China Tech Tour?
Understandably, entering China is by no means easy, and therefore many U.S. tech startups and big companies alike simply procrastinate on their China strategy. The stream of high profile exits from the past 10 years only makes it worse and strikes fear into the hearts of many entrepreneurs. By the time China becomes a top corporate agenda, the founders often findthemselves competing against many successful and well-established local competitors. This only feeds the cycle of even more failed headlines.
The goal of the “Idea Bulb China Tech Tour” is to introduce entrepreneurs to China early and gently. We don’t expect our founders to enter the China market immediately after the trip (though some might consider it). We want to first introduce them to a few friendly, resourceful, bilingual and bicultural entrepreneurs and corporate executives from IB’s network, and expose them to as-many-as-possible relevant, on-the-ground “live” case studies from both local startups and tech giants (e.g. Baidu, Tencent, Alibaba, etc.). We also want them to meet and learn the best practices from the few western startups that are already operating and standing their ground in China.
This is not a standardized, assembly line type, “group tour”, but it’s a very high-touch and tailored experience. We setup customized meetings for each of our teams based on their areas of interest and expertise. With one of the largest entrepreneurial networks in China, a team of close to 50 full-time professionals, and a co-working space of its own, Idea Bulb is uniquely positioned to deliver on this promise. Below are some selected case studies and related insights from the inaugural trip in September 2014.
Live Case Studies
One of our stops was ClassBox, a viral social calendar app, on both iOS and Android, for university students to plan their weekly course attendance and extracurricular activities with their classmates. The app already has 15M+ active users around the country. Founder Tianfang Li is someone who was educated in the U.S. and then worked at Microsoft and Palantir for a number of years before heading back to China. ClassBox has a huge army of on-campus volunteers promoting the service. These ambassadors (in around 1,500 campuses in China) aren’t driven by financial incentives. ClassBox cultivates these relationships with free swags, status within the service, and special access to the company’s staff. This offline marketing component is a big part of ClassBox’s success. In my experience, Chinese founders are much more open minded than their US counterpart when it comes to using offline distribution channels.
Moji is another example of “distribution arbitrage” that is happening in China. Moji is the most popular weather app in China and another one of IB’s portfolio companies. It currently has 200M+ active users. And given the air pollution problem in China, the engagement of Moji’s user base is very high. Moji took their highly successful weather app and used it to promote their new smart home indoor and outdoor air monitors. In the US, most IoT startups use their connected device as a distribution channel for their software service. Moji flips that strategy around and is using their software distribution channel for their connected device. Personally, I see no reason why other startups in the US can’t do the same. I wonder what other successful mobile apps in the US right now could be making their own smart home or wearable product, but aren’t yet.
The third example is Wandoujia.Wandoujia is one of the first IB’s investments made back in 2009, and it has grown substantiallysince then with 400M+ daily active users. Wandoujia is perhaps the only remaining large independent Android content store in China. It is also expanding outside of China and transforming into a cutting edge mobile search solution. However, Wandoujia wasn’t the only one to recognize the mobile opportunity early on and it had many competitors from day one. Wandoujia had the unique insight that mobile bandwidth in China was very slow and expensive. Chinese users can’t simply download apps on a mobile connection just like they do in the US. So rather than creating an AppStore first, it created a desktop app management tool (similar to iTunes). Users are much more open to downloading applications from their laptop through WiFi this way. Wandoujia then quickly established itself as a way to manage apps on your smartphone and then boostrapped this desktop user base into their own Wandoujia AppStore. Effectively, turning a (cheaper) web distribution into a (much more valuable) mobile distribution and solving the classic chicken-and-egg marketplace problem.
Many US startups can learn from these Chinese case studies. The key to “distribution arbitrage” is to identify a cheaper source of distribution and find ways to transform it into a higher value asset. Of course, correct execution is key. If it’s done incorrectly, your users would feel that a completely unrelated product is being forced on to them. Still, ClassBox, Moji, and Wandoujia all seem to be able to transform the original distribution without major user churn and created tremendous value in the process. The startup first needs to have a mentality (and willingness) of considering unsexy and undervalued channels. It also needs to recognize that change happens beyond “pivoting” — it can happen as a general evolution of your user base (e.g. Wandoujia).
Anquanbaois solving the critical CDN / server security pain for many companies in China. What was interesting out of the discussion was that there has been relatively little attention on the B2B / SaaS sector in China, primarily for SMEs. This is partly due to the fact that the average age of an internet user in China is much younger than in the U.S., and therefore a lot of startups are focusing on services like gaming and video entertainment. The founder, Jeffrey Ma, also gave our team some insights into how the Chinese internet infrastructure works (the divide between north / south, internet bandwidth limitations, IP addresses, and the relationship among ISPs, all of which are dramatically different from the U.S.). One of our U.S. founders from Sqwiggle and Jeffrey had a very interesting discussion on how WebRTC could work in China. In general, the future of workplace collaboration and distributed teams in China is changing rapidly, as the economy is starting to transition from a manufacturing / exporting economy into a service oriented and consumption economy.
We also met with AVOS Cloud’s founder, ex-Googler Jiang Hong (invested by the YouTube founders). In general, Chinese startups aren’t as forward thinking when it comes to data export policy. It’s clear that AVOS is different and many (developers) customers appreciate this. Our U.S. founders from Framed Data also had an interesting discussion with AVOS about the development of the Clojure programming community in China.
Doodle Mobileis a China-based Android-only game developer, with a focus on the overseas markets. According to Flurry, China has become a huge exporter of software in recent years, particularly in gaming. Doodle Mobile is definitely riding this macro trend and talking to Doodle’s founder and seeing it in action at their office was eye opening. Doodle’s best markets are in emerging economies such as Brazil and Indonesia, where Android rules and the user base – young and entertainment centric – resembles that of China, much more than that of the U.S. In fact, this trend of China startup going out to the world doesn’t stop at just software, and it includes consumer hardware as well.
Evernote is a company that – contrary to its predecessors – seems to be doing everything right in establishing a presence in China. Starting with localizing its name in Chinese (印象), a lot of thought and planning has been put into Evernote’s China strategy. Evernote China has adapted the product to the local market (it has been allowed to do so, in the first place). New feature requests are now flowing into the reverse direction and incorporated in the global product. Athough Chinese internet users tend to be younger and entertainment focused, Evernote China was still able to create a strong foothold, with a loyal, hardcore user base. One great sign is that many Evernote users in China don’t even know that it’s a U.S. company behind the product — they simply come to appreciate the company because of the great product. Having previously worked at Google myself, both in Mountain View and in Beijing, I understand first-hand that what Evernote has achieved is not easy.
From our visit at Baidu it became clear that the company is very “hungry” for new technologies that will complement its core search service. It has recently hired Andrew Ng and built up a nice office in the Silicon Valley. It has also made some big acquisitionsrecently, which is welcome news for entrepreneurs and early stage investors alike, as the Chinese M&A environment is heating up. Just a few years ago, doing a startup in China was very much “all the way (IPO) or bust”.
We also visited Tencent’s Beijing office — one of the Chinese internet’s powerhouses. One of the most useful apps that our group came to love during the trip is WeChat. It’s clear that WeChat has gone far beyond Whatsapp and other chat tools in the U.S. The more recent trend in the U.S. is that apps have become much thinner (e.g. Foursquare Swarm andFacebook Messenger app splits). WeChat on the other hand (and they aren’t alone in China) has become thicker over time, with many new additional features built into the application. I speculate that there are few possible reasons why there’s a difference in the two regions.
- Splitting an app into multiple apps has allowed companies in the US to occupy more entries in the App Store “index” — i.e. more apps = more landing pages = more keyword coverage = app store search / browser “impressions”.
- On the other hand, the App Store ecosystem is very fragmented in China (Google Play isn’t in this market) so there’s tremendous promotional benefit to focus all your marketing effort in that single app (putting your eggs in one basket effect). Just imagine the effort it would take otherwise to promote 10 apps across 10 App Stores and OEM channels.
- Recreating the web hyperlink experience with inter-app deep linking on a cheap mobile device and a slow connection is poor user experience – especially in China. Users might not want to download that many apps when they have limited data on the go. A more preferable experience is to download all the apps you need on a WiFi connection in one go and then snack on your apps on a mobile connection. In fact, you can argue that many US users with slow mobile connections might not enjoy the app split strategy either.
- Lastly, from a competitive landscape point of view, the Chinese tech giants are more likely to extend their own product rather than building out an ecosystem of partners. This also causes them to double down on their breakout apps and create new features within it. This leaves no room for partners to help build out these extension features. There’re many historical and cultural reasons for this, but it’s beyond the topic of this post. Needless to say, the tech dynamics in China is much more competitive than it is in the US.
Cultural immersion and fun activities
We also made sure that we have plenty of time to enjoy Beijing and its unique culture. We got relatively lucky with the weather and had our fair share of “blue sky” days. In addition to the popular tour guide recommendations, we also took our founders to some of the more local attractions and participated in several Beijinger activities … :-) … The trip was a success and we look forward to bringing more U.S. founders to China next year!