Doing Business In China

China-In vs. China-Out: How to launch your startup in China China is a whole other ballgame The way we look at China and the way we think that other entrepreneurs should look at China is with great humility. China’s ecosystem is more challenging than any other I’ve seen, so if you don’t know how to take your first business steps into China, if you don’t have a plan and a very clear roadmap, and if you haven’t familiarized yourself with other companies’ case studies of failure, then it’s very likely that you’ll lose money in your attempt to launch over there.When we were building ironSource’s "China strategy", I met with CEOs of not just Israeli companies but also American companies, and I saw that most of them are not only failing to achieve their goals, but some of them actually failed so miserably that they had to shut down their Chinese operation. This really made us think about what we could do differently and we tried to analyze the main factors that might lead to either success or failure."China-In" vs. "China-Out" The Economist ran an essay last year that I think did a great job explaining the challenges and opportunities that can be found in China. Taking our cue from the lessons of this essay, we basically identified two different types of strategies for companies to break into China:China-In: The first type involves companies outside of China that see China as their target market. Their aim is to go after the Chinese user and their goal is to gain market share inside China. We call that "China-In". Here, success is the exception not the norm. While the professional social network LinkedIn has successfully penetrated the Chinese market, Facebook, YouTube, Google and WhatsApp – all giant successes outside of China – have virtually no presence in China. On the other hand you have their Chinese counterparts, companies like WeChat for example, that are doing amazingly well and are clear market leaders in China. [Side note: After my second visit to China I downloaded WeChat. I think it’s an amazing product and I find it better than WhatsApp].The reality is that Chinese companies are looking to grow internationally outside of China and I think that their odds of succeeding are very good. At ironSource we are not planning China-in tactics. Instead, we work with most of China’s internet giants to help them grow outside of China.China-Out: The other type of strategy which we call "China Out" involves non-Chinese companies who aim to partner with Chinese internet giants in order to help them take their products and solutions outside of China. As explained in The Economist article I mentioned earlier, these Chinese giants wants to dominate the global market and to be #1 worldwide in their particular verticals. This presents a huge opportunity for Israeli companies (and tech companies in general) who choose the China-Out strategy in order to break into China and "get it right".So to sum up: If your strategy is China-In, then I urge you to consider it very carefully, but if it’s China-Out, then this is definitely a great time to be leveraging your technological strengths to help Chinese companies, and in so doing to secure a meaningful Chinese operation for your company.How do you know if you’re ready to operate in China?  Being ready to operate in China is a combination of your commitment and a valid business model.1) Be committed. Being "Committed" means that you shouldn’t go into China if your plan is merely to test the waters and shop around. The Chinese won’t take you seriously. One of the things that they look for to see whether or not you’re serious is if you have offices in China or whether you’re working through a middle man and are "here one day and gone the next". One of the best practices for launching in China is to have a proper local presence. If you’re not seen to be serious, you will lose face over there, which is something that’s very important in China. You won’t get a second chance to make a first impression.2) Make sure you have a valid business model. What has worked for you outside of China won’t necessarily work in China, so make sure that you have a business model that has been tested in China and can work there. Also, make sure that you have either real revenues and/or real partners. Without real revenues and the right partner, you won’t know if you really have a valid business model in China.More tips on how to get your startup off to a good start in China (based on our experience)3) Be careful of the middleman phenomenon. As a young startup trying break into China, you will meet a lot of "middlemen", mainly Israelis. They may be very nice and offer what sounds like a promising strategy (which involves their help of course), but you should beware of middle-men who can’t actually deliver. The smarter way to go – although it might be more challenging at first – is to have your own operation on the ground that is an extension of your company’s DNA, run by someone that you trust who can open and manage your Chinese business.4) Don’t go to China if you have any IP issues. It’s safe to say that if you launch an operation in China, people will probably copy you. Your assumption should be that if you can be copied, you will be copied, and that’s okay as long as you don’t make a big deal out of it. But if your business is IP-related and you’re not willing to take the risk that you might be copied, then don’t go China because it’s part of the game over there and it can happen to anyone. If you’re not willing to take that risk, then China is not the best market for you. Having said that, if you have the right partners to work with and are working with the "big guys", then there’s less of a risk that you’ll be copied by smaller companies.5) Make sure that you can scale your revenues. When we opened ironSource’s Chinese office we were already turning over monthly revenues of almost $1 million in China (we’re now making a little over $4 million a month from our Chinese operation). It’s important that your business model includes a plan for generating revenues that you can scale and it’s helpful if you can start generating those revenues before you commit to opening an operation China.6) Secure real partners. It’s really important that you partner with the big guys, learn from them and have a meaningful partnership. Our interests were aligned with our Chinese partners and they really helped and guided us. Also, having real partnerships with local companies (preferably big ones) is helpful to gaining credibility with other local companies that you might eventually want to work with.7) Employ locals. It’s very important that you have local employees. In our case, our GM who runs ironSource China, is an Israeli guy who has been living there for many years. He is extremely talented, but his main challenge at first was to build a team. The team has to be built with local people who are very good, who can be trained, and who are the right fit for your company. Finding such people can be very difficult so it’s important to invest the needed time. You should go there, meet the people and build an extension of you DNA there.8)Be present. When you launch your startup in China, make an effort to meet people. Invite them to your offices and show that you are committed. If you can demonstrate that you are ‘present’ there (even if you aren’t always available in person), you stand a better chance of succeeding in China.5 tips all expats should consider before launching a startup in China When I came to China via an internal transfer in September 2007, I was one of very few eligible candidates for the position I took. This was because my job in private equity required that I not only speak but also read and write Chinese. This was in stark contrast to my tentative efforts in the China job market in 2004, when the ability to speak Mandarin with some primitive proficiency was already seen as a major asset. Compare that with now, when I believe (and often counsel) that not only are bilingual and bicultural skills must-haves to be competitive in China’s business environment today, but deep industry knowledge and local contacts (or the ability to quickly assemble a local network) have become absolutely crucial. In the last decade or so, the bar has been raised ever higher with accelerating globalization and there is no more "low hanging fruit."Now that we are in 2014, the allure of China remains strong, and its booming tech scene particularly attractive. To quote one Korean journalist I spoke with this month who had spent a significant portion of the previous year in Silicon Valley trying to understand its "magic," – "Everyone on Sand Hill Road that I spoke to seemed to agree that Beijing is the next closest thing to the Valley."Even though I personally had been espousing this view for a while, I was surprised to learn that it had become such an established viewpoint. Either way, while I am used to fielding questions from friends and acquaintances who want to know – "should I come to China?" – I was still taken aback when a successful American serial entrepreneur from the Valley recently asked me, in all seriousness, "should I do my next startup in Beijing?" At least in some pockets of the world, it seemed, the mythical perception of tech entrepreneurship in China seems to have gotten ahead of itself, and I thought it would be helpful to share some of my insights on things that expat entrepreneurs should keep in mind – some well-meaning advice, if you will – before jumping into founding a tech startup in China.Let me be clear – I am not targeting returnee (i.e. mainland Chinese born and bred) entrepreneurs with this article, although depending on how "localized" you are, and how much time you have spent overseas and away from the mainland, some of the below points are probably applicable to you. Additionally, on a broader basis, some of the points extend beyond tech entrepreneurship and are relevant to any working professional, particularly those who are mid-career.1. Stick to what you know (or can learn very quickly)  Let’s face it, entrepreneurship is hard enough without having to address the challenges of a new country, language, and culture. The odds are already heavily stacked against you as it is (a study by a Harvard lecturer shows that 75 percent of startups fail), so why would you want to bias them further? China, by sheer virtue of its massive population and relatively scarce resources, is an extremely competitive society. It is a mad dash to the top. Yet if you are very strategic (and very brave!), there are always opportunities and markets or niches where explosive growth may await.When my friend Soul Htite, former co-founder and CTO of Lending Club, decided to come to China to establish his new company, guess which kind of venture he embarked on? That’s right, he established a peer-to-peer lending platform called Dianrong.com. Not surprisingly, he was able to hit the ground running. Why? Well, for one thing, he had already helped build a billion-dollar company in the same industry in the US. With that experience, he brought along substantial credibility to policymakers, investors, and media outlets.Of course, not all of us have a billion-dollar company on our resume, but doing what you know will always help you be more successful. One of our investments, Chinanetcloud, is founded by an American named Steve Mushero who had worked for over a decade in the IT consulting business. Later, when he joined Tudou (a YouTube-esque site in China, now known as Youku Tudou) as CTO, he spotted a problem that many Chinese companies faced – a lack of infrastructure services. Chinanetcloud was born from his experience at Tudou in that it allowed him to recognize a specific business opportunity. But his company is thriving because of his prior experience in consulting and IT project management, which he accumulated in the US and in Asia.A notable (but by no means the only) exception where I think it may make more sense to deviate from one’s former career path is in the case of completely new emerging industries where no one has a real head start. Cryptocurrencies, for example, are so new that there’s no significant local knowhow yet, and where being English speaking in particular might actually be an advantage, as most of the original white papers, code, and ongoing community thought leadership seems to be still originating from overseas.2. Find a trusted and qualified local partner  Please don’t roll your eyes at me when you read this. It’s no trivial thing to find a trusted local partner, and most expats, especially if they are new to China, can even misunderstand the definition of "local." Some expats mistakenly believe that cofounders who are ethnically Chinese but hold passports from Hong Kong, Taiwan, or somewhere in Southeast Asia are sufficiently local. Very rarely is this the case. Additionally, associations matter. There are distinct advantages to partnering with someone who is part of the Tsinghua mafia (the top engineering school in China and the alma mater of its current and several ex-Presidents), or someone who used to work at one of the Internet giants like Baidu or Tencent, just like there is social credibility associated with co-founding with a Berkeley EECS grad or an ex-Googler.When my friend Greg Nance started his online admissions consulting platform ChaseFuture, he partnered with fellow Cambridge Business School student Han Shao, a local Chinese from Wenzhou. Han is both savvy about his target market, having been one of those same wide-eyed students applying to study overseas a few years ago, and also trusted because of their common business school experience. When Dave Kanel and Ravi Kotichintala, two founders based in America, decided to form BOXC (one of my investments), a cross-border e-commerce logistics company servicing Chinese vendors who sell to the US, they got local Shanghainese Nicholas Ni to be their third co-founder; someone who was both qualified and trusted from years of working together in the import-export business.One additional note on all-expat teams – all-expat teams have virtually no chance with a purely domestic-facing product, so if you are contemplating such a move, I would suggest you rethink your competitive advantages, and focus on a global or entirely Western-facing product, in which case you’re going to have to go home a lot (see point 5).3. Bring the (best of the) West with you  There is a lot that is good about the West, especially in the tech space, but I’m going to focus on company culture and to a degree, management integrity. Chinese startup culture can be extremely cut-throat, with regular poachings of key employees, active sabotage by competitors, and high staff turnover all par for the course. Due to many cultural and systemic reasons I won’t go into here, some of the best talent still opt for large companies over startups, and are notoriously hard to retain. However, by bringing the more transparent and meritocratic business culture associated with the West to China, you can use this as a powerful differentiator and motivational tool to both hire effectively and drive performance in your startup.One of my favorite examples on startup culture and management that I like to share is that of our portfolio company Microbenefits. When I finally made my way to their Suzhou headquarters months after closing our investment, it was already autumn. It was only when I arrived at the train station that I realized that it was a national holiday – Mid-Autumn Festival. As it was not a workday, the office building did not have AC on, and I instantly regretted my trip when I joined the CEO and three other employees in the sauna-like conference room. I assumed they were all required to be there, and apologized profusely for my unfortunate scheduling. To my surprise, however, the head of product, the office manager, and a newly-hired developer in her third month – all local Chinese who had never spent any time overseas – were there purely because they were curious about me, this mysterious new investor from Silicon Valley. They wanted to ask me questions (why did I invest? what advice do I have for them?) as much as they were willing to answer mine. As it happens, the CEO, a white American named Tyler Lyman who had worked for a long time in Asia, had chosen to take every best practice he had learned in his former management roles with Western companies and apply it to Microbenefits. Every week, all employees, no matter their role, attended an all-hands meeting where the company’s performance and targets were provided in full. Everyone understood how they were contributing (or not contributing) to the company’s bottom line. They completely trusted the management and each other. This kind of transparency is rare even in Western companies, but nearly unheard of in Chinese ones. The employees felt so empowered by this that most of the hires were internal referrals ("our friends are always asking if we have any openings here") and they gladly worked overtime, as was evidenced by my untimely but not-at-all unwelcome visit.Especially when more and more post-90s (China’s version of Gen Y) come into the workforce and demand a more flexible, less hierarchical and more empowered work culture, building that kind of environment is a competitive advantage in itself – and something that Westerners don’t realize they have, more or less by default. Having worked in a state-owned enterprise before, I learned there is a significant cultural difference between the typical, even well-run Chinese company and the average Western one. The smartest Chinese companies realize this and have taken active steps to improve their practices. When I went to visit the usually secretive Tencent Wechat headquarters in Guangzhou last week, I saw a workspace that was no different from Silicon Valley and a culture that by all accounts appeared equally relaxed and approving of individual creativity and accountability. To all the foreigners who are constantly told to localize, I want to say: localize your knowledge and relationships, not your personality or values.4. Use your foreignness to your advantage  Being a foreigner in China can suck, especially if you don’t look East Asian, because you can stick out like a sore thumb. But as Chinese philosophy goes, there are few absolutes, and for every pro or con, there is an equally powerful opposite force at work. There are a few foreigners who have figured out to use their Western background to their advantage. The reasoning is very simple – just as Chinese people are reluctant to deal with foreigners, foreigners can find it difficult to deal directly with Chinese people. Sometimes, doing business can be so fraught with tension that it is necessary to have someone to manage the process, and occasionally, such opportunities can scale to become very large and valuable businesses, depending on the size of the market you target, its growth trajectory, and the complexity of the problem you are solving (your value-add).The most famous example is probably that of Irishman Liam Casey at PCH, who works with Western clients and helps them manage their supply chains in mainland China. To a lesser extent, my friend Henry Fong at Yodo1 does much the same by helping Western game companies navigate the Chinese mobile gaming market. Finally, there are the founders of App Annie, a leading mobile analytics platform that recently raised a series C from Sequoia, that takes advantage of the founder’s company-building experience in China and the somewhat cheaper labor costs here, but has a primarily Western facing customer base. It is not dissimilar to story of the American founders of Grata, another one of my investments, and whose first business involved selling a SaaS product to high-end hotels, who were primarily Western brands managed by Westerners with very Western business practices, even though the assets Grata was targeting were based in China.I highly recommend finding a market or product where being a foreign founder is actually an advantage, and trust me – beyond the obvious English education, luxury ecommerce and overseas travel subsectors, there are still plenty of opportunities waiting to be uncovered.5. Go back home (more) often  If you have followed the above four points of advice you probably have created a business that really leverages your inherent unfair advantages by identifying a market opportunity where your Western background adds more value to your customers than a local Chinese founder would. Most likely it’s something cross-border or global in nature, but in any case, not solely concentrated on the Chinese market, where your competitive advantages can become competitive disadvantages.Yet there is still one more thing that I think often trips up expat founders and is not necessarily intuitive or obvious. This kind of startup, as much as it is set up for commercial success, often does not fit the investment criteria or even understanding of a mainland Chinese investor. It also would not register on the radar of an overseas investor, mainly due to geographic distance. So if you’re seeking investment, there is virtually no alternative to showing up in person to fundraise.Yes, that’s right. Buy a plane ticket and fly wherever you need to go to shake hands and grab coffee. As much as tech investors are into the newest remote communications tools, there is just no substitute for meeting in person and developing an unquantifiable gut "feel" for the founders. Plus, you can safely assume that the high-quality and high value-add investors you’d want in your round are going to be mostly busy enough with local dealflow that they wouldn’t take a second look at something that is tens of thousands of miles away. However, if you fly in and show up, you will have a higher chance of getting a meeting and building rapport. Don’t underestimate the importance of building relationships early, and I mean this for both customers and investors.One of our companies, PicCollage, does this well. Expat founders who relocated to Taipei for personal reasons to build their business, they were able to raise $2.3 million in funding for their seed round from a group of investors in Silicon Valley such as Sand Hill Angels, Floodgate Fund, and XG Ventures. Of course, the founders were educated in the US and their customer base was global, but it still took many trips to the Valley before those deals were finalized.As a foreigner, one of your biggest advantages, especially if you come from a country with a large tech investor base such as the US, is that you will always have a significantly better shot at fundraising than a local Chinese person…in your home territory, that is. Don’t underestimate this advantage, because the number one reason startups die is because they run out of money, and money typically comes from one of two avenues – customers and investors, both of which ideally you can find and connect more easily with "back home."Plus, very few people I know, especially the "global nomad" generation, spend enough time with their families. I know I am definitely guilty of the same!In conclusion To sum it up, if you are an expat looking to start a business in mainland China, and you are not bilingual and bicultural, I believe that it is not the end of the world if you can say yes to the following 5 questions:Am I doing something where I have industry expertise or deep domain knowledge? Am I doing it with a trustworthy and competent local Chinese co-founder, whose network and knowhow complement mine? Am I going to be able to leverage my Western background and build my company in such a way that I will be able to recruit and retain talent better than local competitors? Am I in a business where my foreigner status is an advantage, particularly in selling and business development? Am I doing enough to also be relevant and well-networked "back home" for investors and customers to understand and trust my business? Expats and foreign-trained talent in general have played, and I wager, will continue to play, highly strategic and valuable founding or executive roles in Chinese tech companies. Very few people realize that the incredible stories of both Alibaba and Tencent are the pairings of a local entrepreneur with a Western-thinking and Western-trained co-operator. Jack Ma could not have done it without the Taiwan-born, Yale educated Joe Tsai, who joined the company pre-revenue and put in place professional processes and corporate governance, such as the company’s first cap table, which enabled him later to bring in much needed investor capital from Taiwan and the US. Pony Ma probably couldn’t be where he is today without the strategic vision of Tencent president Martin Lau and head of International, David Wallerstein, who led the incredibly profitable acquisition of Riot Games, and the more recent addition of chief strategy officer James Mitchell, formerly award-winning equity research analyst at Goldman Sachs.While these folks may not have been founders from day one, they have been instrumental in creating the mammoth successes of these companies, and it was their foreign background, skill sets and perspectives that allowed them to see and capitalize on opportunities less visible to purely local teams.All that being said, the number of successful expat entrepreneurs in China remains scarce and it is not an easy endeavor. But then again, startups never are. One of the most well-known and applauded expat entrepreneurs is Fritz Demoupolous, co-founder of Qunar, now a $3 billion publicly listed company. When I sat down with him for dinner at a recent conference, I told him of my intent to write this article, and my cautious stance towards expats wanting to make it big in China, in part fanned by all the "go East, young man" rhetoric in the past two years. He responded: "I don’t know about that, Rui. I think there are still opportunities. It just takes thought. It always has." I would agree with that, and I hope this piece helped form a framework for how you might approach doing a tech startup as a foreign entrepreneur here. Good luck to all entrepreneurs everywhere, and do drop me a line if you’re doing something thoughtful in China.