Is China a Threat or a Treat For Silicon Valley?
This is an edited and slightly augmented transcript of the Analyse Asia Podcast run by Bernard Leong, following my response to the op-ed by Mike Moritz from Sequoia.
What’s new at HAX since our first podcast?
It’s been 5 years since HAX started and we have now added a continuity seed fund, as part of SOSV. We have now over 150 investments, over 30 staff across Shenzhen and San Francisco.
Which companies are doing the best?
- Our most famous investment is Makeblock, a Chinese startup making robots for education. They received funding from Sequoia Capital and have grown to over 500 staff. More than half of their sales is overseas.
- Another is Yeelink, who makes smart lighting systems and received funding from Xiaomi. In the US, Particle offers solution for cellular IoT. The complexity of the projects has increased, we invest a lot in robotics, enterprise and health tech devices now.
- In robotics, Avidbots, based in Canada, makes large scale cleaning robots. They have about 100 staff now. They have a robot at Changi airport in Singapore. You can say hi! — though it will ignore you, go around, or wait to resume cleaning. Another is Simbe Robotics. They automate inventory in supermarkets with advanced image recognition.
- In the consumer space, Nura makes headphones that tune to you.
- In health tech, the Swedish company Flow Neuroscience received funding from Khosla Ventures. They use brain stimulation to treat depression.
HAX expanded to the US some time ago
Yes. In addition to our product-focused program in Shenzhen, we launched a growth program in San Francisco 2 years ago. It’s a follow-up program that helps with marketing, sales and fundraising.
Now, to support later stage companies in our portfolio, we are preparing the very first “Exit Accelerator”. It’s a new program to help founders learn to plan for exits (M&A or IPO). Building a startup is not just building a product and selling it. It also requires planning for the “end game”.
An exit is the most financially important event in a company’s life, and most founders do not dedicate any time to position and structure their company — it is insane. Also, most startup exits are M&As below $100M, and happen before series B. What this means is that founders should start learning from their series A or earlier. What we want is for startups to grow as large as they can, and prepare well so that they do not miss opportunities, or leave money on the table.
How has the hardware ecosystem in Shenzhen evolved?
It’s grown a lot. More startups, high tech, more investors. Shenzhen is more well known today, partly thanks to the WIRED documentary, which has reached almost 2 million views now. Founders more readily get on a plane to come and see what Shenzhen can do for them.
People like Scotty Allen of Strange Parts, who rebuilt an iPhone, or Bunnie Huang of Studio Usagi who wrote a guide for the electornics market, are helping to shed some light onto Shenzhen’s ecosystem.
That said, the ecosystem remains difficult to engage for outsiders. We try and share some knowledge but HAX can only help actively the startups we invest in.
Also, the bar for startups is higher then before. If your startup is making consumer gadgets it’s quite difficult to finance these days. Consumer products tend to be “nice to have” and buyers are very price-sensitive. B2B solutions and deep tech are more popular with investors, as they often focus on real pain points, to save time or money, and have recurring revenue. HAX invests in about 50 startups per year, and about 3/4 are B2B.
How about Software in Shenzhen?
Shenzhen has software — Tencent is based there — and the way the “Big Bay” (Shenzhen, Hong Kong, Macau) is expanding might provide new synergies. But the local strength is resolutely hardware.
Let’s talk about the article your wrote in reply to Mike Moritz from Sequoia. He was praising the “9–9–6” (9am to 9pm, 6 days a week) and frugality of Chinese startups.
No-one can tell what Mike Moritz actually thinks, but when I read his op-end in the Financial Times, I thought he was taking cheap shots at Silicon Valley and its ‘perks culture’. Startups in Silicon Valley work very hard — and perks are mostly for the more established ones, but it does make it harder to hire there, and increases costs.
We can only speculate about why he wrote it — a journalist friend ventured he was raising funds from Chinese LPs — maybe he wanted to show he was impressed by China’s startups?
What he wrote about frugality in China (with reusing teabags, for instance), is at odds with the lavish end-of-the-year parties many Chinese companies host, with cash bonus in red envelopes and sometimes draws where people can win a new car!
I think the underlying message was that China is coming and has to be taken seriously. It could be a threat, an opportunity or a chance to learn.
How do you compare ecosystems in U.S. and China?
China has had 40 years of growth, and an optimistic view. There has been some huge successes; many local entrepreneurs are motivated by its large market and capital access.
Some Chinese companies are making forays into South East Asia
Ecosystems are more similar to China, and the same services and business models have a higher chance than U.S. ones. For instance, Facebook makes most of its money from ads, while Tencent makes most of its revenue from users directly.
Key differences between the U.S. and China result from their GDP/capita and infrastructure. China is structurally closer to emerging markets. Singapore, however, is closer to Western markets.
How about STEM graduates?
China has about 8 times the number of U.S. graduates in STEM. This will have an impact. Maybe on a global level.
Can the U.S. copy China now?
Everyone is looking at the U.S., in English. Copying from China is harder due to language and ecosystem differences.
Some adaptations are easy, some are not. In messaging services, many were inspired by WeChat, which itself learned from Korea and Japan. It’s impossible to find the ‘original ancestor’, but China reached scale first.
Today, China is ahead of the curve in a number of services, though not all can be adapted elsewhere. Also, some battles have already been fought in China, and their result is valuable ‘art of war’ knowledge for the rest of the world.
- China had thousands of Groupon copycats. Struggle for survival forced their evolution. Today, the leader is Meituan-Dianping, which is a novel mix of Groupon, OpenTable, Deliveroo and Yelp. It’s a lifestyle service. Its valuation is over 10 times that of Groupon today. It could be an inspiration for Groupon on how to evolve.
- Didi, the ride-sharing company, is another example. It has diverged from Uber in various ways. For instance, it is now offering bike rentals as well, as it understood its essence was not about cars, but about movement.
- There are also dozens of large Chinese tech companies that are almost unknown outside China. Cheetah Mobile, which does utility apps, for instance. It’s a listed company worth billions of dollars. In the voice tech space, iFlytek is listed for over $10B.
Talking about business models, it seems US companies rely on advertising, while Chinese often replace it with micro transactions.
It varies, but it’s true that the default model and low-hanging fruit in the US has often been advertising. Some services reached a “local maximum” in the U.S. using that model.
The advertising market in China wasn’t large enough, which pushed local ‘copycats’ to explore other models, and start diverging. They looked at Japan and South Korea, and found the micro-transaction model, which helped them reach a new local maximum, which was much higher.
That model, in fact, could perform well in the West as well. In mobile gaming, it is now the prevalent model globally. It used to be derided and called the “Asian model”.
Facebook Messenger hasn’t been able to implement any payment system in South East Asia
The competition, infrastructure legacy and user habits didn’t follow China or the US, which might explain it.
U.S. companies talk about China as a big market, but Chinese companies don’t seem to go to the U.S.
Chinese companies are busy at home trying to survive and win. China is very large and fiercely competitive. They are also realistic about ecosystem differences and competition in the U.S. Baidu couldn’t easily compete in the West where Google is so established.
Chinese companies use different strategies: they invest actively overseas, some do R&D to makes use of foreign talent (e.g. Baidu in Silicon Valley), they acquire companies but keep them partly autonomous. Tencent bought Riot Games and Supercell, so it already dominates the U.S. market with League of Legends and Clash of Clans, they just don’t advertise it.
Some are also running into trade issues like Moneygram and Ant Financial, or Huawei with AT&T
Despite all the talk about free trade and free markets, every country apply some level of protectionism to serve its own interests. Sometimes national security is used as an excuse to protect local businesses, but it happens on both sides.
That said, the Chinese drone company DJI is a global leader with 70% market share and doesn’t seem to have faced much barriers. They destroyed most competitors including 3D Robotics in the U.S.
So it’s case by case. Things related to communication infrastructure is strategic, and sensitive on both sides. The recent failed deals are a reminder of that.
You also mentioned the Belt and Road Initiative in your article
It’s a massive project, recreating the ancient silk road, and expanding on it. It goes across Eurasia and all the way South to Africa.
China is looking for resources and markets, and is helping to build a lot of infrastructure: trains, roads, energy so they can access them. It’s self-serving but has the consequence of developing the region.
For Chinese companies, it’s an easier way to reach those markets, through Eastern Europe and Africa. What’s remarkable is that the US is out of the picture, as well as part of Western Europe. It is significant in terms of geopolitics.
China is looking at new markets rather than going to the West
Again, ecosystem similarities give China an advantage.
What did Mike Moritz get right and wrong about China?
What he got right is that he saw very motivated, hard-working and high tech companies that have domestic and sometimes global ambitions.
In Paris, you already find the Chinese bike-sharing companies Mobike, Ofo and oBike (Gobee, which was under-capitalized for such expansion, just retreated). It’s symbolic because Velib pioneered the city bike model in Paris about 20 years ago, and it’s now threatened by Chinese companies.
His other remarks were more superficial: Chinese and Americans are used to a different level of comfort when growing up. Chinese students were often six in a student dorm on bunk beds, so what tech companies offer is much better, even if it’s seen as frugal or cramped in Silicon Valley.
When you put things in context, it’s obvious that suggesting to copy those things from China doesn’t make sense.
Will China go from 9–9–6 to 0–0–7? ;)
Haha — well, startups work hard everywhere. But such grueling hours are not sustainable long term.What might grow between U.S. and China is a Bond :)
The level of comfort of China will come to resemble more and more the US.
For sure.
Where do you see Chinese tech companies in 5 years?
- More will be global from day one. Particularly in hardware, because it depends less on culture than content. More DJIs, or Mobikes.
- An even larger number will turn to emerging markets, due to similarities. For Chinese companies, these markets are like a “time machine”.
- Overseas investments and acquisitions are going to continue. They are cheap compared to the local startup market. Acquisitions are also easy to justify if they impact the stock price, which often has high multiples on revenue.
- We’ll be using more and more Chinese products without knowing their are Chinese.
And HAX will be contributing to that
Yes. Chinese startups represent less than 20% of our portfolio but one of the main reasons they come to us is because they want to build global companies.
In closing, what resources do you recommend that had an impact on your life?
The 996 podcast by GGV. The SOSV series of VC Lingo is useful for startups. Last, I like a lot the Waking Up podcast by Sam Harris — it has little to do with tech.
Where can people find you?
On twitter, email (ben@hax.co), medium, and various publications like TechCrunch, Forbes, VentureBeat, TechInAsia and Hackernoon. Most articles I wrote along the years are listed here.
And you can find me at @bernardleong or Bernardleong.com, and subscribe to the podcast at analyse.asia or iTunes. Thanks for coming on the show!
Thanks for having me!
