Successfully Launching Chinese Start Ups as an Expat
Interview with Vericant CEO Guy Sivan
We sit down with Guy Sivan, who — immediately upon graduation from Columbia University — moved to Beijing in 2005 and has since started 4 different companies. In 2010, he sold his third startup’s core technology to a publicly listed company, and today he is CEO of Vericant, a Shunwei backed company that helps US schools better understand their international and Chinese applicants through video interviews and spoken English evaluations.
As we know, there are few examples of foreign tech companies entering China and being successful in the long run, and similarly the start-up environment within China is just as tough for expat founders. With over 10 years of experience in Beijing, Guy offers a unique view and shares with us some of his lessons. For example, what are major cultural differences and how do you avoid the classic expat blunders? What advantages (if at all) do you have as an expat founder, and how can you play to your competitive strengths? What are trends in the lucrative Chinese education space that has churned out several unicorns?
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So What’s It Really Like in China?
Adam: There is a lot that we can cover today, including your experience as a founder of different start-ups in China and your latest enterprise Vericant. But I imagine many of our listeners are particularly interested in your unique story as an expat founder in China. So why do don’t we start there?
Guy: I was originally born in Israel, grew up in Hong Kong, and went to the U.S. for college. I was an expat pretty much everywhere. When I graduated from Columbia University in 2015, I was in touch with another two of my high school friends to figure out start-up opportunities. We decided to come to China to start a social website. After that, we created a job search engine and then worked on the real estate side. We ended up selling the core technologies of our real estate search engine company to a company in China. After a break, we started Vericant and that is where currently we are.
Adam: Congrats on that! Very impressive as typically it’s difficult for an expat founder to start just one, let alone multiple successful businesses here. I mean take a look at some of the foreign companies entering the China market. The prime example there is eBay. When it came in in the early 2000s, it competed vigorously against Alibaba. eBay even owned $100 million war chest, yet it was unable to squash a then early stage local competitor (Alibaba) due to differences in local needs and other factors. So can you tell us a little bit more about the challenges that foreign companies or expat founders face?
Guy: If you look at the consumer internet space, I do not know of any foreign company that has achieved large-scale success in China. So it is actually very challenging. Granted, there are some successful foreign companies in China, for example the Colonel and the mermaid (KFC and Starbucks). However, in terms of the internet space, it is kind of limited.
So in our space, for example: consumers, mobile internet, and anything to do with information in China, what I usually recommend to people after learning from the challenges I’ve had is that if you are a foreigner and want to do a start-up in China… first compare it to people from China starting a company in the US, and that will give so many parallels and answer a lot of questions.
The example I think may be funny to you is one of three really brilliant guys from China who went to America. They had their plan. They built their technology. And they prepared for launch. The launch date they planned happened to be on Super Bowl night, and then they were disappointed to see that no one came. They did not realize that the Super Bowl, which is huge cultural event, was happening at the same time. They did not know about it because they had just arrived in America. There are so many of these examples of an expat coming from the outside, and you’re bound to encounter some obstacles. Like in China they call it “坑,” which is like a hole in the ground you would stumble over.
Adam: That is really interesting. Actually, putting myself in the shoes of an expat founder in China, there must be a lot of steps required to find other co-founders in China or local partners and set up a proper entity. Those are things that many of us just do not understand, so would you mind telling us more about some specific requirements to start companies in China?
Guy: Sure. If you are talking about founding a new company completely from the scratch, then there are a lot of logistical and legal incorporation issues. I think the first thing to do is focus on whether this is a viable concept, which includes doing a lean startup method and making sure that it is solving a worthwhile problem and getting people to come to use it and pay for it.
Steps To Starting a Company in China
Adam: I agree that the first priority is to build a product that people want. But what about tangible steps required to incorporate a company in China. Can you talk me through your experience here?
Guy: I’d recommend a legal consultation if you’re serious about this. But from my experience, what usually happens is that you create a wholly foreign owned enterprise, which is a type of incorporation entirely owned by another incorporation outside Mainland China, for example in Hong Kong. You set up a Hong Kong company and then use that company to set up a local company. All the shareholders, including the founders, would be in the Hong Kong company. Or perhaps one layer up would be another Cayman company or BVI company, which owns the Hong Kong company, and then their shares would be in the Cayman or BVI company. That is typically what start-ups do.
There are situations where a foreign company has certain restrictions that a local company does not have, especially in the information or education space, in which case you may have to create a VIE structure. You may know this structure, where there are some legal agreements allowing foreign companies to effectively have the rights that a local company has as well, at a later stage. Those are some basic considerations, and of course it’s important to find the right owners and partners for each of those entities to make things happen.
Adam: When you mention finding partners to be shareholders, how do you go about doing that?
Guy: In a lot of cases I have seen in China, entrepreneurs literally can go find a local wife or husband. This is one way that you find somebody that is trustworthy, understands the local culture, and has local connections. Obviously, I would not recommend people to get married to somebody in order to start a company, but typically this is more successful and sustainable because, inherently in the company, a shareholder or a major player is a local person.
The other way, which I think it is very similar to finding a co-founder in most places, is to find somebody you’ve known and worked with. For example, a coworker in a previous company, maybe even somebody from your badminton club, cross fit class, etc. It needs to be somebody you’ve known for a while and you trust to a certain level. However, it is quite difficult for an expat to get involved in these groups and then start building the trust level with a local person.
Adam: Okay, understood. So at this point, you have a product and you raise funding. Let’s say you set up a structure for a company and you find some co-founders at an early stage. So at that point when you operate the business, you still have to complete a lot of requirements and materials in Chinese, even hire more Chinese or local folks, and sell to Chinese customers. Can you tell us more about your experience there or any other suggestions?
Guy: Yes. So what I learned and would tell other entrepreneurs or foreigners living here is that you should not trust yourself with judgments on what customers need here. I have a much better sense now as I have lived long enough, but it is still something that I would leave to local persons to make a decision.
There is one example that we had when we were building the real estate search engine. We were basically aggregating real estate statistics from three or four hundred different sources and millions of bits of data. One thing that we thought could improve this product for our users was that, at the time, very few websites actually had pictures of apartments. This sounds silly now but at the time it was a big issue. There were no mobile phones by which you could take tons of pictures very easily. So we thought maybe we can add pictures to our website and people could post them directly.
The founding team, which was mostly expats, was very excited about including photos and believed this simple addition would make us so much better than our competitors. We went and asked some of the local staffs, like the local people who worked with us on the product, and several of them separately said that it was obvious why we did not include pictures online… it was not safe.
We still could not understand what they were talking about. It turned out that people did not want to put pictures of their apartments online because it would make it easier for people to break into or steal stuff from their apartments. People do not want to reveal what their apartments look like, which wasn’t something I thought of at the time. This illustrates that you need to be aware of the big cultural gap in order to make the appropriate decisions. So generally I would recommend that expat founders discuss their ideas with somebody local.
Adam: Right, that is a really good point. I image that these trends are things to keep an eye on over time, as they may change. Today, things will be a little bit different, for example with Airbnb entering China with pictures of apartments online as well.
Guy: Yes, totally different now.
Finding Your Competitive Advantage
Adam: Something that really strikes me about China is the pace. Even in the past five years, so many mobile companies went from zero to now being unicorns, such as the Xiaomi, JD, and Dianping. A lot of these have been built on the back of mobile, which is the new trend here. In a market that is changing so fast, what are some other best practices to keep in mind as an expat founder?
Guy: I think there are a lot of potential ways to fail, and, as an expat, you have to identify where you have an advantage because otherwise, you have a disadvantage in pretty much everywhere. So, question for you. Where is the best place in the world to start a company right now. Or where do you think is the best place in the world to start a company?
Adam: I would have said Silicon Valley maybe a year or two ago, but now probably Beijing, Shanghai, or Shenzhen.
Guy: Right, so people usually say something that is pretty smart based on the trend or whatever. But I think the answer to this question is your hometown, because that is where you have the connections, you have the cultural knowledge, you have support if things go wrong, you have the recognition, and all of this stuff. As an expat or foreigner living in wherever you are living, you have nearly zero of all of those. And those definitely help to build any companies.
However, to be more on the optimistic side, there are areas where a foreigner has an advantage, and this is where you want to focus on if you are going to start a company. What I have seen is that there are some companies that are becoming quite successful in China run by foreigners, but they have to have their specific advantages. One area in which foreigners do have an advantage is (from what I’ve seen so far) is the education space, specifically the studying abroad, as well the English education space. It’s not limited to just teaching English, but you can actually create a platform better than the people here. And the food beverage space and the service space are still spaces where can build a meaningful business as an expat.
Adam: In terms of education, we can talk more about that. I mean to your first point on competitive advantages for an expat founder. In some cases, having relationships offshore based in other countries might be valuable. For example, my friend started a company. He was a Rhodes scholar, and he has a very strong network with Rhodes scholars. He actually connects Chinese high school students or undergraduates with exceptional scholars overseas because lots of these folks in China want to apply to these programs in U.S., U.K., etc. With these mentors supporting them, they have much better chance of applying and getting in.
Adam: Coming back to your experience at Vericant, can you tell us more about how you built the company and leveraged your own competitive advantages?
Guy: Sure, so Vericant is actually an example of exactly what we need to do in order to succeed as an expat team. Now, first of all, we are not just an expat team, we started with four co-founders and one of them is Chinese. That was one of my criteria for joining the company.
Our business is based on a cross border ability to execute in both China and the U.S. The way it works is that we have been in China for long enough and we are able to execute operations in different cities, know how things works, do the legal stuff, and have a website, which is also not a trivial matter in China. But at the same time, we have built relationships with top U.S. institutions, universities, and high schools. In the beginning, we built our network one by one, and now we have nearly two hundred universities and high schools to work with. A large percentage of them work exclusively with us. The way it works is that if the student is applying to one of these institutions in the U.S., the institution will either highly recommend or require them to take the Vericant interview as a part of the application process.
We knew we had a disadvantage in marketing and sales here. We knew that we cannot compete with local players in terms of getting students. So instead, we went with what we can do better than any Chinese companies, which is building the relationships in the U.S. with all these high schools or universities and then letting them do the marketing for us. If you put on the admission website says that you are required to do the Vericant interview, then the students will come to us. We do not have any marketing or sales in China until recently. We are bigger now, and we can start to do more local efforts. But the network with US institution was the basis of our company’s existence.
Adam: Ok, thanks to that, Guy. That is very interesting and sounds like a very unique value proposition that you found there. In terms of your cross strategy and your upcoming initiatives, can you tell us more about what you want to be?
Guy: We are still very much focused on just growing in our specific niche, which is to do studying abroad admissions, interviews, and spoken English evaluations. So we work with the U.S. universities and high schools. We help them to interview students all over the world, although primarily in China. With a high-quality video in person, we then do the evaluation with our team in the U.S. They evaluate and score the student’s spoken English ability. We send the score and the video to the school. This is becoming a big trend for U.S. institutions to use third party interview services. We are going to continuously focus on this trend and try to make sure that we can be the standard for that kind of services.
Looking further into the horizon though, we are exploring and gaining some traction on a very recent trend. For the past three years or so, there has been a major trend in online education in China (a few companies have come into the space). So students are learning English throughout their entire education in China. That is part of the “curriculum of everything”. However, most of the English teachers along the way do not actually speak English, which is a problem. The reason for that is just there are not enough English teachers who speak English to teach in a massive country with so many people. So companies like 51 Talk, VIP ABC, and VIP Kid have come up, which takes advantage of cross border connectivity and video capabilities. They are able to get foreign teachers in various English-speaking countries to teach Chinese students online.
At the time, no one believed that the trend would grow so quickly, and these companies I just mentioned can be identified as unicorns in this space to some degree. They have grown within two to three years and last round they are hundreds of millions of dollars. So we are trying to follow this trend.
Everybody is now teaching English more properly, and they are able to teach spoken and communicative English better than ever before. Now what we have been measuring all these years for the universities is exactly that. We measure a person’s ability to communicate in English when they are talking to a native speaker in our interviews. We have top U.S. universities and high schools that we work with all listed on our website as well as on the schools’ websites. So that is our competitive edge. And using that and our capability of doing video based language assessment, we want to become a standard in assessing spoken English in general, and measure what all these new education companies and organizations are teaching and do not have a way to measure.
Adam: That was very fascinating, Guy. 51 Talk is a company that Shunwei Capital invested in and is doing extremely well. It is the first Chinese English language company to be listed in the U.S. I believe.
Guy: Yes, that is amazing. Very fast.
Adam: It seems like they leverage English teachers not only in China, but in other countries, such as the Philippines. Good English speakers with relative low cost. Random thought… Older people, in general, do not have much to do in the U.S., and, for them, perhaps it would be a good opportunity to communicate or interact with Chinese students. They could possibly serve as a really good base for English teachers!
Guy: Absolutely, and people are leveraging all types of demographics and different types of teachers. These companies, I believe, have a hundred thousand teachers on their platforms already. Imagining an educational organization, a big university, or whatever with a hundred thousand teachers, that would be bigger than any other educational institution. To get those teachers, you do have to go to different demographics, different ages, retirees, people in the Philippines, Australia, English, and people who are still in college and doing is like earning extra income. I am sure they are all there.
Adam: Yep, for sure. And going beyond that, the first step seems to be getting more people on board and providing a platform for them to connect with students. But eventually if the demand really is so big and there are not enough teachers, have you seen any other tech-based solution that can solve that? Will we see AI chatbot or eventually hologram teachers?
Guy: I think we are not too far. We are doing a lot of research in this direction for our own sake because we are going to start doing millions and millions of evaluations of spoken English. We can do this with humans too, but It is not that easy. I am surprised by how fast things have moved forward, and I’ve always said that we would eventually have computer-assisted or completely computerized evaluations.
My feeling is that it may happen sooner than we expect. It is kind of technology we have all heard of right now, including voice to text, text to voice, chatbots, A.I… The holographic stuff we are talking about is that VR that can also increase engagement, especially for younger kids. And I think all of that is actually important for language assessments.
Adam: One last question. I also notice that you are a mentor of Chinaccelerator. So could you tell us more about your experience there? What is Chinaccelerator? And how beneficial is it for expert founders?
Guy: Sure. Chinaccelerator originally had their office in Dalian. And I was there for a little bit. So in Chinaccelerator, you will notice this issue that there is a very clear divide between the foreigner entrepreneur group and the Chinese entrepreneur group. It is very difficult to attract a local team and get a top quality local team. So what I understood is that they have pivoted to become an accelerator which is focused on global teams based in China.
I have seen at Chinaccelerator very good teams from Singapore, Hong Kong, or the mix of those from Austria, U.K., and South America. They really managed to identify and incubate some very good teams recently. However, their teams are not typically targeting towards the local Chinese market, but rather leveraging resources in China and looking outwards.
Adam: Gotcha. So to summarize, it’s possible to be successful as an expat founder, as long as you find your niche and leverage your competitive advantages. There are other ways for expats who work in China to start their companies by establishing a base in China but focusing on the global market. Thanks again and catch you next time!