The “Unicorn Fever”: The US overheating and the Chinese awakening.
Written by Henri Delahaye & Bruno Smith
Back in 2013 when Aileen Lee (partner at Cowboy Ventures) introduced for the first time the terminology “Unicorn”, she chose the mythical animal to represent the statistical rarity of successful tech-ventures, being valued at over $1 Billion dollars.
To clarify, When ventures exit and go public (IPO), they are not considered anymore as “Unicorns”. It was the case for Snapchat.inc when the company was listed on the NASDAQ back in March 2017.
In 2017, according to the McKinsey Global Institute, 262 companies had reached that symbolic level. The top 10 is squatted by US and Chinese companies.
The phenomenon seems to have lost in scarcity. The year of 2017, saw the appearance of 57 new “Unicorns”, which is a rebound comparing to 2016. However, it has not recovered yet from the boom of 2015 where 81 ventures reached $1B+ valuations, which was at that time a growth of more than 300% compared to 2013…
This slowdown trend is not a bad thing and the return of rationality into the VC industry could be one of the main reasons of this deceleration. This argument was already formulated back in March 2015 by Bill Gurley, Partner at Benchmark Capital (Early-investor at Snapchat.Inc and Uber), he predicted that the rapid increase in the number of unicorns may presage what he has dubbed a “risk bubble” that will eventually burst, leaving in its wake what he terms “dead unicorns.” This tech overheating alarm is based on the dangerous appetite for risk in the market, the alarmingly high burn rates and the excess of capital flowing around in Silicon Valley.
He emphasised that we were probably not in a “tech bubble” but more precisely in a “risk bubble” characterised by the total absence of “fear “. He added that more people are employed by money-losing companies in Silicon Valley than ever before. This feeling is even reinforced by the multiplication of new emerging and disrupting technologies, explaining the behaviours of investors who don’t know which way to turn.
Since, Venture capitalists have clearly re-focused on selective quality of investments rather than the overall quantity of big bets.
Is the situation comparable in the Middle Kingdom/中间的王国 ?
Not really ! China could soon overtake the US as the tech unicorn capital of the world, according to Boston Consulting Group’s (BCG) recent report, which was assessing the successive reforms and policies aimed at boosting innovation and startups in the country. In 2017, out of the new 57 Unicorns, 18 were from China (32% of the total).
The United States still dominates the landscape, but competition is rife on the other side of the Pacific. The report, compiled with the support of Alibaba’s AliResearch, Baidu’s Development Research Center and Didi’s Strategic Research Institute, found that Chinese tech start ups are reaching the one billion US dollar valuation barrier, three years faster than their US counterparts, taking an average of four years, compared to seven for American companies. It also revealed that 45 percent of Chinese unicorns reached valuations of one billion US dollars in less than 2 years, compared to only 9% in the US.
So what is giving Chinese startups an edge over their US rivals? Does the Chinese tech boom have different features from Silicon Valley ? Is the latter doomed to fall behind Shenzhen, Hangzhou and Zhongguancun (Beijing Tech-Hub) ?
Nearly a third of the unicorns in the world are from China. The most striking aspect is that, half of them did not exist two years ago. They have benefited from the scale effect linked to the size of the country, the explosion of mobile use and diverse innovation strategies.
First Advantage : A Huge market
The most obvious edge Chinese unicorns have over US startups is the size of their domestic market. According to Bloomberg Asia, there are currently 750 million netizens (digital citizen) in the country, 725 million of whom use their mobiles to go online. According to CGTN, 2016 saw 25 trillion yuan-worth of e-commerce transactions which is approximately 4 trillion US dollars. It represents a year-to-year growth of 20 percent ! The Alibaba Singles’ Day or 光棍节, this year is a perfect illustration of the craze of e-commerce in China. During that day, Alibaba mobile wallet app Alipay processed 256,000 transactions per second !
This rise of Chinese high-tech is also seen through the place taken by its giants. Only two flags now appear in the top 10 largest Internet companies in the world: those of China and the US. At parity !
The European players ? absent from the ranking … Tencent (its message app, WeChat has more than 1Bn users everyday) and Alibaba each weigh more than 400 billion dollars on the stock market and are no longer very far from Amazon and Facebook.
Almost non-existent fifteen months ago, Mobike and Ofo, two Chinese stars of the bike sharing industry, are nowadays flooding the streets of big Chinese cities and expanding Internationally (South East-Asia, LATAM, Europe) with their yellow and chrome bicycles as they multiplied the fundraising from prestigious Investors (Tencent for Mobike and Alibaba for Ofo). Alibaba and Tencent have both shifted towards conglomerates by acquiring various tech companies in every sectors in China, leading to a ferocious competition between them. A few months will have been enough for Ofo and Mobike to join the unicorn battalion that now counts China.
Second Advantage: Investor craze
This infatuation of investors for Chinese Internet players is enough to make you dizzy. “It is explained both by the speed with which the Chinese have adopted the Internet in their daily lives, but also by the considerable potential growth that still need to be exploited,” said Jingbo Wang, Partner at IDG Capital. The number of Chinese Internet users has grown on average by 25% per year over the last 15 years, which amounts to 725 millions ! More than India and the United States together !
It is even more relevant when you realise that the penetration rate is at roughly 50% of the population, where it exceeds 85% in developed countries, and that is why the Chinese giants are still very much focused on the Chinese market. Added to this is the explosion of uses. “If the United States is a car-based country, China is now a country driven by the Internet and mobile telephony” said Alibaba founder Jack Ma.
A quarter of Chinese people use their smartphone to surf online (against 12% in the United States). In the last 5 years, every sector of the Chinese’ daily life has been reshaped by the “digitalisation of the society”. The Internet has literally invaded their daily lives. Where Amazon took 15 years to reach 50% of US Internet users, the platform Taobao/淘宝网 (Alibaba) took 9 years.
BCG’s report found that in 2016, China spent 8.5 trillion US dollars through mobile payments — 70 times more than the amount spent in the US, and more than double the entire nominal GDP of Germany…
Third Advantage : Innovation Hubs and Tech sub-sectors are booming in China
The common myth from the West that the Chinese are not creative and innovative must be debunked ! Wake-up people !
Being a student at Tsinghua University, I had the chance to attend a conference organised by EY “Unlearning the rules: Leadership in a new Era” with outstanding guests: Jeff Wong (Chief Innovation Officer at EY), Uri Ferrucio (Director, Investment and Strategy, Head of AI+ Innovation Studio at JD.com), Jingbo Wang (Partner at IDG Capital).
While discussing with Jeff, I asked him what should Chinese Tech Hubs implement to reduce the gap in terms of R&D with Silicon Valley. His answer was quite unexpected. According to him, Chinese tech hubs in the last 10 years have made considerable efforts to evolve and their current ecosystem would be quickly as innovative and creative as SV. He added, that he would not be surprised to see a swing of pendulum where future US investors will come to Shenzhen or Zhongguancun to get inspired !
According to the cabinet Expert Market, Beijing has already unseated Silicon Valley as the top technology hub in the world. Expert Market gave Beijing’s Zhongguancun tech community the number one spot due to its favorable climate for early stage funding and the city’s affordable cost of living (though costs for home buyers in Beijing are even higher than in San Francisco). “Researchers used 10 data points to determine the rankings, including software engineer salaries, how long it takes to get a business up and running, cost of living and monthly rent prices, growth index, startup output and other factors.” Even though Silicon Valley still excels in a number of key areas, international competitors have overtaken the original tech hub city by far, offering a much lower cost of living and rapidly increasing funding.
Beijing has increasingly been compared to Silicon Valley in recent years. For many analysts, the Chinese capital is the “only true competitor” to Silicon Valley, thanks to its massive market, fast consumer adoption rate, rapid business development timelines and appetite for innovation. In 2016, the government announced that it would invest $1.5 billion to renovate and develop the area.
From a different perspective, Shenzhen often considered as “The Chinese Silicon Valley”, hometown of Tencent Holdings, DJI Innovations, Huawei Technologies, BGI and many others was 35 years ago a fishing village across the border from Hong Kong. Last year, Shenzhen’s GDP reached $338 billion and surpassed Hong Kong’s GDP.
Finally, China benefits from flourishing tech sub-sectors. The main example is Ant Financial/Yu’e Bao which represents a leap ahead for traditional financial sectors. China is also embracing entirely new concepts like live streaming and P2P lending to the extent that the rest of the world is far behind. There are 6 times more live streaming companies competing with each other in China than in the US, according to BCG’s report.
Can the unicorn fever last?
The Chinese Premier Li Keqiang’s mass entrepreneurship and innovation program, initiated in 2014, has clearly played a big role in China’s unicorn phenomenon.
As long as there are entrepreneurs, there will be new ideas — and entrepreneurship is very much on the rise in China. A study from Fudan University (with a sample of 300,000 students) showed that at least half of them were considering to launch their own businesses, while new policies to encourage graduates to fund startups are being rolled out across the country. By the end of 2016, China had set up 900 government guide funds, which have attracted 1 trillion yuan. Also, 45 % of the country’s entrepreneurs are “young people”/millenials. Despite some critics, emitted by the CEO of Xiaomi ,Lei Jun, regarding the difficulty for chinese start-ups to have access to loans.
The future is very bright.
I will conclude with the very inspiring words of Uri Ferruccio (Director, Investment and Strategy, Head of AI+ Innovation Studio at JD.com) “Being risk-averse is risky”. I strongly believe that the Chinese have internalised these words.
Now, it is time for Europeans to develop their tech ecosystem if we want to stop looking on our left or right side. The world is buzzing over there !
