Turning down Gates & Buffett: Philanthropy in China requires For-Profit Social Enterprises

Posted: October 3rd, 2010 | Author: | Filed under: Kev's Thoughts On... | Tags: , , , , , , , , , , , , , , , , , , , , , | 1 Comment »

A few days ago we witnessed two momentous occasions: 1) Bill Gates and Warren Buffett took their much anticipated trip to China to encourage philanthropy among China’s super rich, and 2) Many of these Chinese super rich turned down their invitations to meet with Gates & Buffett, because of their unwillingness to give away part of their wealth and participate in philanthropy.

Media have been hotly debating what happened, and many are asking: Where is China’s philanthropist? Why are China’s super-rich so reluctant to help others? Why don’t they follow the examples led by Bill and Warren?

China is not completely devoid of rich, individual philanthropists. Jet Lee has for some years been very active in seeing his charity, the One Foundation, succeed. Guangdong province recently had one of its richest citizens, Yu Pengnian, commit all of his wealth, USD$1.2B, to charity. And there were the few who did pledge to come along side Bill and Warren during their visit. But these examples are the exceptions, not the norm. The broader implications why we do not yet see the rise of a philanthropy class/culture in China can be viewed in three driving factors: No religious precedent, no cultural precedent, and no historical precedent in China for Philanthropy.

No Religious Precedent: While religion is not the only factor to birth philanthropy, it is an effective driver of the philanthropic mindset. The most famous philanthropists in history, and indeed the forefathers of the modern (post Industrial Revolution) philanthropic model such as Andrew Carnegie, Henry Ford, and John D Rockefeller were rooted in their spiritual motivations. These pioneering philanthropists ascribed to the American philanthropic spirit, a cultural legacy from America””””s forefathers: Benjamin Franklin, Thomas Jefferson, and George Washington, Christians in the Age of Enlightenment.

China, a State that for many generations has had as its official religion Atheism, continues to be widely criticized for its lack of religious freedom. As a result of its policies, China has bred a general population that today is mainly faithless. The spiritual motivations and drivers that helped give rise to philanthropy in other nations are not present in China.

No Cultural Precedent: Even with all of China’s recent industrialization, urbanization, and modernization, China is still in an agrarian popular culture. More than half of China’s population continues to live in villages based on an agrarian economy. The other half of China’s population is mostly one generation removed from the same agrarian reality. Agricultural society is based on harvest and storage. Hoarding is a very strong cultural imprint that has lasted for many millennia. Even now with economic development, the hoarding culture — which is engrained in familial norms and passed-down by generational lessons — endures even beyond the first and second ‘moneyed’ generations. China will need at least one or two more generations of continued economic development and consistent education of its lower classes before the hoarding imprint can begin fading. Having a hoarding culture is a direct limitation to any rise of philanthropy in China.

No Historical Precedent: China’s history is based, in one perspective, on familial wealth & power via heirlooms, bequeathments and hereditary titles. China comes from an Imperial, agrarian society, where power and social status is based on familial wealth. Modern Chinese society continues to have many aspects that still emphasizes family wealth. We see this today in the continued inadequacy of China’s social welfare system, where Chinese parents still need to save all their wealth in order to pay for the education, and buy real estate later generations. Bill Gates and Warren Buffett have not been explicitly religious in their motivations for philanthropy. But they have had historical precedent from such past American philanthropists as Carnegie, Rockefeller, and Ford. China does not have philanthropic heroes in its own history.

The classic philanthropy model (the super rich who devote the rest of their lives to the effective distribution and use of their wealth to alleviate societal ills) is still a long way away for China as it needs to overcome the lack of religious, cultural and historical precedents to philanthropy that is so evident in western countries.

Luckily for us, philanthropy in China is starting to come in different shapes and sizes:

Micro-Philanthropy has potential, perhaps later:

Wokai.com, 51give.com and other micro-finance sites in China have gotten a lot of coverage lately as they are doing admirable, pioneering work. China is experiencing an increased social consciousness and activism, especially from the younger generations. However, China’s stagnant social structure and the turbulent overheated economic bubbles mean this young, socially aspirational generation does not have the economic power or wealth to ‘put their money where their mouth is’. So while Micro-Philanthropy mechanisms might be a useful model that fits with the motivations of this young socially driven class, unfortunately this group does not yet have the mass economic ability to participate even in micro-philanthropy to make it a market-changing force. What these young people can offer instead, is their time. We continue to see a rise in volunteerism in recent years. But even with volunteers, there still needs to be capital to fund and sustain any operation or project. Micro-philanthropy at this point cannot provide this.

Corporate-Philanthropy in China is currently inept:

High competition and continuing immature industry structure in China means businesses are almost completely focused on reinvestment of capital on development of their own direct competitive advantages. In addition, unlike in Western countries where advocate groups, and a socially-active older baby-boomer generation place increasing demand on corporations for social corporate responsibility, China’s public demand for such initiatives is still extremely immature and shallow. Therefore China’s corporations have little incentive to be involved with philanthropic endeavours.

NGOs & Non-Profit FDI valuable but inadequate:

Foreign direct investment into developing China’s social solutions is valuable, but a blunt tool for a complex and highly nuanced field. A local community knows best and is the first to recognize what are the most pressing social issues for that community. For money coming from outside sources, funding requirements and measurements of success may not be aligned with what is optimal and beneficial for the local community. Also, foreign funding is precarious because it is dependent on external factors such as the fluctuating enthusiasm of the foreign funding community. This risk is compounded if the projects are time-sensitive. Funding is always most aligned, most precise and has greatest potential coming from the domestic community.

With these philanthropic methods falling short, I believe the time and the environment is right for another kind of model, the For-Profit Social Enterprise.

The Case for China’s For-Profit Social Enterprise:

Social enterprises and social entrepreneurs are still buzzwords and novel concepts in most markets. But there is a clear fit and synergy for this model in China’s present context:

1) An up-and-coming generation of young, energetic, socially conscious workers/participants who have the heart for, and the time to, be involved in a socially conscious endeavour.

2) The lack of funding options from traditional philanthropic models: Individual wealth estates and corporate philanthropy

3) The need for locally-sensitive, locally-active, and locally-innovative solutions that only a private, local enterprise can offer.

4) The ability for Chinese pragmatism to shine yet again: The ability to accept a for-profit solution to social problems. Organizations can build a profit center that powers a non-for-profit objective.

Isaac Mao, a prominent China blogger and a critical voice on China’s inter-nets wrote a popular and widely re-posted article earlier this year entitled ‘Sharism(read the essay here), espousing that an open-source mindset established in a community will bring greater benefits than the protection of private information and property. Isaac posits that Sharism should be primed and applied to multiple industries to disruptively create greater value. People are buying into this ‘Sharism’ mindset, and courageous businesses can do it as well. Companies need to have faith: Investing in the community is profitable in the long-term for the business. A sharing business is an integral component and catalyst of a sharing ecosystem, an ecosystem that will eventually share back with that business.

Being socially-minded is not just profitable, but it is an emerging paradigm that may sooner or later not just be a luxury, but a necessity: each subsequent generation entering the workforce, even in China, yearns for visionary companies, companies with a larger purpose. Speaking specifically to the rising need of Chinese Youth, this new generation is seeking to go beyond monetary profit: they seek the pursuit of Truth. As Chinese youth continue to evolve in their individualities, they are looking for companies, organizations, and work environments that can support, add, and inspire their continued identity development. Visionary companies that care about more than the profit motive are built to deliver on this need.

Being a for-profit business on a social endeavour also enables two critical factors required for the China context:

1) For-profits have the benefit of trial & error. Responsible for their own money, businesses can define their own future. NGOs cannot, because they are answerable to their donors, and were sold on one original objective. They have no room to pivot. But ‘pivoting’ is exactly what is needed in a social condition like China’s, that continues to change, evolve and develop new or adapted social issues. For-profit social enterprises have the ability to adapt with the problem.

2) For-profits have the viability appropriate for a staunch pragmatic nation. While young people want to take part in social issues, they do not have the social or economic luxury to pursue such altruistic goals – often the social risks for them and their families are too great. If a for-profit company could offer them a tangible, sustainable option both financially and ideologically, you would see young people flock to that kind of organization. A for-profit social enterprise can do just that.

———-

In complete disclosure, the research and consulting company that I help lead, China Youthology, is pursuing exactly this course. As a For-Profit Social Enterprise, we’ve outlined our company spirit and values by placing our priorities and measures of success on social impact. We’ve aligned our for-profit business lines with Sharism for the community through a social platform that we’ve canonized as Open Youthology.

Our young, post-80’s and almost post 90’s staff have always loved our company’s DNA of self-discovery through cultural research. But they are even more empowered and captivated with our core purpose and group mission of social impact. As tweeted by one of our staff on China’s version of Twitter, Sina Weibo a few weeks ago:

“@SummerXia?Developing some anti-commercial emotion inside of me…only excited when in that part of OPEN YOUTHOLOGY and providing value to as many people as possible… Unhealthy? Shall I do something about this emerging feeling?”

Indeed, she’ll do something. She and her colleagues have gone above and beyond and will continue to do so, because they believe in what we are all about. The truth is, it is what they are all about.

Philanthropy in China today won’t come from the super-rich and follow the classic model that we’ve seen promoted by Bill Gates and Warren Buffett. The one model with real potential for substantial social impact and viable for today’s China context is the For-Profit Social Enterprise.


What the Media won’t to tell you about China’s Youth.

Posted: August 23rd, 2010 | Author: | Filed under: Kev's Thoughts On... | Tags: , , , , , , , , , | 3 Comments »

As China continues its emergence on the world stage and gains evermore influence and power, more and more interest is being cast upon today’s China youth – a segment of the population that controls a growing portion of China’s domestic economy and will in the coming years control China’s industrial and economic agendas.

With such importance placed on the youth, the media, both international and domestic, are trying their best to help us understand who these people really are, and what we can expect from them. However in the media’s never-ending quest for the perfect sound-bite/headline that will turn heads and provoke public reaction, they skew the portrayal of China’s youth and miss the point.

Often media will begin an article by saying “China has over 400 million young people. These youth are…” and start using adjectives or an individual’s story to describe this whole group. Next time you’re reading any article on China youth, try to remember some of these points so you don’t get misled:

1) Is the media talking about China’s wealthy youth or the rest?

If you read an article that describes young Chinese’s consumption power, or the fact that these youth have ‘grown up only knowing prosperity’, remember that like in every country, the Have versus Have-Nots is a reality. In China this fact is hyper inflated. Do Chinese youth drive expensive Italian sports cars and buy luxury brands? Yes. Does this segment of the Chinese youth make up a very tiny small percentage of the whole group? Yes. While the large majority of young Chinese have indeed experienced prosperity for much of their lives, the term ‘prosperity’ takes on a different meaning for different Chinese youth. To some prosperity means having more than one set of clothing. To others it means owning their first digital mobile phone. To others it means buying a separate apartment for their dog. When the media is telling you Chinese youth have consumption power, put it into context and think of an upside-down funnel. Which part of the funnel are they talking about? Because it certainly isn’t the whole thing.

2) Is the media talking about big city youth or small city youth? Edgy youth or mainstream youth?

Media will find fantastic stories of some really inspirational Chinese youth who have a unique view of life, sense of style, and sub-culture group they belong to. While they are authentic Chinese young people with authentic stories, again we need to put it in the correct context. Big cities, like all big cities in the world, offer more opportunities for subcultures to develop. Access to disparate international and domestic music, movies, literature, and ideas are greater in big cities than in small. Entrepreneurs and grass-roots initiatives have greater acceptance and greater support in big cities versus small. So it is no surprise that we find greater variety and most pioneering youth in bigger cities. Again, do they make up a very small percentage of the total China youth population? Yes. Edgy youth have a similar, but uncorrelated upside funnel to China youth’s consumption power distribution. Which part of this funnel is the media showing you?

3) The majority of Chinese youth are happy – or at least content

Media focus a lot on stories of angst or stories that cause panic or shock. They do this primarily because that””s what mostly constitutes ‘news’. Unfortunately that means we get stories about Chinese youth that seek to illustrate how different they are from the rest of us, or make us very concerned about them. The fact is, the large majority of Chinese youth are happy, or at least content. There is no burning desire or excruciating pain being experienced. When we interact with youth, when our researchers and ethnographers do deep-dive immersions, time and again we find stories and personal accounts of young people who can’t come up with too many complaints. Fairly irregardless of their economic status or whether they are living in a 1st or 4th tier city, we find many youth who are patiently living in the roles and positions allotted to them. Many accept and do not question their current path in life; many, while indulging in some misdemeanors or escapes, are not driven by negative impulses. Certainly the caveat to this lack of discontentment is that through our research we also find there is a lack of excitement as well. But, for the media, a majority that is neither discontent nor excited is not compelling enough to be reported.

4) The majority of Chinese youth are not rebellious

Those youth stories that the media does find about discontentment or frustration is often implied to as instigation for rebelliousness. Not true. Most Chinese youth, while having many frustrations (but still content), do not naturally resolve to rebel when engaging their frustrations. Although having different values than their parents, teachers, or older generation, this does not mean Chinese youth will rebel. This has to do in part with contemporary Chinese culture and the social + societal construct that youth find themselves. Responsibility to the family unit still holds extreme importance to Chinese youth. It is an intrinsic part of their character. The acts that result from discontentment or frustration are not in reaction to the family, the parents or to authority. It is an engagement and exploration of a different value system. Rebellion and exercising a different value system are very separate and distinct things. The actions of Chinese youth are the latter. Media, especially international media, likes to characterize Chinese youth as rebellious because this is the context, culture and experience of those foreign nations. And when the viewers/readers of the story are primarily from that foreign culture, it is much easier to write to something they can understand and relate to. However this minute but important discrepancy has already been seeded.

5) Chinese youth do not want rebellion

Another instance of foreign context and understanding being superimposed onto the Chinese youth experience, media will sometimes talk or wonder about this generation having the potential for open rebellion. In the years I’ve been in China, in the numerous projects our teams have conducted, I have not once met a Chinese youth who has mentioned, let alone contemplated mass rebellion. Then again, I’ve never personally met any Chinese citizen who has entertained the idea. While rebellions have been in the legacies and histories of almost all nations, including China, it is not in the thought processes of today’s Chinese, and especially the youth.

6) There is no longer ‘mass’ Chinese youth

Part of the reason why mass rebellion is not an option for Chinese youth, is because ‘mass’ youth is no longer valid. The concept of banding together as one glorious generation or group of people to stand up and make one common statement does not hold sway with this generation of young people. It is also not attractive to this group if one leader were to rise up and call for everyone’s support. Chinese youth today are experiencing a rapidly evolving sense of individuality and identity. We do see multitudes of youth taking part in causes, such as leaving school and work to volunteer in aid of the 2008 Sichuan earthquake victims, or volunteering to support the 2008 Beijing Olympics or the 2010 Shanghai Expo. But it is not for a common cause or a group statement that they do these things. When asked why they volunteered, young people commonly responded it was first and foremost because they personally felt they could learn and explore something new in themselves from the experience. The fact that there are so many young people following their own self-motivated direction speaks to the strength and reality of this generation’s evolving individuality. The subcultures that have emerged, the creative and edgy youth that share their unique stories, the different ways which youth are engaging their frustrations; these are all examples of individual youth wrestling and trying to resolve who they are in their world. Media won’t tell you about this, because it doesn’t make for compelling news. Media will use one individual youth’s story to draw out one thematic experience that they use to represent the entire China Youth generation. It makes for good sensation, but couldn’t be farther from the truth.


China’s Innovation Gap and How to Break the ‘Copy-to-China’ Model.

Posted: July 5th, 2010 | Author: | Filed under: Kev's Thoughts On... | Tags: , , , , , , , , , , , , | No Comments »

In the past couple months WebWednesday Beijing, a monthly gathering of Internet, tech, and digital marketing professionals has invited speakers from the China venture capital & start-up investment world share to with us their thoughts. Harry Man is a Partner at Matrix Partners, a venture capital firm in Beijing with a home base in Boston. Stanley Tang is Vice President at China Renaissance, a financial advisory investment bank for startups seeking funding.

The majority of the speakers’ thoughts and tips were fairly mainstream venture capital selection criteria, such as looking at the ‘Team first’, then the Market, then the Model. However, there was a common point made by both speakers specifically about venture capital dynamics in China.

1) Harry Man mentioned that the ‘Copy-to-China’ model is good. Creativity in China is not on technology, but more on the business model.

2) Stanley Tang said that their firm highly prefers to work with those business plans that have benchmark businesses overseas.

What does this tell us about the startup investment industry in China?

Quite simply, we’re seeing that venture capitals, start-up financial advisors, and investment banks are very active in funding copycats because the model has been tested and proven in other markets, thus lowering investment risk. This also means that the sentiment, attention, and majority of investment dollars are supporting the copycat industry in China. Both speakers mentioned that there is still a lot of opportunity for creative localization and adaptation of tried & true overseas business models. These professional investors also noted that they do prefer local Chinese entrepreneurs, as the nuances of Chinese localization are best identified and executed by a native of that culture.

Here I must add a caveat: It may be that the speakers we listened to were coming from smaller VC and investment firms, so their investment strategies cannot take on higher levels of risk, and therefore have crafted this ‘prefer copycat’ guideline as an additional risk-mitigating rule to help them in their selection criteria.

But if two speakers are saying the same thing, then it is likely that this is common practice and strategy among many China investment firms.

Given this clear preference for investing in copycat start-ups, what does this mean for original innovation in China?

Here I want to add another caveat: We could be looking at a paradox – chicken & egg – scenario. Venture capital’s preference for copycat start-ups maybe a direct result of the entrepreneurial ideas coming out of China. VCs are investing in predominantly copycats perhaps because the other actual original ideas are just not very good. Maybe the best that would-be entrepreneurs in China can come up with right now is copycat models. Indeed, both speakers mentioned that they do a lot of handholding with their selected investment start-ups, as most are first time entrepreneurs.

Regardless of which side of the paradox you believe to be truer, one thing is for certain: one reinforces the other. A VC culture of investing in copycats drives many entrepreneurs to think, plan and look for opportunities only as a copycat. Conversely, if there are not enough good, fresh, original ideas coming out of China’s entrepreneurs, naturally this will influence VCs to allocate their funds to primarily copycat models.

(Image Source)

If China has this downward spiral paradox, how then can it break out, and get the chance to build an investment ecosystem that at least allows China the opportunity to create something completely unique?

In the developed economies, and especially in the North American context, Angel investors help to fill that gap between early stage startup and venture capital financing. Angels play a pivotal role in championing a much wider variety of entrepreneurial permutations – the widest rim of the funnel – which inevitably gives rise to a greater probability of different and unique innovations being funded by venture capital. In China the Angel circuit is almost non-existent, a natural consequence of an economy and investment environment that has leapt almost overnight from a society of have-nots to a society with a small group of have-plentys with no investing experience.

To fill this gap, venture capitalists are revising their tactics and role in China, taking on more duties that normally an angel investor would do; the VC often provides training, HR, and direct development strategy. But venture capitalists can only do so much.

Lee Kai Fu, the former head of Google in China, identified this systemic problem with China’s innovation capacity very early on and decided to do something about it. Late in 2009 he announced the creation of a new company called Innovation Works. This company would be a hybrid angel-investor/startup-incubator. While adding a very minimum seed capital into the ventures they recruit, Innovation Works’ main value-add is its ability to augment the founding entrepreneurial team by supplying expertise in areas the founders have not: finance, marketing, user experience, design, strategy, engineering, etc. All the combined expertise makes for better product and business quality, and better chances of market success. Lee Kai Fu’s prestige and Innovation Works’ reputation means their endorsed startups have a clear path to eager venture capitalists ready to ensure enough funding so the startup can reach its full potential. What Innovation Works gains in return is a significant share of these top-grade startups, effectively giving Innovation Works a portfolio of higher-performance, lower-risk startups. Innovation Works may eventually end up with a better IRR and higher startup success rate than even the top VCs.

Innovation Works is a new kind of creature for China, and perhaps is the structural component China needs that will allow entrepreneurs to pump fresh ideas and opportunities into the startup soil bed here. There are other natural incubators in China, namely the academic institutions like Tsinghua, Peking U, and Fudan. But whether universities can weaponize incubation as well as a privatized entity like Innovation Works remains to be seen. The other saving grace may be in China’s DNA of copy-cating. Now that Innovation Works has shown one viable model to solve this innovation gap, will others copy and iterate? Maybe an entire industry of incubators is just what the doctor ordered. It could give entrepreneurs enough time and incentive to start thinking beyond copycatting and give China some real new creativity. It would also give VCs breathing room so they could start funding unique ideas beyond just copycats.

Incubators can also innovate themselves. Innovation Works is just one model, best suited specifically for the tech industry. The challenge is how incubators can be applied creatively to other industries with dynamics different than purely product-based startups? How can incubators be brought to benefit grassroots cultural entities? Can incubators be catalysts for human capital development? Similar to the tech startup environment, can incubators help open-source, viral, or the creative industries find monetization models faster, cheaper, with less risk, and with more accuracy?

One final thought: I agree with Harry Man when he says that creativity in China is not in new technology but in new business models. Its not that China cannot produce new technologies, it can. But it is so obvious that the size of China’s markets, the economies of its scale, and the ability now to crowd-source at a hyper extent, means China’s greatest and easiest opportunities for innovation and creativity will come from new business model development. There will be models that can only be tested and proven in a market size only China can currently provide. Models that America’s numbers cannot validate. There will be models that emerge from China with individual margins too small to be worthwhile in America, but extended with China’s long-tail, these models may suddenly become viable. And there may be models based on cultural norms found only in Eastern cultures, norms that may alter the paradigms of doing business, norms that the West could not behaviourally or naturally conceive of.

Incubators could be a key player in innovation and creation for China. At the very least, they could offer China the opportunity to switch course, away from the diminishing returns of copycat startups.