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.

Music Review: Hua Acid Live

Posted: December 27th, 2009 | Author: | Filed under: Kev's Music Review | Tags: , , , , , , , , | 1 Comment »

I love finding exciting new Jazz music creators.  I love them even more when they are doing it in China! Case in point: Hua Acid Live.

These guys just formed at the beginning of 2009, and they””ve hit the city of Beijing hard with their vicious rhythms and hypnotic tunes.  Being promoted by local media as the Only Acid & Funk group in Beijing, Hua Acid Live (or just known as Acid Live) are true to form with hard-hitting Acid Jazz mixed with Funk and House beats.  The band has been busy this inaugural year building an active local following and strutting their stuff at all the hottest live music venues in town.

The band says it is a melting pot for cultures and musical styles with the sole purpose of making good music.  This can best be seen by the groups”” eclectic roster: classical-pianist-turned-funk-keyboardist Zhang Zhang, UK expat Chris Cook AKA DJ Shiva spinning Electro and House music, guitarist Fei Jia and bassist Liu Yang.  Acid Live is joined regularly by other accomplished and diverse musicians such as Irish vocalist Anne Marie, American rapper Kor-E, Hip Hop group In3””er, and Chinese guzheng player Zhang Wei.

While the music Hua Acid Live plays is not ground-breakingly new, it is important to note that the high calibre with which they are playing this kind of fusion, is being played in China.  I have great excitement and high anticipation when I think about the scores of Chinese music patrons who will be exposed to this kind of music for the first time.  And I have even greater anticipation thinking and hoping for Hua Acid Live to record their first album! During their live performances that I have attended, they have mostly played standards that can be recognized by the audience — namely mainstream jazz-funk-soul songs for a still-maturing listenership. But Acid Live has played a few original songs as well.  Especially when they are mixing musical styles like with DJ Shiva, or one of the musical guests, you really get a sense of their potential in creating fresh, unique music that hails from Beijing but is made for a global audience.

Of course, there are many, many great unique musical groups that have put Beijing and contemporary Chinese music on the map, like PK-14, D-22, and Carsick Cars. But Hua Acid Live is really the first real Chinese foray into Acid Jazz+.  I hope but the first!

You can read some more reviews about Hua Acid Live at MySpaceTheBeijinger and CityWeekend 1, CityWeekend 2.

You can also see their MySpace page (music streaming) or their YouKu page (live performance videos)

Or just watch them now!

Hua Acid Live (electro)

Hua Acid Live w/ Kor-E

Hua Acid Live (soulful)

Kev’s Reflections On… the 2008 Beijing Olympics that was, and was not

Posted: September 15th, 2008 | Author: | Filed under: Kev's Thoughts On..., My Reflections On... | Tags: , , , , , , | No Comments »

Well, its come and gone.  The great expectation that all of us have been waiting for the past 8 years has come to pass, and for better or worse, without any incident.  What do we make of it all? Here are some of my thoughts:

The time leading up to the Olympics went by much too fast, with most of us saying at least once every day something like “can you believe its only 1 week before the Olympics?” It was oddly quiet in and around Beijing, and understandably so, with all the foreigners being booted out of China because of renewing visa issues.  Most of us thought secretly to ourselves “things will pick up once the Olympics roll around and droves of tourists make their way to the city.  Our predictions of hordes of uncontrollable tourists will hold up.” And so everyone waited, and watched, as the news cycle grew ever-increasingly centered around the city we’ve adopted as our home.

Those lucky enough to have secured a proper visa to stay in Beijing witnessed the last few weeks leading up to the Olympics a huge amount of last-minute effort by the Chinese government to beautify and spruce up the town.  To name a few noticeable changes:

1)    The Beijing government instilled a even-odd license plate driving law: where even-numbered license plated cars can drive on even numbered days, and vice versa for odd number plated cars.  Essentially halving the number of cars on the streets

2)    The Olympic Volunteer stations started popping up everywhere; and more than just a few of us watched in wonderment as countless Chinese retirees lined the sidewalks sitting on stools or falling asleep beside their blaring radios, while wearing their official ‘Volunteer’ shirts.

3)    Overnight, every hutong and mom & pop shop had a Chinese flag hanging on a pre-installed flag-stand just over every shop entrance.  To this day I still don’t know how they did that, given my colleagues went out looking for Chinese flags to buy, and had difficulty locating a good dealer.

4)    The government also commandeered every available outdoor billboard, and also made wholly-new outdoor advertising space by draping all unfinished buildings (and many fully operational ones as well) with Olympic posters.  Lots of commercial buildings put up Olympic-themed sculptures, and I wouldn’t assume they did it out of their own Olympic spirit.

5)    A whole new army of VW cars hit the roads during this time.  As VW was the official automobile sponsor of the Olympics, it is logical.  But it was still astounding to see how many VWs were on the road, all of them with Olympic-decorated side panels.

6)    Hybrid-Electric taxis were seen cruising the streets, just a token amount, to be picked up by news agencies of Beijing’s ‘Green’ Olympics, but they were present. And, surprisingly, they’re still on the streets now, a few weeks after the close of the Olympics.

7)    The Olympics had an official Dumpling brand too. Can you believe that? I just wanted to add that in because I found it ridiculously hilarious.

Yet while all of these great, noticeable improvements were taking place, China’s dealing with foreigner visas and also the immense scrutiny by foreign media on China’s numerous shortcomings made me think again about China’s conduct leading up and during the Olympics.

I found it amusingly similar (although I don’t know why it was surprising to me), that the way the Chinese government went around preparing and executing the Olympics is much like how any normal Chinese business negotiates and delivers on a business deal.

In essence (and I’m sure those of you who do business in China will agree with me), the Chinese are overly willing to promise the moon when it comes to the opening deal negotiation and what is ‘possible’.  Very rarely will you hear a ‘no’ from a Chinese counterpart during a deal-making discussion.  “You want this to be done then? No problem.” “You want there to be this many widgets in that many sprockets? Absolutely, we can do that.”  But, as many of us have experienced before, when it comes time for the goods to be delivered, the project to be complete, the event to be executed, you find that they’ve done their job, but maybe only 75% to your expectations.  And when you ask them whats up with the other 25%, your Chinese counterparts answer something like this: “Sorry, that’s all we could do in this time frame.  Give us more time and we can get it done to the way you like it.” Or “We’ll use some other material. Its almost the same as what you wanted, give us another week and we can do it.” Or “Yeah, we’ll give you a discount cause you’re not happy with it.”

The Beijing Olympics were alarmingly similar.  Those of us living here were constantly wondering if the Bird’s Nest and the Watercube would be done in time, and most critically, whether we would see blue skies.  The new subway lines promised for the Olympics just barely got up and running, just weeks and days before the Opening Ceremonies, and you could see it was a rush job, as Line 10 and the Olympic Line 8 had completely bare white walls, something I am sure was not originally planned.  And then there are the two other elephants in the room, the ‘Green’ Olympics and the promise of a free press.

Eight years ago the Beijing Olympic Organizing committee promised China would change to the Olympic selection committee and by proxy the free world.  But eight years later the same excuses that you’ve heard from Chinese business people were expressed (albeit intrinsically) by the Chinese government at the state of the Olympics: “Sorry, our economy has been uncontrollably strong, we couldn’t wean our heavy industry off of coal in time, so it’ll be ‘Green’ because we’re just going to shut down our factories for the period during the Olympics.” And “Yeah, sorry, our society isn’t yet ready for the onslaught of free press, so we’re going to have it ‘free’ by allowing the press free access to designated zones, and then follow you around everywhere else you go.” And “yeah, sorry we did mention freedom of speech to our citizens by the time of the Olympics, but we just couldn’t make it happen, so we’re going to create ‘protest zones’ for any legitimate protestors, and all they’ll need to do is apply to protest, and those that get through our application process (although none will) will be able to protest, and those that don’t make it through will be tracked, and then kicked out of China.”

It’s all very Chinese. But when this comparison first entered my mind I thought “huh, yeah, makes sense.”

Another perspective and another example that came to mind that characterizes China’s actions during the Olympics is like a Chinese family welcoming you to visit their home.  If you have a Chinese mother, or know a Chinese family, you may be familiar with the type of mindset that rules any occasion when company is coming over: Everything must be PERFECT.  Dusted, vacuumed, tidied up, the best silverware, and mom’s most accomplished dishes prepared for the guest.  What cannot be fixed or cleaned up must be hidden away, or put out of sight for fear of embarrassing the host.
I don’t think it’s a far stretch to see this is exactly how the Chinese reacted to the Olympics.  Foreigners who didn’t have a clear and productive purpose for being in China were deemed a ‘risk’ and sent home; migrant workers, while the backbone of the development of China, were all sent home for fear of tarnishing China’s ‘developed’ image.

But before some of you think to yourself “yeah that was wrong, the Chinese were overly cautious”, let me ask you, what would you do if you had guests coming over to your house? What happens if you have a very important guest coming over and you have a very unhappy brother who you know will try to make it his mission to cause a scene? Would you not make sure that he isn’t there during the visit?

Or more interestingly, what would you do if you had an important visitor coming to your house, but you knew he had a strong tendency to poke through all of your rooms, closets, and dressers, in search of something to condemn you on? Wouldn’t you lock some of your doors too?

I’m sure these are some of the feelings shared by the Chinese officials as they planned on what they would and wouldn’t permit during the Olympics.  Can you blame them? In the name of rights & freedoms, maybe.  But if the tables were turned and there was press coming to dig deep into what you have stashed away in your closet, under your bed or in your dresser, wouldn’t you do the same thing?
For the Chinese, the fact that the Olympics were met with no real terrorist attack or major protest, must be a huge sigh of relief.  A lot of patting on the backs I am sure.  They must be feeling that the important guest has finally left, and no real debacle has made them lose irreparable face.

For the rest of us, the Olympics have come and gone.  The actual games were a blast and yet a blur, and a little dissapointingly quiet and orderly.   Now that its all over, we here living in China are in a post-Olympic disillusionment.  What do we look forward to now? Just 10% Year over year GDP growth? That’s it? Nothing else?

Great expectations have come and gone.  And now we’re just trying to make sense of what is next.