China’s Start Up Incubators

Author: Péter K. Gergely

The success of start-ups, which  increase their value from scratch to several billions of dollars within a couple of years, has created a new entrepreneurial culture in China. The stories of Jack Ma (Alibaba), Lei Jun (Xiaomi) and other successful entrepreneurs, who have battled their way up and become some of the richest people of the world within a couple of years, inspire millions of young Chinese  to establish start-ups all over the country. The generations born after 1990 have grown up in such an economic environment which contains only traces of China’s planned economy past, and they can learn about countless success stories of Chinese start-ups via internet news portals, blogs and social media.

In this new culture, ambitious Chinese youngsters regard money as the absolute measurement of success, and they assess the extent of political influence based on market influence.  The generations born after 1990 allocate greater prestige to the leaders of start-ups than to the directors of large state-owned companies. This is because the leaders of state-owned enterprises are usually promoted along political interests, while the leaders of start-ups become influential due to their successes in market competition. The emergence of the entrepreneurial spirit and the peculiar corporate culture of Chinese stat-ups – which is much more similar to the culture of an American start-up than to that of a Chinese state-owned company – will definitely result in the most talented fresh graduates preferring a start-up as their first workplace.

Although the Chinese government makes considerable efforts to develop the infrastructure supporting start-ups, brain drain has remained a serious challenge; so far, they have been able just to slow down this process. The ratio of students not returning to China after finishing their studies abroad is extremely high: a study in 2007 found that seven out of 10 students who enrolled in an overseas university between 1978 and 2006 had not returned to China. As the result of the government’s efforts, the trend appears to be slowly reversing, for example on average, annually 3% more Chinese students have come home since 2007 than in previous years.

Nonetheless, the lack of the most talented professionals keeps the economy under perceptible pressure. And not just because Chinese companies cannot find appropriate workforce due to brain drain, but also because there are too few enterprising students who would launch start-ups.

In 2014, the Chinese government introduced reforms, hallmarked by Prime Minister Li Keqiang, which significantly facilitate the establishment of companies in China: business registration rules were simplified and the minimum amount of registered capital required was lowered, which is very important given that start-ups usually require little capital for starting their operations.

The reason for the attempts of the Chinese government is twofold.

(1) The backing of university students to create their own start-up companies would help alleviate a lack of employment opportunities for students graduating from higher education;

(2) With the slowdown of Chinese economy, the country needs new leading economic sectors, primarily in the high-tech and service-driven sectors.

According to a survey from 2015, 6% of new graduates planned to start their own business; this ratio is very close to European and American statistics.  While only 535 larger start-ups were registered in China in 2005, there were more than 2,000 operating all over the country in 2015. Although the number of start-ups is anticipated to reach 5,000 by 2020, experts expect a powerful market regression in 2016, meaning less available capital, investment and financing, spelling the doom of poorly performing Chinese start-ups.

China’s start-up incubators have been managed mainly from state sources in 2016 since the research universities, which promote start-ups the most, are all owned by the state. The state plans to add 45 “national” incubators to these universities.

The state‘s plan to make the start-up sector a leading one, and the abundant venture capital injections from the state and the private sector have resulted in a bubble in the financing market by  2016. International analysts think Chinese hi-tech companies are excessively overvalued, since they have pumped too much money into start-ups which are moderately competitive in an international context. It is partly due to the fact that many investors do not have sufficient experiment to judge start-ups appropriately in an early stage of their lifecycle, therefore less competitive companies could also get considerable funds.

The Ministry of Science and Technology appoints some incubators “national”, which means more government subsidy to these organisations. “National” incubators attract the most talented start-ups and investors more easily, since they can receive tax allowances, favourable loans and other support.

POSITION OF START-UP-FRIENDLY PROVINCES, CITIES AND QUARTERS

In Europe and the USA the myth that Shanghai is China’s centre of innovation still persists, but this has not been the case for years now.  Although Shanghai and Kanton province are still very important centres of innovation, Beijing has become the number one hub of innovation in the country.

It was not a coincidence that Beijing became a start-up centre: the presence of the elite universities of the country and the bodies of central government resulted in the fact that most Chinese internet companies have their headquarters in Beijing. In addition, in the personal relationship-based (guanxi) Chinese culture, when state resources are allocated, such incubators are favoured which have proper representation in the capital.

THE TORCH PROGRAMME

Of all programmes operated by the Chinese government with the aim to support the kick-start of China’s high-tech industry, the Torch Programme is definitely the most popular and successful initiative. The secret of the success of the programme launched in 1988 is that it managed to break free of China’s rigid bureaucracies; its leadership style and organisational structure is more similar to those of a western incubator than a state-owned organisation. This character has proven to be essential for accommodating the Torch Programme to the rapidly and continuously changing economy of the country successfully.

While Silicon Valley has become the centre of American high-tech start-ups in a natural way, China focussed the resources on some geographical locations designated by government programmes. Companies with geographically closely located headquarters form clusters and gain a competitive advantage against isolated companies. In technology clusters, a close relationship is established between companies, as well as laboratories and research institutes.  Thus, it is not surprising, that the government designated most of the technology parks in the near of China’s best universities of engineering, fostering the collaboration between companies and universities.

The first such centre was Zhongguancun Science Park (Z-Park) in Beijing, which is still called China’s Silicon Valley. Z-Park covers approximately 17% of the capital’s area, including 32 universities and colleges (such as Tsinghua and Beijing Universities) and 84 national key laboratories. The companies of Z-Park account for one-third of the high-tech start-up investments of the country. By 2011 there had been 89 technology parks similar to Z-Park operating all around China. These account for 33% of the total high-tech performance of the country, i.e. 7% of Chinese GDP. By 2011 more than 1,000 start-up incubators had been working in these 89 state-designated high-tech clusters. 300 hundred of them have been given the “national” attributive, and approximately 20% of these are privately owned. About 60, 000 start-ups have been housed by incubators, including some of today’s giants, such as Lenovo and Huawei. In addition to technology parks and incubators, he third important element of the Torch Programme is InnoFund, which offers equity investment opportunities and loan interest subsidies on existing development loans. Since 1999 9,000 projects have been approved and $1 billion have been allocated within the framework of InnoFund.

MAJOR CHINESE INNOVATION CENTRES AND INCUBATORS

Innoway

Transformed into an incubator centre with a government-backed investment of $36 million in 2013, the 200-meter strip in Z-Park, Beijing, currently houses 40 incubators and 300 start-ups.  Start-up culture is strongly present in Zhongguancun because the headquarters of internet giants Baidu and Tencent can be found here. Start-ups in Innoway can enjoy all the advantages of the new infrastructure: in addition to cheap offices and electricity, there are several cafés and bookshops here, which also serve as meeting rooms of start-ups, just like in the American start-up culture. Innoway’s largest incubator, 36Kr selects 30 start-ups each month to work inside the company’s space for 90 days. Beijing Makerspace, also located on Innoway, claims to be the biggest maker space. It has had more than 300 registered members in Beijing by now and has serviced over 30 start-ups as of August 2015. Garage Café, with a space of 800 m², offers working space for start-ups at the price of a cup of coffee. By now, almost 100 teams have landed their investments in the Garage Cafe platform.

Tsinghua x-lab

The incubator programme launched by Tsinghua University  functions as a forum for VC investors and the students of the university. Student who manage to get admission into the programme are provided all necessary equipment for the projects free of charge by the university and they have the opportunity to make their idea into a start-up. On top of equipment, the incubator programme provides legal and investment counselling for free as well as access to the design centre of Tsinghua University. In the first 18 months of it operations, Tsinghua x-lab housed about 400 start-ups, 300 of which are still operating, and 30 of them have received substantial funding from external investors. The projects include start-ups engaged in 3D printers, digital healthcare and electric mopeds.

Tencent Public Space

Tencent, the maker of WeChat, China’s most popular social media platform, was launched as a start-up in 1998. The story of the company grown to be today’s internet giant greatly contributed to the establishment of the start-up culture dominating China today. In addition to its own products, the company places great emphasis on portfolio building: it acquires successful start-ups a well as supports emerging companies within the framework of incubator programmes. Tencent Public operates incubator centres in several cities including Beijing, where start-ups can rent office space for RMB1,200 per month (cca. HUF51,000), with such added extras as tax exemption for three years and free or very favourably-priced access to Tencent’s products and infrastructure.  Furthermore, the company assists start-ups to target government-backed support programmes, since, as an internet giant, it has several ties with the government.

TusPark

The headquarters of Tuspark, a company primarily engaged in building business parks but also monitoring technological start-ups, can be found next to the campus of Tsinghua University. The company ensures optimum environment for growth for start-ups: in addition to office space and a high-tech infrastructure it provides human resources management, legal and financial counselling services at a discounted price. TusPark closely cooperates with Tsinghua University, since the incubator programmes compete for the most talented fresh graduates of elite Chinese universities.

Phoenix Plan

The government of the Chaoyang district of Beijing launched a programme in 2010, targeting foreign entrepreneurs and Chinese returnees to launch start-ups in the district. Chaoyang provides an excellent environment for growth-focussed start-ups, since 60% of the foreign companies registered in the capital have headquarters in this district.

1000 Talents Plan

The 1000 Talents Plan established by the Government of China exists to recruit professionals with high qualifications and considerable experience in one of the government’ high-priority fields from abroad to China. As a result of the 1000 Talents Plan and other incentive programmes, the number of professionals returning has increased, but only 3.2% of them planned to launch a start-up in 2015.

Chinaccelerator

Chinaccelerator is a privately-owned incubator, with numerous foreign mentors in its network. Mentors provide business counselling to selected Chinese start-ups which target the global market with their products instead of the Chinese one. Successful applicants are given an initial investment of $30,000 in return for 6% equity, with an optional $25,000 from the partners of the incubator. The partners of Chinaccelerator include, among others, investment groups from China and the Silicon Valley specialised on start-ups.

POSSIBILITIES OF INTERNATIONAL COOPERATION

ChinaEU has been set up to foster cooperation and exchange of information in IT between China and the European Union (EU). As a forum, ChinaEU facilitates communication between Chinese and European IT professionals, and the organisation is an incubator for joint business projects and start-ups between China and Europe. The National Innovation Office (Nemzeti Innovációs Hivatal; NIH) and the State Administration of Foreign Experts Affairs (SAFEA) granted funds to joint Chinese-Hungarian start-up projects at their joint committee meeting held in 2013. The Hungarian party’s contribution amounted to €1 million. 36 of the 59 applicants received a grant from the joint Chinese-Hungarian fund.  Although the Science and Technology Attaché Network proposed as early as in 2008 to set up a Chinese-Hungarian incubator with the collaboration of the Budapest University of Technology or Eötvös Loránd University, this incubator has not been set up yet.

Involving a Hungarian university in a joint incubator initiative would offer the possibility to create a more sophisticated programme then the current cooperation with the NIH. In addition to financial support, technological, advisory and infrastructural assistance could be provided for the Chinese-Hungarian start-ups.

The Asia Pacific Foundation of Canada has collected the experiences of Canadian incubators and start-ups operating in China, which may be very useful also in the context of establishing a Chinese-Hungarian cooperation. First of all, the companies “growing up” in joint Chinese-Hungarian incubators will be more likely to succeed in the Chinese market, since large Chinese companies tend to have an inclination against risk-taking; it means they are willing to do business with known and tried-and-tested companies. This is especially detrimental to smaller companies unknown in China, but an active Chinese partner may moderate the “outsider” status of start-ups. Furthermore, it is advisable for the foreign government to have a friendly and positive relationship with the Chinese party so that Chinese-Hungarian start-ups should feel themselves relatively safe even in a changing regulatory and economic environment. Since the 1980s the fast-paced development of Chinese economy has been greatly promoted by the import of foreign technologies but by now it has resulted in considerable dependency. With its 15-year plan for technology and innovation, the Chinese government gradually shifts to supporting the innovation activity of domestic companies in order to mitigate this dependency. It might be counterbalanced by good diplomatic relationships facilitating the operations of Chinese-Hungarian companies in the new political and market environment.

The equity capitalisation of the Chinese start-up market has grown considerably over the past years, owing to the state, the universities and private investors. Although some experts expect the market correction of start-up financing in the near future, which will entail the depreciation of Chinese start-ups, the impact on companies will be just temporary. The high volumes of capital and the expansion of the start-up culture in China has triggered the establishment of several state- and privately owned start-up incubators, the majority of which is more like American incubators than typical Chinese state organisations. Support from the state played a considerable part in the success of Chinese start-ups, since they enabled the creation of zones in which start-ups can grow under favourable circumstances. Regarding the promising future of the Chinese start-up market, it is recommended to set up a Chinese-Hungarian incubator in cooperation with the Chinese Ministry of Science and Technology and the related state bodies responsible for start-up incubators. The chances of a market break-through by Chinese-Hungarian start-ups could be improved by the cooperation and coordination between the state bodies, which would facilitate establishing partnerships with large Chinese companies.

Author: Péter K. Gergely