China no place for nice Israeli start-ups, says battle-scarred tech vet

Israelis who think that China is welcoming them with open arms are in for a very rude awakening, said a top investor in Chinese start-ups

William Bao Bean at Silicon Dragon, December 2, 2015 (Courtesy)
William Bao Bean at Silicon Dragon, December 2, 2015 (Courtesy)

For many Israeli tech firms, China is the new Promised Land, a place to find investment money and a huge customer base for technologies developed at home that can be scaled up for big populations, bringing in big profits. Then there’s the support that both governments are providing for Israel-China partnerships – support backed up by money, with both Israel and China investing in incubators, accelerators, university research programs, and much more, to help bring tech from Israel to China.

All all in all, China looks like a great place to do business for Israeli start-ups.

So what could go wrong?

Plenty, according to China-based investment veteran William Bao Bean. “I’m here in Israel to bring companies to China, but ninety five percent of you don’t belong there,” Bean told a room full of Israeli entrepreneurs at an event last month called Silicon Dragon, where businesses got firsthand information about the practical steps needed to make it in China . The event was sponsored by Silicon Dragon Group and Israeli law firm Tadmor and Co. Yuval Levy and Co.

Rebecca Fannin is the founder of the group (the name was taken from a book she wrote about the Chinese tech scene). “This is the first event we have run in Israel, and we see the China-Israel relationship as one of the coming trends in tech,” said Fannin. “The more collaboration between countries, industries, and entrepreneurs, the better off everyone will be, and that is the goal of this event and similar ones we sponsor around the world.”

Reality check

Collaboration is nice, but Bean’s presentation at the event was a reality check on the nuts and bolts of doing business in China. Bean is a partner in SOSv, a firm established over a decade ago by Internet entrepreneur and visionary Sean O’Sullivan (not only did he coin the phrase “cloud computing” in 2006, long before there was a cloud, said Bean, but he copyrighted it as well).

SOSv, based in China, is a venture capital “accelerator of accelerators,” running several programs in China and the US for start-ups in a number of industries. Among SOSv’s accelerators are HAX, located in Shenzhen, the world’s biggest and most accelerator for hardware, IoT, and connected devices; IndieSF and IndieEU, the world’s first synthetic biology accelerator, where companies create “milk without cows and pork without pigs,” said Bean; New York-based FoodX, the first international business accelerator program focused on launching food-related ventures; and Chinaccelerator, considered the top accelerator program in the country. Over the past decade, SOSV has funded over 300 start-ups, with returns that place it the top 5% of all venture funds worldwide.

It’s not that he’s skeptical about the chances for Israeli tech firms to succeed in China, said Bean; with 19 years of experience working in China and the Far East, he’s just being realistic. One reason for the average entrepreneur’s success is his or her ability to follow their “gut instincts” – making educated guesses about how to handle a situation. “In the West, your gut generally steers you in the right direction, but in China those instincts send you in the wrong direction,” said Bean. “The rules you know Israel and the West don’t apply in China. You have to look at it as an alternative universe with its own rules. That doesn’t mean you can’t succeed, but you have to realize that the game is played differently.”

Those different rules are partially defined by how different a tech economy China is. “China is the biggest mobile first, mobile only market in the world,” said Bean, with some 600 million-plus phone users – who constitute 99% of the country’s 600 million-plus Internet users. In ten years, the market for mobile phones and services has jumped from $3 billion to over $700 billion – and it’s still growing.

On paper, China looks like a paradise for Israeli tech firms; many of the fastest growing tech areas there look ripe for Israeli innovation. E-commerce, where purchases are made through the Internet, is huge in China, because the retail sales infrastructure is lacking, said Bean. “For example, there are about 6,000 mobile accessories stores throughout China, which sounds like a lot, but actually is far less than needed to cover the needs of the population. Twenty five percent of apparel sales, for example, are done on a mobile phone.

Mobile gaming is also a major moneymaker in China. “The majority of money in China is made through games and e-commerce,” said Bean. “An advertisement drives a user to a game or an e-commerce site. Most of the entertainment that monetizes is the result of paying to play a mobile device game.”

Credit cards and banking services are in the dark ages there, so P2P loans – where individuals use mobile apps to borrow money from each other and replay through their cellphone account, is huge there. Eighty percent of the global total of e-commerce loans are done in China. The country also has regulated currency and a less than free economy – as a result, Bitcoin is huge there as well.” Social apps, as well, are big in China; “China is six to eighteen months ahead in innovative uses of social media,” Bean added.

There are numerous Israeli tech firms that specialize in all these areas – but as start-ups, they don’t have a shot. “Israel is about hard tech, but in China we don’t care about tech – we care about the business model. There haven’t been any Mark Zuckerbergs in China and there are unlikely to be,” said Bean. “What counts in China is how much money you have and how many people – both among the masses and in power – you know. Zuckerberg had a technology, but as a kid he didn’t have money or the large number of acquaintances he would need to succeed.” For that same reason, young entrepreneurs – especially from outside the country – will have a very hard time succeeding in China.

In fact, the majority of the mobile market – the centerpiece of China’s technology economy – is controlled by three companies, each with a huge market cap; Baidu’s is $74 billion a year, Alibaba’s is $206 billion, and Tencent’s is $183 billion. These three companies have the money and the friends to stay ahead of the game, and to basically form a “great wall” that keeps competition out.

But Israeli start-ups who think they can succeed by making a deal with one of these conglomerates ought to think again – because a Chinese conglomerate is nothing like the ones they are familiar with. “In the US, you have CEO, you have middle management, and you have departments that do work” who report to their managers, with data filtering up the chain, said Bean.

It doesn’t work that way in China; at Tencent, for example, typical of the other firms, “things aren’t organized like that. The last time I checked a few years ago, Tencent was made up of 519 product groups, each of them set up like a separate company. They each have their own CEO and their own resources, and their goal is to take over the world. If they are on their way to taking over the world, they get more resources. Their goal is to destroy all the competition, including the start-ups in their path.” With the backing of the conglomerate and the huge resources available for the “baddest,” most successful/destructive company, start-ups don’t have a chance, said Bean.

But it gets even worse. “Increasingly they start to destroy each other. For example, in a corporation you will have one service or department that has users and another that doesn’t, and each department helps the other out – after all they are in the same company.”

The rise of WeChat, the most popular chat system in China, is a good example. “Of Tencent’s market cap of $183 billion, $83 billion comes from WeChat, which didn’t really exist three or four years ago,” said Bean. “Even though WeChat currently makes about $7 per user annually, they have not really begun to take advantage of all the monetization possibilities available – because they have been spending all their energy and resources over the last two years destroying QQChat, which is a part of Tencent itself. Senior management has been trying to get them to play nice, but it’s not working – and outside the company, competitors like these don’t play at all.”

The ‘spirit guide’

So what chance does an Israeli entrepreneur have in China? The only way is with a sort of “spirit guide” who knows the playing field, and can find an opportunity – and Bean believes he has found it, in WeChat. “A couple of years ago Tencent decided that it would be better to partner with start-ups instead of destroy them. At Chinaccelerator we have developed several start-ups that allow us to use the WeChat platform to monetize social activity.” For example, one of the start-ups has developed an e-commerce platform for WeChat verticals, “so we have an e-commerce application for wine, luxury, travel,” and other verticals, said Bean.

But as Tencent and the other conglomerates try to compete in the more sophiscated areas of tech, like big data, they realize they need some outside help. “In China people do not value mathematicians, so it is very hard to find people who are good at algorithms,” said Bean. “It sounds ironic, but the Chinese in China are not very good in math. The good mathematicians in China fled to the West because they get paid a lot more over there.

“That’s where you guys come in,” said Bean. With all the mobile usage and data collection, companies like Tencent are awash in data, “but they have no idea what to do with it.” Israeli tech experts and big data start-ups have an opportunity to build applications and services for “the next billion,” the rising population of the Far East that is already dominating the international tech scene. With Israeli big data skills, Bean believes companies like Tencent – and the product groups within it – will see an advantage for themselves over their competition, internal and external.

The fact that Israeli entrepreneurs have skills that Chinese firms need will act as a brake on the average Chinese CEO’s competitive instincts, sparing locals from the ulcer-wrenching competition Chinese companies face. As someone who knows the playing field, Bean believes that the right companies can succeed – and those that do will be able to tap into a huge market opportunity.

But Israeli tech firms hoping to make it in China need to act fast.

“We’re actually making a bet here that Tencent won’t change its mind and go back to trying to destroy the start-ups we are bringing into the Chinese corporate sphere,” said Bean. But he believes that once the conglomerates – and their product groups – see what Israel has to offer, they will make an exception to their “crush, kill, destroy” rule.

“I’m all about unfair advantage, and bringing Israeli technical and programming skills will definitely give any company that works with start-ups based on Israeli tech an unfair advantage.” That, Bean said, might just be enough to enable an Israeli start-up to thrive in the toughest business environment they will ever face.

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