Disrupt Beijing Take-Aways: How China Moves Beyond the Clones

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Eric Schmidt Is Right: Google’s Glory Days Are Numbered

The biggest barrier to starting a company isn’t ideas, funding or experience. It’s excuses. And you can understand why: Starting a company is scary even in Silicon Valley, a place where decades of ecosystem formation have provided entrepreneurs with soft-feathered nest of funding, mentoring and support. Outside the Valley it’s downright terrifying. It’s little wonder that even the best entrepreneurs go through a period of doubt and excuses not to take the plunge.

So when I hear complaints from entrepreneurs in other areas of the US or in other countries about how they can’t start companies because there is no angel money, no mentors, no employees that will work for a startup, I always wonder how much of these gripes are truly insurmountable odds to new company formation and how much are the grousing of someone looking for someone else to blame. Perhaps someone who likes the idea of starting a company, but doesn’t really want to put in the hours.

In China, the complaint du jour is that the entrepreneurs are trying to push beyond just founding companies that are clones of Western Web brands, and it’s the VCs that won’t take the risk on truly new ideas. Over two days of backstage deliberation at Disrupt Beijing, I got to see first-hand how the mind of the Chinese VC works. And I have to say, Chinese entrepreneurs have a valid point. Pushed to make a decision on which startups should move forward and which should not, Chinese VCs frequently picked the company with the clearer market over the company with the cool new technology and the gorgeous UI.

This is not entirely a bad thing. In part, the emphasis on solving an existing problem and building a business was refreshing to hear. I’ve long argued we don’t ask these questions backstage at US Disrupts enough, and when I’ve disagreed with the winners in the past, that’s usually been the reason why. In fact, given the arguments over Qwiki v. CloudFlare or Sonar v. BillGuard or Shaker v. anyone else, I might lobby to have a Chinese VC on our judging panels from now on. So it was surreal for me to be the one arguing against an obsession with the market, saying to judges last week, “Remember! These companies are starting for the first time; they don’t have to have all of the answers yet!”

There were a handful of companies shot down by Chinese VCs that would have been received far differently at a US Disrupt. I have a hunch 8 Securities with its slick UI and social engineering would have been a crowd favorite in the US. (It certainly got Jason Kincaid and Erick Schonfeld all hot and bothered.) Likewise, several members of the TechCrunch staff were surprised at how little support there was for UnitedStyles– a user-generated fashion design site built by people with deep industry domain expertise and with a well-thought through user experience. The delightful make-your-own animated ebook company Moglue was another one that seemed to captivate Valley judges in attendance, but was brushed aside by Chinese VCs as clever technology and little else.

In each of these cases– and several others– Chinese VCs had the same complaint: Not a clear enough market for the product. In fact, one thing that set eventual winner OrderWithMe apart from the pack was how well the founders knew their target market and how clearly they could articulate that market’s need for easier-to-source Chinese products. (They deserved the win no matter what continent we were on and were the clear judges, staff and crowd favorite. See our post-win interview with the winners here.)

The bias towards market size makes sense. Size is after all what China’s Web scene has historically had going for it. How much of Tencent’s domination is management and product and how much is its whopping 600 million person audience? It’s impossible to know, but it’s clearly a mix of the two. After all, plenty of companies fail in huge China. But no Tencent, Alibaba or Baidu has come out of India or Brazil to date. A massive domestic market not easily tapped by the West has clearly given Chinese startups more room for error than counterparts in other countries.

Most Westerners have written off Chinese entrepreneurs as unoriginal, and maybe that’s how it started. But it’s clear that at least half of the problem comes from investors. When I asked VCs about their over-reliance on funding clones over new ideas, no one really denied it: The Chinese Web has been characterized by speed and land grab, like the US in 1999 but on steroids. Culturally, the Chinese excel at efficiency and the surest, quickest, easiest way to grab large tracts of Web land was to copy what had worked in the US. The innovation has come in delivery and monetization– many of the so-called copy cats of China are totally different from US companies in practice. But they get their start as the “fill-in-the-blank” of China, and that’s the marketing when they go public too. At the beginning and the end, it’s the game they have to play to get money.

Many investors have become addicted to this sure-thing copy-cat model, although a few investors pointed to increasing investments in areas like the mobile Web that are still developing everywhere. Our runner up– which got the majority of the votes among the Chinese VCs– was Anquanbao, arguably a clone of CloudFlare. (Fittingly, the original was a Disrupt runner up too.)

Anquanbao was the only clone in the finals, and some of the judges seemed to gravitate to it for that reason. Matthew Prince, CloudFlare‘s founder, was a judge of an earlier session and I asked his thoughts on the company. Although he humbly thought CloudFlare’s technology was better, he admitted Anquanbao was the surest bet of all of the Battlefield contestants to build a big company. As he explained it, the market need in China for a security product like this is just so huge. And while CloudFlare is doing plenty of business in China, Prince expects a local company will be the one to win big. That makes Anquanbao perfectly positioned for success.

As an investor, how can you ignore a near-certainty like that? Looking at Disrupt finalists as our own venture portfolio, it was powerful logic for us too and a big reason Anquanbao made it into the finals and won the title of runner-up.

But for Chinese entrepreneurs to get to the next level of Web innovation, investors are going to have to stop making the easy bet. As I reminded VCs on our venture capital panel, they’re supposed to be taking risk. (The normally reverent crowd of Chinese entrepreneurs applauded.)

There’s a groundswell of entrepreneurs who want them to. We not only saw it with the imperfect-but-original company pitches we saw from the Hackathon and the Battlefield, but we heard it from entrepreneurs in the hallways. Pony Ma, founder of Tencent, opened the conference by arguing it was the crucial next step for Chinese Web companies, and said that fears of whether Tencent will keep up with this new generation are what keeps him up at night.

There are hints of a new generation of angels in China who may push the envelope further, even if VCs won’t. Chinese entrepreneur and angel Lei Jun spoke at Disrupt about how he invests differently, despite his most notable win being an Amazon clone. Today, he says he doesn’t merely back a pre-existing idea, he partners with entrepreneurs to create new companies that evolves overtime along with what the market wants.

If TechCrunch didn’t believe in Chinese innovation, we wouldn’t have held our first international conference there. And if the current crop of investors aren’t going to champion it, the market is big enough and there’s enough talent there now that others will. It’s up to the entrepreneurs to push the market forward, not just give the investors what they want.