The Web Behind The Wall Explains China’s Complicated Startup Industry

“The Web Behind The Wall” is an e-book published by TechNode (our partner for next month’s TechCrunch Shanghai event) that wants to be “the #1 resource for foreign tech companies to understand China.” The book is a quick but highly informative read about China’s startup ecosystem, which has proven unpenetrable for tech giants like Google, Yahoo, Facebook and Amazon.

But any startup that wants to grow into a global company can’t ignore China. The country currently has 591 million people online and 460 million mobile Internet users and that number is rapidly increasing every day. In the next two years, 200 million users are expected to go online, rapidly increasing China’s current 44.1% Internet penetration rate. Companies like Tencent, Alibaba and Baidu have already enjoyed massive growth over the last decade and are poised for even more.

“The Web Behind The Wall” looks at the Chinese startup ecosystem’s laws and regulations, culture, market opportunities, barriers to innovation and funding opportunities. The book was co-authored by Kevin I. Chen, Jason Lim and Ben Jiang , who were introduced by TechNode founder Dr. Gang Lu, and includes contributions from The Founder Magazine, strategy and design firm Frog Design and blogs Tech In Asia and TechRice.

Correcting Misconceptions

Chen started writing the book as a memoir about his experience working for Shanda, a leading Chinese game developer, and within the Shanghai startup ecosystem. Then “The Web Behind The Wall” evolved into a primer that seeks to clear up misconceptions about China’s tech industry.

“Before coming here in early 2010, my understanding of China was limited in that China startups are depicted by Western media as mostly copycats,” says Chen, who earned undergraduate and graduate degrees from UCLA. “Fact is, China’s startup scene is full of excitement and original ideas. Growth here is also phenomenal with around 10 million new users joining the Web every month.”

Chinese companies were among the first to adopt and scale innovations like the freemium model for games and apps. Snapchat founder Evan Spiegel has referred to Chinese Internet giant Tencent as a “role model” for its ability to make revenue from in-app purchases.

There are several daunting barriers to innovation in China, however, including weak intellectual property laws, high competition and government censorship. The latter not only includes the “Great Wall of China,” which blocks foreign sites like Facebook and Twitter, but also a domestic surveillance and filtering program called the Golden Shield. Coping with cultural differences when hiring and trying to retain employees is another potential headache.

“The most unexpected thing for me is how many people are interested in startups and how few individuals possess the skills and mental toughness to do startups here,” says Chen. “Unlike Western education, which teaches leadership and risk-taking, Chinese education teaches discipline and obedience. There are big pros and cons as a result of this, but definitely more handholding is required here.”

Chen says other things that foreign entrepreneurs tend to misunderstand are China’s regulations and policies, which are often unfavorable to overseas companies, and how to scale up. Though the government has invested billions of renminbi in cloud computing since 2009, it has been a “fairly slow moving beast” because of several issues including an immature ecosystem that negatively affects data quality, reliability and speed; skepticism among entrepreneurs who don’t trust cloud operators with their data; complex regulations; and the lack of developers who understand cloud architecture, all issues that Chen writes about in detail.

Looking Toward The Future

“The Web Behind The Wall” argues that people who want to truly grasp China’s startup ecosystem must not only familiarize themselves with the tech communities in Beijing, Shanghai and Shenzhen, but also the provinces of Sichuan, Jiangsu and Zhejiang.

The city of Chengdu in Sichuan is known for its business process and software outsourcing. Zhejiang startups are closer to U.S. startups in terms of their focus on app development, while Jiangsu is “by reputation friendlier to enterprise development.”

But it is still important for entrepreneurs–especially ones from overseas–to first build relationships in China’s main tech hubs.

“These [second-tier] cities are accessible by transport but soft barriers are higher in talent availability and language capabilities,” says Chen. “There are lots of under-utilized resources in Shanghai as most people don’t know there are 600+ incubators and tech parks and 300 angel and venture funding organizations that welcome entrepreneurs.”

Several essays in “The Web Behind The Wall” focus on cultural differences. For example, entrepreneurs of Chinese descent who grew up overseas (referred to as “sea turtles”) often overestimate their understanding of nuances in language or management practices. As more of China’s population goes online for the first time, localization becomes increasingly important. This means that founders can no longer count on easy success by taking existing business models from other countries and cloning them in China.

Despite the headaches and the emergence of promising new markets like Southeast Asia, “The Web Behind The Wall” argues that China’s growth potential is still staggering enough for it to be worth the risk to foreign entrepreneurs.

One of the most anticipated developments for the tech industry is next year’s shift to 4G/TD-LTE by China Mobile, which is the largest carrier in the world with 740 million subscribers.

“I think there will be a fundamental transition in how people communicate and entertain when this happens,” says Chen. “Keep in mind, China Mobile never offered 3G, so the delta in experience from EDGE to 4G/TD-LTE will be tremendous for all these subscribers.

Click here for more information about ((”The Web Behind The Wall.” The book is available for $2 online or as a Kindle download for $2.99.

Photo by MadanH on Flickr