Chinese Startups Are Beating Silicon Valley … at Hopefulness
WHY YOU SHOULD CARE
Despite the trade war, China’s business climate is more hopeful than in the United States — at least for startups.
The economic standoff between Chinese President Xi Jinping and U.S. President Donald Trump has affected an ever-growing list of companies on both sides of the Pacific. Factories in China producing everything from bicycles and baseball caps to hair clippers and electric generators are bulging at the seams with surplus stock. American farmers have been left frantically searching for customers outside China to buy harvests of soybeans. The price of a Tesla fluctuated by $20,000 as the carmaker tried to find a way to soften the blow of new tariffs. As a result, entire industries are tightening their belts and looking to ride out the economic storm.
But one corner of the Chinese economy is actually thriving in the current climate. Or at least it thinks it is.
Optimism among Chinese startups has never been higher — and it’s nearly 40 percent higher than optimism among U.S. startups.
That’s according to a 2019 report by Silicon Valley Bank. Of the startups in China surveyed, 83 percent believed business conditions would be better in 2019 compared to the previous year, up from 80 percent who were asked the same question in 2018, and 74 percent in 2017. This optimism, which spans many industries within the startup ecosystem, contrasts with the outlook of larger businesses in China, for whom the trade war has brought doubt and anguish. In the first five months of 2019, U.S. exports to China dropped 30 percent from the same period last year. Chinese exports to the U.S. fared slightly better, but were still down more than 8 percent. Meanwhile, SVB’s research found that just 60 percent of U.S. startups had a positive outlook for 2019, down slightly from 2018. Almost 1 in 10 believed that their business would face a tougher outlook this year, compared with 1 in 17 in China.
For Christiana Zhu, founder of Beijing-based startup Marvelous Foods, the remainder of 2019 looks rosy. For her and other entrepreneurs, “there’s plenty of pasture for all kinds to thrive” — thanks in part to “the sheer size of the market,” she says. Driven by a middle class expected to number 550 million by 2020, total retail spending in China is predicted to total $5.6 trillion in 2019, compared to $5.5 trillion in the U.S.
This positive outlook for Chinese startups looks set to ensure growth — both in terms of workforce and funding. Sixty-one percent of startups said they’d add to their workforce in 2019, compared to 49 percent a year earlier. Marvelous Foods is scaling up to factory production in 2019, as well as investing in research and development for new products, both of which will involve increasing its workforce.
In terms of available funding, the trade war seems to have done little to dampen the optimism of Chinese investors. According to estimates from the Organization for Economic Cooperation and Development, the trade war could damage global gross domestic product to the tune of 0.7 percent by 2022 if it escalates further. In China alone, the potential damage could be more than 1 percent of GDP. Bilateral investment is already a victim, with Chinese foreign direct investment in the U.S. dropping 83 percent in 2018. Of the Chinese companies surveyed by SVB, however, more than half expected to find venture capital funding in 2019 versus just over a third last year. In 2018, 30 percent of global VC investment went to Chinese companies, according to figures from financial data firm PitchBook.
Raz Gal-Or, founder of Beijing-based media startup Ychina, which creates videos for social media, says 2019 will be a big year for growth. “Over the next six months we’re investing in becoming a new-generation content plus e-commerce platform,” he says, using the popularity of the videos to sell goods directly to viewers. It’s a big step, but one the company is confident enough to make in the current climate.
Despite the positive outlook, this optimism is not blind. Startups in China face the wider economic consequences of a trade war that shows no signs of letting up. The rapid rise of China’s convenience economy has meant increasing opportunities for startups in sectors unaffected by the escalating tariffs. There has also been a surge in Chinese startups targeting domestic sectors like health, retail and education. While it may not affect their business directly, if the trade war continues to slow economic growth in China they will feel the effects further down the chain.
But the environment in China is such that external circumstances are more easily worked around. According to a March 2019 report on Chinese VC by PitchBook, pro–venture capital policies have meant funding has remained available to startups. These include generous tax incentives and relaxed regulations. The mobile-centered internet scene in China also makes reaching a domestic audience simple, with 98 percent of China’s 802 million internet users accessing the web through mobile devices. China also has a huge talent pool, says PitchBook, with 7.4 million new university graduates in 2017. All of this means businesses within the country can focus on the domestic when international trade becomes difficult.
Ychina landed an early-stage investment from a Chinese venture capital firm and a more recent series A round of funding. “Startups in China may have seen a slowdown in available funding, but I definitely wouldn’t call it a downturn,” says Gal-Or. Investors may be a bit more cautious about where they invest their money in light of the trade war, but there is still plenty of funding available to innovative startups that understand their industry and communicate their vision to investors, he says.
As leaders from the U.S. and China continue the cycle of rhetoric, breakdowns in negotiations and escalating tariffs, uncertainty plagues the future. Goods continue to pile up in China, waiting for the conflict to cool, and American businesses that rely on exports to the world’s largest consumer market scramble to find alternate buyers. But for Marvelous Foods, Ychina and many other startups in the Middle Kingdom, everything’s coming up roses for the remainder of 2019.