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Despite Uber’s fate, it’s possible for U.S. startups to do profitable, sustained business in China–as long as they’re not traditional Silicon Valley tech contenders.
Most startups aren’t Uber. They don’t have the $60-something billion valuation, the former presidential advisers leading an army of lobbyists, or the war chest to spend scaling the market walls around China, the world’s second-largest economy.
Yet even with all of those advantages, Travis Kalanick’s ride-sharing juggernaut couldn’t succeed on its own in China. This week, after burning more than $1 billion per year trying to keep up with local competitor Didi Chuxing, Uber said it would sell Didi its China operations.
So should any other U.S.-based startup even try to follow Uber’s footsteps into China? Actually, yes–with carefully managed expectations. Several entrepreneurs and investors who do business in the country say it’s possible for a U.S. startup to survive and even thrive in China, as long as it isn’t a traditional Silicon Valley tech titan.
“I expect to make a lot more money in China–but doing so in a way that helps Chinese businesses and doesn’t compete with them,” says Ryan Petersen, the founder and CEO of freight-forwarding startup Flexport.
The company, which sells logistics software to shipping companies, is based in San Francisco. But it operates a profitable office in Hong Kong and is soon opening an outpost in Shenzhen. Petersen, who lived in China for two years during the past decade, now travels there every two months and says that his biggest customer is Chinese.
Still, Petersen recognizes that Flexport still needs strong allies in the country as it expands its operations there, noting that he sees a lot of tech founders underestimating the barriers to entry.
“You look at China and you think, ‘What a huge market! And our product works here in the U.S., so let’s take it to China!” he says. “And I think that’s really naïve.”
Kevin Chen, co-founder of language-tutoring service Italki, is even more blunt. “This type of competition is insane,” says Chen, an American who started his company in Shanghai. “Everyone views China as a strategic market, and people are willing to invest staggeringly stupid amounts of money for dominant market share (to be ‘the XXX of China’).”
No room for Google
Even Apple, the third-largest smartphone company by Chinese market share, has seen its recent sales inroads into the market erode this year. Entrepreneurs and investors say that specialized tech companies that focus on business software, as well as more old-fashioned sellers of physical goods, are better positioned than would-be Googles and Facebooks.
“You need to bring something the Chinese cannot copy: interesting hardware, or software-as-a-service,” says Richard Chen, a Chinese venture partner at Ceyuan Ventures and Vitruvian Partners (and an investor in Flexport).
If your business is labor-based, like Uber and its fellow demand-economy internet startups, “everyone can do that,” he says dismissively.
For tech startups, there’s also the fundamental hurdle of China’s massive home-grown internet economy. Instead of Facebook, there’s WeChat; instead of Google, Baidu; instead of Amazon, Alibaba; and so on. These Chinese tech providers already have massive customer bases, as well as a jump on any outsider when it comes to navigating the government’s myriad regulations and tight rein on outside information. The so-called Great Firewall, which stops much international online traffic, is no joke. (Try checking your Gmail at a Macbook-filled coffee shop in Shanghai, as I futilely did during a recent vacation, and you’ll realize just how little the local tech ecosystem needs Google to thrive.)
Even if your tech company manages to scale that firewall, there’s the problem of ferocious local competition. “Most times I don’t think foreign companies lose because the government kills them–they lose because they don’t adapt fast enough,” says Lucas Englehardt, the American chairman and co-founder of Shanghai-based food-delivery service Waimai Chaoren, which operates in 18 cities and has five million users.
Englehardt has dealt with his own setbacks in China: Germany’s Delivery Hero backed his company but pulled out earlier this year. Now Waimai Chaoren has frozen its spending on sales and marketing, hoping that its rivals burn cash faster than investors will replenish it.
“Once upon a time [foreign companies] could rely on outspending the local competition, but Chinese competitors are as well-funded, if not better-funded, now,” he says. “Didi is the perfect example.”
Still, some U.S. entrepreneurs look to Uber as equal parts role model and cautionary tale when it comes to the Chinese consumer tech market. After all, the terms of Uber’s deal give it a 20 percent stake in Didi, thus maintaining a Chinese foothold for Kalanick and his investors while eliminating a ton of hassle.
“Uber needed to have a presence and a strategy for China–without it they wouldn’t have had anything,” says Paul Murphy, the co-founder and CEO of New York-based gaming startup Playdots. The developer of popular mobile games Two Dots and Dots & Co., Murphy’s company has released its games in China and is backed by Chinese tech conglomerate Tencent.
Murphy says the lesson for small startups is to get into the market early. “That’s not to say it’s easy, or that you’ll succeed,” he says. “But it’s worth trying.”