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Feb 11, 2016 @ 11:02 by Patrick Boos

How incubation programs in China make Western start-up initiatives look ridiculous

The start-up landscape in Europe and the U.S. is ever-flourishing. But we should wrap up warmly: China unfolds incredible start-up traction which is strongly supported by the government.

The size of the digital market in China is astonishing. It has about 700m internet users, more than twice as many as the US, and more than 80% of them access the web through mobile devices. While internet usage in the US has almost reached full penetration, China is adding 60m new users per year. Picture yourself serving a market that is growing by 5m potential customers per month! So the opportunity for e-commerce is obvious. In 2015, market leader Alibaba generated USD 370 Bn in Gross Merchandise Value. That is more than ebay and Amazon had together – worldwide! And have you heard of Didi Kuaidi? Chinas largest taxi platform generates 3 times as many daily taxi rides in China than Uber does worldwide. Such data points might give you an idea of the Chinese dimensions and the foreseeable impact this will have for the Western world.

Remarkable support from the government

The digital hyper growth attracts Chinese entrepreneurs to set up companies and bet on making a fortune by selling to one of the e-commerce giants, Alibaba or Tencent. No big difference to entrepreneurship in other countries, you might say. What´s different, though is the way in which the Chinese government gets involved into supporting founders of internet start-ups.

One cornerstone of Chinas political system is the definition of five year plans and the relentless execution of them. This way China controls urbanization, builds infrastructure, and ultimately holds up GDP growth. The government’s planning is also a catalyst for the flourishing start-up community. Key element of the “Internet Plus” strategy of the communist party is to support entrepreneurs and enable them to build innovative companies as effectively as possible.

During our trip to China we had the opportunity to visit “Dream Town” in Hangzhou, a 5m city 200 km west of Shanghai and home of Alibaba. Dream Town is one of the start-up incubation facilities that you need to visit in order to believe what is going on. In brief:

  • Creation in summer 2014: Dream Town concept provides office space, administrative support, and funding for local start-ups
  • Construction start in fall 2014: Dream Town has seven major buildings with tens of thousands of square meters office space built in less than one year
  • During our INSIDE CHINA SUMMIT in fall 2015: 385 start ups with more than 4.000 employees had moved in
  • Funding: So far, Dream Town management had accumulated more than USD 3 bn in public and private funding to kick start new ventures (more than the biggest three VC funds in the US had totally invested into early stage companies in 2014)
“Dream Town”: almost 400 start-ups moved in less than two years

Here is the Dream Town deal for founders in a nutshell: They do everything, you pay nothing. For three years. There is a government office in one of the buildings. If you want to have your company registered, you go there, leave your personal data and a few days later your entity is set up. Done. The opposite of this is Germany, for instance. Here it takes weeks and countless bureaucratic procedures to set up companies. In addition, over here private equity funding still has a rather bad reputation.

Dream Town`s current traction is already pretty impressive. However, the size of the facility is planned to quadruple within the next four to five years. That equals up to 20.000 employees in just one start-up incubation site. Plus, Dream Town is only one of currently 50 facilities of that kind in China which will be more than 200 by 2017. Just do some math and you will understand the magnitude of the state-driven start-up growth in China.

Well-educated digital natives in Dream Town

What we can learn from Dream Town

There are a few question marks around Dream Town and similar facilities in China. First and foremost: To what extent will these start-up machines create meaningful and sustainable companies instead of short-term, exit-focused founders? This is not easy to answer. During the times of group buying, there had been up to 5.000 Groupon clones in China, out of which less than ten survived. A clear sign of an overheated market with too much funding available. In Dream Town, however, business models of start-ups seem to be more substantial and promising thanks to a selection procedure that founders have to pass.

Surely, incubated companies in China have a significant failure rate just as startups in the U.S. or Europe. The strong political support in China, however, seems to unlock an enormous degree of entrepreneurship that will result in a few but highly successful companies. It creates a spirit that will convince talented people to rather become founders than to choose “safe” jobs in state-owned enterprises.

How successful will the start-ups from Hangzhou be?

So what can we learn from Dream Town? Certainly, Germany cannot be compared apples to apples with China. Neither do we have similar dynamics and dimensions in our domestic market, nor is our political system set up for the same influence on the economy. Nevertheless, would a better support from politicians and public institutions help to significantly encourage entrepreneurship? Absolutely. More public private partnerships would secure more funding. Furthermore, less hurdles in setting up companies, less obstacles towards private equity and less demonization of “copy cats” would increase the incentives for founders to start new ventures. Last but not least, the Chinese teach us how to execute. And most start-ups do not win through creativity and great ideas, but by focused execution.

Patrick Boos is Associate Partner at dgroup. He is serial entrepreneur, internet executive and expert for the Chinese digital landscape.

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