Venture capitalists are familiar with the “Copy-to-[Insert Country]” model. It goes like this - find inspiration in business models or trends that have exhibited strong momentum in the U.S., and then fund comparable companies in China. Examples of this strategy include our investments in the “Gilt of China,” VIPShop and the “Craigslist of China,” 58.com. Other notable ones include the “Groupon/Yelp of China, Meituan Dianping, the “Google of China” Baidu and the “Uber of China,” Didi Chuxing.
The colloquial name of this tactic, however, is a bit reductionist. Although all of the aforementioned companies drew inspiration from U.S companies, each one of these businesses rapidly localized and adapted to local geographies. Moreover, each one of those companies ultimately found differentiation and, in most cases, achieved wider reach than their American counterparts.
Now, it is time for entrepreneurs and investors from the West to look for inspiration from China rather than the opposite.
The era of “Copy-to-China” is over. Welcome to the era of "Copy-from-China."
This shift comes from four key elements falling into place:
Most importantly, Baidu, Alibaba, and Tencent have not only built dominant platforms on which other services can grow, but also serve as training grounds for future entrepreneurs to hone their skills. The ecosystem these companies have created continues to grow through China's new wave of tech giants such as Meituan/Dianping, YY, MOMO, Sina Weibo, and Didi Chuxing, and JD.com. Furthermore, we are already seeing signs of a subsequent wave with companies such as Bytedance/Toutiao, Kuaishou (DCM portfolio company), Pinduoduo (beneficiary of Wechat’s mini-program ecosystem), Mobike, Ofo, and Man Bang (DCM portfolio company).
The Chinese tech scene has benefited from the mass influx of "Sea Turtles" (a name for Chinese returnees who studied abroad in the U.S.) and the rise of a young tech-forward middle class. According to the Ministry of Education, last year 432,500 Chinese overseas students chose to go back to China after completing their studies. That is nearly 80% of Chinese overseas students. Even more astonishingly, in the past 15 years, the annual number of college graduates has soared one million to seven million. Chinese talent is not only coming home, but it’s also growing at home.
On the consumer side, near complete smartphone penetration and ubiquitous mobile payments provides an opportunity for mobile-focused startups. While China still trails the U.S. in terms of internet penetration at 53.2% vs. 83.7% respectively, 95% of its internet users use a mobile device to access the internet. This is mainly due to the fact that many of its citizens skipped the "PC Generation" and went straight to mobile devices. As a result, internet users in China have developed a level of comfort with the mobile web that is beyond that of a typical western internet user.
Ubiquitous mobile payments followed the influx of smartphones. According to Forrester, U.S. consumers transacted $112 billion worth of mobile payments in 2016 while Chinese consumers transacted $9 trillion.
China has developed into a truly cashless society. Mobile payments via Alipay or Wechat Pay are dominant, and this has allowed business models such as dockless bike sharing, automated convenience stores, and virtual gifting to flourish. The West has neither a dominant commerce platform nor messaging platform from which mobile payments platforms like Alipay and Wechat pay can arise.
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4. The Chinese central bank has the financial data from 800 million people, but only 320 million have a traditional credit history. China only has 8.8 commercial bank branches per 100,000 adults compared to the U.S. which has 27.8 bank branches per 100,000 adults. This lack of a mature credit and financial infrastructure means that one has to be built from the ground up - with modern tools and measurements. No FICO score and no brick & mortar bank tellers. Currently, eight private companies have been granted a license by the government to attempt to develop an all-encompassing Social Credit Score (SCS). Two of these are Alibaba and Tencent, they also happen to be the operators of the two most popular payments platforms in China.
Alibaba’s Sesame Credit is currently the most widely adopted system and like many other technological developments in China, it is shaping up to much more than what its namesake suggests. Individuals are scored between 350 and 950 points. Depending on where an individual's scores rank, they are then entitled to various loans, car rentals, faster check-ins at hotels/airports, and even expedited travel visa approvals. China’s largest matchmaking site, Baihe, which has more than 90 million clients even encouraged users to flaunt their Sesame Credit scores. All of this has led to the creation of new financial products and new methods of underwriting. Unlike the West, where many unbanked and underbanked are locked out of traditional financial products, this “fresh start” in China has allowed for a more inclusive financials services ecosystem to be built.
Throughout this explosion, there have been more massively successful China-first models than this post can do justice. A study by GSR Ventures revealed that since 2007, the total market capitalization of Chinese consumer technology companies was $275 billion while that same figure for U.S. consumer technology companies was $173 billion. That said, there are a few early winners that warrant mention:
Bytedance/Toutiao - Pegged by many to be China’s next $100 billion tech company, Toutiao began as an AI-powered mobile news curation app but now boasts a portfolio of leading photo/video sharing applications such as Douyin, Huoshan, Neihanduanzi, Xigua Video and now most recently through acquisition, Musical.ly. What’s most impressive is that each one of these products caters to a different demographic in China, from young urbanites to rural pig farmers. Most recently, they’ve even launched a domestic clone of HQ called Millionaire Heroes. Toutiao boasts 120 million daily active users across its portfolio and unlike most other social platforms in China that monetize via virtual gifting, its business model is entirely ad-supported.
Kuaishou (DCM Portfolio Company) - With more than 100 million daily active users, Kuaishou is one of China’s most popular short video streaming applications. It focuses on sharing content relevant to the everyday lives of ordinary people and makes money through transaction fees on virtual goods paid to live streaming stars. With an early focus on those living in China’s countryside, Kuaishou is extremely popular among China’s migrant worker population.
Mobike/Ofo - Thanks to the numerous dockless bike sharing companies already operating in the U.S., at this point the industry needs no introduction to a Western audience. If there is any business that benefited the most from the ubiquity of mobile payments in China, it is dockless bike sharing. The convenience of scanning a QR code to unlock a bike using a mobile device coupled with the extreme popularity of biking in China has led to two massive companies each with hundreds of millions of users.
The reverse flow of knowledge is already underway. Limebike (DCM portfolio company) was founded by entrepreneurs who saw the opportunity to bring dockless bike sharing to the U.S. Now, the company is operating in over 50 markets throughout the U.S. and is the first dockless bike share company to operate in both the U.S. and E.U.. Similarly, one of our earlier investments, Musical.ly (DCM portfolio company) was a purely Shanghai-based team that decided to launch a Chinese concept in a foreign country.
While Silicon Valley will always be the birthplace of multiple technological growth cycles, there are signs that next cycle of growth may be driven by ideas hatched abroad. Entrepreneurs and investors will soon stop “Copying-to” and start “Copying-from."
