Entrepreneurship in China

Today, I got the following from Pacific Epoch, a leading English market intelligence research company based in China.

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I. Venture News

ATTACK OF THE CLONES 21 Dec 2007 - There was famous joke in the 1990s that C2C stands not for "Consumer to Consumer," but for "Copy to China." When I look at China's internet industry today, I realize that this is still very much the reality.

I do not want focus on the old story about how sohu.com (NASDAQ: SOHU) began its website with the ¡°sohoo.com¡± domain name and pretty much attempted to clone the look and feel of Yahoo.com (NADDAQ: YHOO). Instead, I'll focus on the Web 2.0 space. Now that Facebook has become arguably the most trendy internet website in the world, hundreds of Facebook clones have sprung up in China in the past year. In fact, some of these entrepreneurs have copied Facebook not once, but twice! Below is a quote from the blog of Elias Glenn, one of our analysts who covers emerging media companies in China.

Wang Xing, the Chinese entrepreneur known for cloning popular overseas Web 2.0 sites in China, has recently launched his newest C2C (copy-to-China) site. After starting Xiaonei.com (a Facebook copy which he sold to Oak Pacific Interactive) Wang founded Twitter knockoff Fanfou. I guess Wang decided to stick with what works, because he has recently started up ANOTHER Facebook clone: Hainei.com The design and layout of Hainei is an almost exact copy of Facebook, just like Xiaonei was. Hainei does seem to be targeting a larger audience than Xiaonei - Xiaonei means "on campus" and is still only open to college kids; Hainei means country- or worldwide. I keep thinking it has got to be some kind of joke, but if Wang is able to sell two Facebook copycat sites before Facebook itself gets acquired, he will be the one laughing the hardest. Wang has got to be one of the most intrepid characters in China's Internet industry - I really do need to meet him.

I actually know Wang Xing. I met him at an industry gathering, and found him to be a really smart entrepreneur. After becoming his "friend" on his website, Hainei.com, I have learned that Hainei.com already has attracted more than 10,000 registered users since its launch two months ago.

Although some companies like Hainei.com might "Copy to China" and implement Western businesses here, others take it even a step further and copy domestic Chinese market leaders. For example, the number of clones of Yesppg.com (an e-commerce company that sells about 1 million RMB of men¡¯s shirt every day) skyrocketed in 2007. Yesppg.com competition now includes Vancl, founded by former Joyo CEO Chen Nian, and Bono founded by former Yahoo China CEO Tianjian.

I have asked some of these entrepreneurs why they are copying existing businesses instead of starting something new and different. The resounding answer was that investors are more likely to invest in businesses they both understand and have proven success stories.

Perhaps this is true, and perhaps copying the market leader also enables the investors to have a more certain exit strategy. Just think about how many Focus Media (NASDAQ: FMCN) clones have been bought by Focus Media. Last week, the company purchased Cgen for $US 168M in cash and up to $US 180M in stock. Exit stories like this encourage other entrepreneurs to copy market leaders instead of innovating.

The New Year is upon us and it is time for all of us to take a break from our 80 hour work weeks. Perhaps over the holiday we all can spend some time thinking about investment ideas for 2008 that are actually new innovations and are not merely clones of someone else's creativity and hard work.

Frances Du
Partner, JL McGregor & Company
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There is one way that you create startup to please potential investor so that we can have Baidu (Google in China), Sohu/Sina(Yahoo in China), Dangdang/Joyo (Amazon in China) and the list can go on and on. And it's very true that "that investors are more likely to invest in businesses they both understand and have proven success stories."

Not to claim I am smarter, I do think this what hinders why China cannot stand for its innovation. Rather, we stands for our ability to manufacture or reengineer or copy. It's a quick way to make money to copy those models, esp. if you also have a sound resume including universities or companies that investors trust as well such as Harvard and IBM. As my professor said in the "entrepreneurial financing" class at Babson: "..reduce the perceived risk.."

The investors put money into those clone startups clearly have a strong business acumen but also indirectly are HURTING the real innovative ideas that may emerge in China. And the success stories of those clone startups and entrepreneurs will also "discourage" other Chinese would-be entrepreneurs to put effort to develop creative and innovative Chinese business models, something that investors without a sound Chinese business and social background may not get it.

There is easy money. There is hard money. Overall China is suffering a "short-sight" mania. Who cares about tomorrow? Who cares about long-term thing? Who cares about things may have a long-term impact such as environment?

If China really wants to match the creativity and innovation development at US, please devote the effort towards "local" innovation. Otherwise, the introduction of VC in China will be very similar to the introduction of stock market in China decades ago. We had the domestic stock market but we didn't have the foundation underneath it such as American legal system and fully empowered security regulation watchdog. It's like we have the top of Pyramid which is most noticeable from far away but lack the base. How stable this pyramid could be? Today, while the Chinese domestic stock market had been greatly improved, I see the Chinese VC industry is repeat the same "mistake". Yes, we have government regulation of VC and its partnership structure. We have tens of, if not hundreds of, local and oversea VC firms. But what are we lacking? We are lacking the true spirit of VC/Startup movement in the US. The system, courage and spirit that honors and support true innovation.

It takes decades for Chinese stock market to work hard to build fundemental blocks. I hope it would take shorter for the startup way.

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