China is the new promised land for startups

In her recent annual report for the Internet industry, Mary Meeker noted that “China is catching up as a hub to the world’s biggest internet companies.” Nine of the top twenty Internet companies in the world, by market valuation, are Chinese. That puts China nearly on a par with the United States, where the other eleven come from.

This has huge ramifications for New Zealand’s technology sector. In particular, it opens up opportunities for our local startups to expand into China. Maybe even be acquired by one of those big nine Chinese companies.

Indeed, that’s already happening. As noted in my column last week, China’s second-biggest Internet company Tencent has made significant investments into our gaming industry. It’s now the majority owner of Grinding Gear Games and a 25 percent owner of RocketWerkz.

Of course to become an acquisition target, you first need to establish a presence in the market. Before being acquired, Grinding Gear Games worked for two years to create a Chinese version of its game Path of Exile. It not only changed the language but also the content of the game, mainly to address censorship issues. The Chinese version launched last August, which paved the way for Tencent to buy a controlling stake in Grinding Gear Games this year.

The opportunity is so great for our export-focused startups, there’s even a local venture capital firm dedicated to investing in startups targeting the Chinese market. Zino Ventures launched in September 2016 as an angel investment firm. But it has since graduated to being a full-on VC, with its new Growth Fund of $10-$15 million.

Zino has so far invested in several kiwi startups, including LatiPay and Parrot Analytics (which I wrote about recently). But its biggest investment to date has been US$2.5 million into a company that is specifically targeting the Chinese market. Enring is a CRM tool that runs on the popular WeChat mobile app. WeChat, which is owned by Tencent, is a sophisticated chat app. By comparison, using Facebook Messenger is like making a phone call on a 1970s rotary dial telephone. It’s no contest which is the better app. Tens of millions of Chinese people use WeChat every day, to do everything from chat to e-commerce and more.

I reached out to Nelson Wang, COO of the Zino Growth Fund, to enquire about New Zealand’s potential in the Chinese Internet market. I asked him what advantages kiwi startups have, compared to local Chinese firms and even Silicon Valley startups?

Wang replied that “the level of innovation and ideas” among our startups has impressed him. He also noted that by taking kiwi startups into China, there are “fewer competitors” due to the “difficulty of access” for US startups.

But when it comes down to it, Zino’s Asian connections are key when entering China. Wang said that Zino can help kiwi companies with “supply chain opportunities to reduce costs once in-market.” He added that Zino has access to large pools of capital in Asia – “on advantageous terms” – through its “close relationships with Singapore based Jubilee Capital and Shanghai based Delta Capital Potential.”

Another source for this column, who did not wish to go on record, confirmed to me that “China is not difficult if you have the right contacts on the ground.” So it’s not what you know, it’s who you know. That’s an adage that sums up China’s Internet market.

It’s easy to forget that adage works the other way round too. Just as we need people with Chinese connections to help our startups gain a foothold in China, likewise Chinese firms are looking for Western help to get to large markets such as the US and UK. Aucklander Charles Coxhead co-founded a digital marketing agency, called Cross Border Digital, that does exactly that.

“Our clients are mostly Chinese manufacturing companies that need to market themselves online internationally, primarily in North America and Europe,” Coxhead told me. “Our clients include Huawei, OnePlus and VIPShop.”

The company is just over a year old now and has eleven other employees, seven based in Shenzhen and four in the Philippines. Coxhead partnered with a Chinese local, who set up a base for the company in Shenzhen.

“Our company is a New Zealand entity,” Coxhead explained, “but our operating company is a wholly owned foreign entity (WOFE) registered in Shenzhen. Shenzhen is one of the few special economic zones in China where foreign businesses can register wholly owned local Chinese companies.”

It hasn’t all been plain sailing over the company’s first year. “Marketing and brand building in the Chinese market has been a challenge,” Coxhead acknowledged. However they discovered that networking on the ground helps a lot. “Our biggest source of leads are the conferences we run quarterly,” Coxhead said. “We’ve also gotten good at converting conference attendees to our social media channels on WeChat, where we can nuture those relationships and turn them into sales.”

I asked Coxhead if there are specific markets in China that would suit kiwi startups. Other than the obvious industries (such as wine, dairy and tourism), Coxhead believes there are opportunities in niches where “particular skills are needed and are in short supply in China.”

He cited his own business, international digital marketing, as one of those promising niches. “It is easier for us as native english speakers, and with ready access to all the tools, to do this well,” he said, noting that Google and Facebook are blocked in China.

It’s an interesting point: the obstacles the West typically associates with China (in this case, language and China’s Great Firewall) can be turned into opportunity by NZ startups. That along with the sophistication of certain Chinese Internet products – notably WeChat – opens up many avenues for kiwi entrepreneurs to explore.

While I wouldn’t go as far as to say Shenzhen is the new Silicon Valley, it’s clear that China’s Internet hub should now be a major export destination for New Zealand startups.