Chinese entrepreneurs aim to become technology power players

U.S. tech firms such as Google are heavily censored in China, leaving room for homegrown services to step in

Alibaba was just the beginning: Get ready to hear a lot more about Chinese tech companies.

China's technology industry, much like China in general, is undergoing a transformation. Entrepreneurs speak of an innovation "golden age" fueled by a mobile-device-obsessed culture, upward economic mobility and an influx of capital from investors locally and abroad.

"China is going through an extraordinarily innovative period," said Eric X. Li, a venture capitalist and political scientist in Shanghai. "My bet is that five years from now, the most valuable company in the world will be a Chinese technology company. My second bet is that five years from now, the second-most-valuable company in the world will be a Chinese technology company."

The stunning success of Chinese e-commerce behemoth Alibaba, which went public on Wall Street in September, has been instrumental in paving the way: Founder Jack Ma, a former schoolteacher, is now China's richest man, and Alibaba has become a $263-billion juggernaut with far-flung interests in areas such as entertainment, mapping and banking.

"It proved one thing, which is you can grow a company pretty much from ground zero to a very high level. It gave young graduates a good example," said Lingyun Gu, an investment advisor at Beijing-based IDG Capital Partners.

China for years has been laying the groundwork to become an innovative tech power player, not just an electronics manufacturing machine. The government subsidizes and promotes numerous high-tech clusters around the country, and university-affiliated and independent incubators have stepped in to nurture young entrepreneurial talent.

Those efforts are beginning to pay off.

In the second quarter, investments in China's fast-growing telecommunications, media and technology companies totaled $5.35 billion across 214 deals, the cash coming from inside and outside China. That was seven times more than the $752 million the industry received in the year-earlier quarter, according to a recent MoneyTree report from PricewaterhouseCoopers.

"China's private equity and venture capital investment in the telecommunications, media and technology industry is now in full swing," the report said.

There are several reasons for the boom.

First, it takes a lot less capital to start a tech company than in the past, thanks to the widespread availability and affordability of cloud computing and other business services that have brought costs down. That's true around the world, but especially helps countries like China, where millions of would-be entrepreneurs now have a chance to get a foothold.

"You don't need as much money as you did 30 years ago, and we believe the pace of establishing new start-ups is getting shorter and shorter," said Gu, who estimated that many fledgling companies take just three months before they're ready to approach venture capitalists for funding.

There are China-specific factors as well.

Many of America's stalwart tech companies, including Facebook, Twitter and Google, are heavily censored by the government in China, leaving room for homegrown services to step in.

Entrepreneurs also point to an Internet culture centered around the smartphone. Many middle-class families in China never owned a personal computer or television, jumping directly to mobile devices as they became more affluent.

The number of Internet users in China is staggering: By the end of last year, 618 million Chinese were connected to the Internet, compared with more than 250 million in the U.S. The number of smartphone users in China is expected to exceed 500 million this year.

That has made building a Web-based business extremely attractive. To wit, China's Internet giants Baidu, Alibaba and Tencent have exploded in popularity.

There's also a new entrepreneurial spirit found among Chinese youth that didn't exist just a generation ago, Gu said. As China has grown into a strong economic force, young people are more educated, have fewer financial burdens and have been freed from the pressure of immediately joining the workforce in the hope of landing a stable and lucrative job, he said.

"Their minds are very open," Gu said. "If you put everything together, it makes them one of the best groups to be the new entrepreneur."

To encourage college graduates, IDG created a $100-million fund three months ago geared toward Chinese entrepreneurs born in the 1990s.

"We've shifted our emphasis significantly to this young age group," Gu said. "We just try to set a very positive message for those people: 'Don't be hesitant.... We have enough money and want to help you realize your dream.'"

Established tech firms are stepping in as well. Kim Xu, director of strategy of IBM's Greater China Group, said the company has donated to 100 Chinese universities for tech-related education and is actively looking for fledgling companies to fund and work with.

"Today, everybody is a possible candidate for partnership," she said. "It's not just about venture capital activity; it's about growing and nurturing start-up companies."

As the opportunities have grown, Chinese who were educated in the U.S. say they're more willing to return home to set up companies there.

Jennifer Xu left China to attend Harvard Business School but moved back after getting her MBA in 2011. Last year she founded Green Apple, a Shanghai-based mobile healthcare start-up that connects doctors and patients for appointment scheduling and pharmacy orders. The app, which quickly received its Series A funding from angel investors, launched in March and currently has thousands of doctors on its platform.

"It's the best time for entrepreneurs," she said. "The mobile health sector is super active now and the venture capitalists are chasing after deals."

Although starting a company is easier than ever, long-term success is still far from guaranteed.

Investors worry about regulatory hurdles and loose intellectual property rules, with some privately griping that many companies are mere copycats of U.S. ideas. Gu said people used to joke about a "C2C," or "copy to China," business model, but noted that entrepreneurs today are being pushed to create original ideas.

Going forward, industry watchers predict that Chinese tech companies will become more commonplace in the U.S.

So far the firms have focused primarily on growing their businesses domestically. But in the next decade many will begin to ramp up their global expansion efforts, with the U.S. being an attractive market, said S. Ramakrishna Velamuri, who teaches entrepreneurship at the China Europe International Business School in Shanghai.

Velamuri also predicts more Wall Street fervor in China. There's an "obsession to list abroad" after the U.S. IPOs of Alibaba and Chinese microblogging site Weibo, he said.

U.S. venture capitalists doing deals in China describe a booming space not unlike what is found in Silicon Valley, although the energy and pace are even more intense. Techies are experimenting in an array of sectors including online media, mobile, alternative energy and gaming.

"Founders work real hard," said Doug Leone, a managing partner at Sequoia Capital, one of the earliest U.S. venture capital firms to enter China. "I've had midnight meetings in China — I've never had a midnight meeting here."

China is Sequoia's largest market for investments after the U.S. and deals are "incredibly varied across a broad spectrum of opportunities," Leone said. Sequoia has invested in numerous Chinese companies, including Meituan, a group discount website backed by Alibaba; Dianping, a restaurant reviews platform; and Pinterest-like website Meilishuo.

A decade ago, when Sequoia first considered investing in China, "we asked ourselves the simple question: If you look out 10 years from now, where are the most valuable companies in the world going to be created?" Leone said. "In that case, we made the correct call."

Twitter: @byandreachang

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