Interviews

Are you ready to scale your business in China? Cocoon Networks founder John Zai on why UK tech should grow in China

11 min read

11 June 2018

Editorial Director

Cocoon Networks founder John Zai says opportunities for UK tech abound in China. Here's why.

Launching a startup is a challenge. Early stage companies need the right balance of investment, support, and market stake to succeed. Once launched, a startup’s growth phase comes with its own set of obstacles.

Previously, UK startups looking to make a name for themselves internationally would flock to Silicon Valley. But with investment there slowing down, UK entrepreneurs are faced with a difficult decision. Brexit’s shadow on the business landscape is creating some hesitancy among founders to keep their company in the UK without global links.

Despite the uncertainty, Brexit can be viewed as an opportunity to form closer business relationships with the rest of the world. There’s never been a better time for UK businesses to grow in China. Earlier this year, Theresa May brought a delegation of 50 UK business leaders to China to strengthen the partnership between the two countries.

Don’t be put off by the cultural differences: China has a rich history of business success, especially in tech. Chinese brands Huawei and Lenovo are two of the biggest names in global tech, with net incomes exceeding $7.27 billion and $353 million, respectively. China also has its own ‘tech giants’ operating within the country, such as Baidu, Alibaba and Tencent.

The startup scene: early stage life in China

Last year, nearly 660,000 companies were established in the UK, up from 608,000 the year before. That’s 80 startups created every hour.

Despite its massive population, China produces significantly fewer startups: just 4,000 businesses last year. China values quality not quantity when it comes to startups. The country is home to a third of the world’s ‘unicorns’, and produces them thick and fast. In 2014, there were just eight $1 billion startups in China; now there’s 56. The UK, on the other hand, has just 22.

Though the UK produces a large crop of new businesses, sustainable growth is a challenge. Just 4% of UK companies achieve ‘high growth’ – defined as achieving ten or more employees after the first decade. In China, this figure is closer to 10%. Achieving high growth is also much quicker in China. While it takes UK startups at least five years to grow significantly, Chinese startups typically achieve this growth in three to five years.

The secret ingredient for growth

The amount of government support and funding for tech businesses in China far surpasses that available in the UK. In fact, government support is the most common funding option for Chinese startups.

Each district in China receives funds from central government to invest in local businesses. There’s a great deal of competition between local governments, and each has their own priorities and agenda. UK startups thinking about scaling up in China should be aware of these nuances, and pick the most hospitable region.

For example, Beijing’s local government favours media and telecoms startups, while Guiyang is seen as China’s ‘cloud hotspot’ and Shenzhen favours AI and robotics businesses. Conversely, Shanghai may be tricky for growing businesses as the city prioritises large firms. Businesses operating in these ‘priority’ sectors benefit from easier access to funding, as well as additional support like tax relief.

While increased government support is a big contributing factor to the successful scaling of Chinese tech firms, startups need to be aware of the increased regulation that accompanies this support. For example, businesses need to meet certain requirements to qualify for the mentioned tax reliefs.

Like UK businesses, startups in China can also explore private equity and venture capital funding options. Last year in China, there were 502 seed funding deals, 2016 angel investments, and 4,441 deals in pre-A to A+ round. Chinese venture capital firms prefer early stage startups, whereas private equity firms want to acquire businesses ready to scale. Overall, businesses that are ready to try for series A or B funding are at the best stage to make a move to China.

A small word of advice: venture capital firms will consider the background of a team in close detail before investing. That includes the technical background and history of the management team, as well as the startup team. Intelligence is viewed as essential for innovation, so make sure you have your talent in place first!

Crowdfunding is a large part of UK startup culture, and the number of startups using crowdfunding platforms has increased 300% in the last two years. However, this is simply not the done thing in China due to internet regulations. Though some ‘crowdfunding style’ platforms do exist for sectors with softer regulations like culture and entertainment, it is easier to consider other options.

Thriving tech sectors

China is receptive to all technology in general, and businesses in any sub-sector have a good chance of success. However, AI and cloud computing are two of the biggest sectors. China is a large country with a huge population, and Chinese firms rely on the latest AI and big data tech to achieve the most accurate and tailored marketing strategy.

More good news for UK companies: Chinese investors are particularly interested in a number of tech sub-sectors that British businesses generally excel in. For example, UK companies may have an advantage over their Chinese counterparts in green-tech and bio-tech. Chinese investors are also looking out for UK businesses with an AI offering.

Business communities and cultural differences

While UK businesses should not be put off going to China by the fear of cultural differences, it’s worth bearing these in mind.

In China, people’s work and personal lives are much more interconnected than in the UK. The right personal connections can be vital, and employees often promote their jobs and employer on personal social media. Business in China can be very competitive. Due to the high population, jobs can be in short supply and high demand.

While there are many ‘tech hubs’ and hotspots across China, independent accelerators and business incubators don’t exist in the same way as in the UK – these tend to be managed by local government and based on industrial parks. However, western style co-working spaces exist in the larger cities – there are several WeWork facilities in Beijing and Shanghai.

Chinese business culture values long-lasting relationships. Most meetings are carried out face-to-face, often over dinner, and trust must come before collaboration. For a nation that values trust, China is not a naturally trusting country and could learn from the UK in this respect.

Partnerships and collaboration

Like most countries, China has its own rules and regulations that businesses must follow. For example, only companies registered in mainland China can be traded on the Chinese stock market. Combined with the necessity of negotiating cultural differences, the best way for UK businesses to break into China is by forming partnerships with Chinese firms.

One UK business that has successfully broken into the Chinese marketplace with local partnerships is health-tech startup, Medopad. Launched in 2011, the firm combines wearable tech and AI to provide an integrated health platform used by hospitals. Medopad was part of Theresa May’s trade delegation to China in February, and announced a number of partnerships during the trip. Collectively, the deals are worth over £100m and include collaborations with Chinese firms Tencent, Ping An, GSK China, and Lenovo.

Collaborating with a local firm can also help UK businesses form the partnerships essential for commercial success in China. Local government is very influential in China, so it’s worth having a contact on the ground to facilitate relationships between business and government.

The “Golden Era” of relations between the UK and China is fuelled by collaboration – long may it continue!

John Zai is the founder and CEO of Cocoon Networks, Europe’s first Chinese capital-backed, international business platform strengthening China-UK trade.

For the first time this year, Cocoon Networks is bringing London Tech Week to China in May, and is hosting the 3rd annual China-UK Hi! Technology Festival during June’s London Tech Week.

Zai is also founder and chairman of Tech Shanghai Advocates, Global Tech Advocates’ first landing point in China, as well as an Ambassador for London Tech Week and a mentor on the Mayor’s International Business Programme.