Technopreneurship in China and recent innovations and opportunities (continued series on China)
The Research arm of Hong Kong Trade Development Council has published an interesting feature on Technopreneurship in China, including the recent innovations and opportunities, as well as the future role of Hong Kong. TextileFuture is considering this feature as an important input in its series on China, and for the benefit of its readers
The momentum of technological innovation is gathering strength in China, as people are inspired by the success of technology giants in the country, and beyond. Enthusiasm is further fostered by government initiatives to encourage “a new pattern of innovation by the people”, in line with which the 13th Five-year Plan (2016-2020) is set to promote the advancement of mass entrepreneurship and innovation as a long-term strategy to facilitate growth. Now, makers and investors are rushing into different technological ventures – despite risks and keen market competition. This has produced huge demand from “technopreneurs” for not only financial resources but also support in areas such as technology, market connections and entrepreneurial development.
Hong Kong could be regarded as an important partner for the mainland’s technopreneurs, who are increasingly looking for enhanced access to foreign technology, international markets and additional financing channels in order to scale up their ventures. Coupled with Hong Kong’s inherent advantages, such as free flow of information and capital, this means technology players and investors based in the territory are well-placed to capitalise on the demand from flourishing technopreneurialism on the mainland.
Becoming a Nation of Innovators
China is now embracing innovation as a long-term strategy to sustain economic growth. This is partly a response to slowing markets, which have posed challenges to many Chinese enterprises in terms of both domestic and export sales. Innovation is seen as one of the major routes to transforming and upgrading the country’s industries. Accordingly, Chinese businesses and individuals are being encouraged to proactively re-invent themselves via innovation in order to add value to their business activities.
The community – especially youngsters, entrepreneurs and investors – has been inspired by the success of technology giants such as Alibaba and Tencent. Along with a more liberalised business environment, the number of technology-related start-ups in China – including technopreneurial ventures engaged in technological innovation – has increased exponentially in the last couple of years.
This momentum, in favour of innovation is supported by recent government initiatives. Back in 2014, at the Summer Davos Forum, China’s Premier Li Keqiang suggested the country would step up institutional innovation, as well as innovation in science and technology, in order to foster growth in the “new normal” era. In a Government Work Report released in March 2015, there it was mentioned, that the authorities would encourage “a new pattern of innovation by the people and innovation by all” as a way to create new impetus to growth.
Following this, the 18th Central Committee of the Communist Party in October 2015 passed suggestions that the 13th Five-Year Plan would place extra emphasis on advancing mass entrepreneurship, encouraging technological innovation and promoting the development of new industries in a bid to inject new vigour into the economy.
Helped by reform of the company registration system, including the scrapping of minimum capital requirements, since March 2014, the number of new companies established in China has surged over the last two years. Figures from the State Administration for Industry and Commerce (SAIC) reveal that the number of newly registered enterprises grew by 19.3 % year-on-year to 3.16 million during January-September 2015, after a surge by 45.9 % to 3.65 million in 2014. Notably, in 2014, the number of new set-ups registered in the areas of information transmission, software and IT services surged 97.8 % to 146700, and the number engaging in scientific research and technology services rose 70.3 % to 262600.
Such development is in line with the survey results released in November 2015 by UHY International, an accounting and consultancy firm based in London. According to the UHY report, the number of new companies created in China in 2014 was nearly double the number created in 2010, up by 98 % in the period. As a result, new business creation in China is outpacing that of the rest of the world, with the UK lagging a distant second (in terms of percentage increase in new businesses since 2010).
Flourishing Technopreneurship in China
The government has taken unprecedented steps to promote advanced Internet applications, technology and innovation as growth engines, including through providing subsidies and different kinds of capital financing. In addition, local governments, institutions and private entities have been encouraged to set up incubators, accelerators and co-working spaces to nurture the development of new technological start-ups via provision of low-cost office space, equipment, mentoring assistance and sometimes seed money and capital to new businesses. A particular emphasis was on promoting technopreneurship, and the search for those, who are capable of turning their technological knowledge into viable, scalable businesses.
As stated in the 12th Five-Year Plan for the Development of Technopreneurship Incubators during 2011-2015, the Ministry of Science and Technology (MOST) hoped to raise the number of recognised incubators in China from 896 in 2010 to 1500 by 2015. The actual development has outpaced the initial expectation, with about 1700 incubators already recognised by the end of 2014.
Some industry observers even suggest that the total number of incubators, including those not yet recognised by the MOST, amounts to about 3000 at present. This is due mainly to exponential growth since late 2014, when the government recognised innovation as the new impetus to growth. The HKTDC Research visited some technopreneurship incubators established in the Yangtze River Delta region (YRD) in late 2015 and learned that some of them were existing only for a few months, meaning they were not yet been recognised officially. Moreover, some incubators may allocate part of their resources to nurturing certain non-technological businesses – including design works or even education ventures – these are not exclusively related to technological innovation. Thus, they may not be on the MOST’s list as the Ministry’s criteria relate primarily to technological credentials.
As shown in the figures below, there were 1468 recognised incubators, accommodating 77677 incubatees – meaning each incubator nurtured around 53 incubatees on average – by the end of 2013. By the same date, incubatees had together obtained a total of RMB 44 billion in venture capital, as well as RMB 14 billion in subsidies from local governments. On average, each incubatee was able to obtain some RMB 561600 from venture capital investors, and government subsidies amounting to RMB 183500.
Pursuing Technopreneurship despite Risks
It should also be noted these technological ventures come with significant business risks. Incubators tend to screen start-ups rigorously during the recruitment of incubatees – some incubators told the HKTDC Research that for every 150-200 “makers”, on average only 20-30 candidates would be approved for further assessment. Recruited incubates stated that they have to undertake ongoing assessment. Some start-ups were asked to leave after just three months, this in instances where their development did not satisfy the incubators, or if they had been unable to attract any investment. Many of these businesses are in fact very short-lived, with relatively few able to survive in a very competitive environment.
Those that are able to scale up will reach the so-called “Round A” stage, i.e. the first round of venture capital financing in exchange for stocks. Some relatively mature start-ups told the HKTDC Research that the valuation for their ventures had surpassed RMB 100 million in just 18-24 months. This explains why many makers and investors are very keen to pursue technopreneurial businesses, despite the high risks and failure rate.
IT-related ventures are among the most popular start-ups and range from development of social media apps to utilisation of big data analytics for smart city applications. The teams usually comprise young makers and professionals with experience working for renowned companies in the TMT areas (technology, media, and telecom), as well as doctoral/post-doctoral graduates from mainland or overseas universities. They only require decent office space with internet access and equipment such as computers to begin their operations, thereby require a minimal amount of seed money to get going.
According to the Ali Research, the number of new start-ups in the area of mobile Internet surged to an all-time high, amounting to some 3,200, in 2014. Such technopreneurial ventures mainly concentrate in large mainland cities such as Beijing, Shanghai, Shenzhen and Hangzhou, and tend to focus on mobile applications for e-commerce, enterprise services, games and animation, finance, consumer spending, social media and more. However, the surge in numbers of new mobile apps has led to intensified competition in the market, making it a tougher environment for newcomers. Ali suggests there is a watershed: start-ups must succeed in about 24 months, or they will fail.
Graphs 6 + 7 (7: source Ali Research July 2015)
On the other hand, many start-ups are in a hurry to tap the benefits of China’s “Internet Plus” strategy, a government plan to encourage integration of the Internet and mobile networks, cloud computing, big data analytics and the IoT, the Internet of Things,into modern manufacturing, e-commerce applications, the banking industry and more. Some others are focusing on upgrading existing manufacturing via development of advanced integrated circuit devices, high-end computer-controlled machine tools and new energy as is called for in the government’s “Made in China 2025” policy documents.
However, for the area of advanced manufacturing, undertaking R&D on robotic equipment, for example, would require substantial initial capital investment for acquisition of development tools and equipment. As for ventures related to financial technology, industry expertise is among the key drivers for the success of any start-ups, while industry connections to the right platforms are crucial for e-commerce ventures. Therefore, it is no surprise that start-up teams tend to comprise experienced personnel from the industries concerned, and that their sources of seed money often comprises the leading companies in these industries.
The Evolving Needs of Emerging Technopreneurs
Unsurprisingly, finance is always among prime concerns of technopreneurs, including those at the early start-up stage. Initial funding such as seed money provided by angel investors is essential for start-ups to pay off their bills and operational expenses at the outset of their ventures. Continued financing such as venture capital tends to be key for those hoping to survive through the early start-up stage, or the so-called “death valley” of business development, to grow their businesses further, before they have the capabilities to raise funds or secure further financing from banks or other financial channels.
However, during its meetings with technopreneurs, incubators and related investors in the Yangtze River Delta, the HKTDC Research was impressed that finance is not the top actual concern of many start-ups. This is because there are a lot of funds looking for opportunities to invest in Meanwhile, various high-tech parks and economic development zones set up by local governments have also established their own incubation and acceleration centres. Local governments are also providing seed money and start-up funds to assist youngsters and makers in growing their ventures. Furthermore, the start-ups may also have recourse to equity crowdfunding platforms, which are now blossoming in China. Examples include zhongchou.comtechnological ventures in China.
Notably, China is regarded as one of the largest venture capital markets in the world. Venture capital under management in the country amounted to over RMB 357 billion in 2013, surging by 478 % from the level of 2004. In particular, high-tech deals accounted for about half of cumulative venture capital investment by 2013, with 35 % of these deals made when the investment targets were still at the seed or start-up stages.
Meanwhile, various high-tech parks and economic development zones set up by local governments have also established their own incubation and acceleration centres. Local governments are also providing seed money and start-up funds to assist youngsters and makers in growing their ventures. Furthermore, the start-ups may also have recourse to equity crowdfunding platforms, which are now blossoming in China. Examples include zhongchou.com and hi.taobao.com. Businesses that are approaching a level of sustainability or scalability can also choose to seek further financing via listing on the National Equities Exchanges and Quotations (NEEQ), China’s so-called “new third board”. As a result, as long as makers are able to demonstrate an innovative and viable idea, they will have access to many different sources of funds to help their technopreneurial ventures, even despite the recent volatility of the financial market.
To successfully lure investors, however, technopreneurs must be able to demonstrate they have the capabilities and the technological knowhow to turn their innovative ideas into viable and scalable businesses. In this regard, technopreneurs are keen to look for mentors, incubators and/or investors that can provide them with guidance and assistance in terms of entrepreneurial development, marketing connections, technological wherewithal or collaboration with relevant players, in addition to mere financial assistance. Such needs can be summarised as follows:
In view of these requirements, some technological enterprises and investors are joining forces to nurture start-ups, offering them both technological and financial resources. For example, the cloud computing giant aliyun.com of the Alibaba Group, the advanced manufacturing player Foxconn and the financial player Zhejiang Yinxinggu Capital, along with other technological enterprises and investors, have cooperated with the Cloud Town set up by the Hangzhou government (Xihu district) to establish an innovation platform to nurture technological start-ups. Via the so-called “Taofu Chengzhen Programme” participants are joining forces to assist makers to grow their technopreneurial businesses by integrating their R&D, product design, advanced manufacturing, testing, cloud computing, ecommerce, investment and financial resources.
Implications for Hong Kong
The huge demand from the mainland’s technopreneurial ventures for financial inputs, as well as non-financial supports in areas such as technology, market connections and entrepreneurial development translates into huge opportunities for relevant technology players and investors. Financially, such technopreneurial ventures can, as mentioned, have access to various sources of funds, notwithstanding the volatile markets recently encountered by investors on the mainland. It would follow that technopreneurs and makers may not feel it necessary to come across the border merely to look for financial support in Hong Kong.
Paradoxically, many technopreneurial businesses are indeed interested in building Hong Kong connections. Many of them are particularly keen to reach out to technology partners and other professionals based in the territory. This is because Hong Kong has the capacity to assist these start-ups through opening up massive business opportunities, thanks to its excellence in areas such as system integration and application, business and marketing management, finance and other professional services. Through Hong Kong, they are often able to obtain access and exposure to technology that meets international standards, while also reaching out to markets in the territory and overseas in order to scale up their ventures in the longer term.
Taking the development of IoT systems and big data analytics/applications as an example, the prevailing technical standards are largely those developed by advanced countries over a decade ago. Hong Kong has developed a cluster composed of technology players and investors of both local and foreign origin who are well versed in international technologies and standards. Hence, they are in a position to enhance the innovation efforts of technopreneurs from across the border through helping them to integrate with foreign standards, and to commercialise their products or solutions in overseas markets.
With regard to the more mature technopreneurial ventures, one that have survived through “death valley”, they are often looking for further investment from venture capitalists and other private equity investors. Some of them are even within sight of the ultimate objective of listing in the stock market. Commonly their priority is to pursue public listing on the mainland, due in large part to an established record of higher valuations of certain technology-related stocks. However, the volatile performance of the mainland markets has created new uncertainties for companies looking to list.
The mainland’s technopreneurial businesses may therefore look to take Hong Kong as an alternative platform to meet their financing and even ultimately their listing requirements. Moreover, investment with “foreign elements” is often preferred, as Hong Kong-based investors can help enhance businesses’ international exposure in both the financial and non-financial areas mentioned above. It is supported by Hong Kong’s status as the second largest private equity management centre in Asia after the Chinese mainland.
By the end of 2014, there were more than 400 firms established in Hong Kong, managing about USD 110 billion of private equity capital. This accounts for about 19 % of the total in Asia). Many world-class international funds have set up offices here, while others are using Hong Kong as their Asia Pacific headquarters for the purposes of exploring business opportunities in Hong Kong and the mainland. Notably, technology ventures are high among the priorities of such investors. Coupled with Hong Kong’s inherent advantages, such as free flow of capital and information, sound protection of intellectual property rights and the availability of a wide range of professional services, this means the territory has a clear opportunity to cater to the service demands of the mainland’s flourishing technopreneurial culture.