Earlier this month, the ZhenFund, a China-based angel fund partially backed by Sequoia Capital, put together a telling presentation on China’s startup landscape and the traits that characterize the ecosystem at large, especially from a behavioral and cultural perspective.

To start, it quantifies the potential of the Chinese investment market, which processed some $12 billion in funding across 1,400 deals in the last year, concentrated primarily in industrial and Internet-related ventures.  While this number is roughly 60% of the amount of capital that went into venture funding in the US last year, it represents more than double the investment that went into China-based deals in 2010. Of those roughly 1,400 deals, early stage companies represented 25% of total investments, making up roughly 18% of total funding.*

But the number I found most intriguing was the amount of funding directed towards e-commerce ventures.  Of the 202 Internet-related investments made in 2011, 93 were related to e-commerce, demonstrating several key traits that define the Chinese market: 1) a growing demand for goods and services among Chinese consumers as a new middle class continues to emerge; 2) the fragmentation that still dominates the market (how do you broadly reach all provinces?); and 3) the pervasiveness of copycat models not just from models like Groupon abroad, but also within China.  According to Tuan800 (translated as Group800), an online portal that tracks group-buying websites in China, the number of sites currently hovers around 3,900 (at its peak, there were over 5,058 group-buying related sites in China).

As ZhenFund’s presentation notes, part of it is because of VCs’ willingness to fund these type of ventures, as well as an understanding of the inherent challenges there are to peg the group buying model in a country like China.

Culturally, fewer individuals express interest in launching their own ventures in China than they do in the US, instead often opting to work/be involved with the government.   And existing (successful) startups typically only have one exit route: IPOs, versus M&A transactions/deals that often characterize exit profiles for startups in the US.

A large part of the reason for this is because China’s big Internet players — NetEase, Tencent, Baidu, etc. — want to do it all, similar to how media organizations are structured in Japan. Additionally, due to murky regulations and lack of IP protection, would rather just copy a successful concept versus acquire an existing team.  ZhenFund’s report also notes a striking contrast in attitude towards talent between the US and China, where US sees talent as a huge part of the acquisition equation (and sometimes, almost the entire part) versus China where first-time teams are perceived to be less valuable that may quickly jump to the next project.

However, among the larger Internet players, this is changing as they continue to build large cash reserves (Alibaba, Netease and Baidu all have upwards of $1.5 billion), and are beginning to launch pilot acquisition funds.

In the long-term, it will still be about building a network of trust among the different players, and like so many Chinese (copy-cat) startups have found, will have to undergo a “process innovation” in finding that balance between Western values and Chinese practices (this will be true especially in knowledge and data sharing where the US has largely adopted an attitude of open-source while knowledge is still closely guarded in China).

And as always, the ongoing challenge for all Chinese innovators and related parties alike will be to fuel the creativity and drive the innovation in making disruptive changes that have lasting marks and ripples beyond China’s borders.

China’s Entrepreneurship Ecosystem

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