Why China is the new Silicon Valley

There is a deeply ingrained mindset among those who work in China’s increasingly hot technology sector that foreign Internet companies are doomed to fail here.

It’s true that non-Chinese players have yet to experience success in capturing significant market share in the country. Google more or less failed. So did eBay and Yahoo along with Facebook and Twitter (yes, Facebook and Twitter are blocked in China, which is obviously not good for business, but many Chinese Internet companies have their own SNS services that suit the needs of Chinese users more than their Western counterparts.)

Major foreign Internet companies may never find much success in China for a number of reasons, one of the main ones being that the Internet business is downright dirty here.

Success mostly boils down to government connections, an ability to basically screw other companies out of whatever as well as an unflinching ability to do whatever under-the-table deals must be done.

These are games that foreign companies will likely never be able to ever play, at least not without a Chinese partner, which also has its own set of risks. 

However, there are foreign players here focusing on the Internet and mobile that are finding success. A small, but growing, community of non-Chinese entrepreneurs are launching their own start-ups in China not because they care so much about capturing a large market share here, but rather because there’s no better place in the world to be an entrepreneur.

Earlier this week, I had dinner with Frank Yu, an American, and Prashanth Hirematada, who is from India. Yu, who used to work for Microsoft, and Hirematada, who once worked for Shanda, one of China’s largest gaming companies, recently founded Kwestr, a gamification company. The two were in Shanghai to meet investors but would soon head back to Dalian, a coastal city in northeast China, where they are participating in Chinaccelerator, a four-month long mentorship program for startups.

According to Yu, other entrepreneurs participating in the program come from Malaysia, Canada, Korea, the Philippines and the United Kingdom. “China is the new California,” he said. “Here, you can just try stuff out, and see if it sticks. Everything happens faster in China.”

While wages have been increasing, the obvious benefit of launching a company here is still relatively cheap labor. Other costs are also low, which means seed funding can be stretched a lot further than in the West. “The cost of doing a startup is going down so much,” Yu said. “You really don’t even need VCs.”

Chinese developers are “messy,” according to Yu, but they are also incredibly fast, which means new products can be launched at breakneck speed and tweaked as companies learn what works and what does not work in the market. “We are always on the edge, always willing to try something new, and then just turn and pivot [if it does not work],” Yu said.

But perhaps what is most interesting about the new generation of China’s foreign Internet companies is that they don’t really care that much about China. Instead, the goal is to test the products in this market, even if their share of the market here is relatively small, and then use that experience to launch the products in the developing world: “Markets that American companies don’t care about,” Yu said. “Which is like 80 percent of the world. Anything you do in China, can work in other emerging market countries.”

Google and Yahoo may have failed in China. But there could soon be a whole new set of foreign players on the mainland that become dominant in markets that the West has forgotten. Now, that’s a success story.