By Zvi Shalgo
Like it or not, China simply cannot be ignored by your startup. Despite many of the flaws of a command economy, China represents one of the most serious markets in the world at this moment and should be a consideration for any startup that is building towards going global.
Along with the advantages of a billion or so person market, China comes with its own set of unique opportunities and challenges. As the CEO and founder of the PTL Group, Zvi Shalgo has worked with companies coming from abroad to find their way into the Chinese market. Along the way, he picked up on a number of important lessons and pitfalls that entrepreneurs need to take into account when thinking about their China strategy.
1. Getting there and proving your concept in the local market
It goes without saying that China’s market differs from the Israeli as it differs from the UK and US. Even if you have a business concept that works in your market or elsewhere, you still need to get on the ground and actually validate for the Chinese market.
Shalgo says that any business model that was not validated on the ground in China is not really worthwhile. This is because the situation is so radically different, taking into account aspects like consumer behavior, price models, competition, technological standards, regulations, etc.
While this might sound like a stumbling block — and it can be if you don’t have the right fit — it can actually be a bonus in disguise. Shalgo tells Geektime confidently that a company that shows that it can sell in China will be rewarded with a dramatically better valuation from investors, including those from the US or Israel, as many companies fail to reach any level of basic success in China.
2. After you establish yourself there, managing a local subsidiary
“The Israeli managers you select will have a tremendous task building personal relationships with their employees,” he says, adding that, “You need a very high emotional intelligence (EQ) to bridge between the cultures.”
He explains that successful businesses in China — like pretty much anywhere — are based on a stable core of loyal employees. However, in China this point of loyalty is more severe as they will not be loyal to you if you do not create trust, says Shalgo.
“The person who is going there must be sensitive and warm. Chinese demand that you trust them and give them all the tools they need to run the business. Otherwise it’s not worth their time and they will simply leave you.”
3. Raising money in China is easier than the US
From the Chinese investor’s perspective, money is pretty cheap in China right now, and they are looking for places to park their cash. Moreover, the government’s Five Year Plan is doubling down on bringing innovation to China, and is giving it the necessary backing. This means that Chinese investors have serious incentives to go out and look for companies to bring into China, whether it is having them open up an office, acquiring their technology, or making partnerships.
For the Israeli or Western startup, this can be an amazing opportunity for significant expansion, both in developing their own product with well funded R&D, or in making spectacular sales. But there are also risks that will be explained in the sections on partnerships.
4. Too many Israelis are signing exclusive deals with “strategic investors” for small amounts of money, giving away their rights for selling in China
In avoiding strategic partnerships, he explains that many of the scouts that come looking for Israeli companies to form strategic partnerships often either have hidden motives like bringing companies into an “industrial hi-tech park” as part of their fulfillment of a contract with the local government for tax breaks, or simply cannot deliver on their promises. The more serious potential partners are less likely to be sending out scouts, having the luxury to have opportunities come to them.
Shalgo says that time after time, he has seen Israeli companies make the mistake of signing deals that they end up regretting later. Feeling unconfident to move forward into China themselves, they will make an exclusive partnership for selling to the Chinese market. These arrangements can be very one sided and damage the startup over the long run, especially considering the size of the Chinese market.
Don’t limit yourselves without having done your research.
5. You as the supplier of technology have to show the initiative
Channels in China (the distributors, system integrators, etc) are passive. It’s not that they are lazy, but do not expect your local partner to do all the work for you, or for buyers to make the step of reaching out to you, even if your product is the best one on the block.
Simply put, Shalgo says that a sale won’t happen if you aren’t friends with the buyer. If Israel is a small network of friends from the neighborhood or army, China is the same but on a whole other level. Deals are made because someone has a cousin or old classmate at another company. This is not a critique as much as it is a statement of facts.
Like all sales ecosystems, networking is key. But from listening to Shalgo, you need a LinkedIn on steroids to succeed here, reaching out to the different players in the food chain.
“You need to have tens of dealers, managing between them,” he says, adding the the way the system works is that sellers have connections who work at businesses that are their customers.
“If you want to break into this system, then you need to go to the owner of the business that you want to sell to, and ask him who his preferred dealer is. Then form a relationship with this dealer who can help you build a network.”
This process has to be repeated multiple times in order to grow the market. From PTL’s experience, between 70-80% of the deals are initiated by PTL’s clients and not their individual channels.
6. Navigating the rapid currents of regulations
Since China has been reforming its economy for the past 30 years at an unprecedented pace, regulations tend to change every three months or so. This can affect, taxes, human resources, or any other aspects of your business.
“It’s very hard for a foreign management to establish governance in your company,” he says, explaining that, “30 years ago, there were no laws. Now they change it all the time. PTL’s purpose was to help companies keep up with the regulations and focus on their business and technology.
Shalgo strongly suggests outsourcing for these kinds of tasks, not only to save money but also to get knowledge. Especially for startups that want to enter China lean and keep maximum flexibility, outsourcing would appear to be a key solution for them.
7. Will your website show up in China?
Despite their full steam ahead charge to embrace technology and innovation, China is still very much China.
While happy to take the economic benefits that come from doing business abroad, there are still many barriers put up to keep undesired content out, such as pro-democracy ideas for example.
What this means in practice, though, is that China has built their own infrastructure for the web that can be less than friendly for platforms built abroad. Instead of Google and Facebook, they have companies like Sina Weibo, YouKu (China’s YouTube), and of course, WeChat.
So what happens if your startup is using a YouTube video that you need for a presentation, or whole sections of your website are not showing up because it uses a Google particular font?
To help their clients overcome this challenge, PTL Group came up with their China Ware service that converts foreign content to a China-friendly format. It was developed by their CIO, Yotam Neuthal and starts at $150 a month.
Up until now, Shalgo tells Geektime that the work around has been to create a separate website on a server in China.
He explains that, “In order to do this, you need to apply for an ICP license which can be given only to registered businesses in China. This makes it nearly impossible for most business people. The marketing department of PTL Group that provides marketing execution services for our clients worked on finding an initial cheap solution for this.”
They have created a system that automatically will screen your web page or social media content from China, identify the flaws and fix many of them automatically. Those images that it cannot fix, it will notify the owner. Then the team there can work on a solution to deal with the individual issues.
For example, if there is a video that is on a platform like Google’s YouTube, PTL can handle moving the content over to a more Chinese friendly platform like YouKu.
“This system is running for our clients on an hourly basis, but this can be set according to need. The idea is that an Israeli businessperson,” or any Western businessperson, really, “can be confident that their Chinese counterparts can see their web content clearly, avoiding embarrassing mistakes.”
8. Get to know your market and the players in China before committing to any partnerships
Making the right partnerships in China is probably one of the most essential and tricky steps that an entrepreneur can take when looking to get started on the ground.
The first thing to know is that this process will take time. Shalgo estimates that the average time for a company to set themselves up for the local market is around two years, at a cost of around $150,000 per year if they make use of existing infrastructures like the ones on offer by PTL Group.
He is also a firm believer that joint and strategic partnerships are not the way to go in China, seeing them as asymmetrical and dangerous for startups.
In the conventional models, specifically talking about joint ventures, Shalgo says that if your contribution as the Israeli part is the idea or a technology that can be learned quickly by your partner, it will be close to impossible to keep the joint venture going after they have what they need.
“These relationships are doomed,” he says.
Due in part to a national ethos for rapid progress that is pushing the Chinese to be less than respectful of intellectual property rules, preferring to “borrow” ideas and technology from others if it means that it helps them grow, entrepreneurs have good cause to be cautious of potential partners in China.
Shalgo expresses that he is not unsympathetic to the Chinese in their approach to IP, noting that the Americans used to operate in a similar fashion. He says that it was only once they had IP worth protecting that they demanded others respect it as well.
Either way, he says that fear of having your ideas stolen should not keep you from opening up your business there. At least by getting in on the ground in China, a young company can establish itself as the leader there, and become known as the standard of quality.
More importantly, if a company avoids going into China, he says that they will miss the opportunity for the rapid growth that could come with selling in the massive market there. By not taking that chance, the startup may not be able to attain the statistical spike that could get them their next round of investment.
He advocates a strategy of working with what he calls a symmetric partner, meaning a local entrepreneur. “So long as you can represent the West for him, the partnership will probably remain,” explains Shalgo, making the point that for the Chinese entrepreneur, partnering with an Israeli or other foreign startup can also be a status symbol for them, showing that they had the capacity to make deals with supposedly powerful forces from abroad.
“There is clearly a missing business model that has to be developed between entrepreneurs and Chinese entrepreneurs, because the current joint venture concept, an asymmetric one, where a mature Chinese company, joins with a younger smaller Israeli one, is just not working,” Shalgo notes to Geektime.
He is particularly concerned with the model wherein Israeli companies come looking to China for resources like investments and a market to sell to, in exchange for their know-how. On the one hand, he says that, “Israel and China can have a great synergy together. Israel with its creativity, and China with their large market and future domination of the world market along with their own.”
On the other hand, the partnership has to be the right fit, and not just one of convenience or as last ditch effort for a company that is down to its last dollar, looking for some extra funding.
“It’s clear that China is the next big power to rise and we need to do everything we can to be a part of this.”