When Swiggy joined the Indian startup unicorn club last week, it was the third one to do so this year. The 2016 startup dip seems a mere blip now. But for some perspective, look north. With the caveat that valuation isn’t always a cut and dried business, credible independent assessments of China’s unicorn club peg its membership at anywhere from 65 to 100. That’s more than thrice as large as India’s at a minimum. This is a relatively recent explosion. Why does the Chinese startup ecosystem seem so potent now—and is it sustainable?
Go back to the beginning of the decade and the US ecosystem’s dominance appeared unlikely to be challenged. Startup Genome’s Global Startup Ecosystem Report 2018 shows how rapidly that balance of power has shifted in the years since. The Asia-Pacific region now rivals the US for investment value—and China is the primary growth driver. As late as 2014, only 13.9% of unicorns were from China. Now, China accounts for 35% while the US’s share has declined from 61.1% to 41.3%. Part of this was inevitable. China’s market size allows for immense scale. And the US, as a more mature ecosystem and market, was bound to cede some ground. Other factors have been less predictable.
Firstly, government intervention has been audacious. The ‘Made in China 2025’ plan, put in place in 2015, aims at a fundamental economic shift from heavy industries and manufacturing to services and innovation. Beijing doesn’t mean to stop at outlining policy direction. Governments at both the central and province levels are now funding the startup ecosystem on a scale that could dwarf private capital. “Government guidance funds”, flush with government money and roping in private investors are pumping resources into early-stage funding at a time when it’s trending down globally. In India, for instance, despite 2017 being a healthy year for startups judging by headline figures, early-stage funding had dropped to a three-year low.
Secondly, the government’s focus is strategic, and private money has followed suit. The first wave of Chinese tech entrepreneurship—the BAT (Baidu, Alibaba, Tencent) trinity—had a broad focus on building service ecosystems. The “little dragons” that have grown in BAT’s shadow are skewing increasingly towards deep tech—robotics, artificial intelligence (AI), blockchain, self-driving vehicles, biotechnology. Investment trends in the US are similar. China, however, has kept pace, and by some metrics at least, pulled ahead. Take patents; they are not the only measure of knowledge production but they are an important one. Last year, China had four times as many AI-related patent applications as the US and thrice as many blockchain-related ones.
Thirdly, Chinese tech giants are playing the Google game, ploughing cash into investments and acquisitions both domestically and around the world, in everything from consumer-facing applications to AI. It’s a scattershot approach—but it has two benefits. The first, of course, is capturing potentially valuable innovation at an early stage. The second is creating an umbrella for domestic startups. Investment allows the startups to access BAT’s huge customer bases while acquisitions give them an exit route.
There are a number of caveats to keep in mind. The government’s role in Chinese startups might have paid early dividends, but there is no way to tell if it will lead to capital allocation that is as productive in the long run as the US’s market-driven process has been. The tech sector, after all, is no more immune to graft, cronyism and provincial governments’ tick-the-boxes approach than China’s manufacturing sector has been. There is reasonable scope to criticize BAT’s investment strategy as undisciplined, besides. And market volatility is a concern. In an effort to provide exit routes, the China Securities Regulatory Commission (CSRC) has now removed the decade-old profitability requirement for innovative companies. Well and good—but given the valuation bubble in tech, that is likely to lead to the CSRC making exceptions to its 23 times earnings price ceiling. That, in turn, boosts the chances of a boom and bust cycle.
The volatility of the tech startup sector and the hype clouding it make it difficult to predict if those hurdles will prove to be a long-term drag on Chinese startups. But their focus on deep tech that will be increasingly important across sectors in the medium term means that it would take a brave man to bet against them.
Can government guidance equal organic market-driven growth in the long run? Tell us at views@livemint.com