Why foreign start-ups fail in China

'99 percent of startups that want to access China, shouldn't': VC
'99 percent of startups that want to access China, shouldn't': VC

It's a dream for nearly any international start-ups: Enter China.

The country's massive population of more than 1.3 billion, of which 730 million are currently connected online, is attractive to almost any enterprise looking to expand and scale. But, China is a big enough market for any local player to redesign a solution that's localized for its own demographic, making it hard for foreign start-ups to access.

"Ninety-nine percent of companies who want to access China as a foreign company, shouldn't," said Oscar Ramos, Program Director at Chinacelerator, an accelerator that helps connect startups across China's borders. The 1 percent that Ramos said might have a chance, need to ask themselves what makes them better than any existing company in China.

"Start-ups that do good are very well funded and run and operate extremely fast," Ramos said of China's ecosystem. "For a long time Chinese companies have been copying things, they're very good at doing that."

What is China censoring online?
What is China censoring online?

The Chinese user is very different

"We've seen companies coming to China and adapting to the value proposition to a different type of demographic," said Ramos. "But afterwards they realized they were more successful in Southeast Asia where they can leverage their acquisition channels that they're more familiar with."

Platforms like Google and Facebook are common forms of getting new users for many start-ups, both of which are blocked in China.

In fact, an estimated 96% of online traffic in China goes to Chinese servers, according to China Internet Network Information Center.

"Challenge all your assumptions," Ramos said. "Everything that works in other markets, you need to be open to changing."

There are opportunities, after all

When it comes to a competitive advantage, there's several industries growing fast, in which there's a lack of expertise in China, according to Ramos. This includes health care, education, fashion and food. Not only are they opportunities to enter and scale in China, but Ramos said, being a foreign brand is actually an asset in such industries.

He also adds both augmented and virtual reality are also in demand right now.

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Why are startups leaving Silicon Valley?

But it's a two-way street.

Just as there's limited cases of any big foreign company successfully getting into China, it's not often you hear of a Chinese start-up making it big on a global scale. Although, currently, half of the top biggest unicorns are based in China, they may not even need to scale to continue to grow.

"It's the same problem Chinese companies face when they want to expand internationally. They get used to their local consumer that has a very specific requirement and they're very different than foreign customers and what they need."

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