Every spring I moderate startup events across Europe where budding entrepreneurs from Berlin, Zurich, and Munich meet investors from Europe and the U.S. Frequently, the entrepreneurs in the audience ask the VC speakers how to get U.S. venture money for scaling their European startups.
But this year something changed.
In each of the events I participated in this year, the entrepreneurs asked, unprompted, about whether they should rather get funding from investors in China and look to expand there instead of the U.S.?
This, in my eyes, represents a tectonic shift in the audience within 12 months of the last event series when no such question was asked. I first thought it was a one-off question in Berlin, but the same topic came up in Munich and Zurich.
The reason the question comes up at all stems from the fact that the EU market is so fragmented, with many small countries that have different languages and cultures. To summarize what seasoned U.S. investor Matt McCooe said to a group of German entrepreneurs in Berlin: Do you really want to conquer next the market of 11 million people in Belgium, the 6 million Danish market, and 17 million Dutch market next? Each one has its own language and culture, and you need to fly there to serve your customers. Why not just attack one huge market of 300 million people right away instead of jumping over these small hurdles for years in Europe?
But with the recent substantial successes of Chinese startups such as Ofo, Vipkid, Bytedance, and Mobike making the news, the question has become, why not attack a market of 1.3 billion instead?
This question is clearly on the minds of founders across Europe who have achieved initial product-market fit in their home market and are now thinking of expanding. These entrepreneurs must consider four goals for expansion:
- Access to funding and exits
- Access to customers
- Access to talent
- Open processes
Let’s take a closer look at each of these considerations.
1. Access to funding
At a recent event, Eran Davidson, a famous VC investor in Berlin, encouraged German entrepreneurs to go to China: “The window of opportunity is now. There are still many startups who are afraid of going to China, but the brave Western entrepreneurs who go today will have a once-in-a-lifetime opportunity to participate in the biggest economic boom in history, which is hungry for innovation and people who can execute on it. A huge market is awaiting you there,” he said.
Looking at the numbers, China’s venture capital market has skyrocketed in the last few years. Last year about $60 billion went into startup financing in China, which is already comparable to the $70 billion in the U.S.
And one interesting new phenomenon is that famous entrepreneurs who made their success in the West are now coming back to conquer the Chinese market with their next startups. When Jimmy Zhong built his class notes startup in Atlanta, he followed the usual path of a brilliant Chinese student making his fortune in America. But after his $40 million exit with Find Inc, he is now going back to China to lead two startups in the areas of self-service kiosks and blockchain worth over $100 million already. When The Economist asked him why he’s returning to China, he said, “I realised, what am I doing in New York City? It’s a complete waste of time.”
2. Access to customers
The second large attraction of China is clear: It has a large population of customers that are digitally connected. WeChat has over 1 billion active users worldwide, and Alibaba has over 700 million active customers, according to ECSI research. ECSI also underscored the dominance of Chinese technology in its research article that: “Chinese companies are globally number one in fintech; number two in virtual reality, autonomous driving, wearables, robotics, drones, and 3D printing; and number three in big data and artificial intelligence.”
A large domestic market is great, but only if it includes many early adopters who try new products and aren’t afraid of risks. We Europeans, for instance, have always been in awe of U.S. consumers’ openness to try new things as early adopters. Europeans prefer to try a proven product once it’s clearly adopted. For China, it is difficult to judge whether they are really early adopters culturally or have just leapfrogged a technology generation into the current mobile world. But a recent survey showed that 60 percent of Chinese respondents classified themselves as early tech adopters. Furthermore, an academic research paper dispelled the old myth that Chinese business are more risk averse that Americans: “Our findings show that Chinese in our sample are more risk tolerant than Americans in their financial decisions, both in attitudes and behaviour.”
3. Access talent and fit to team
America has long been the dream destination for top scientists and tech talent. Nowadays, China is investing lots of money and energy to lure exceptional talent in business and science to the U.S. As the FT reported in February in a story titled “China in push to lure overseas tech talent back home”: “Chinese funds backed by the state or municipal governments often host events on U.S. university campuses and offer everything from free housing and office space to startup capital — without taking equity rights — to those who agree to develop their businesses in the city that provides the funding.”
European founders, though, are often inclined to keep their R&D in their home country and rather look for sales and marketing talent overseas. As Steffen Wagner of Swiss venture capital fund Investiere.ch said, “We have some of the best tech universities and talent right here in Switzerland to scale your startup’s technology.”
But startups should also take into consideration their existing team’s skills and strengths. For instance, a few years ago I led a UK startup with a U.S.-cofounder; and for us it was clear that the U.S. was our expansion market due to our cofounder’s closeness, experience, and cultural fluency with the U.S. market. Setting up a subsidiary in a country the core team has no connection with could be much harder than you think.
4. Open processes
Despite the opportunities opening up in China, EU startups shouldn’t discount the U.S. The legal process in the U.S. to setup a subsidiary is easy and transparent, so European entrepreneurs can keep their IP rights secured and can easily sell and transfer assets when an exit is negotiated.
And there are decades of experiences and established paths in the U.S. that help European founders with their market entry and growth. One example is the annual $5 million startup competition for international startups, called VentureClash, run by Connecticut Innovation as part of their remit to bring international startups to the U.S. They have successfully helped tech startups from Ireland, Israel, the UK, and the Netherlands to conquer the US market.
For European entrepreneurs, scaling a startup in China has become a real option that deserves serious consideration. However, when it comes to the question of whether China or the U.S. is a better target market for scaling, there isn’t a clear-cut answer. Founders should weigh up the four areas of consideration and make a decision based on the market that is the best fit.
Simon Schneider is an entrepreneur in the crowdsourcing economy and director at ECSI.