In the US, a start-up can grow into a unicorn in a fairly niche industry. In a hot industry, typically we can find 2 or 3 unicorns at the same time. Start-ups in China are not so lucky. It’s a true winner-takes-all market.
When Groupon started getting traction in the US, many entrepreneurs saw the opportunity. The first Groupon type of business emerged in China in March 2010. By August 2011, 5,058 companies had entered the market. At the end of 2011, one-third of the players had already gone bankrupt. In June 2014, the number of Groupon-style businesses had decreased to 178. Today, the only winner is Meituan. Others either were acquired by Meituan or went bust. By the way, in the US, at its peak, fewer than 100 companies were competing with Groupon.
To be honest, the product and service offering was pretty much the same among all players. What matters is execution, operation excellence, a massive amount of capital, and an aggressive culture. Actually, Meituan was pretty late in joining the other Groupon types of businesses in China.
Another good example is bike-sharing.
At the industry’s peak, more than 70 bike-sharing companies were in China. Every company wanted to use its own color to distinguish itself from others. But there were many more companies than colors to use.
Mobike and ofo, two leading players, raised over $4Bn in total. That amount can deploy 50 million bikes. At one point, Mobike and ofo owned over 95% of the market. Still, in the end, Mobike was acquired by Didi for a fairly low valuation. ofo effectively ceased operations. Now Hellobike is the new winner in this red ocean.
As with Groupon, from the user point of view, the experience of Mobike, ofo, and the 70 other companies is effectively the same. Execution becomes the only way they can compete.
Most of the hot categories in China faced the same challenge.
For example, the Accelerator + Co working space is overcrowded now. There are more than 11,000 accelerators in China. More than 7,000 co-working space companies are operating at the same time. WeWork owns only a tiny part of the market. Pretty much every company is losing money.
The biggest ride-share company in China is Didi. To become the winner, it acquired—or killed—more than 30 ride-share companies, including Uber. To win, Didi did everything possible at the execution level. It even developed a mobile phone virus that can automatically disable competitors’ apps.
Why “Execution Is Everything” in China
In my opinion, there are three main reasons why “Execution Is Everything” in China.
Poor IP Protection
Until very recently, there were almost no hard tech start-ups in China, as the IP protection was poor in China and it takes years to go through the legal process. As a result, no VC was willing to invest in technology or other Ips., which can create a moat for start-ups. Recently, things have started to change, especially in the healthcare and life sciences industries. However, compared to the US, IP doesn’t mean much.
All start-ups have to pick a side among Baidu, Alibaba, and Tencent. As a result, it’s tough to have more than 2-3 winners in each category by definition.
Didi was backed by Tencent. Didi received a huge amount of free traffic from WeChat. Other apps had to deal with many artificial bugs in WeChat integration.
Mobike’s main strategic investor is Tencent. ofo is backed by Alibaba and Didi. Alibaba is also the main shareholder of Didi.
Aggressive Venture Capital
In 2018, VCs in China invested over $70Bn, which is 14 times higher than the total investment in 2008. The rapid growth of the VC industry in China created fierce competition among VCs, which leads to a very aggressive investment style. Many VCs tend to focus only on high-risk/high-return investments. Valuation went through the roof. In many red ocean industries, the total capital raised became the most important factor in competing with others.
“Winner takes all” + “Execution is everything” pushed Chinese start-ups to focus on some very different skill-sets as compared to its peers in the US. The culture tends to be more aggressive. Lots of resources are focused on operation instead of R&D. Fundraising is extremely important.
In many emerging countries, the key success factors might be similar to those in China. This explains why Chinese start-ups are having more success in South East Asia, India, and Africa.