How Big is the Tech/Start-Up Ecosystem in China?

There are lots of conversations about the Tech/Start-Up Ecosystem in China. At a high level, everyone knows it’s big. The question is: How big?

Let me break it down into three figures that are critical to the growth of the Tech/Start-Up Ecosystem: Number of Internet Users, Amount of VC Funding, and Number of Engineers.

Internet Users

CountryInternet Users 2020 Q1% of PopulationInternet Growth 2000 – 2020Internet Growth 2015 – 2020
China854,000,00059.3%3796%31%
India560,000,00040.9%11200%217%
USA313,322,86894.7%328%8%

The massive Internet user base is essentially a Tech/Start-Up Ecosystem. China has about three times more Internet users than the US—and even 50% more than India. Assume that the number of Internet users in China will eventually catch up to the US in terms of % of population. The number of Internet users in China would be around 4.5 times larger than that in the US. Based on the current growth rate, most likely this will happen in the next 10 years.

We can argue that ad spending per user in China is still very low. In another blog post, I will focus on the media/advertising industry and consumer behavior in China. However, this massive user base alone is enough to make China one of the biggest tech markets in the world. Another important point is that most of these internet users in China are mobile-first.

VC Funding

VC funding is critical for the Tech/Start-Up Ecosystem, especially for one that may change the world.

In the US, VC deals have been fairly stable over the years ($25-30bn per quarter). Back in 2017/2018, at one point, China’s VC funding was as big as that in the US. However, it started to shrink significantly in the following years. In 2019, VC funding was about $9bn per quarter, which is about one-third the US level.

Of course, in China, lots of capital comes from government grants and contracts. However, most likely, the total funding to the Tech/Start-Up Ecosystem in China is 50% less than that of the US. Given that China had a small bubble in 2017/2018 and that the entire VC industry has only about 20 years of history, it will take a while for China to again reach the level of the US market.

Interestingly, China has almost half of the world’s unicorns—three more unicorns than the US in 2019. Four out of the 10 highest valued start-ups in the world are from China. I believe this is driven mainly by the “winner-takes-it-all” market dynamics in China.

Engineer Talent Pool

The tech industry needs lots of engineers to write code and build hardware. A massive engineer talent pool is the key to success.

China is definitely leading the league in this one. The World Economic Forum reported that China had 4.7 million recent STEM graduates in 2016, and that India had 2.6 million new STEM graduates. The United States had only 568,000.

Among those 568,000 graduates, foreign nationals accounted for 81 percent of the full-time graduate students in electrical engineering, 79 percent in computer science, and 75 percent in industrial engineering. Sixty-nine percent of STEM graduates came from China and India.

To be honest, this gap is much wider than I thought it would be, and is quite alarming for the US.

Summary

At this point, the US is leading the total VC funding or total valuation of start-ups. However, if we believe that the engineer talent pool and internet users are leading indicators, the gap between the US and China may close fairly soon. In upcoming blog posts, I will share my perspectives on each element of the Tech/Start-Up Ecosystem in China.

Will Addressble TV really save the TV industry

Since I started TVision, every year I hear from people in the industry telling me, “Addressable TV is going to save the TV industry. It will grow exponentially starting this year.”

eMarketer has been lowering its estimates on US Addressable TV Ad Spending every year since 2015. Clearly, we start every year being too bullish about addressable TV, then get disappointed around Christmas.

Let’s take a look at the value of addressable TV from both the buy and sell points of view.

For brands, the value is clear: It will improve targeting capability. Brands will be able to broadcast ads to only their target audience, which is very attractive. The question really is: How much of a premium should brands pay?

Let’s take a look at the following four brands. They have very different addressable audience percentages. Brand A is a large CPG brand that sells soap. Everyone is a potential customer. Brand D is a luxury auto brand. If we assume that the average linear TV CPM is about $10, Brand D’s target audience based effective CPM will be around $100.

Addressable TV today is sold at a much higher price. Usually, its targeting data is based on household-level data. As we all know, a TV set is a passive multi-viewer device. Even if the targeting data is 100% accurate, there is at least a 50% chance that ad exposure is directed at the wrong individuals. If we assume the price of addressable TV CPM is $50, the actual CPM might be $100 or above.

This is a very rough analysis. However, it does show that if a brand has a very board target audience, most likely it doesn’t make sense to leverage addressable TV at all.

I think that even for Brand D, the cost benefit is questionable. First of all, at $100 CPM, Brand D can purchase premium display or video ads via a digital channel. A digital channel provides a much better capability to target each individual and not the entire household. In addition, the potential customer base might be much larger than 10% if the sales cycle is very long. A poor college student may eventually buy a BMW in his 40s. However, it’s impossible to target the high-potential college student in an effective manner.

To sum up, unless it’s a super-niche brand, most likely addressable TV doesn’t make sense, at least at the current CPM level. 

BrandAddressable Audience %Linear CPMEffective CPM (Linear)Addressable TV CPMAddressable TV CPM (Actual)
Brand A70%$10$14.29$50$100
Brand B50%$10$20.00$50$100
Brand C30%$10$33.33$50$100
Brand D10%$10$100.00$50$100

TV networks have been selling the best inventories during Upfront for the last few decades. By selling all the premium inventory at once, networks were able to artificially create scarcity and charge a premium. However, addressable TV inventories are much harder to optimize for the yield, even if it is part of a private marketplace. To offset the potential risk, networks must charge a very high CPM for addressable TV ads. Given that the Upfront market is getting stronger every year, it’s very unlikely that networks will make addressable TV part of their main offering.

Please don’t get me wrong. I do agree that current Nielsen age/gender targeting is outdated. However, this doesn’t mean that digital media like one-on-one targeting is the best answer for the TV industry. Most of the brands use TV to quickly get a massive reach and grow their brand. Data-driven linear might be a happy middle ground. I think that the automation of the TV planning/buying process makes a lot of sense but, most likely, the answer is not addressable TV.