Lucas returned to his motherland to build his own internet startup after graduating college abroad in the hopes of becoming the next Jack Ma or Pony Ma. His enthusiasm waned after two years of running the business. The regulatory risks and compliance costs affecting his company have become too high to justify building a China-focused product, prompting him to look abroad for growth.
Lucas is the founder's name due to the sensitivity of discussing regulations. We can't say what his company does as that would compromise his identity.
In the past few years, China has introduced a number of policies to assert more control over its internet sector. Social media, gaming, e-commerce, and live streaming have come under regulatory fire for their unscrupulous growth and the social issues they produce. Now, that scrutiny is propelling startups that thought they had a future for funding and growth in China to go overseas.
Observers argue that the Chinese government's decision to crack down on consumer internet giants like Didi and Alibaba is meant to encourage domestic innovation in technology that will help China compete on the global stage. Beijing wants to curb the power of internet giants, especially those generating structural problems like lending products that put young consumers in debt, games that cause addiction, and online education services that widen the wealth gap.
The policies set out to rein in the internet giants have ended up hurting the growth of budding startups like Lucas, which face mounting compliance costs and operational hurdles in China.
According to three other China-founded consumer internet startups, they are also leaving the Chinese market because of regulatory uncertainty. Four investors told us that portfolio companies that focus on online education, fintech, and video games are making a similar pivot to target international users.
In China, the industry has fallen out of favor due to strict censorship and a ban on cryptocurrencies, which have made it difficult for Web3 to thrive. The startup community in China is worried about another vertical being taken down.
For years, the authorities in China kept one eye closed when it came to tech companies.
Beijing's shelving of the initial public offering of Ant Group in 2020 was the first sign that China's internet firms had the authority to grow quickly. The government made major changes in the regulatory environment of the financial technology industry, which led to a restructuring at Ant and brought it under strict financial regulations.
A government investigation into Didi over its cross-border data sharing practice again underscored Beijing's determination to tighten control over what it once deemed its internet darlings.
The impact is felt by smaller startups. If internet platforms fail to institute the required content censorship and data storing mechanisms, they will face severe fines and even service suspension.
Compliance costs are not the only thing hobbling growth. The unpredictable nature of online censorship puts enormous pressure on companies to figure out what is acceptable and what is not.
Venture capital firms in China didn't care if a startup made money or not in the beginning. The company could take care of monetization later if it saw miraculous growth. Lucas said that the formula has stopped working because any app can be taken down at any time.
Jike, a social network popular in the Chinese VC and startup community, was shut down for a year before reopening in 2020. The reason for its suspension was never made public.
The ultimate goal for many Chinese entrepreneurs is to go public in the US, which has the world's largest stock exchanges, and eventually cash out and generate more capital for scaling. In December of last year, China's cybersecurity regulator said internet platform operators with data of more than one million individuals must undergo a pre-IPO review before listing abroad. The IPO will be stopped if the platform poses national security threats.
China's securities authority proposed that a company, regardless of where it is incorporated, must go through a filing process with the Chinese government if its main management mostly consists of Chinese nationals or executives who live in China.
VC firms in China are now advising their portfolio companies to pursue international markets instead of pursuing overseas listings. We learned from a founder and an investor that some companies are providing foreign citizenship applications for entrepreneurs.
Lucas lamented that a startup's success depends on whether the founder can predict the direction of Chinese policies and follow them through. We should focus on building the product.
The regulatory environment in China has become more restrictive, making it harder for young companies to emulate the success of their predecessors. Some people have no choice but to give up their China dreams. Consumer internet models that have proven successful in China, such as bike-sharing, virtual gifting, social commerce, and grocery delivery, are useful for the rest of the world.
Many Chinese pioneered or popularized technology-enabled business models are better suited for emerging markets than models from the United States, according to Ben Harburg, managing partner at MSA Capital.
Everyone would love to be a part of the Ant Group in terms of having money markets, loans, payments, merchant to peer, peer to peer services.
Chinese startups going global have gone through several changes over the past two decades. They went from exporting cheap electronics, creating a foreign version of something that is successful in China, to building services and products that are designed to compete globally from day one.
In the past, companies were globalizing based off of their successful model and examples in China, then taking the same product overseas.
More companies are building their products for international customers at the beginning, but the infrastructure and engineering is still in China.
Shein is a fast fashion company that is mostly out of China and serves international customers.
It's no small feat to go to the sea. The saga of TikTok in the US, where the Trump administration wanted to force a sale, shows how a Chinese app with enormous global success can get caught up in tensions. New challenges to Chinese founders with little exposure to overseas compliance practices are caused by the Stringent privacy rules in developed regions.
Lucas was born in the 1990s and is one of the founders of the current wave of Chinese startups going global. As they charge into new frontiers, they bring with them lessons from home, potentially helping to evangelize China's tech business models and culture. The home market is missing out on the service and creativity of these young, ambitious entrepreneurs driven away by the country's regulatory storm.
I think that Chinese companies globalizing is positive, but at the same time, I would caveat with the fact that there is going to be a brain drain in China, especially in sectors where Chinese entrepreneurs have found it difficult to navigate the blurred.
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