Puff the Magic Dragon? China Equity Group’s Incubator Purchase and What It Means for the US

mar dragonChina Equity Group and Hanxin Capital recently announced a $713 million fund (Cocoon Networks) to invest in European start-ups.  In addition, they will be partnering with the University of London to establish an incubator to help start-ups expand into the Chinese market.  According to the CEO of Cocoon, Jack Zai, the Europe shift is due in part to disillusionment with some aspects of stateside investment, including competitive rounds and high valuations.

Should US start-ups be concerned about the Chinese recalibration?  What has been the experience of similar ventures in the US?  Innospring was perhaps the first joint US-Chinese incubator.  It formed as part of strategic partnership between Tsinghua University Science Park, Shui On Group, Northern Light Venture Capital, and Silicon Valley Bank.   It aimed to help firms expand beyond their home countries, especially useful for US start-up firms thinking of navigating the more opaque Chinese operating environment.   This is only one of the potential advantages for start-ups considering the Chinese-flavored incubator route.   Others include access to deep pocketed Chinese investors, particularly institutional ones; the scale of the Chinese market; and access to a cost-effective manufacturing base (e.g. Ecomotors).  Many tech firms in saturated US market sectors also seek a less crowded playing field.

Innospring was followed by other openings in the Valley such as zPark and TIPark and the new branch of Chinese incubator Techcode.  Despite the flurry of openings,  the number of US start-ups in these incubators with immediate Chinese market goals has been fairly low.  (One estimate of the Innosprings ratio was 20%.)  As for success metrics, it is perhaps too early to assess exits, but it appears that the incubators are at least managing to coordinate big financing rounds for some of their stars.  (Innospring has had one big success story in the start-up Trustgo, which was purchased by Baidu in 2013 for $30 million.)  The fact that these incubators have not yet managed to replicate the achievements of Y Combinator may be more due to characteristics of the Valley itself...the importance of first mover advantage in a saturated market.  (That being said, Y Combinator itself has an important Chinese link in its partner Garry Tan).  

This might be the reason why some incubators are trying a different marketing approach.   zPark touts itself more of a Silicon Valley operation with Chinese financial backing, rather than a bridge between the countries.  Hanqi Investment’s incubator has gone the niche route and aims itself at life–science firms interested in launching in Zibo, Shandong Province.   In the accelerator field, Plug and Play touts itself as a “global accelerator”, not a Chinese-focused one.  Its president however emphasizes its deep-pocketed Chinese corporate partners including Baidu, Huawei, TCL, and Lenovo.

Outside of California, a few other initiatives have been launched.  For example, the Memphis accelerator ZeroTo510 recently partnered with the Lianchuang Biomedical Incubator in China to facilitate regulatory approval, manufacturing, marketing and financing in each other’s market.  In Massachusetts, the China-based business incubator COMB+ and Mass Challenge are considering a similar partnership, as did Harvard’s Office of Technology Development.

These links/ opportunities do not necessarily require an incubator set-up however.  Start-up competitions (the North America US-Chinese start-up competition), diaspora networks (the National Association of Chinese Americans), and board representation by Chinese VC and angel investors have achieved similar levels of advice and access.

There are also those who voice concern over the quasi-public nature of some of the Chinese incubator backers (while ignoring the fact that many US programs receive similar levels of state support).  In the Chinese market state-backing is more likely to be a positive, given the afore-mentioned opaque regulatory environment.    A more relevant concern may be the slowing growth in China, coupled with increasing costs of production.  This development may jeopardize the three benefits mentioned above as it means a shrinking market and investor pool.  All in all, I think Chinese incubator type programs can offer value, but they are not an easy ticket to rapid expansion.  Their shift in focus toward Europe might even be a good thing if it both reduces the froth in over-heated sectors, AND makes US start-ups consider other emerging markets beyond China.  Many of these have lower manufacturing costs and rapidly growing middle classes.  

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