Why Your Startup Should Think Twice About China

One of my law firm’s international lawyers just sent me an article entitled, 4 reasons why your startup should go to China RIGHT NOW, along with the comment that he’d like to see me “set the record straight on this.”

Okay, here goes.

I hate this article makes it seem like every startup should go to China when in reality only a small percentage should. I also hate how it makes it seem like doing business in China will be all upsides. Trust me, this just’ ain’t so.

This article starts out by saying that “your startup, whatever it is, could benefit from being in China RIGHT NOW” and then it lists the following four reasons why:

“Everything is bigger in China.”

The article talks about how China has almost 1.5 billion people and how this means even your “special niche products that would be too tiny in Europe or even the US have a HUGE market opportunity in China.” It goes on to say you should go into China with the “great idea you’ve been thinking of, confident that the market will be waiting for you.” This is just not true, because selling your idea in China — no matter how many people there — requires at least some serious combination of a good idea that works for China, good execution in China, good contacts in China, and enough money and talent before you go to pull all of this off. It’s not entirely clear even what the other means by “being in China,” but whether you plan to sell your products or service to China from your own country or form a WFOE or Joint Venture to do business in China, just going to China because it is “so big” is an instant recipe for disaster. I also should note that everything being bigger in China can make things more complicated and expensive there. Every city has different rules and regulations regarding just about everything, from WFOE formation to employment law requirements. See e.g., China Employment Law: Local and Not So Simple. This is all great for we China lawyers but it adds a lot of money to your China startup and operating costs.

“Opportunities are everywhere in China” 

According to the article, the China pie is huge and constantly getting bigger and “you can create and own a brand new $1 billion market in YOUR PRODUCT for YOUR STARTUP from scratch in China in just a few years.” Not sure how this reason is any different from reason number 1 and it suffers from the same flaws.

“China’s talent pipeline is much better than you think.”

The author states: “Yeah, yeah, I know what you’re thinking. China… that’s the place where they copy everything and steal technologies from Japan, Europe, and the US. But that’s not true anymore” and notes how the Chinese government has poured tens of billions of dollars into tech infrastructure and China’s universities are turning “out some of the best tech talent anywhere on earth, and they’re ready to work for you too.” Wow, if only it were really that simple. First off, as much as IP protection has improved in China, it has improved mostly only for those foreign companies that can afford the necessary bilingual contracts and IP registrations. See Manufacturing in China: Do Not Be “Assimilated” and How to Give Away your IP in China Without Realizing It. A startup that goes to China believing it cannot fail because China is so big and fast growing could possibly survive that mistake, but a startup that is unaware of the need to rabidly protect its IP from China is not going to be long for this world. And as for the tech talent, it does now exist in China, but it is far more expensive than most realize and being able to secure the right people for your startup is super-difficult.

“Willingness to try any idea; no fear of failure!”

 The author claims that China has” no long memory of being burned with what some people might call “crazy ideas” and its VCs and tech talent are “willing to take a risk on something that Europeans, or even sometimes the Americans might dismiss as ‘too out there.'” Many Chinese companies are willing to take risks but I do not believe that its VC companies and techies are any more likely to put their time or money into a foreign startup than the VC companies and techies in other countries.

I am not saying startups should not go to China, because some should. But I am saying that most should not go to China and those that are considering going to China should first engage in a serious cost-benefit analysis before doing so. But you already knew all this, right?