China’s tech entrepreneurs could challenge Silicon Valley

SHANGHAI — Eric Li wants to make a bet.

“In five years, the most valuable and second valuable company in the world will be a Chinese tech company,” said Li, a top venture capitalist in China.

“So far, no one has taken my wager,” he said, his lips curling into a smile.

In many ways, Li, who received his MBA from Stanford, represents the new face of China’s business elite: confident and aggressive. He is absolutely convinced that the world’s most populous country will soon rightfully take its place as a top global economic power. It might even displace Silicon Valley as the epicenter of tech innovation.

And for that, he acknowledges, China can thank the United States. China’s emerging class of entrepreneurs and venture capitalists, including Li and Alibaba founder Jack Ma, honed their skills at America’s top universities, corporations and investment firms.

“There is a tremendous amount we learned from the U.S.,” said Li, founder and managing director of Changwei Capital. “We imported venture capital from Silicon Valley.”

Li’s confidence is hardly misguided bravado. Low-cost manufacturing has largely powered China’s astounding economic growth in recent years. But Chinese Internet companies are exploding onto the scene, led by e-commerce giant Alibaba’s $23 billion IPO in September, the largest ever debut on Wall Street. But lesser known to Americans are JD.com and Tencent — whose revenues dwarf those of Facebook, Yahoo and AOL.

China’s success, though, comes with a significant asterisk: Its government currently bans Facebook, Google and Twitter, ostensibly for political reasons. But in reality, the policy shields homegrown companies from foreign competition, allowing Chinese firms unfettered access to the country’s enormous market of Internet consumers — currently estimated at 641 million and growing, according to Internet Live Stats. By comparison, the United States boasts about 280 million Internet users.

Easier path

A de facto monopoly on the world’s largest Internet base offers a huge strategic advantage for Chinese firms, allowing those companies to quickly grow and develop in their home market before expanding to the rest of the world.

China still lags behind the United States in education, capital and tech innovation. But the success of Alibaba and others is inspiring other entrepreneurs. During the first half of 2014, 108 companies from China went public, with 11 raising $3.9 billion through American stock exchanges. This year, VCs poured $24 billion into Chinese companies, a 60 percent jump from 2005, according to Wind Financial.

In the past, the best way to get rich in China was to become a politician, locals say. Now it’s to start a company.

“Entrepreneurialism was looked down upon in China,” said S. Ramakrishna Velamuri, who chairs the department of strategy and entrepreneurship at the China Europe International Business School in Shanghai. “But within 10 years from now, Chinese entrepreneurialism will be more dynamic than the U.S.”

China can trace its online history back to 1994, when the country became the 77th in the world to connect to the Internet. Since then, as China started to grow richer, two big things happened: More Chinese traveled abroad to study and work, especially in the United States, and more Chinese bought mobile devices.

Despite the growing prestige of home-grown schools like Fudan University in Shanghai, Chinese people who can afford it prefer to study in the West.

Take Jennifer Xu. After graduating from college in Shanghai, Xu decided to get her MBA from Harvard.

“I wanted to become an entrepreneur since I was a kid, to start a business,” she said. “I wanted to go to the States because it was the best environment to think about what I wanted to do.”

Xu grew interested in health care, an industry more dysfunctional in her home country than in America. In China, there are no primary care doctors so patients flock to the state hospitals in major cities. With so many people to see, physicians can only offer a few minutes of their time to each patient a day. And unlike their counterparts in the United States, Chinese doctors don’t make much money.

However, people in China do own smartphones — a lot of them. In 2014, the number of Chinese smartphone users is expected to surpass 500 million.

Adapting ideas

After seeing an Uber-like mobile app to summon cabs in Beijing, Xu got the idea to offer a mobile service that would allow patients to schedule followup visits with the physicians they only briefly saw at the state hospitals. The service could also help doctors to build up a private practice. Her startup, Greenapple Health, has already raised several millions of dollars from investors.

“We are doing a simple thing, but it’s really powerful,” Xu said. “I don’t know why people weren’t doing it before, but we were the first ones to do it.”

And that’s the beauty of starting a business in China: it’s a quickly developing country where there is no shortage of opportunities to be first at something, she said.

“As an entrepreneur, there are a lot of problems to solve in China,” Xu said. “It’s the best time to be an entrepreneur.”

Like Xu, other entrepreneurs have proven adept at tweaking Western ideas and technologies to solve unique domestic problems.

For example, unlike Amazon, Alibaba doesn’t actually sell things. Instead, it connects shoppers with small merchants. Instead of large chains that dominate retail in the United States, mom-and-pop businesses make up most of China’s fragmented retail industry. That’s why Best Buy and Walmart have not fared well in China.

“In America, we think we are going to build it and the rest of the world is going to use it,” said Joanna Weidenmiller, a San Francisco entrepreneur who spent several years in China. “But China has different likes, preferences and systems. They are not looking to build things the same way we are.”

In China, the most popular mobile messaging app isn’t WhatsApp but rather WeChat, owned by Tencent. During Chinese New Year celebrations, when parents offer their children “lucky money,” WeChat started a highly successful service that facilitates those small payments.

“Chinese companies will copy the West, and add services that are in tune with local demand,” said Velamuri, the Shanghai professor. Chinese companies have not yet expanded overseas because “they desire growth from the domestic market. Internet penetration is the key to growth. Chinese kids are much more connected to devices than the West.”

But Chinese entrepreneurs face many challenges. For one thing, the annual per capita income is only $7,000, which means employees will often switch companies for just a small bump in salary, Weidenmiller said.

“It’s very hard to hold on to people, to find people willing to sacrifice pay to build a company,” she said.

And in many quarters, China suspects that the United States wants to prevent the country’s ascension. That’s part of the reason users can’t access Facebook or Google in the mainland.

Chinese government leaders “feel under attack from foreign powers,” said Shen Dingli, associate dean at Fudan University’s Institute of International Studies and an expert on the China-U.S. security relations. “They feel one party rule equals a strong government. Too much information or unnecessary information undermines the party.”

“In 10 years, I hope China evolves so that the government realizes Facebook, Google, and Twitter can actually empower the Communists,” Dingli said. “We need the U.S. to invest in China because we still have a lot of poor people. We need the technology.”

Looking locally

It’s no accident that Kinzon Capital in Palo Alto has been scouring Silicon Valley for startups in health care and education, two areas of great need in China. Fosun International in Shanghai, the largest privately owned company in China, created the $350 million VC fund in 2012 and plans to raise another fund next year.

Brad Bao, the fund’s managing director, said China knows how apply to technology to business uses like cost-efficient manufacturing. But the country still needs to build an innovation culture that looks to the future, he said.

“The U.S. still leads the trends globally,” Bao said. “Google is researching things that we would never think about.”

Thomas Lee is a San Francisco Chronicle columnist. He recently traveled to China on a fellowship organized and funded by the National Press Foundation, a nonprofit that helps journalists cover complex issues. E-mail: tlee@sfchronicle.com Twitter: @ByTomLee