[FoRK] why China isn't the next Silicon Valley

Eugen Leitl eugen at leitl.org
Tue Jun 2 06:59:19 PDT 2009

Sounds quite interesting, if true. Can anyone deny/confirm?


Why China Isn’t “The Next Silicon Valley”


by Sarah Lacy on June 1, 2009

Since I got home from China last week, I’ve found myself in a lot of
conversations where phrases like “the next Silicon Valley,” or “just like
Silicon Valley used to be,” keep coming up. But while China is swimming in
capital and littered with start-ups, I’m going to argue it’s not the next
Silicon Valley. In fact, it’s something far different than I’ve ever seen

If you think about it, Silicon Valley doesn’t really move as fast as people
say it does. Sure, the rest of the U.S. business world may feel out-lapped by
the pattern of companies going from nothing to billions in a few years, but
those start-ups are mostly the outliers. For every wunderkind smirking on the
cover of a magazine, there are far more entrepreneurs who slogged away for
thirty years before ever getting their Nasdaq moments. And there are even
more who slogged away for longer and didn’t.

And even the breakout Googles and Facebooks of the Valley had the clear
benefit of building their companies on top of decades of infrastructure
build-out. I mean “infrastructure” in the sense of technology
infrastructure—the chips, routers, open source stack, etc.— but I also mean
it in the sense of Valley infrastructure that makes it possible to come up
with an idea at breakfast and have a company by noon. It’s taken decades of
continual boom-and-bust cycles to create the complex fabric of venture
capitalists, angel investors, lawyers, term sheets, accounting methods and
best practices that a newby entrepreneur waltzing in the Valley today has the
luxury of taking for granted.

What makes China so staggering is that everything that happened to corporate
America over decades—think the television and media studios build out of the
1950s, the greed of the 1980s, the dot com bubble, the build out of physical
and IT infrastructure, current Web 2.0 and CleanTech innovation—is all
happening to China at once.

Imagine: At the same time eCommerce is getting sea legs, TV Home Shopping is
also getting hot. Online ads are growing not because people are TiVoing
through commercials—both TV and online ads are growth markets at the same
time. Ditto for entertainment and piracy: While Hollywood sees the Internet
as a threat to its cozy legacy business, China’s entertainment industry is
just now building amid a world where piracy is already rampant. No one
assumes anyone will buy a CD, so they just look for other ways to make money.
The wonder of China right now isn’t just the size of the market. It’s the
rate at which dozens of “old” and “new” economies are all maturing amid one
another, and the hyper-network effects that such economic progress is having
throughout the country.

As for China’s start-up ecosystem , it’s working to build its own Valley-like
infrastructure, but it doesn’t have the luxury of growing it steadily over
several decades. Experts say there’s at least $20 billion in venture capital
sloshing around the country right now. It’s probably double that if you count
angels and unofficial or very local funds, says Rocky Lee of DLA Piper, a law
firm that represents much of that venture money in China.

That’s why calling China merely “the next Silicon Valley” misses the
singularity of what’s happening there. The Valley has never been like this,
and I don’t say that to knock the Valley. In many ways,  our steady
development has been healthier. But it’s also a lot less electric. In the
next ten years or so way more money will be lost amid the China chaos, but
I’m betting way more money will be made too.

It reminds me of the distinction between start-ups who develop products in
“parallel” and those who develop them in “serial.” In the former, you raise a
bunch of money, hire an army of coders and develop your whole vision at once.
In the latter, you build one product, prove that one works and can make
money, then raise more money to develop a second. Typically in a time of
economic plenty and investor froth everyone pushes for parallel. When the
funding and revenues get tight, the serial approach comes into vogue.
Parallel is always more exciting; serial is always more rational.

Silicon Valley tends to develop start-ups in “serial waves,” if you will.
There are always outliers and waves can coincide in timing like CleanTech and
Web 2.0 did, but investors and entrepreneurs tend to jump on dominant
high-growth bandwagons and ride them until a few billion companies come out
of them and many more fail. Then they wait for the next wagon.

China, as a country, is developing in parallel. The wagons are running
constantly and going in nearly every direction. It’s a time of chaos that can
burn people out, but it’s also one so unique in the history of modern
economics that many ambitious people can’t ignore it. That’s why most
transplants from the West who survive their first two years in China tend to
stay for more than ten.

Given all this, China is a lot more inwardly focused than other places like
Israel and Europe where start-ups have to be global from day one to have a
big enough addressable market. When it comes to the Web and mobile, the
biggest surprises will likely come from local, non-English speaking
entrepreneurs, maybe even those outside the largest cities. They probably
don’t read TechCrunch and may not even know where Silicon Valley is on a map.
But that won’t matter, because their local market will necessarily develop
very differently than ours.

And while China gets a rap for ripping off U.S. Web start-ups now, I think
we’re going to start seeing U.S. start-ups copying a lot of elements of
Chinese entrepreneurs’ business plans, whether it’s unlocking the value in
virtual goods, experimenting with alternative online payment methods or
developing more social forms of e-commerce, where like-minded friends shop

You always find the best ideas within atmospheres of constraints. It’s why
some of the best companies are started during recessions. It’s why Israel was
such a surprising hot-bed for Nasdaq IPOs in the late 1990s. And it’s why
Chinese Web companies have come up with other ways of making money than just
slapping ads on a site, because they had to.

I’ll be going back to China in October, and I’m learning Mandarin in the
meantime. Because odds are the next great grinning Web coverboy may not speak
English. (And for the commenters who keep complaining that India isn’t
getting enough TechCrunch love, calm down! I’ll be there most of November.)

More information about the FoRK mailing list