The dilemma of Chinese startups going global • TechCrunch

One day in 2020I published an article about a Chinese hardware manufacturer, which would have been a typical story on funding. Instead, I got a complaint from its PR asking me to remove all mentions of “China” from the piece. The startup wanted to be called “American” on the basis of its having a small office in California. I declined, insisting on the fact that it was our duty to find relevant facts for readers. I never heard from the company again.

This was just the beginning of a trend I observed in my interactions with Chinese startups expanding abroad. “We don’t want to be seen as Chinese,” many of them tell me. My attitude has over time gone from disappointment at companies’ lack of respect for journalistic independence to a growing concern that my portrayal of them might unfairly prejudice their growth. These companies could lose business partners, receive stricter oversight via app stores, and be subject to greater scrutiny by local regulators by putting the Chinese label on their operations.

What used to be a no-brainer geographic categorization of a company — “it is Chinese/based in China” — has become politically charged. Five years ago, a Chinese firm would be boasting its “successful entry into Europe” as a Chinese firm. Many globalizing Chinese businesses choose to hide their origins, despite rising tensions between China, the West, and China. They worry that their links to home — however it is defined — can be viewed as a national security threat to the foreign market they serve.

“We are going from longing China to longing Chinese, like Eric Yuan.”

As startups build increasingly distributed teams, it’s also become harder to put a geographic pin on them. The world’s largest crypto exchange Binance, which started out in China, a famously doesn’t have a headquarters.

“If you look at companies such as Tiktok, Binance, Grab…these startups all started from day one with a global market in mind and built with teams located in multiple jurisdictions. It is really difficult to label them as from a certain country” said Ron Cao, who’s an early investor in Pinduoduo and founder of Sky9 Capital, an early-stage VC with a presence in China, Singapore, and the U.S.

But Chinese startups aren’t just concealing their origin. Many of them are in effect moving legally and operationally to distance themselves from their homeland to reassure foreign authorities that they aren’t beholden to Beijing. The upside to decoupling is that companies invest more in localization which is always favorable for overseas expansion. However, this could mean that they lose some of the benefits of being Chinese.

The journey of becoming less “Chinese” is long and complicated, and the extent to which companies choose to reduce their ties to home is playing out differently across sectors and the stage of their business. But there’s one overarching sentiment shared by the dozen entrepreneurs I spoke to: They have never felt more confident about competing with international rivals, thanks to the talent and knowledge they have accumulated at home. But they are also increasingly daunted by — and weary of the geopolitical uncertainty they face in the process.

Decoupling from your home

U.S.-China relations sharply deteriorated under former President Trump’s reign from 2017 to 2021, and President Biden seems to be staying the course, taking a firm stance on China with a sweeping chip ban. Having seen how U.S. Sanctions have affected our lives, kneecapped Huawei’s supply chainsThe spate of regulatory scrutiny on TikTokStartups in the West fear they could be caught between the superpowers.

As a result, companies minimize their Chinese connection. Startups used to be able to claim they were based in Singapore or San Francisco, but not have any meaningful operations in those areas. Shein, for example, used to bill itself as being “founded in L.A.” when in reality it started out in Nanjing and Guangzhou as a typical Chinese e-commerce exporter leveraging the country’s robust supply chains.

China’s foreign policy and press scrutiny are pushing Chinese companies to increase their overseas footprint, especially if they reach a critical size. Shein recently announced plans for open major warehouses in North America. The company has moved most of its assets to Singapore and made the island nation — which is widely regarded as politically neutral — its headquarters.

Sky Xu is also the founder and CEO at Shein. reportedly seeking Singaporean citizenship. Several entrepreneurs told me that top VC firms in China now provide passport shopping as part of their post-investment service for founders targeting overseas markets in response to a new rule on offshore IPOs: last December, China’s securities authority proposed that a company, regardless of where it’s 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, and whose main business operation is in China.

“If you look at companies such as Tiktok, Binance, Grab…these startups all started from day one with a global market in mind and built with teams located in multiple jurisdictions. It is really difficult to label them as from a certain country.”

The first step is to get the overseas legal setup. The second step is to gain the trust and support of local regulators. The founder of a productivity app that is targeting the U.S. market told me that “everything we use at work is non-Chinese,” so all of its data, internally or those of its end users, are kept offshore. Rather than ByteDance’s Lark and Alibaba’s Dingtalk, the startup uses Notion and Slack for internal communication, AWS for data hosting, and Stripe for payments. The company was established in Shenzhen, but it is currently setting up a Singaporean company as its holding company.

The need to localize enterprise software providers is even more urgent. While consumer app developers might gain traction without having to leave their China office, as they can remotely answer user emails  and master search engine optimization to acquire users, building an enterprise business from afar is nearly impossible. Business is best done face-to–face for large corporations as well as small mom-and pop shops. Why would a Shenzhen robotics startup move its parcels for a warehouse in Dallas?

Localization can create interdependence between economies which can then be used as a bargaining tool for Chinese companies as they navigate geopolitical challenges. “Once you have hired enough employees in the U.S., you have vested interests in the local economy, and your staff and local regulators will speak for you,” reckoned Richard Xu, an investor at Grand View Capital, which focuses on helping Chinese startups go global.

Losing your edge

Many challenges come with decoupling from China. Relocating executives and staff often means that their entire families have to move abroad. Additionally, it can be expensive to build teams in Western countries. Many globalizing startups find that their presence in China is a key advantage. Just as China’s cheap, skilled labor allows factories to produce affordable and quality goods for the world, its millions of engineers, who on average earn just a fifth of their American peers in 2022Chinese tech firms have a cost advantage which allows them to produce cheaper gadgets, better apps, and lower subscription fees for SaaS.

Despite the flurry of skepticism around TikTok’s data practice, the short video powerhouse seems to be keeping its core development force in Beijing for now. It is likely that the firm will have to raise its operating costs if it establishes an engineering army in the U.S.

TikTok could theoretically implement data anonymization. This is to ensure that engineers in China have only access to data whose identifiers are not connected to foreign individuals. According to a former employee of an American internet giant who worked in both the firm’s U.S. and China offices, “data anonymization isn’t impossible, but it’s extremely counter-productive for developers, which is why many companies aren’t willing to do it.”

“[Chinese startups]They are aggressive in pursuing market share and can quickly iterate on new products. They operate with a highly efficient and results-driven mindset and are comfortable with taking risks because in many ways they come from the world’s most competitive local market.”

Companies stay in China not just for the country’s cheap talent but also for its brain power. The U.S. might still have a lead in fundamental research around artificial intelligence, quantum computing, and other cutting-edge technologies, but in China, one can find some of the world’s best product managers who obsess over user experiences. Vine pioneered short videos, but it was TikTok who made this medium a global phenomenon.

In their transformation of becoming “less Chinese,” a question that founders keep asking is: how far should one go? While Zoom’s Eric Yuan is hailed as a role model for immigrant founders, his upbringing was thrust into the limelight amid rising U.S.-China tensions. U.S. lawmakers and media raised suspicions that the conferencing giant’s R&D center in China could be used as Beijing’s spying outpost, prompting the founder to issue a statementHe said that he was an American citizen since childhood and had no allegiance whatsoever to Beijing.

China is under increasing pressure from the West. China has also been undergoing regulatory changes. also pushing Chinese startups to drift away. In the last few years, Beijing’s clampdown on Alibaba, Tencent, and other domestic tech giants has dampened venture capitalists’ confidence in the consumer internet sector. Tech companies are no longer able to enjoy the same unrestricted growth as their predecessors over the past two decades due to new regulations regarding data practices and industry monopolies.

Regulations might also compromise the core of a startup’s servic, a particularly salient issue for content-heavy startups. Game developers need to be pundits of Communist ideologies to ensure their works meet the government’s content guidelines. Social networks are required for speech moderation systems that are expensive and that undermine user experience. Many founders in these areas are switching to other markets or pivoting to a different sector.

For businesses that aren’t aligned with the interest of the government, even having a physical footprint in China can be risky. “In China, we operate like a semi-illegal, underground business,” the founder of a web3 startup said, asking for anonymity.

He recently moved to Singapore with many other blockchain entrepreneurs after China outlawed cryptocurrency transactions. His target audience had been worldwide from the start. Since rules around the budding industry are ever-changing, “you never know if you’d be the next to be in trouble, especially when it’s an industry flooded with money.”

Longing to be Chinese

As they march into foreign territory, many Chinese startups are withdrawing themselves from public view — not to hide a nefarious behavior but out of a fear of being misunderstood. They resort to a strategy of “lying low and making money.” The taciturn further widens the gap between them and Western media, meaning American VCs have few ways to learn about them. Many of them feel more at home with Chinese media despite their international ambitions and continue to raise money from China-focused Venture Capitalists who are happy following the founders overseas.

“In more recent years, we are entering a new phase of entrepreneurship as more and more local startups are building businesses for global markets while leveraging the most strategic and relevant resources globally. In order to support this new phase, successful investors need to have a global perspective and value-added,” said Cao of Sky9.

“Entrepreneurs from China can be very competitive in many sectors globally. They are aggressive in seeking market share and can quickly iterate on products. They operate with a highly efficient and results-driven mindset and are comfortable with taking risks because in many ways they come from the world’s most competitive local market,” he added.

My attitude has over time gone from disappointment at companies’ lack of respect for journalistic independence to a growing concern that my portrayal of them might unfairly prejudice their growth. These firms could lose business partners, be subject to more stringent oversight by app stores, or face greater scrutiny from local regulators if they are given the Chinese label.

As their money crosses borders to follow Chinese talent, ideas and talent, VCs have a new slogan to describe their investment thesis. “We are going from longing China to longing Chinese, like Eric Yuan,” said Xu. “Chinese founders need to speak up more and accept that being Chinese is a thing to be proud of. But unfortunately, under the current geopolitical environment, it’s not really achievable.”

There are other encouraging stories. Jina.ai, a neural-search engine startup, was a guest at my lunch in Berlin. The founder, Han Xiao, turned up with 10 of his employees, who chatted in English and sat by a long table while Han, who is originally from China, proudly counted the number of nationalities present — twleve.

I was impressed by how globalized the team is, in part thanks to the diverse tech talent in Berlin and Xiao’s experience in Germany. On a daily basis, Jina’s developers in Berlin work closely with the rest of its team in Shenzhen, the Chinese city known for birthing tech powerhouses such as Tencent, Huawei, and DJI. In a way, Xiao has achieved the dream of many Chinese founders — to run a global startup that still gets to play to China’s advantage — without having to cover up their Chinese ties.

“In the beginning, people would still ask if we were a Chinese company, but these questions happen less and less now. I’ve been in Germany for years. Most of our staff are international, and they are the people who represent us in meetings with clients and business partners,” said Xiao.