China’s Journey From Imitator to Innovator

Entrepreneurs are adding new features and looking West | China’s answer to Facebook is “for the first time ever, within reach”

Edmond Lococo

Xu says PaPa will have 200 million users in three years


Instagram, the photo-sharing app bought by Facebook last year, offers special effects that can give pictures a weathered black-and-white cast or retro tints. In Beijing, Xu Chaojun’s PaPa app does that, too. But it also lets users add voice messages that can sound like robots or cats. PaPa notched 10 million downloads in five months from iPhone and Android users; the company released an English-language version, Wave, on iTunes on March 10.

Many Chinese Internet companies have been dismissed as mere imitators of successful U.S. enterprises, such as YouTube clone Youku, and they’re often content to profit from their vast home market. But Xu’s firm and others aim to compete globally. Kai-Fu Lee, the former head of Google China and founder of venture capital fund Innovation Works, says many Chinese entrepreneurs are improving on the Western products that inspired them. “Innovation, if it’s defined as inventing the light bulb, might still be a stretch for China,” says Lee, who helped fund PaPa. “To be the first to conceive of the next iPhone may be still a little difficult, but the prospect of making a Facebook, a Twitter, or an Instagram, I think that is now, for the first time ever, within reach for the Chinese startup.”

The companies Lee says are closest to that kind of success — two years away, he predicts — aren’t exactly startups. He points to WeChat, an instant-message app with 300 million users that’s owned by Tencent Holdings, and Weibo, a Twitter-like microblog with more than 500 million registered accounts, run by Sina. Tencent is China’s largest Internet company by market value, and Sina is listed on the Nasdaq.

Innovation Works, founded in September 2009, manages $500 million in assets, including funding from YouTube co-founder Steve Chen and Foxconn. The fund is based in the Zhongguancun district of northwestern Beijing, China’s equivalent of Silicon Valley. So far, Lee’s invested in roughly 50 companies, with a goal of five success stories per year.

Intel’s venture fund, Intel Capital, has invested about $670 million in more than 100 Chinese tech companies since 1998. Richard Hsu, managing director of Intel Capital China, says many of the roughly 40 companies in his portfolio have had to develop new business models to succeed. Shanghai-based Uucun, which helps set up and run app stores for more than 300 smartphone makers, gives away its products, making money from ads and promotions embedded in the apps. Uucun Chief Executive Officer Zhang Zhendong says the ads reach 30 million users and the company has attracted more than $10 million in investment from Intel Capital, Vickers Capital, and other firms.

China added 51 million Web users last year, bringing its total to 564 million.

In a speech on March 4, President Xi Jinping urged “boosting innovation-powered development in order to make China an economic heavyweight.” Yet censorship by the government hampers entrepreneurs and keeps China from taking “its rightful place in terms of innovation,” says Duncan Clark, the chairman of tech consulting firm BDA China. Another problem: reduced access to financing abroad. The number of Chinese initial public offerings in the U.S. last year declined to three from a peak of 42 in 2010, as allegations of accounting fraud weakened investor demand.

Still, Clark says, China has become “a fast-paced entrepreneurial launchpad.” PaPa’s Xu, 33, says he and Li Xiaobao, 24, finished the first version of their photo- and audio-sharer a month after conception. Xu estimates that PaPa will hit 50 million users this year and 200 million within three years. (That would outpace Instagram, which reached 100 million users in January, nearly two and a half years after its launch.) The 30-employee company, based in a reclaimed Mao-era factory, has raised more than $10 million from Innovation Works, Sequoia Capital, and other firms. It’s already sold its first paid advertisements, and Xu says it’ll do even better once he hires a sales team. But he’s resisting urges to attempt an IPO. “PaPa now is only at the start of our ambition,” he says.

The bottom line China’s Innovation Works is pouring $500 million into tech startups looking to take on preeminent U.S. companies.


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