Navigating the Shanghai Startup Ecosystem An Essential Guide: Part 2. Deep Dive:

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1 Deep Dive: Navigating the Shanghai Startup Ecosystem An Essential Guide: Part 2 Deborah Weinswig Managing Director, FGRT deborahweinswig@fung1937.com US: HK: CN: This report is part of our series on startups in China in which we focus on the startup ecosystems in Shenzhen, Beijing and Shanghai to provide insights into how these three cities are incubating businesses with global potential. In this report, we examine the growing presence of incubators and accelerators in Shanghai. 1) Incubators and accelerators serve to support earlystage ventures. Currently, there are over 500 entities in Shanghai that can be classified as incubators, accelerators or co-working spaces, most of which were established within the past three years. 2) These accelerators and incubators are moving quickly to differentiate themselves as the competition heats up, while also remaining flexible in order to take advantage of the various government programs and incentives. 3) Overseas players have also entered the scene in Shanghai Chinaccelerator, Plug and Play and Microsoft are all running programs to support local and foreign entrepreneurs in the city. We highlight five accelerators with overseas partnerships in this report. 1

2 It Takes a Village The number of incubators, accelerators and co-working spaces in Shanghai has grown rapidly from fewer than 40 in 2014, to 60 by mid Currently, there are over 500 entities in Shanghai that can be classified as incubators, accelerators or co-working spaces. The lines that define incubators, accelerators and co-working spaces have blurred in China. These entities are collectively referred to as mass incubation spaces ( 众创空间 ) in everyday vernacular as well as in government policy, as further explained below. The explosive growth in incubator-style entities has several implications: Incubators from overseas, particularly those with a globally known brand and proven track record, play an important role in Shanghai: A large number of incubators and accelerators are mainly operated by local enterprises or corporates, many of which do not have much experience in advising, mentoring or growing startups. In contrast, incubators and accelerators associated with a global brand name can give credibility to the Shanghai startup ecosystem as a whole. They can also help attract overseas talent and provide support to the startups when it comes time to expand outside of China. The lines between the roles of incubators, accelerators and coworking spaces are very fluid in China, as each entity maintains the flexibility to respond to the latest government incentives or startup needs: Entities that call themselves incubators in China often offer short-term boot camps, similar to what accelerator programs offer, rather than tying down the startups for a one- or two-year program. Most co-working spaces in large cities find themselves having to advise startups on legal or intellectual property issues, or to connect startups with investors. These incubator-style entities are known as zhongchuang kongjian ( 众创空间 ) in Chinese more accurately translated as mass innovation spaces and are a cross between an event space, a community and a trendy café, complete with the services offered by an incubator. This is the type of space that has been receiving the greatest policy attention of late. Source: istockphoto 2

3 A competitive landscape is emerging: It is a survival of the fittest environment, not just for startups, but also for the incubator-style spaces. Some mass incubation spaces compete by focusing on their specialization in the Internet of Things (IoT) or content marketing, for example. Those co-working spaces operating purely on an office-leasing model and offering limited startup support services are generally not expected to survive in the next few years. Shanghai is not alone when it comes to rising concerns about an overcapacity in mass innovation spaces. Suzhou, a leading high-tech manufacturing hub, which is located near Shanghai, targets to build 300 incubator-style entities by Tianjin, a city near Beijing, aims to increase the number of mass innovation spaces in the city from 100 in 2016 to 150 by the end of Chongqing, China s most populated city with over 30 million people, aims to build 1,000 such spaces by Below, we highlight a few accelerators that have significant overseas partnerships. Chinaccelerator A Shanghai-Based Startup Accelerator Chinaccelerator, a branch of SOSV an early-stage startup investment firm with $300 million under management was the first accelerator in Shanghai to focus on cross-border innovation, helping international startups enter China and Chinese companies expand internationally. Chinaccelerator picks a small number of promising startups twice a year. The accelerator program includes an investment of $30,000 for approximately 6% of equity, and provides office space, training and mentorship support. In addition, startups can collaborate with a network of corporate partners through Chinaccelerator s corporate innovation program. Microsoft Accelerator A Professional Network Provided by Microsoft Microsoft Accelerator provides startups with access to top Microsoft partners and customers, business connections and technical knowledge. The program has offices located in seven cities, including Seattle, London, Berlin, Tel Aviv, Bangalore, Beijing and Shanghai. Some 647 companies worldwide have joined the accelerator program and have generated an average of $5.2 million in follow-on funding. Microsoft supports the tech startup community by offering technology enablement through programs such as BizSpark, which gives free access to Microsoft Azure cloud services, as well as funding through its Microsoft Ventures fund. Plug and Play A World-Leading Startup Accelerator Plug and Play is a global innovation platform and startup accelerator with 22 offices around the world, including in Silicon Valley, Shanghai, Beijing and Shenzhen. Plug and Play runs 12 industry-specific accelerator programs twice a year, which act as a platform for major corporations and high-quality startups to connect and collaborate. Plug and Play has helped market leaders such as PayPal, Danger, 3

4 Google, DropBox, LendingClub, Zoosk, SoundHound, CreditSesame and Skytree, and has over 400 more early-stage startups in its portfolio. Shanghai Valley An Online and Offline Investment Platform Shanghai Valley is a China-focused accelerator that provides an online and offline investment platform for institutional investors. Startups, as part of the platform, receive investment money from pre-screened institutional investors. Institutional investors, after investing, become local partners to provide resources and connections to help the startups grow. The online and offline platform also gives startups a secure way to communicate to build visibility and credibility with investors. X-Node An Accelerator Operating Multiple Co-Working Spaces in Shanghai X-Node operates multiple co-working spaces located in core commercial areas around Shanghai Jingan, Zhangjiang, Hongqiao and Donghu. The company holds three to four events weekly, including lectures, networking sessions and focus workshops for small teams. X- Node also partners with 10 incubators and innovation programs from around the world, among which are Rocketspace and NUMA. The New Breed Mass Innovation Spaces Below, we take a closer look at a local community café for integrated circuit startups that benefitted from government funding. In early 2015, 36 of these Shanghai mass innovation spaces formed an alliance to coordinate better amongst themselves and with the government. Among the founding members of this alliance is SuHeHui, an angel investor institution. Apart from running a co-working space and helping angels find startups, SuHeHui offers a four-month program in which selected startups are required to participate in training and networking once a week. However, the startups are not required to have their team work from SuHeHui s offices. Like an accelerator program, a demo night is held at the end of the four months. Another mass innovation space, Tech50, is located in the suburban Jiading District. It combines co-working with co-living, pitch competitions and training for entrepreneurs. Source: istockphoto 4

5 Featured below, IC Café was also one of the pioneers of these incubator-style entities in Shanghai. IC Café IC Café was set up in 2012 as a café for enthusiasts in the semiconductor industry (the name IC stands for integrated circuit). Eight cofounders contributed a total of 160,000 for the initial setup capital. It took about two years to break even. By early 2015, the immensely popular coffee club had expanded to Beijing and Shenzhen, hosting community events to a full house every other night. However, despite its popularity, the café was struggling financially. Early 2015 was also a time when several privately-owned startup incubators and tech community spaces in Shenzhen and Beijing were shutting down or laying off staff. Thanks to government support, IC Café was saved from the same fate. The Science and Technology Committee of the Pudong District government rented a 300-square meter office to serve as an incubation space that could accommodate startups at a time, and made IC Café the operator. IC Café has since expanded to Hefei and Wuhan in China, and also overseas to Singapore and Silicon Valley. Conclusion Accelerators, incubators and co-working spaces play an integral part in any startup ecosystem, and the same is true for Shanghai. Spurred by government incentives and a proliferation of entrepreneurs, the number of entities that support startups in the city has increased rapidly over the past three years. While the presence of accelerators and incubators is good for entrepreneurs, there is a case to be made about an overcapacity of innovation spaces in the city. Naturally, players in this space are increasingly looking to differentiate themselves in an effort to attract the best startups, and those offering the best soft support services, such as access to mentors, potential clients and investors, are the ones that will likely remain relevant. 5

6 Deborah Weinswig, CPA Managing Director FGRT New York: Hong Kong: China: Freda Wan Pivotal China Consulting Kiril Popov Senior Analyst Simic Chan Senior Research Associate Hong Kong: 2nd Floor, Hong Kong Spinners Industrial Building Phase 1&2 800 Cheung Sha Wan Road, Kowloon Hong Kong Tel: London: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) New York: 1359 Broadway, 18th Floor New York, NY Tel: FungGlobalRetailTech.com 6