TSS is excited to present the Startup Sofa, a new video blog interview series created for the Taiwan startup ecosystem! In this episode our guest is Dan Wong, Venture Partner at Landon Financial Advisors. A full transcript of the interview can also be found below:
TSS: Many of our startups are interested in entering China. Have you discovered any specific sales strategies for entering China?
Dan Wong: That's a very deep topic, entering China is a BIG topic. Lots of people are looking at it and I would say you can't dabble in China. You're either all in or you're all out. It's just different from so many perspectives.
The first decision is, “Am I going to go all out into China?” Because from channel strategy, to consumer behavior, to market segmentation, to marketing tools, it's all different. It's a completely different landscape. That means that a lot of the work that startups outside of China need to work on are not leverageable in China. It really needs to be an “all out” proposition.
A lot of people think about partnerships and going into China. Partnerships are important but a lot of startups, even big companies, often run into a misconception or over expectation that if I find the right partner then I'm set. I would tell you absolutely not. Having a partner is critical but at the end of the day, you’re going to be running this yourself.
I'll break it down, let's look at the media landscape. If you're a startup, you might want to use social media, you might want to build social media into your product. You might want to use social media and digital to do promotions and let other consumers know about your product.
But for those who understand China, China has a big firewall so a lot of commonly used digital media - Facebook, Twitter, all these - it’s a different set of players in China. The big players are BAT: Baidu, Alibaba, Tencent so it's a very different media landscape. Therefore, a lot of the partnerships for content for channel needs to be different so you have to start from scratch.
And more and more, these partners are very big. They're just as powerful as Facebook, or Google, or Amazon outside. If you look at the numbers that would tell you. If you look at Tencent and the Wechat platform, the number of users on that is north of 700 million.
You enter into China, you can't ignore these platforms and partnerships. At the same, they're very, so the scale is very big.
I have a lot of expertise in terms of consumer electronics products. There again, the consumer behavior is very different than you might expect elsewhere. I've been in China for 14 years so when you look at this period of time, you have consumer behavior evolve within those 10 years than do generations before.
What does that mean? When I first went to China and that was with Nokia, you would go sell mobile phones. Back then, mobile phones is a big category. We would have a mobile phone that's not selling. And so what would you do? You might discount, you might do something else. Guess what we did for certain models? We raised the price to the top and then guess what? Your volumes increase, too.
That has not happened anywhere else because normally, when you do a price increase, you have to do elasticity analysis - so if I raise the price, volumes will go down a little bit, but net/net, I increase my revenues. Back then in those days, that did not apply. You can both raise your price and raise your volumes and you don't see that elsewhere.
And the reason is very simple - these are consumers that are buying stuff for the first time. They don't understand how to pick products. They know the brand and then price itself communicates a lot. You have people come in and they say. “What's your most expensive mobile phone? Give me five.” That behavior no longer exists.
Then, there's a period of time where people buy the big brands. “I'm going to buy Gucci, I'm going to buy my first car…” So you have a generation of consumers who are buying stuff to try stuff for the first time. Now it's brand, so they'll buy these high-end brands.
Now you have people doing what? They’ve stopped buying brands. They're not buying products, they’re buying experiences. You'll notice for example in social media they’re not buying stuff anymore. Before people on their WeChat, “I bought a Gucci,” “I bought a whatever,” “Here's my first car.” Now you'll notice a lot of people “I am in Europe, I'm in France, I'm at a winery, I'm in Antarctica.” So they’re buying experiences.
In the Western world, other places, this is generations of change and different behavior. You have this crunched into ten years in China and so this has lots of implication for how you build your brand in a place of China. It has lots of implications for how you segment your product.
Because of what I just said, the market in terms of consumer behavior is hyper-fragmented. In China there's a saying that you need to adapt your message and your product for different generations of people. It’s not even even generations, they say, "80 後", ”90 後“ - those born after 1980s, and those after 1990’s - completely different. They expect different things, they buy things differently.
In summary, the whole consumer behavior is very different than you might expect. And the reason is very simple - this generation of people is the first consumer class in China and it continues to change it very quickly. Partnerships is different, the media landscape is different, consumer behavior is different, channel is different.
There's a lot of people again trying to sell products in China, let's say online e-commerce. This is very interesting, e-commerce in China I would say drives a higher percentage of sales than anywhere else. Consumers in China are very used to constantly using e-commerce to buy all sorts of products.
I had this similar experience when I was with my startup Rokid because we were looking at both the Chinese and the US markets. This is an interesting story. China is a very large market but with e-commerce, you're able to use e-commerce platform only to sell products to get to a certain level. If you look at the United States, for example, I think there is e-commerce there as well for certain products, but in general, consumer behavior is still very much brick and mortar.
I'll give you an example, there's a company called Pebble which is a bit under trouble now. But Pebble is one of the pioneers of the wearables market. The way they started is online, I believe as Kickstarter. I thought given how they started, most of their sales to be completed online.
It’s actually false. I was talking with them about a year ago and tried to ask them, “What's your split in terms of your online virtual versus your brick-and-mortar channel?” They never gave you the number, but what they did say “Predominantly brick-and-mortar.” Even for a brand like Pebble. So this is a very clear difference. E-commerce as it relates to consumers in China, is taking more percentage of sales.
At the same time, the channel mix is also quite different meaning that, I see a lot of startups doing both online and offline type of mixes. But then again, the partners that you would choose in China all differ. In China, it would be Alibaba, it would be Jingdong.
Then there's some verticals you would try or these are not big names outside of China in terms of your channel partners. For example, for consumer electronics products, it would be Suning, Guomei, these types of stores all again, different names.
The channel structure as well in terms of the margins, are quite different. The net-net where you can see here is China is a big topic. To do properly, you can't rely on a partner to do it for you. You need to roll up your sleeves and understand the market because it also moves very quickly.
TSS: Have you noticed any Taiwanese Startups entering China? Why or why not?
Dan Wong: I have almost not seen Taiwanese startups entering into China. I have seen many local startups headed by Taiwanese. There are lots of Taiwanese in China but frankly, I don't see a lot of Taiwanese startups actually working here and going into China and being successful.
In the earlier days when I was working with some content providers at Nokia, I work with companies at KKBOX which is still in Taiwan and I think they had a presence in China for a while. But a lot of those, given the hyper-competition in China, they haven't really made it to the top three in their categories.
For example, KKBOX, I don't believe is still in China or there might be then a very small footprint now. It's a hard market, it's different. I think China is a particularly tricky thing for Taiwanese startups and I think part of that is also a little bit of a mentality.
I mean I grew up in Taiwan too and I'm going to betray my age - I remember when I was growing up here, you go to the movie theater, they'll sing the Taiwan national anthem. You would stand. Then they would say in Chinese, "檢舉匪諜，人人有責“ - “To report on communist spies is everybody's responsibility.” That's how I grew up here.
Given the political situation between China, lots of Taiwanese startups think twice before they go in. There are lots of stories about how Taiwanese companies who get cheated somehow in China. Lots of markets, Western markets in particular, if you sign the contract, you can bet on it. In China, it's a piece of paper, really. It's a piece of paper. So that changes what needs to happen. This is not just for Taiwanese companies, it's for any companies, even big companies.
When I was with Samsung before Nokia, we had big legal departments but I’d always carefully review the contract. Actually, you know very clearly that if things don't work out, the contract won’t help you. The bottom line is you also need to manage the alignment of interests in China.
What I'm trying to say is that, because of that and that framework, it just takes a different and more detailed mode of operations than just signing a contract or picking a partner.
On the other hand, because of Taiwan's unique positioning, actually, there were some more beneficial policies for Taiwanese companies versus let's say a Western company. I'm used to working with U.S. multinational, European multinational, even a Korean multinational as well in China.
There's much more restrictions than for a Taiwanese or Hong Kong company so it's definitely a market that startups in Taiwan should consider. It's a very tricky market, but it's quickly becoming a market, not just of scale but for companies that are doing technology, lots of innovation.
I'll give another example. When I was with Nokia many years back, Nokia was number one, number two in China. We had lots of local Chinese competitors. They come in low-cost and we always felt none of the local Chinese will ever make it big or globally because a mobile phone has lots of technology; It's a very tech-heavy product. So we never felt that, any big chance they would really make a global. However, if you look at the global top ten phone manufacturers today, five of them are Chinese.
And you look at some of their technology, the innovation, it's come up very very quickly. Not only is trying to help a consumer market in and of itself, it's also now becoming a place of innovation. You look at some of the products that they do, for example, social media. For those who use WeChat, I would say it's a better product than Facebook, Twitter users combined. It really is. China is also now becoming a hub of innovation.
An area where I work a lot is the area of artificial intelligence and one of the experiences I found is that the China market is a very good environment for startups and innovation. Of course, the government encourages it but then there are other factors as well. You have a market of scale so if you do something big, it could really run quickly. You also have a consumer base where consumers are willing to try new things, so it's a very suitable market for innovation.
More and more, you see that their technology expertise is growing by leaps and bounds. So it used to be a factory, it used to be a big market. Now it's generating some very interesting innovations so it's a market that I encourage startups to really look closely at.
TSS: How is the government support in China regarding regulations, taxes, etc.?
Dan Wong: The government supports as it relates to tech subsidies and these governments now have some small investment funds but those are mainly for local companies. Some areas are restricted for foreign companies, while there are some other policies that tend to be slightly more favorable to Taiwanese companies than they are for multinationals or other foreign companies.
Again, the regulatory landscape in China changes very quickly. And so, depends a bit on what's happening at the macro level. But at least it's a common playing field for all foreign companies in China.
But yeah, anytime you do business in China, you need to think a bit about government and government regulations. I think that’s just built into the way you operate. I think that mentality is quite different from elsewhere. If you’re doing a startup in Taiwan, you’re not spending a lot of time thinking about what the government is thinking about unless you're trying to get some subsidies and other things.
Same thing in the U.S. when I worked in other places. But China is very different because the government is involved in many things. So I remember way back when I was still based in Silicon Valley, I would fly in when we were doing business in China, and we were working with the big operators - China Mobile, China Unicom, China Telecom.
I'll have a meeting with them and they'll say, “Yeah, you go back, and you tell your government XYZ.” We don't really have tight communications with our government.
Anything that you do in China like regulation, governmental support is always a fact that you at least need to think about. It's a bit better for tech but it's front and center and one of the criteria you need to consider when entering China.
TSS: Regarding Taiwanese startups interested in manufacturing in China, what are the challenges and opportunities?
Dan Wong: There are two challenges for startups. One challenge is a global challenge, it's not just for Taiwanese startups. Any startup doing hardware faces the challenge of getting a manufacturing. Because the factories are used to doing volume production.
It's very hard for them to take on the volumes that a startup can offer. It's very difficult even if you have the money so that's a global challenge, just getting a factory to accept your order.
The other piece, though for Taiwanese startups, there's a slight advantage because lots of the contract manufacturers in China who are building the products are Taiwanese. The top five are Taiwanese. So my factories in China, I have two large factories, these contract manufacturers are both Taiwanese-owned, so the expertise is here.
I'm living in Taiwan now and there's always a question: “What's the special opportunities for Taiwan, in today's global tech environment?” I would say this trend and growth of IOT is an advantage for Taiwanese willing to capture it. The opportunity is very simple- with all these IOT companies, there's a very big demand to find a factory to build your product, a turnkey solution if you will. Right now I can tell you, none exists.
At the same time, Taiwan has a lot of expertise in contract manufacturing. Existing big companies find it very hard to service the needs of IOT startups, very hard. They're just not set up to do it and I have direct experience going through that process. And I had my own hardware engineers, still it was hard and it remains a challenge.
So there is a very big opportunity for a Taiwan-based company to become the factory for IoT startups. This demand is global. I have seen IoT startups in Silicon Valley fly to China to find factories because there's no turnkey solution. I haven't seen anybody actually targeting that opportunity.
TSS: What are some differences you’ve experienced between running a company and now as an investor?
Dan Wong: The perspective is completely different. Being a founder, an executive in running your own company versus being an investor, the perspective is completely different. The issues that you think about, the areas that you focus on are quite different between these two.
When you are running a company, a lot of the issues you're thinking about are How do I do the partnerships? How do I develop my product? How do I market it? Lots of these are operational issues.
From an investor perspective, you'll ask about it, and this is certainly part of the due diligence. I think what you're more focused on as an investor is the team. This team here, are they going to be able to stick with it when things get tough? When the market changes on them, are they going to be able to shift?
Because you're almost guaranteed that the business plan you see today will be different tomorrow. Guarantee you and they know that too. So they're looking at the composition for the team, not just the skill sets, but also your mental stamina, your emotional stamina. Can you stick with it?
So you're looking at that, you're also looking for some track record. Are these people have a track record of exiting and building companies that bring value to their investors?
You're also looking at a more macro scale. Investors often invest in certain sectors and they go with it. A lot of people looking at venture investing from the outside. You think, venture investing is about taking risks. So venture capitalists should be very good at looking at risk and taking risk. But I tell you the opposite is true. Venture capitalists often have a very much herd mentality.
This is why you see certain companies with very high valuations because everybody's going after the hot deal because even if a hot deal fails, you're not to get blamed for it because you know everybody else went for it. Actually, venture is a bit of a herd mentality which is why sectors are important. These sectors go up and down.
When we were doing Rokid early on, we were very much in the artificial intelligence space. Back then, it was starting to get hot in China but not elsewhere. But now, AI as a topic, as a domain, it's very high.
For our startups looking for investments, you need to position yourself in the right domain. Sometimes this is not just about what you're actually doing, but also about packaging. So you're doing big data and some people think big data is now AI. From that perspective, what's the macro level transit? Are you part of that trend? Because from a venture perspective, we’re looking for the big, the big one.
You’ve focused your investments on IoT or Smart Home tech. Where do you see these industries in the next 5 - 10 years?
Dan Wong: This is a very interesting period of time to be in technology. You might notice that now there are a lot more new product categories coming to the market and I'm talking specifically about consumer electronics.
A couple years ago, if you look at the landscape, it's pretty standard - you have phones and tablets and computers. Right now, you have wearables, you have drones, you have robots, you have smart speakers. You have a whole host of different things. You have self-driving cars!
I tell you, these are the things when I was growing up, this is like fantasy. You're reading a book, “In the future, your car will drive you” and I remember reading it ands thinking that's that's just never going to happen. I tell you, it’s happening right now. I talked to some car manufacturers, you know, it's happening right now. In our lifetimes, we're going to be in self-driving cars. I guarantee you that.
The broad trend is that there's a lot of new product categories coming to market. One of the areas that is really interesting is within IoT, home. The use of artificial intelligence in the home, products like the Amazon echo. It came out two years ago and now depending on the reports that you look at, five to eight million units sold in the US alone. It's starting to build some scale.
Very quickly, we're going to see a revolution into home in terms of the types of products and capabilities that you can now do inside your home, one of those being “Voice” in terms of a new interface. I think the timeframe will be fairly quick. I think in five years, you'll see of every different landscape and products than we are seeing today.
TSS: What words of encouragement do you have for our startups?
Dan Wong: Tagging along what I just said, this is a very interesting time to be alive. There's a lot of areas that you can tap into. You can choose all sorts of different areas. Even for building IoT products, lots of modules are becoming available.
There's a lot of open source stuff - Google is opening up their AI, their tents are flowing. If you want to tap into that, there's a lot of open-source stuff and so there's a lot of opportunity that's available.
For the entrepreneur, for the startup, for the company that's paying attention, going out there looking for these resources, I think in many ways, the barrier to entry has lowered.
At the same time, the world has become a more complicated place. How do you go to market? It's a lot of competition and you know having worked in China, it's hyper competition. You do something and guess what?! A couple hundred other companies doing the exact same thing and so then how do you compete in this environment?
I'm very optimistic, I mean there's all this innovation happening right now. Things that even a couple years ago, people thought were impossible are now happening around us. Even things like voice - Siri has been around for a long time yeah it's not really working out. Who ever thought there's now a new product category called smart speakers? Alexa is coming out and it's actual powering lots of IoT products.
So if you're building an IoT product today with voice, you don't have to develop your own. You can use Alexa you can use lots of third-party services and platform that are out there today.
About Startup Sofa
The Startup Sofa is video blog interview series created to provide practical knowledge and valuable know-how to the Taiwan startup ecosystem. We've sat down with successful startup founders, industry experts, mentors, and guest speakers to have honest discussions on overseas sales & marketing, breaking into new markets, differences with Taiwan's startup ecosystem, and more! Please let us know what you think at firstname.lastname@example.org!