What can startups learn from the Chinese ‘copycats’

China has long enjoyed the reputation of being the manufacturer for the world. With the ubiquitous fake branded-goods available for a tiny fraction of the cost of the genuine goods, China has also developed a reputation of manufacturing “fake” or “copycat” products. This reputation has undoubtedly and unfortunately extended to the startups scene. Over the last decade or so, the Chinese startup companies have gained an infamous reputation of copying business models from US or Europe and planting it at home. Being a Chinese national, I too held this perception for years until I took a close look at the industry recently.

Are most Chinese startups simple “copycats” of their western counterparts?

Out of the top 30 Chinese unicorns (according to CB insights), at least 9 have been publicly considered as copycats of more well-known western counterparts by various publishers and tech media.

• Xiaomi: seen as the Chinese Apple
• Didi & Kuaidi: seen as the Chinese Uber
• Meituan: seen as the Chinese Groupon
• Dianping: seen as the Chinese Yelp
• Vancl: seen as the Chinese Uniqlo
• Mogujie & Xiaohongshu: seen as the Chinese Pinterest / Instagram
• Tujia: seen as the Chinese AirBnB

However, it may be surprising for some to discover that some of these “copycats” were in fact launched before their western counterparts. For example, Dianping has been called by Business Insider “the Yelp clone” in an article published in Nov 2015, but it was in fact launched in 2003 while Yelp was launched in 2004. You would think that a well-known publisher would do a simple search on the launch dates before making such claim. But instead, mental shortcuts kicked in and the misconception is further reinforced. In addition, while Dianping started as a consumer review app for restaurants similar to Yelp, it started offering group-buying discounts through partnership with restaurants in April 2008 similar to how Groupon has started. And 7 months later, Groupon was launched in America.

I am not saying that Groupon copied Dianping. All I am trying to say is that in the startup world, inspiration can come from anywhere so it is difficult to conclude who copied who but it is dangerous and somewhat ignorant to automatically resort to mental shortcuts and assume everything Chinese are copycats.

The “copycats” sometimes does it better

Even among those Chinese startups that were launched after their western counterparts, their business models and products are often considerably different and some may even argue, better. Chinese startups tend to start thinking about monetization from the very beginning which may stem from the “practical” Chinese mindset. Among the top 30 Chinese members of the unicorn club, only 1 startup has no clear monetization model – Meitu, the most popular photo-editing app in China. In comparison, one can easily think of a handful of American unicorns that either have no clear monetization plans or have only started to figure it out recently. Whatsapp, Instagram, Pinterest and Quora (*its latest valuation is at 900 million, just shy of the unicorn status) are some of the notable examples.

Take Pinterest for example, the content discovering platform with over 150 million users bolsters an incredible valuation of $11 Billion. Pinterest had no revenue model till 2014 and it was already valued at $5 Billion then. To justify for the soaring valuation, Pinterest hired executives from tech giants like Google and Facebook and started exploring different ways to generate revenue that had worked elsewhere before. While they have made some progress, growing annual revenue from $100 million (in 2015) to $300 million in 2016, there is still a long way ahead before they can prove their worth of the $11 billion valuation. The journey to monetization has proven to be a tough game for Pinterest because the entire monetization model is an after-thought. When Pinterest was first envisioned and the initial prototype was built, no one thought about how this can ever make money. It is no wonder that it becomes extremely difficult now to try to incorporate a money-making engine seamlessly into the platform. What is alarming is that such extreme cases of high valuation with weak revenue model have become a source of inspiration for other startups in the west who struggle with monetization. Many single-mindedly focus on user growth and take for granted that money will follow once a large enough user base is built. However not every startup can realistically dream of a billion-dollar exit with no monetization model. And many startups may not be able to survive the long and exhausting search of a fitting monetization model.

On the other hand, Chinese startups tend to  be more conservative on this front and start thinking about monetization from the very beginning. For example, Xiaohongshu, often compared to Instagram or Pinterest, is a content sharing and e-commerce platform where users discover, share and purchase global fashion and beauty products. To understand the business model of Xiaohongshu, imaging you are browsing on Instagram and come across a unique and trendy pair of black pumps worn by a user and wondering where you could get those for yourself. In Instagram, you could post a question in the comment section and if you are lucky, the user replies in a few days with the complete information, then you could search for that product on other e-commerce sites and eventually may or may not find it.  On Xiaohongshu, all you need to do is to click on the little icon next to the product and it takes you to the merchant website where you can purchase it directly. The ingenuity of the business model is that the e-commerce angle does not diminish user experience at all as the product information is very non-disruptive to the original content and you can make them disappear with one click anywhere on the picture. In fact, the e-commerce angle enhances user experience for many because it allows users to experience the instant gratification of buying an item that they fancy immediately. Monetization was on the mind of the founder from the very beginning, coupled that with the eagerness to meet the ever-evolving Chinese user needs, Xiaohongshu managed to create a seamless model that combine authentic user generated content with e-commerce. With only 15 million users and counting, the platform boasts an impressive annual revenue of $200 million and has one of the highest conversion rate (eight to 20 percent) in the ecommerce industry. Valued at $1 billion, Xiaohongshu boasts a much more modest revenue multiple of 5, compared to Pinterest’s revenue multiple of 37.

Difference in thinking driven by investor perspectives

The difference in priority placed on monetization between the west and east also stems from the differences in investor perspectives. In Asia, it is extremely difficult to have successful IPOs when companies are not making money and investors are generally more conservative. In US, on the other hand, a stunning 83% of the IPOs in 2014 were making losses. Twitter, for example, had a hugely successful $14 billion-IPO while posting $80 million loss. It is stories like these that fuel investor confidence, which in turn encourages entrepreneurs to singe-mindedly chase user growth and de-prioritize monetization. However things are starting to look less rosy with the recent de-valuation stories like Square, which reduced its valuation of $6 billion by more than half when it went public in 2015. At the end of the day, businesses need to make money so while the profitless super-startups may be hot today, it is unlikely to be sustainable.

I hope more and more people start to fight the mental shortcut that all things Chinese are “copycats” and perhaps even take a page out of the Chinese playbook and start thinking about monetization from the very beginning.