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Business
The State of Play
Startups continue to crop up but the market may be overrun with funding
By Jordyn Dahl | NO. 16 APRIL 21, 2016

Experts in Chinese technology and innovation discuss how startups are growing at a panel discussion on March 19 at the Bookworm, a bookstore in the Sanlitun neighborhood in Beijing. From left, Josh Chin, a reporter at The Wall Street Journal, Christina Larson, a science and technology reporter, Edmond Lococo, Senior Vice President of Public Relations at consulting company ICR, and Kaiser Kuo, Director of International Communications at Baidu (JORDYN DAHL)

Researchers at the Guangzhou Medical University in Guangzhou, south China's Guangdong Province, made headlines in early April when they published news in a scientific journal that they had edited the genes of human embryos in an attempt to make them HIV-resistant. This marked the second time human embryos have been genetically modified.

A separate team of Chinese scientists published the world's first claim of human embryo DNA editing in April 2015, sparking an international debate about the ethics of the scientific practice. That team, from Guangzhou-based Sun Yat-sen University, modified a gene linked to a blood disease that reduces the production of hemoglobin, an iron-containing protein in red blood cells.

Other scientists across China have edited the embryos of animals and published several papers on their findings. While these papers did not cause the same level of public outcry that the human embryo gene editing projects had, the Western scientific community regularly approaches the Chinese researchers' results with suspicion. This largely stems from the fact that up until a few years ago, the scientists responsible for the majority of DNA editing research were rooted in the West at schools like MIT and Harvard, Christina Larson, a science journalist based in Beijing, said at a March 19 panel on innovation in China at the Bookworm, a bookstore in downtown Beijing's Sanlitun area.

"These scientists in China are suddenly publishing dozens of papers in international journals, and nobody knows who they are or what to think of them. Sometimes the fact they're unknown creates suspicion. It caught the world's attention how quickly [genome editing] happened," she said.

Part of this rapid growth in scientific development can be attributed to government initiatives to develop the country's scientific research and lure back top scientists from overseas. China launched the Thousand Talents Plan in 2008 to recruit those with Chinese heritage or citizenship to come to the mainland for study and work. Scientists who enter the program are eligible to receive a 1-million-yuan ($154,000) subsidy and can apply for a 3-million-yuan ($462,000) to 5-million-yuan ($770,000) research fund.

The plan is one measure the country is using to stem its "brain drain"—the massive outflow of students and professionals going abroad and not returning. A 2007 study by the Chinese Academy of Social Sciences found that seven out of 10 students who enrolled in an overseas university between 1978 and 2006 didn't return to China. Of the 1.06 million Chinese who studied abroad, only 275,000 came back.

The trend appears to be slowly reversing, though, with many of the Chinese students abroad returning upon graduation to find work. About 460,000 Chinese students went overseas in 2014, a 30-percent year-on-year increase, according to the latest available figures from the Ministry of Education. Yet close to 365,000 students returned to China that same year, a 3.2-percent increase over 2013, according to the figures.

Song Yangzhou (left), a Sun Yat-sen University professor specializing in gene editing and one of the experts recruited under the Thousand Talents Plan, works with his colleagues in their lab in Guangzhou, south China’s Guangdong Province, on April 2 (XINHUA)

Jumping on the bandwagon

DNA research is just one sliver of the innovation upheaval happening across China. A startup craze took off in 2014 when Premier Li Keqiang began making statements encouraging students and other would-be entrepreneurs to launch their own companies. The government reformed its business registration rules and lowered the minimum amount of registered capital required in order to promote entrepreneurship. The number of startups boomed almost overnight, rising 46 percent from 2.5 million in 2013 to 3.65 million in 2014, according to data from the State Administration for Industry and Commerce.

The push for new companies in China is twofold. The backing of university students to innovate and create their own companies is partially designed to help alleviate a lack of employment opportunities for students graduating from higher education, Mark Williams, chief Asia economist at Capital Economics, said in an interview with Beijing Review.

Graduates appear to be heeding the call. More than 6 percent of new graduates planned to start their own business in 2015, according to a survey by Zhaopin.com, a Chinese human resources website. Another 21 percent expressed that they would like to start a business, although it's unclear if they had serious plans to follow through on that desire.

"We see a lot of students who are jumping out of school to start a business. It's like a trend to do startups; it's a cool thing to the young kids. They don't see the hardships in creating a startup, so a lot of them will fail," Sino Shi, a venture capitalist with China Growth Capital, told Beijing Review. In fact, only 2.4 percent of first-time startups succeed, according to a 2014 Xinhua News Agency report.

The rise in college graduates launching their own companies has coincided with a shift in Chinese culture. A few years ago, it would have been unthinkable for a graduate to announce they were forgoing a career at one of the state-owned companies or larger private firms in favor of the risk of branching out on their own.

"There is a culture that no longer stigmatizes failure. Starting a company is becoming a legitimate thing to do," Kaiser Kuo, Director of International Communications at Baidu—China's leading search engine and one of the country's three major technology giants—said at the innovation discussion.

An overvalued market

The other hope in boosting entrepreneurship is that creating an innovative economy will help cushion the economic growth slowdown as the country shifts from trade and manufacturing-heavy industries to relying on consumer and service-driven sectors.

But analysts and economists warn that China is walking a tightrope between making gains in GDP growth through innovation and creating additional problems in the labor market by shifting prematurely.

"Incremental technological gains here really could have a big impact on how labor is deployed generally," Charles Freeman, a nonresident fellow at the John L. Thornton China Center, a think tank, said in an interview with Beijing Review. "China still has huge overemployment and overcapacity, and if they actually do address some of that and move into innovative new things, that doesn't really employ a lot of people."

The need for new revenue sources and employment opportunities is growing, however, as the country cracks down on overcapacity in the coal and steel industries. The industries are expected to lay off 1.8 million workers as they reform to address the excess in supply. The government has set aside 100 billion yuan ($15.4 billion) to assist those laid off.

Regardless of China's motivations for promoting innovation, it has seen a surge in the number of venture capital firms—both private and government-funded—investing in the new companies.

Government-backed venture capital firms raised about 1.5 trillion yuan ($231 billion) in 2015, according to data from Zero2IPO Group, a consulting firm. Other venture capital investments more than doubled last year, reaching $32.2 billion, according to CB Insights, a research firm. About $4.7 billion worth of investments were made into domestic startups in just the first quarter of 2016 alone.

Venture capitalists (VCs) interviewed by Beijing Review say that the massive amount of money flowing into the startup market has created overvalued companies, particularly following the influx of newly registered companies in 2014.

"There's too much money in the market but not as many good teams. If you look at the supply and demand, there is some natural inflation. But it has been cooling down a little bit," Zhao Chen, a regional manager at the technological accelerator Plug & Play, told Beijing Review.

It's not just professional VCs who are investing, either. With the turbulence in the domestic stock market and an excess in real estate inventory, many looking to invest their money have turned to startups, Liu Bo, a VC with TusPark Holdings, told Beijing Review. The swarm of new investors has only increased the overvaluation of startups.

"Most of them don't have the knowledge of how to judge an early project, and they don't have the resources to help the startup, so it's really a disturbing voice in this market," Liu said.

Copyedited by Mara Lee Durrell

Comments to yushujun@bjreview.com

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