The following post is based on a presentation by ironSource Co-founder & CEO, Tomer Bar-Zeev at Viola’s CEO Event in Nov 2014.
ironSource is the world’s leading platform for application discovery, distribution and delivery. Our end-to-end platform helps software and app developers concentrate on developing great products and transforming them into scalable businesses. We’re a young company that’s been operating for less than six years. We opened our office in Beijing a couple of years ago and today, China is our third largest and also our fastest growing market.
We don’t see ourselves as ‘experts’ on China but we have learned a great deal from our own experience about how to create a meaningful presence there, and I’m happy to share our story and insights with other entrepreneurs who are hoping to do the same.
China is a whole other ballgame
The way we look at China and the way we think that other entrepreneurs should look at China is with great humility. China’s ecosystem is more challenging than any other I’ve seen, so if you don’t know how to take your first business steps into China, if you don’t have a plan and a very clear roadmap, and if you haven’t familiarized yourself with other companies’ case studies of failure, then it’s very likely that you’ll lose money in your attempt to launch over there.
When we were building ironSource’s “China strategy”, I met with CEOs of not just Israeli companies but also American companies, and I saw that most of them are not only failing to achieve their goals, but some of them actually failed so miserably that they had to shut down their Chinese operation. This really made us think about what we could do differently and we tried to analyze the main factors that might lead to either success or failure.
“China-In” vs. “China-Out”
The Economist ran an essay last year that I think did a great job explaining the challenges and opportunities that can be found in China. Taking our cue from the lessons of this essay, we basically identified two different types of strategies for companies to break into China:
China-In: The first type involves companies outside of China that see China as their target market. Their aim is to go after the Chinese user and their goal is to gain market share inside China. We call that “China-In”. Here, success is the exception not the norm. While the professional social network LinkedIn has successfully penetrated the Chinese market, Facebook, YouTube, Google and WhatsApp – all giant successes outside of China – have virtually no presence in China. On the other hand you have their Chinese counterparts, companies like WeChat for example, that are doing amazingly well and are clear market leaders in China. [Side note: After my second visit to China I downloaded WeChat. I think it’s an amazing product and I find it better than WhatsApp].
The reality is that Chinese companies are looking to grow internationally outside of China and I think that their odds of succeeding are very good. At ironSource we are not planning China-in tactics. Instead, we work with most of China’s internet giants to help them grow outside of China.
China-Out: The other type of strategy which we call “China Out” involves non-Chinese companies who aim to partner with Chinese internet giants in order to help them take their products and solutions outside of China. As explained in The Economist article I mentioned earlier, these Chinese giants wants to dominate the global market and to be #1 worldwide in their particular verticals. This presents a huge opportunity for Israeli companies (and tech companies in general) who choose the China-Out strategy in order to break into China and “get it right”.
So to sum up: If your strategy is China-In, then I urge you to consider it very carefully, but if it’s China-Out, then this is definitely a great time to be leveraging your technological strengths to help Chinese companies, and in so doing to secure a meaningful Chinese operation for your company.
How do you know if you’re ready to operate in China?
Being ready to operate in China is a combination of your commitment and a valid business model.
1) Be committed. Being “Committed” means that you shouldn’t go into China if your plan is merely to test the waters and shop around. The Chinese won’t take you seriously. One of the things that they look for to see whether or not you’re serious is if you have offices in China or whether you’re working through a middle man and are “here one day and gone the next”. One of the best practices for launching in China is to have a proper local presence. If you’re not seen to be serious, you will lose face over there, which is something that’s very important in China. You won’t get a second chance to make a first impression.
2) Make sure you have a valid business model. What has worked for you outside of China won’t necessarily work in China, so make sure that you have a business model that has been tested in China and can work there. Also, make sure that you have either real revenues and/or real partners. Without real revenues and the right partner, you won’t know if you really have a valid business model in China.
More tips on how to get your startup off to a good start in China (based on our experience)
3) Be careful of the middleman phenomenon. As a young startup trying break into China, you will meet a lot of “middlemen”, mainly Israelis. They may be very nice and offer what sounds like a promising strategy (which involves their help of course), but you should beware of middle-men who can’t actually deliver. The smarter way to go – although it might be more challenging at first – is to have your own operation on the ground that is an extension of your company’s DNA, run by someone that you trust who can open and manage your Chinese business.
4) Don’t go to China if you have any IP issues. It’s safe to say that if you launch an operation in China, people will probably copy you. Your assumption should be that if you can be copied, you will be copied, and that’s okay as long as you don’t make a big deal out of it. But if your business is IP-related and you’re not willing to take the risk that you might be copied, then don’t go China because it’s part of the game over there and it can happen to anyone. If you’re not willing to take that risk, then China is not the best market for you. Having said that, if you have the right partners to work with and are working with the “big guys”, then there’s less of a risk that you’ll be copied by smaller companies.
5) Make sure that you can scale your revenues. When we opened ironSource’s Chinese office we were already turning over monthly revenues of almost $1 million in China (we’re now making a little over $4 million a month from our Chinese operation). It’s important that your business model includes a plan for generating revenues that you can scale and it’s helpful if you can start generating those revenues before you commit to opening an operation China.
6) Secure real partners. It’s really important that you partner with the big guys, learn from them and have a meaningful partnership. Our interests were aligned with our Chinese partners and they really helped and guided us. Also, having real partnerships with local companies (preferably big ones) is helpful to gaining credibility with other local companies that you might eventually want to work with.
7) Employ locals. It’s very important that you have local employees. In our case, our GM who runs ironSource China, is an Israeli guy who has been living there for many years. He is extremely talented, but his main challenge at first was to build a team. The team has to be built with local people who are very good, who can be trained, and who are the right fit for your company. Finding such people can be very difficult so it’s important to invest the needed time. You should go there, meet the people and build an extension of you DNA there.
8) Be present. When you launch your startup in China, make an effort to meet people. Invite them to your offices and show that you are committed. If you can demonstrate that you are ‘present’ there (even if you aren’t always available in person), you stand a better chance of succeeding in China.
Tomer Bar-Zeev, Co-founder & CEO at ironSource speaking at Viola’s 2014 CEO Event.