The Future of China’s Startup Incubators Posted: June 9th, 2012 | Author: Kevin Lee

China’s business & start-up incubators are adopting different models than

those popularized from Silicon Valley and other mature, Western ecosystems. The

drivers developing a different incubator model are rooted in a different local

context, but the successful application of these models can have global

implications.

By Incubator I mean…

I’ve been tracking the term ‘incubator’ on Twitter since last year and am amazed

not only by the number of incubators that have sprung up all over the world, but

also how many diverse and loose definitions of ‘incubator’ there are.

By ‘incubator’ I do not just mean co-creation space, or consolidated back-office

support, or start-up competitions, or a crowd-sourced website of projects, or

classes on pitching and writing business plans.

By ‘Incubator’ I DO mean in addition to the above, tactically helping to build

businesses through to sustainability by bringing in the needed people/partners,

asking the right questions & molding the business model, coming out with a

working product/service & organization, and utilizing ready-made launching

platforms which include financing, marketing and/or retail/distribution channels.

THE RISE OF INCUBATORS AS A CULTURAL PHENOMENON

It is important to first understand the cultural and social significance of incubators

in western society to help us gain a comparative perspective on how China

incubators will impact a new generation.

The reason why the start-up incubator is enjoying success and widespread

popularity in our time and not before has to do with one unique occurrence: The

rise of the highly educated, freelance individual. While two other factors have also

been vital for the popularization of incubators – 1) macro economic demand for

innovation competition, and 2) an abundance of investment capital looking for

alternative asset classes and the development of mezzanine financing options –

only the rise of the highly educated, freelance individual is unique to this

generation and unique to the rise of the incubator.

Tracking the emergence of the highly educated, freelance culture

The expansion of a highly educated mass population happened in western society

and North America with education reforms and a greater access to higher

education in the Post-War era. The popular expansion of the North American

freelance culture (as documented by Douglas Holt in ‘Cultural Strategy’) began

in the 90’s as we experienced the early 90’s recession and then accelerated as

corporations and industry underwent an intense period of outsourcing, thus shifting

us away from the concept of lifetime employment.

And so since the 90’s we’ve witnessed the emergence of a highly educated,

freelance generation. These individuals, being more creative, independent, and

autonomous, have been building a new proposition of economic pay-off that

rewards ingenuity and seeks not a steady pay-check, but periodic bulk payments

that allow for more pivots in a person’s freelance-style career. Additionally, as an

economy built on high-educated, freelance culture demands greater creativity,

integrated thinking capacity, and greater specialization, these individuals seek an

actionable, and reliable form of collaboration that will see their unique capabilities

and ideas properly utilized.

It’s therefore understandable why it is this generation, a highly educated and

freelance group, which would construct and consider start-up incubators a viable

and important vehicle for long-term freelance achievement, and career success. In

fact, as chronicled by GigaOm, the first popular wave of incubators emerged

over 10 years ago, during the Dot-Com boom, when high-educated freelance

culture hit its first period of maturity.

Our current cultural legacy: the Silicon Valley incubator model

The current wave of incubators like the iconic YC, TechStars, and 500 Startups are

a product of A) a much more networked, collaborative culture, learned and

reinforced by social media’s dominance in our society, B) further maturation and

refinement in the venture capital/private equity apparatus, plus C) the justifiable

fixation on timelines and incubation processes specifically catered to technology

and digital venture types.

The Silicon Valley incubator model is built to graduate start-ups within 3 months of

incubation. Fast ideas, fast iteration, fast testing, fast scaling. High independence,

high autonomy. This is the incubator’s cultural legacy we’ve inherited from the

success of Silicon Valley and American-style venturing from a generation of highly

educated, freelance individuals.

There is a growing perception that the Incubator can become a new model for

graduate school. I too observe that this generation is beginning to perceive

incubators as having the same cultural significance as graduate schools. Indeed,

these are important implications for how a new generation of young Americans

and global citizens will classify ‘education’, fit for their future world.

instituteB - a Canadian Incubator reframing as a new kind of 'skool'.

But with this understanding of the cultural role of the Incubator for a highly

educated, freelance society, the Incubator finds a different role in China and is

therefore developing into a different creature.

A NEW FORMATION: CHINA INCUBATOR AS ENTERPRISE

Over the last year, a number of China incubators have either reformed, or newly

emerged, as professional enterprises, away from the classic western incubator

model that just serves as a prototyping platform for independent start-ups. China

Incubator Enterprises are acting more like niche early-stage private equity

acquisition groups – without the private equity.

Incubator Enterprises characteristic #1: A longer timeline with

greater vested interest.

These China incubators are elongating the incubation period, bringing the start-up

more permanently into the incubator, well beyond the traditional 3-month timeline.

Often times the gestation period is dependent upon the start-up’s complexity and

development needs. Many times incubators will not graduate a start-up until there

is a fully sustainable business model, and there is more to show than just a

prototype product.

This is taking a page out of more established corporate innovation processes, like

the one system made famous by 3M. Here, what is provided is not only space and

supplies for a team to get their idea off the ground, but the host organization also

takes a lead responsibility in filling the missing team and functional gaps such as

finance, marketing, project management, and strategy. In this way the incubator

graduates not only entrepreneurs with a product and some mentoring, but instead

a founding team, fully equipped to grow from start-up to small business.

Innovation Works, an incubator I’ve written about before, was one

of the very first China Incubators and still one of the most famous. Created

by Ex-Head of Google China, Li Kai Fu, they incubate tech start-ups, but

bring these companies in-house and build out fully functioning teams around

them. They usually graduate only after a product is tested and there are

investors lined-up to take it to the next step. This whole process normally

takes much longer than 3 months.

Incubator Enterprises characteristic #2: Cut out start-up pitching,

instead cultivate investor expectations.

Whereas the mark of a great incubator in western countries is giving the start-up a

chance to pitch to a packed room of potential investors, China Incubator

Enterprises instead opt to act as agents, selecting the right investor introductions

and brokering the right deal.

This deal making has much to do with the fact that each incubator has pre-existing

relationships with a set investment community or network, usually specializing in

one specific area of interest. In some cases, an incubator’s inception is the direct

result of a pre-existing fund’s desired investment objectives, looking to develop

investment opportunities.

With the Incubator Enterprise knowing the investor preferences and objectives so

well, there is little need for pitching but instead collaborating with the investors on

their investment expectations and involvement right from the outset. In this way, the

start-up, and the investor(s) are developed from inception to be the perfect

partners.

Xindanwei has been the poster-child for Co-working spaces in China

since its launch in 2009, with a very distinct and strong open community

culture. Last year Xindanwei expanded to build Xinchejian (New

Garage), a specialized program for the Open Hardware, hacker and

maker communities. Xinchejian provides specific events, workshops,

machining tools & technology, plus prototype product exhibitions; all

crucially needed to grow this emerging community. What is more, this

special unit has developed its own network of specialized partners and

investors, people who have a specific interest in funding and prototyping

co-hacked gadgets. These partners coming in at the very earliest stages and

develop ideas together.

Incubator Enterprises characteristic #3: Find industries to fill beyond

tech.

The emergent Incubator Enterprise, with the intention of incubating longer, more

thoroughly, and molding investor expectations from the beginning, find greater

capabilities to nurture new business models. This is proving powerfully applicable

for capturing the new opportunities emerging from China’s diversifying economy

needs.

Each Incubator Enterprise, in capturing its industry specialization, is also

customizing their incubator to fit the specific needs of that industry’s start-up needs

and also that industry’s investor requirements. With this evolutionary approach,

Incubator Enterprises from different industries will have different incubation

timelines and boast different incubator component strengths. It is only in

customizing the incubator format can the incubator fill the needs existent beyond

tech.

Transi.st is an incubator that seeks to develop tech that has direct impact

on social good. Shifting from the ideology that a start-up’s primary path

leads to IPO, Transi.st chooses its China incubation projects first for its

scalability in social impact.

Yuenfen-Flow has constructed itself as the nexus between tech, business,

art, and sustainability. Boasting its offering of methodologies such as

IDEO’s Human Centered Design, Yuenfen-Flow chooses its projects for their

creativity and the merging of artistic and technical form and function.

Jue.io is perhaps one of the most exciting examples of an Incubator

Enterprise, specializing in manufacturing incubation. Jue,io seeks to attract

creative youth culture products; from new iPhone case concepts to

innovative RFID key chains for offline social networking. Jue.io was set up to

cater to the needs, expertise and interests of its founding investor, who

comes from the manufacturing industry. Boasting a vast network of OEM

manufacturer relationships, Jue.io offers not only team, product

development, and funding for the right manufactured product idea, but also

the right manufacturing and distribution partners. Jue.io’s incubator

capabilities are specialized for the needs of the industry it serves.

Localized industry contexts force incubators to structure differently

It is easy to see that these incubator innovations come from the different industry

forces present in China’s very different economy. As chronicled above, traditional

western incubators are a product of a driving macro demand for innovation

competition, a mature alternative asset-class investment community, and a highly

educated, freelance generation. China does not strongly possess any of these

forces. The incubator was started in China not as a reaction to competition need,

but with the intention of leading social change. It found itself in an economy with a

very immature investor community, and within a generation and culture that is not

overtly highly educated nor freelance. And so in order for the incubator to survive,

flourish and add value in a different industry context, the China incubator has had

to evolve, with a longer timeline, a greater vested interest, a different approach to

cultivating investors, and filling opportunities in many other industry fields.

These non-traditional forces are not unique only to China. We are seeing the

incubator evolve into Incubator Enterprises in other fields that require adaptation

for distinct requirements. In Canada, an Incubator Enterprise exists

named InstituteB, a specialty incubator focused on sustainability start-ups and

cultivating particular skills for the sustainability field with special relationships with

sustainability-focused investors. They also bring in start-ups for a long timeline,

build thoroughly, and graduate only with the right investor already in place.

CHINA INCUBATOR’S ROLE FROM A CULTURAL PERSPECTIVE

And so as people have alluded to the Western incubator as a new form of

graduate school for a highly educated, freelance generation, what is the meaning

of the emergence of China’s Incubator Enterprises to this new generation of

Chinese?

I would offer a suggestion that China’s Incubators act more like the equivalent to

an after-school program, or a special summer program, or an extra-curricular

sports team. What I mean is that it is within these kinds of environments that many

Western-raised children first developed specialized skills, and first learned how

their unique skill integrated into a larger team. More importantly it is within these

extra-curricular program that many talented youth first developed passions for

personal hobbies and interests, and added very important components to their

developing self identity.

I feel the China Incubator’s cultural role is providing a similar, and vital service,

albeit not extra-curricular, but full-time.

Leading edge Chinese youth, with newly constructed identities and the beginnings

of unique talent, are in need of space to refine and sharpen what raw ability they

have. Incubators become the place this cohort of creative talent can deepen who

they are and sharpen their skill.

This being still one of the earliest generations of Chinese creative talent, these

innovators have not enjoyed as comprehensive an upbringing as the young talent

in other mature societies. Therefore Chinese incubators are calibrated to allow

participants to specialize on one creative ability, while the incubator fills the other

skill gaps. As a consequence, the incubation period grows longer; to not only

allow the business to mature, but also the creative talent powering it.

Incubators in China can develop in this way because China creative talent is still

so rare and offers the great potential for highly unique value creation. As the

competitive pressures in China continue to rise, the value proposition to incubate

talent and new China business solutions is something no investor can ignore.

It is within these incubators that a new generation of Chinese creative talent is

realizing that there are other options to their future career and life path. For the

first time China’s creative middle class sees a viable, and socially acceptable path

to having one’s own ideas & inventions realized.

The new Chinese incubator enterprises are in part instigating new culture, and

may become the modus operandi for a new creative class of Chinese youth.

****

Kevin is COO for China Youthology, a cultural innovation lab connecting Brands with Youth. There he leads business strategy & operations, and contributes as a Sr. Insights specialist. Kevin is a contributing writer at Forbes.com, and in 2009 and 2010 Kevin (@kevinkclee) was named one of the top 25 Twitterers in China by AdAge China and China Law Blog. He also is a respected blogger, writing the well-regarded genYchina.com. Kevin has an MBA in Strategic Management from Canada’s #1 business school, the Schulich School of Business, York University.

E: kevin.lee@chinayouthology.com B: http://genYchina.com T: @kevinkclee W: www.chinayouthology.com W: www.chinayouthology.com/blog W: www.openyouthology.com