Y Combinator talks incubation in China

The vitality of China’s technology and startup is putting the country’s innovation ecosystem under the center of world spotlight. Yesterday, Y Combinator (YC), the Silicon Valley-based incubator, is hoping to join the trend. Eric Migicovsky, a partner at YC, shared his thoughts on the potential and globalization of Chinese innovation with Daniel Hsu, contributor to TechNode and former Vice President at venture capital firm Village Capital, at TechTemple, Beijing.

From Silicon Valley to Beijing

“It’s easy for people to dismiss ideas,” Eric says. The initial critical and suspicious thoughts on raw ideas could lay a negative influence on the shaping of a startup’s potential. The spirit in the Valley that may seem “some kind of stupid” to outsiders, as Eric explains, is the opposite of “what if it works.”

And YC is building up its base in China’s capital city to spread the spirit. The country’s unique characteristics is distinguishing itself from world’s major innovation centers such as London, YC’s close study on global technology ecosystem says.

“Beijing is the first tech ecosystem that does not rely on the Valley,” Eric says. The Chinese system is breeding exclusive domestic markets and business models. Meanwhile, it’s integrating some of the most advanced technology and business trends. This has convinced YC to firmly believe in Beijing’s future global leading position.

Eric Migicovsky, partner of YC (left) and Daniel Hsu, contributor to TechNode and former Vice President at venture capital firm Village Capital (right). Image Credit: TechNode/VPHOTO

Home advantage and going abroad

The “tremendous capability to scale” and close ties with government are the 2 characteristics that are special in China.

From the perspective of startup models, Eric confirms that Chinese startups’ capability to scale could lead to an exponential curve that shows remarkable expansion and market share growth. However, a concern is sustainability and profitability. “[But] it’s super dangerous for [early-stage] startups to scale up before profits,” Eric says. He believes that a both stable and strong ecosystem needs vision and practical global experience to consolidate.

He admits Chinese government’s role in accelerating technology development and investment very often in particularly policy-oriented industries. Eric says YC suggests flexible approaches to fit into the Chinese environment. “Take [policy] advantages available” and “[no need] to go into hard [administrative] problems all the time”, are keys to sustain a friendly but independent relationship with local official departments.

Additionally, though it’s not always crucial for a Chinese startup to go oversea, business lessons such as task specialization with partners could accelerate operational efficiency. Eric says Chinese startups are inclined to do “all the things on their own.” This approach, according to him, has space for enhancement.

Target Chinese projects and blockchain

The accelerator is interested in a diverse range of Chinese tech startups. Matching user needs, a “formidable” founder with a crazy mindset who is determined to work through all hardships, and entry to new markets, are the major startup criteria YC looks for.

Speaking of the latest blockchain trend, YC has been looking into the field since 2011. Eric says the accelerator has invested in “a dozen or 2 dozens” of blockchain companies. Coinbase, the world’s leading cryptocurrency exchange, enrolled in YC’s 2012 Summer program.

He further explains that fundamental blockchain technology is what they’re looking at now. Sectors including smart contracts, capability testing, and those that are fundamental to empower blockchain applications, are to be closely watched for the next trend.

Eric also clarifies that the accelerator has no limit to the number of startups invests in. A Variable Interest Entity (VIE) structure allowing an investor to hold a controlling position of interest not based on the majority of voting rights is under discussion. Widely used in foreign investment in China, the structure could grant foreign companies voting rights despite limited stake portion strictly monitored by the state government.

Eric says the majority of YC’s funds for Chinese startups are balanced in U.S. dollars, and a few RMB funds are available.