China Is Winning the Race for Young Entrepreneurs
Trump’s restrictive immigration policies—along with generous incentives from Beijing—have pushed Chinese students in the United States to return to China.
When Leo Wen wrote his first ever business plan in the spring of 2017, he believed that his social media app, called Pokke, would soon be profitable. Having recently graduated from Hofstra University a year earlier with a master’s degree in accounting, the then 26-year-old Wen had experienced firsthand the isolation that Chinese international students studying in the United States can face. He hoped Pokke, a map-based app that allowed users to post their activities and share relevant information based on their locations, could better connect them.
Wen assembled a team of 18 people, all Chinese students or fresh graduates, to design the app. He needed to raise $500,000 to launch it and expected to reach 100,000 users by the end of 2018.
It didn’t happen. After winning that year’s Chunhui Cup, an entrepreneurship competition held jointly by China’s Ministry of Education and Ministry of Science and Technology for overseas Chinese students around the world, Wen was offered a paid trip to China to tour government-run start-up incubators, some of which were interested in hosting his project. But he decided to return to the United States, as that was his initial target market.
Back in the United States after the trip, his rosy prospects began to fall apart. Soon, half of Wen’s team had gone back to China for good, thanks to Washington’s tighter immigration policies and the increasingly tense U.S.-Chinese relationship. Pokke is postponed indefinitely. Wen is considering following his team back to his home country, too. “Lately, I have been asking myself, why do I want to stay in a country that doesn’t even trust us?” Wen said.
The relationship between the United States and China has swung from cooperation to mistrust and competition in the past two years. Those involved in innovation and technology may have felt the change most. While China is stepping on the accelerator of its Made in China 2025 strategy, a plan aimed at upgrading the country from a manufacturing center to an innovation center, the United States is ratcheting up its guard over its intellectual property. In part, that involves essentially placing all scholars and students from China under a watchful eye.
Stuck in the middle are young U.S.-educated Chinese nationals like Wen. Students from China have been coming to the United States in increasing numbers since the two countries resumed their diplomatic relationship in 1979. In the 2018-2019 school year, for example, 370,000 Chinese were studying in the United States, making China the country’s No. 1 source for international students for 10 successive years.
What’s more important than the headline numbers is the newly awakening entrepreneurship drive among the young Chinese students. A couple of factors are pushing them along. For one, the current generation of Chinese students is much wealthier than previous ones. Many have grown up in relatively affluent families and have witnessed their own parents building up family businesses from scratch. In addition, they also have entrepreneurial role models such as Jack Ma, the founder of Alibaba.
There isn’t one formal study that shows the increasing proportion of entrepreneurs among Chinese students, but enough disparate data points make the trend very clear.
Yuanyuan Zhou, a professor of computer science at the University of California, San Diego, (UCSD) and a serial entrepreneur herself has witnessed from the front lines how much more entrepreneurial young Chinese students in the United States have become.
When Zhou started her first company in 1999 as a Ph.D. student at Princeton University, she was unusual among her peers. So far, she says, only two of the 20 or so Chinese Ph.D. students at Princeton she got to know while she was a student there have created their own companies. By contrast, Zhou says, seven of the 19 Chinese Ph.D. students who have graduated since she became a professor have done so. Last year, Zhou even offered a seminar in entrepreneurship at UCSD. About half of the 25 students who took the class were Chinese.
“Many people in my generation knew nothing about entrepreneurship, and we preferred a stable career to taking adventures,” said Zhou, who created her first company, a data management center, after potential clients and investors pushed her to make ideas in her Ph.D. thesis into real products. “The new generation,” she said, “is familiar with the stories of Jack Ma, Michael Yu, and Robin Li. Their passion for creating their own companies is much greater.” (Yu was the founder of New Oriental Education and Technology Group and Li of the Chinese search company Baidu.)
There’s a reason students are so passionate about entrepreneurship. For one, in 2015, Beijing issued directives to encourage entrepreneurship, a watershed moment in the country’s economic history. Among the initiatives were building more incubator spaces, offering rent stipends to start-ups, launching entrepreneurship courses in colleges, and allowing college students to temporarily suspend their degree tracks to create their own companies.
The response was fast. The average number of new businesses registered daily in China jumped from 7,000 in 2013 to 12,000 by the end of 2015. The number reached 19,700 by last October.
Since 2015, China has designated 200 model colleges for innovation and entrepreneurship education, and it has launched 2,800 courses for 630,000 students. Of college students graduating in 2017, 3 percent started their own businesses within half a year, almost double the rate in 2011. A survey released by a few dozen colleges at the beginning of 2018 showed that close to 90 percent of college students in China have considered creating their own company.
The effects reached the United States almost immediately. The number of entrepreneurship workshops and competitions in the country backed by the Chinese authorities, private investors, and student association, surged in 2015. “Those days, almost every week there was an event,” said Bianca Chen, who, as a bilingual financial reporter for Reuters TV in New York, is often invited to host such occasions.
In the same year, Chen, herself a Chinese student at New York University 10 years earlier, launched a show in Mandarin called “Startups Made in the USA,” via her newly founded company OX3 TV Production. Her series featured promising start-ups in the United States. Uploaded on youku.com, an online video carrier in China, the show reached 700,000 views by the second episode. “We caught the best time,” said Chen. “After Premier Li Keqiang called for mass entrepreneurship, the Chinese audience was hungry for such content.” The show’s target audience is in China, but it was also seen among Chinese students in the United States.
Meanwhile, Chinese venture capitalists were increasingly active in the United States as well. According to Pitchbook, whose data is not publicly available, Chinese venture capital firms had invested $2.8 billion in U.S.-based start-ups in 2014, but by 2018 the total had jumped to $14.8 billion.
It seemed to Sam Wang, who had attended Yale University as a graduate student and had started a venture capital firm in Silicon Valley, that the boom would continue indefinitely. In a speech in early 2018 at the Silicon Valley Innovation & Entrepreneurship Forum, Wang predicted the year ahead would be a “China year” when Silicon Valley would witness the spread of Chinese business and investment models and advanced manufacturing trends. “Each of these will bring hundreds of billions of dollars of business opportunities,” Wang said.
But what happened next made anyone expecting such a boom have to think again.
In February 2018, amid a tougher stance by the Trump administration on China’s trade practices, and particularly IP theft, Christopher Wray, the director of the FBI, called for a “whole-of-society response” to what he called China’s nontraditional espionage via Chinese students, scholars, and scientists in testimony in front of the Senate Intelligence Committee.
Then, in August 2018, U.S. President Donald Trump signed the Foreign Investment Risk Review Modernization Act, which handed the government’s Committee on Foreign Investment in the United States greater powers to restrict direct investment from foreign countries, with China in focus.
A few months later, in November 2018, the Office of the United States Trade Representative updated its Special 301 Report, an annual review of its trade partners’ intellectual property protections. The report included a specific focus on Chinese economic espionage and stealthy technology transfer. Another section of the report dealt with Chinese venture capital investments in the United States.
The same month, the U.S. Department of Justice launched its China Initiative, meant to target economic crimes of Chinese companies and individuals. Soon, U.S. colleges and private entities began to receive letters from the FBI, reminding them to keep an eye on their Chinese students, scholars, and employees. Some researchers involved in China’s Thousand Talents Plan, a program Beijing initiated in 2008 to recruit top scientists and innovators from around the world, were likewise called in for interviews by the FBI.
Fear spread quickly.
In April 2019, at the annual Carnegie Mellon University Summit on U.S.-China Innovation and Entrepreneurship, the impact of Washington’s policies had already become clear. First assembled in 2012, the summit had grown into one of the major platforms for young Chinese entrepreneurs to connect with funders in the United States. But only 50 business plans were filed for the event, half of the number in 2018. And only one of the dozen or so China-based venture capital firms that regularly attended in the previous years showed up.
Two weeks later, the Chinese Consulate-General in New York hosted its annual ceremony to award scholarships to selected Chinese students in the United States. I was able to attend a private preceremony meeting at which students spoke of their many concerns about their future prospects in the United States
When Jun Yang, a consul and head of the education office at China’s consulate in New York, asked about the students’ future plans, one who had just obtained his Ph.D. in rare earth chemistry and was scheduled to soon start working in a national lab in a U.S. university stood up and said solemnly: “Honestly, I just want to survive.” The audience nodded knowingly before Yang told them to strictly follow the law and protocols of their institutions to protect themselves.
Several months later was China’s annual Chunhui Cup award ceremony. There were 553 business plans filed for the competition from around the world, a 10 percent increase from 2018. The United States was the only country that saw fewer applications. “The IP issues are very sensitive now,” Dong Weiguo, a consul hosting an award ceremony at the New York consulate, told me at the time. “Students who were not sure about the IP ownership of their research would rather stay away from the competition.”
Of course, the U.S. government is not wrong to sound the alert about Chinese involvement in intellectual property theft. More than 80 percent of the economic espionage cases prosecuted by the U.S. Department of Justice in the past seven years related to China, and some Chinese nationals have been convicted for stealing trade secrets, although others have been released for lack of evidence.
It is the second category that really scares Chinese entrepreneurs and investors.
This past October, I attended the annual convention in New York of the Chinese Association for Science and Technology, USA, an organization boasting 10,000 members of Chinese American professionals in science and technology.
The convention lined up world-famous scientists as keynote speakers, including two Nobel laureates. But the conference room was most packed for the last session of the day, a panel discussion titled “The New Reality Ethnic Chinese Scientists and Tech Professionals Face in the U.S.” in which Xiaoxing Xi, a former chair of the physics department at Temple University, joined two former U.S. prosecutors via Skype to advise the audience about how to stay away from trouble.
Arrested at home by armed FBI agents in May 2015, Xi was accused of sending restricted technology to China. It later became clear that the brouhaha stemmed from the agents’ misunderstanding of the technology he was dealing with. The charges were dropped a few months later, but Xi said he and his family are far from recovering from the fear and humiliation. “I’ve been telling Chinese scientists: Don’t think this won’t happen to you,” Xi said.
In a break at the convention, I chatted with David Ho, the inventor of the cocktail therapy for HIV/AIDS and a founder of several biotech companies. He warned that the chill among Chinese scientists and inventors brought on by Washington is going to hurt U.S. interests. “Chinese scientists’ contributions [to the U.S.) are huge. The chill will take away that contribution and drive more people back to China than the Thousand Talents Plan,” Ho said.
It does seem like, as the Trump administration has made the United States less welcome to Chinese graduates, China has seen an uptick in returnees. Statistics from China’s Ministry of Education show that 519,400 Chinese students returned to China from around the world in 2018, an 8 percent uptick from the previous year.
Beijing has also been happy to lure them back. The Chunhui Cup, for one, has helped 634 promising start-ups to get funding and establish themselves in China since its inception in 2006. More recently added incentives are eye-popping. By the end of 2018, China had built 350 enterprise parks that offer services such as office space and business facilities to returning entrepreneurs. Altogether, the parks host 25,000 companies. These parks offer discounted rent and seed money. In some cases, start-ups can receive financial support of more than 100 million RMB ($14 million) from local governments.
That was part of the reason Tony Gao brought his company, Easy Transfer, to China. Gao, who came to the United States for high school in 2010, co-founded the online payment system with his friend Michael Shang in 2013. He wanted to help Chinese international students like himself get money wired from China faster and with lower fees. Shang, who was a few years older, initially proposed the idea to the U.S. education financial services company Nelnet, where he was working, but his idea was rejected.
In 2017, when Gao graduated from college, he moved the company back to China so he could work more closely with potential customers in China’s burgeoning payments market and with the education industry. The company set up shop in the Haidian district of Beijing, which provides up to 50 percent in rental discounts and about $15,000 of financial assistance to start-ups run by returning students.
“For a new company, these were quite appealing,” said Gao, whose company has since become the largest online payment platform for Chinese international students, with 100,000 customers and 20 billion RMB ($2.9 billion) of total transactions in 2019, double the previous year.
With the help of returning entrepreneurs like Gao, China had by the end of 2018 already almost reached or exceeded many of the goals it set to have an innovation-driven economy by 2020. According to October 2019 figures from the Hurun Research Institute, China now has 206 so-called unicorns—privately owned start-ups worth more than $1 billion. That is three more than the United States, making it the biggest unicorn hub in the world.
As much as China encourages entrepreneurship, of course, some of those returning to the country may also be disappointed. China’s economy has shown signs of weakening, and a flood of seemingly endless venture capital has started to dry up. Start-ups in China raised $35.6 billion in 2,047 rounds in 2019 until mid-November, compared to $93.4 billion over 2,795 rounds in the same period in 2018, according to Crunchbase News. And the United States, with its more mature venture capital operations and business environment, is still attractive to Chinese students, many of whom hope the trade war will be over soon or at least ease considerably in its intensity.
Even if that wish comes true, it seems unlikely that the barriers to Chinese graduates will ease anytime soon. Between 2010 and 2015, the denial rate for applications of H-1B visa, which international students need to be able to work in the United States after graduation, had never been higher than 8 percent a year, but in fiscal year 2018, it tripled to 24 percent.
And that will come with costs to both the students and to the United States. Wen, the entrepreneur behind the planned app Pokke, has thrived in the United States. Since he came here in 2013, he has founded an alumni association for those like him who went to China Agricultural University, formed a rock band that performed at Lincoln Center in New York, and worked on creating his own businesses.
“I won’t have done this if not being influenced by the dreamland atmosphere in the U.S. that set my mind free,” Wen said.
But with his visa expiring in two years, Wen said he has stopped seeking other means to stay here any longer. “If the U.S. was still the open-minded country that welcomes immigrants, sure,” Wen said. “But we are not welcomed here anymore. And China is stronger and is having a wrist-wrestling with the U.S. I see no reason why we won’t go back to help our own country.”
Although the U.S. economy may look robust at the moment, particularly as reflected in the surging stock market and lower unemployment rate, there is a danger that, when the clouds eventually get darker, the United States will regret having missed out the investments by thousands young Chinese entrepreneurs.
This story is made possible by a fellowship from the Alicia Patterson Foundation.