Will China’s Internet Startup Companies Continue to Stay Plugged In and Profitable?

China has some of the world’s largest, valuable, and well known internet startups, including tech giants Alibaba, Tencent, and Baidu.  However, with a suffering Chinese economy, world globalization of products, and the internet becoming more complex and more difficult to censor, it will be intriguing to see the future of China’s internet startup companies.

China’s Internet Use

China is well known as being restrictive on consumers obtaining information and using the internet in everyday life.  This is because the Chinese government censors websites that its citizens can use, known as China’s Great Firewall. China believes that is has the legal right to control the internet’s content and therefore this censorship does not hinder its’ citizens right to free speech.  In fact, China has the world’s largest number of imprisoned journalists and cyber-dissidents.  This Great Firewall restricts the information and websites that its citizens can go to.  China was even ranked last in the world (North Korea was omitted) for internet freedom.  

However, even with this censorship, China is the largest market for the internet.   In China, there are nearly 650 million internet users, which constitutes approximately 22% of the world share of all internet users.  Therefore, a successful internet company from China, catering  to the Chinese customers, has a great chance of being successful due to the large number of potential customers.  

Successful Internet Startups in China

China is known to have large and successful internet startups.  However, some economists believe that a great deal of their success is because these companies did not have competition with international companies due to government regulations.  Therefore, these companies were successful in part due to the China’s restrictions of competition from outside companies.  

China’s most valuable Internet Startups include:

  • Alibaba: the world’s biggest online commerce company and has millions of merchants and businesses.  It is also a marketplace, a search engine, and a bank.  
  • Tencent: China’s largest and most used internet service portal.
  • Baidu: a search engine, similar to Google.  

Additionally, the success of these startups has led to an increase of former employees from these companies leaving to start other internet companies.  In 2010, it was considered a boom time for Chinese internet startups as Chinese users increased and restricted international competition increased profit potential.  Venture capitalists were becoming more and more excited with the potential of these companies.  Venture capital investments doubled to $6 billion in 2014 from $2.8 billion in 2013.  Additionally, early stage funding for Chinese tech startup increased to nearly $2 billion in 2014.  As of middle of 2015, the environment for for entrepreneurs was the most favorable.  However, a lot has changed over the past seven months.  

Current State of Internet Startups in China

First, China’s economy has struggled in the past seven months.  China’s Shanghai Composite Index (similar to United States S&P 500) has fallen nearly 50% in the past seven months.  Additionally, China has seen a large amount of capital exiting the country as investors begin to worry about its’ economy, nearly $1 trillion in those seven months.   This leads to the current state of internet startups to decrease.  According to a KPMG report, venture capital funding for all startup fell 29% in the fourth quarter of 2015.  Additionally, there have been hiring freezes at Alibaba and Baidu, indicating a slower momentum for internet companies.  

Future for Chinese Internet Startups Companies

I believe that with China’s suffering economy, as well as increased globalization, the valuation of these China’s internet startups will decrease as global competition will take customers away from these sites.  I believe that there will be an increased demand from outside of China for the Chinese government to decrease the amount of censoring on the internet.  Therefore, Chinese internet startups will see increased global competition which will lead to a decreased valuation.

Alan Posner
A.B. Freeman School of Business, Tulane University