by Kai-Fu Lee
WeChat’s early tweaks and optimizations were just the beginning. It soon pioneered an innovative “app-within-an-app” model that changed the way media outlets and advertisers used social platforms. These were WeChat’s “official accounts,” subscription-based third-party content streams that lived within the app and were sometimes compared to Facebook pages for media companies. But instead of Facebook’s minimalist platform for posting content, the official accounts offered much of the functionality of a standalone app without the hassle of actually building one. These accounts quickly became so dominant in the social media space that many media and consumer companies simply stopped building their own apps, choosing instead to live entirely in WeChat’s world.
In the span of two years, WeChat went from a no-name app to a powerhouse of messaging, media, marketing, and gaming. But Tencent wanted even more. It already monopolized users’ digital lives, but it wanted to extend that functionality beyond the smartphone.
Over the ensuing five years, Tencent painstakingly built WeChat into the world’s first super-app. It became a “remote control for life” that dominated not just users’ digital worlds but allowed them to pay at restaurants, hail taxis, unlock shared bikes, manage investments, book doctors’ appointments, and have those doctors’ prescriptions delivered to your door. This metastasizing functionality would blur the lines dividing our online and offline worlds, both molding and feeding off of China’s alternate internet universe. But before it could do that, WeChat had to get inside its users’ wallets, and that meant taking on the top dog in digital commerce.
THE PEARL HARBOR OF MOBILE PAYMENTS
The attack came on the most festive night of the Chinese calendar—Chinese New Year’s Eve, 2014—and the weapon drew inspiration from the occasion. Chinese tradition calls for the gifting of “red envelopes” during Chinese New Year, small and decorative red packets with cash inside. That cash is the Chinese equivalent of a Christmas present, something usually given by older relatives to children, and by bosses to employees.
Tencent’s innovation was so simple—and such pure fun for users—that it masked the magnitude of the power grab. WeChat gave its users the ability to send out digital red envelopes containing real money to WeChat friends near and far. Once users linked their bank accounts to WeChat, they could send out envelopes worth a set amount of money to one person or into a group chat and let their friends race to see who could “open” it first and get the money. That money then lived inside users’ WeChat Wallet, a new subdivision of the app. The money could be used to make purchases, transferred to other friends, or added to their own bank account if they linked it with WeChat.
It was a seamless translation to digital of an age-old Chinese tradition, one that added a gaming element to the process. WeChat users loved the envelopes, sending out 16 million of the packets during Chinese New Year and in the process, linking 5 million new bank accounts to WeChat Wallet.
Jack Ma was less amused. He called the move by Tencent a “Pearl Harbor attack” on Alibaba’s dominance in digital commerce. Alibaba’s Alipay had pioneered digital payments tailored for Chinese users back in 2004 and later adapted the product for smartphones. But overnight WeChat had taken all the momentum in new types of mobile payments, nudging millions of new users into linking their bank accounts to what was already the most powerful social app in China. Ma warned Alibaba employees that if they didn’t fight to hold their grip on mobile payments, it would spell the company’s end. Observers at the time thought this was just typical over-the-top rhetoric from Jack Ma, a charismatic entrepreneur with a genius for rallying his troops. But looking back four years later, it seems likely that Ma saw what was coming.
The four years leading up to Tencent’s Pearl Harbor moment saw many of the pieces of China’s alternate internet universe fall into place. Gladiatorial competition between China’s copycat startups had trained a generation of street-smart internet entrepreneurs. Smartphone users had more than doubled between 2009 and 2013, from 233 million to a whopping 500 million. Early-stage funds were fostering a new generation of startups building innovative mobile apps for this market. And WeChat demonstrated the power of the super-app installed on virtually everyone’s smartphone, an all-in-one portal to the Chinese mobile ecosystem.
When Tencent’s flood of red envelopes lured millions of Chinese into linking their bank accounts to WeChat, it put in place the last crucial puzzle piece of a consumption revolution: the ability to pay for anything and everything with your phone. Over the coming years, Alibaba, Tencent, and thousands of Chinese startups would race to apply these tools to every nook and cranny of Chinese urban life, including food delivery, electricity bills, live-streaming celebrities, on-demand manicures, shared bikes, train tickets, movie tickets, and traffic tickets. China’s online and offline world would begin rubbing shoulders in a way not seen anywhere else in the world. They were refashioning China’s urban landscape and the world’s richest real-world datascape.
But building an alternate internet universe that reaches into every corner of the Chinese economy couldn’t be done without the country’s most important economic actor: the Chinese government.
IF YOU BUILD IT, THEY WILL COME
On that front, Guo Hong was ahead of the curve. In the years after his first visit to my office, his dream of an Avenue of the Entrepreneurs had been turned into a plan, and that plan turned into action. Guo chose for his experiment a pedestrian street in Zhongguancun that was home to a mishmash of bookstores, restaurants, and knockoff electronics markets.
Back in the 1980s, the government had already transformed this street for the sake of an economic upgrade. At the time, China was in the throes of export-driven growth and urbanization, two projects that required engineering expertise that the country lacked. So officials turned the walking street into a “Book City” packed with stores carrying modern science and engineering textbooks for students at nearby Tsinghua and Peking University to pore over. By the year 2010, the rise of the Chinese internet had driven many of the bookstores out of business, replacing them with small storefronts hawking cheap electronics and pirated software—the raw ingredients of China’s copycat era.
But Guo wanted to turbocharge an upgrade to a new era of indigenous innovation. His original small-scale experiment in attracting Sinovation Ventures via rent subsidies had succeeded, and so Guo planned to refurbish an entire street for high-tech tenants. He and the local district government used a combination of cash subsidies and offers of space elsewhere to move out almost all the traditional businesses on the street. In 2013, construction crews took jackhammers and paving equipment to the now-empty street, and after a year of laying bricks and building sleek new exteriors, on June 11, 2014, the Avenue of the Entrepreneurs opened to its new tenants.
Guo had used the tools at his disposal—cash, cement, and manual labor—to give a strong nudge toward indigenous innovation in the local startup. It was a landmark moment for Zhongguancun, but one that wasn’t destined to stay sequestered to this corner of Beijing. Indeed, Guo’s approach was about to go national.
INNOVATION FOR THE MASSES
On September 10, 2014, Premier Li Keqiang took the stage during the 2014 World Economic Forum’s “Summer Davos” in the coastal Chinese city of Tianjin. There he spoke of the crucial role technological innovation played in generating growth and modernizing the Chinese economy. The speech was long and dense, heavy on jargon and light on specifics. But of note during the speech, Li repeated a phrase that was new to the Chinese political lexicon: “mass entrepreneurship and mass innovation.” He concluded by wishing the attendees a successful forum and good health.
To outside observers, it was an utterly unremarkable event, and there was almost no coverage in the Western press. Chinese leaders deliver speeches like this almost every day, long, plodding, and full of stock phrases that ring hollow to Western ears. Those phrases can act as signals during internal debates within the Chinese government, but they don’t necessaril
y translate to immediate changes in the real world.
This time was different. Li’s speech lit the first spark of what would become a raging fire in the Chinese technology industry, pushing activity in the investment and startup space to feverish new heights. The new phrase—“mass entrepreneurship and mass innovation”—became the slogan for a momentous government push to foster startup ecosystems and support technological innovation. Guo Hong’s proactive approach to innovation was suddenly being scaled up across the world’s second-largest economy, and it would turbocharge the creation of the only true counterweight to Silicon Valley.
China’s mass innovation campaign did that by directly subsidizing Chinese technology entrepreneurs and shifting the cultural zeitgeist. It gave innovators the money and space they needed to work their magic, and it got their parents to finally stop nagging them about taking a job at a local state-owned bank.
Nine months after Li’s speech, China’s State Council—roughly equivalent to the U.S. president’s cabinet—issued a major directive on advancing mass entrepreneurship and innovation. It called for the creation of thousands of technology incubators, entrepreneurship zones, and government-backed “guiding funds” to attract greater private venture capital. The State Council’s plan promoted preferential tax policies and the streamlining of government permits for starting a business.
China’s central government laid out the goals, but implementation was left up to thousands of mayors and local officials scattered around the country. Promotion for local officials in China’s government bureaucracy is based on performance evaluations conducted by higher-ups within the Communist Party’s internal human resources department. So when the central government sets a clear goal—a new metric on which lower-level officials can demonstrate their competence—ambitious officials everywhere throw themselves into advancing that goal and proving themselves capable.
Following the issuance of the State Council directive, cities around China rapidly copied Guo Hong’s vision and rolled out their own versions of the Avenue of the Entrepreneurs. They used tax discounts and rent rebates to attract startups. They created one-stop-shop government offices where entrepreneurs could quickly register their companies. The flood of subsidies created 6,600 new startup incubators around the nation, more than quadrupling the overall total. Suddenly, it was easier than ever for startups to get quality space, and they could do so at discount rates that left more money for building their businesses.
Larger city and provincial governments pioneered different models for “guiding funds,” a mechanism that uses government money to spur more venture investing. The funds do that by increasing the upside for private investors without removing the risk. The government uses money from the guiding fund to invest in private venture-capital funds in the same role as other private limited partners. If the startups that fund invested in (the “portfolio companies”) fail, all the partners lose their investment, including the government.
But if the portfolio companies succeed—say, double in value within five years—then the fund’s manager caps the government’s upside from the fund at a predetermined percentage, perhaps 10 percent, and uses private money to buy the government’s shares out at that rate. That leaves the remaining 90 percent gain on the government’s investment to be distributed among private investors who have already seen their own investments double. Private investors are thus incentivized to follow the government’s lead, investing in funds and industries that the local government wants to foster. During China’s mass innovation push, use of local government guiding funds exploded, nearly quadrupling from $7 billion in 2013 to $27 billion in 2015.
Private venture funding followed. When Sinovation was founded in 2009, China was experiencing such rapid growth in manufacturing and real estate that the smart money was still pouring into those traditional sectors. But in 2014, this all turned around. For three of the four years leading up to 2014, total Chinese VC funding held steady at around $3 billion. In 2014, that immediately quadrupled to $12 billion, and then doubled again to $26 billion in 2015. Now it seemed like any smart and experienced young person with a novel idea and some technical chops could throw together a business plan and find funding to get his or her startup off the ground.
American policy analysts and investors looked askance at this heavy-handed government intervention in what are supposed to be free and efficient markets. Private-sector players make better bets when it comes to investing, they said, and government-funded innovation zones or incubators will be inefficient, a waste of taxpayer money. In the minds of many Silicon Valley power players, the best thing that the federal government can do is leave them alone.
But what these critics miss is that this process can be both highly inefficient and extraordinarily effective. When the long-term upside is so monumental, overpaying in the short term can be the right thing to do. The Chinese government wanted to engineer a fundamental shift in the Chinese economy, from manufacturing-led growth to innovation-led growth, and it wanted to do that in a hurry.
It could have taken a hands-off approach, standing aside while investment returns in traditional industries fell and private investment slowly made its way into the high-tech sector. That shift would be subject to the ordinary frictions of human endeavors: imperfect information, old-school investors who weren’t so sure about this internet thing, and plain old economic inertia. Eventually, though, those frictions would be overcome, and money would make its way into private venture funds that might spend each dollar more efficiently than the government could.
But that’s a process that would take many years, if not decades. China’s top leadership did not have the patience to wait. It wanted to use government money to brute-force a faster transformation, one that would pay dividends through an earlier transition to higher-quality growth. That process of pure force was often locally inefficient—incubators that went unoccupied and innovation avenues that never paid off—but on a national scale, the impact was tremendous.
A REVOLUTION IN CULTURE
The effects of China’s mass entrepreneurship and mass innovation campaign went far beyond mere office space and investment dollars. The campaign left a deep imprint on ordinary people’s perceptions of internet entrepreneurship, genuinely shifting the cultural zeitgeist.
Chinese culture traditionally has a tendency toward conformity and a deference toward authority figures, such as parents, bosses, teachers, and government officials. Before a new industry or activity has received the stamp of approval from authority figures, it’s viewed as inherently risky. But if that industry or activity receives a ringing endorsement from Chinese leadership, people will rush to get a piece of the action. That top-down structure inhibits free-ranging or exploratory innovation, but when the endorsement arrives and the direction is set, all corners of society simultaneously spring into action.
Before 2014, the Chinese government had never made clear exactly how it viewed the rise of the Chinese internet. Despite the early successes of companies like Baidu and Alibaba, periods of relative openness online were followed by ominous signals and legal crackdowns on users “spreading rumors” via social media platforms. No one could be sure what was coming next. With the mass innovation campaign, the Chinese government issued its first full-throated endorsement of internet entrepreneurship. Posters and banners sprung up around the country exhorting everyone to join the cause. Official media outlets ran countless stories touting the virtues of indigenous innovation and trumpeting the successes of homegrown startups. Universities raced to offer new courses around entrepreneurship, and bookstores filled up with biographies of tech luminaries and self-help books for startup founders.
Throwing even more fuel on this fire was Alibaba’s record-breaking 2014 debut on the New York Stock Exchange. A group of Taobao sellers rang the opening bell for Alibaba’s initial public offering on September 19, just nine days after Premier Li’s speech. When the dust settled on a furious round of trading, Alibaba had claimed the title of the
largest IPO in history, and Jack Ma was crowned the richest man in China.
But it was about more than just the money. Ma had become a national hero, but a very relatable one. Blessed with a goofy charisma, he seems like the boy next door. He didn’t attend an elite university and never learned how to code. He loves to tell crowds that when KFC set up shop in his hometown, he was the only one out of twenty-five applicants to be rejected for a job there. China’s other early internet giants often held Ph.D.s or had Silicon Valley experience in the United States. But Ma’s ascent to rock-star status gave a new meaning to “mass entrepreneurship”—in other words, this was something that anyone from the Chinese masses had a shot at.
The government endorsement and Ma’s example of internet entrepreneurship were particularly effective at winning over some of the toughest customers: Chinese mothers. In the traditional Chinese mentality, entrepreneurship was still something for people who couldn’t land a real job. The “iron rice bowl” of lifetime employment in a government job remained the ultimate ambition for older generations who had lived through famines. In fact, when I had started Sinovation Ventures in 2009, many young people wanted to join the startups we funded but felt they couldn’t do so because of the steadfast opposition of their parents or spouses. To win these families over, I tried everything I could think of, including taking the parents out to nice dinners, writing them long letters by hand, and even running financial projections of how a startup could pay off. Eventually we were able to build strong teams at Sinovation, but every new recruit in those days was an uphill battle.