AllChinaTech brings you the layout of China’s internet startups in 2015 – here are the stats on how the scene looked in comparison with 2014, where the startups are based, what stages they’re in, and what sectors are being developed. This review is based on a report conducted by ITjuzi.com, a comprehensive database of Chinese internet companies.
At the end of 2015, there were 22,033 Chinese startups in the database, with 8577 startups added last year, among which 2921 were newly founded in 2015. The following analysis is generated from the data from 22,033 startups.
According to ITjuzi, the data from 2015 is incomplete and more startups founded in 2015 will be added this year. This seems to be due to their method of gathering data. In 2014, the database listed 2566 startups founded in 2014 and 5778 more startups founded in 2014 were added in 2015.
A quick review of startups in China in 2015
1. Startups continue trend of increase
In general, China has been seeing rapid growth in startup companies for four successive years. 1945 startups were founded in 2011, and 3020, 4272 and 5778 startups were founded in the next three years. On average, 750 startups were founded every quarter in 2012. In 2013, an average of 1000 startups were founded every quarter and in 2014, this number rose to 1400.
Due to incomplete data from 2015, we excluded this year from our trend analysis.
2. Beijing, Shanghai and Guangdong province are home to the most startups
These three first-tier cities were home to 15,722 startups at the end of 2015, accounting for 72% of the total number. Beijing is home to 36% of startups, as many as all the startups in Shanghai and Guangdong province combined. Shanghai was slightly ahead of Guangzhou with around 300 more startups founded as of the end of last year. Zhejiang, Jiangsu and Sichuan provinces all trailed behind with no more than 2000 startups. Most startups, especially those in telecommunications, media, and technology, require internet resources including broadband access, smart terminal devices, and tech talent, so they tend to congregate around big cities.
3. It’s hard to transition into a growth-stage startup from the early stage
ITjuzi classifies startups into four different stages according to funding series and scale of funding. These four stages are early stage, growth stage, IPO stage and mature stage. The number of startups in the database increased by 63% in one year, with 13456 startups in 2014 and 22033 startups in 2015. Early-stage startups increased by 67% while growth-stage startups only increased by 46.5%, which means that startups faced a lot of challenges growing into the second stage. However, it’s encouraging that there were 144 more IPO companies in 2015.
4. Most startups are in the e-commerce, business service and entertainment & sports sectors
There were 3163 e-commerce startups, 2599 business service startups and 1815 entertainment & sports startups at the end of 2015. These were the top three fields for startup entrepreneurs to enter. Unsurprisingly, these sectors also received the most funding in 2015. The next most popular fields were, in order, local services, finance, education, games, SNS social network, hardware and transportation. What’s worth mentioning is that startups providing local services grew from 671 in 2014 to 1738 in 2015.
E-commerce has always been the hottest sector for startups, due to the deficiency in retail facilities in China. The boom of e-commerce saves businesses money that would otherwise go into building stores. Business services gained a sudden popularity in 2015, with focus on human resources, big data, security and Software as a Service (SaaS). Meanwhile, startups in the entertainment & sports sector are working on related information services, video and film production, Japanese anime, live broadcasts of sports and gaming, and music radio.
2015 was a hard year for startups in the finance sector, especially P2P lending platforms. The Chinese government introduced regulatory policies on P2P lending, equity crowd funding and personal credit investigation businesses.
Startups that did not survive 2015
At the end of 2015, there were 989 startups labelled as “shut down” on the database, accounting for 4.5% of the total number. 2015 had 83 more dead startups than 2014. ITjuzi labels a startup as “shut down” if its website is no longer available.
Reading into the failed startups
1. Dead startups ran 32 months on average
According to data collected on the last day of 2015, among the startups which were shut down, 37% were founded in 2013, 29% were founded in 2012 and 16% were founded in 2011. Those founded in 2013 were the largest proportion of failed startups (368 companies). So on average, these startups ran for 32 months. In 2014, this figure was 34 months.
2.E-commerce, local service and social network are the hardest sectors to survive in
Most failed startups are from the fields of e-commerce and local services (17% and 10%, respectively). It’s mainly because these sectors have already drawn many startups, owing to the huge market. Coming in next, 10% of failed startups were social network startups and another 10% were entertainment & sports startups. These two businesses are alike in that they have low thresholds for entry, low operating costs and low costs for error. These kinds of business are unstable and don’t tend to survive for long.
3.Over 80% of these startups haven’t been funded
84% of the failed startups have never landed investment, and they were mostly founded between 2011 to 2013. The other 16% were startups that had been funded and later shut down. Of these, 15 startups were acquired and 160 were in their seed-stage, Series A or Series B funding.
Interpreting failures
Among the 160 startups which scored funding and then shut down, most of them are in the fields of e-commerce and transportation.
1. E-commerce startups
E-commerce is a cash burning business. The typical model of a successful e-commerce company is to sell its product at a lower price in the preliminary stage of online promotion to draw in consumers and orders, after which more investments come in, making it a dominant giant. Some startups fail in this process because they run out of funds. Most e-commerce startups don’t make it because they can’t keep up with their offline chains including production, design, logistics and storage.
2.Transportation startups
Obviously, the ride-hailing and carpooling businesses are already dominated by Didi Kuaidi, Uber China and Ucar, aka Shenzhou Zuche. In the secondhand car market, platforms including Youxinpai, Cheyipai, Renrenche.com and Guazi.com have an edge. But it remains to be seen whether they will survive, since the standards of vehicle evaluation and pricing have yet to be unified.
Then we have door-to-door car wash services. Many of them shut down in 2015. This kind of startup faced big challenges when seeking to expand into car maintenance and repair, including stricter requirements for qualified technicians, professional techniques and related materials.
3. Local O2O service startups
There were only a few O2O startups in the list of the 160 startups that failed after receiving funding. But why has Chinese media been making such a fuss over the crisis of O2O companies? The answer is that most O2O companies fail before they get any funding.
The first reason for this is because most local service startups seem to have taken the same road of development as e-commerce companies. In some markets, a few giants own the majority of the market share, leaving little chance for newcomers. The second reason is that businesses like those in the beauty industry are only visited by customers once every several weeks or even once in several months, so it’s hard for them to get a stable increase of income. The third reason is because it’s still uncertain whether the targeted group of “lazy” customers supply a large enough demand for home services for massages, manicures and the like.
(Read Top 10 Chinese VC investors in 2015.)
