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Shanghai’s Quickly Becoming The Next Startup & Innovation Hub

Estimated Reading Time: 6 Minutes

Shanghai, the financial mecca of China, has not often been thought of as the country’s hub for innovation, but recently Shanghai has blossomed into a startup heaven. Since mid 2016, more than 70,000 startups have been set up in the city, 20% more than the last year. For most, Beijing comes to mind when talking about China’s startup culture, and rightly so, however most of them are locals, making it increasingly inaccessible to foreigners. Shanghai on the other hand, is attracting expat talent like never before. This internationally friendly center for innovation is where the international startup action is taking place now.

The city is extremely cosmopolitan , attracting expats and major corporations from around the world, a key ingredient for innovation. It is the perfect Chinese city to step in to avoid total culture shock. It is also seamlessly turning into the ‘go to’ place for innovators, startups and entrepreneurs after being the epicenter and showcase of China’s fast growth and sophistication.

Despite being a city of 23 million people (world population review), the startup community in the city is well connected. There are countless incubators, accelerators, coworking spaces, events, meet-ups, mixers, VCs and networking parties. And a lot more are coming since this city has put innovation as a top strategic goal, transitioning from heavy industry to high tech ones.

Sounds like Shanghai is the perfect play to grow your startup, right?

Don't get me wrong, the environment is challenging and the competition is fierce, but their are several assets you can leverage to make the landing smooth, and the growth fast.

Government Channels to Fuel Funding

With an exponential rise in innovation, Chinese government coffers are shelling out to create several types of startup related funds. It comprises of funds and grants from governments local and central agencies. There are around 780 of such fund channels across China. They are rolling out cash to boost mass entrepreneurship, especially companies that can deliver ‘global impact’ and ‘innovation’ to the tech industry in China. They have also facilitated a compensation program for losses incurred while investing in early stage startup .

Currently in Shanghai, investors can be compensated for up to 60% of their initial investment depending on some factors such as size of the venture and number of employees. The compensation for each investment project in up to RMB 3 million and the annual compensation for each investment firm is capped at RMB 6 million. While there is some criticism over this move as critics are pointing at the tax payers money being spent in compensation losses, the government promises to fill all loopholes.

The city’s goal is clear : Catching up with Beijing and Shenzen and becoming the innovation showcase of China.Beijing still remains a strong tech hub, but it is very much Chinese oriented, and can be very unwelcoming to foreigners. While Shenzhen is mainly recognized for its hardware and IoT capabilities.

Others cities, such as Singapore and Tel Aviv also followed the same strategy and turned into leading startup ecosystems. Shanghai's strategy is probably not sustainable in the long run, but very efficient in the short one. The momentum for startups is perfect.

Currently in Shanghai, investors can be compensated for up to 60% of their initial investment

The government has also loosened the noose on the ‘hukou’ residency and degree requirements which restricts the freedom of movement of labor in China. Recently, Shanghai municipal government has announced to make permanent residency and educational degree requirements more flexible for the entrepreneurship market. Thus making it easy for permanent residency for tech entrepreneurs.

All eyes on Private Entrepreneurship

The days of state-owned enterprises are fading fast, and meanwhile private entrepreneurship has come sharply into focus. China’s total revenue from private and public sectors was the same in the year 2000. In 2013, the public revenue increased 6 times while the private one 18 times. In many industries, from general purpose machinery to paper and plastics, the state share is less than 15%. 4/5ths of retailers are also privately controlled. The Entrepreneur mindset is clearly taking back control.

Since mid 2016, more than 70,000 startups have been set up in the city.

We have heard about the rags to riches stories of startups making it big in the industry. Alibaba, Tencent and Baidu, all started small with a niche audience. However, the amount of exciting work being done in tech and digital startups by the newbies is phenomenal. There are several startups based in Shanghai which are doing very well: leading travel site CTrip, internet advertising platform AdChina, global property portal Juwai, P2P loan service PPDai and more. Around 12,800 angel investors are interested or have invested in Shanghai startups and there are more lining up everyday.

Key Assets to Support a Startup Ecosystem

Due to several factors like rising incomes, demographics, increased purchasing power of the growing middle class, the city witnesses a favourable environment for innovative businesses.

A huge market, where a niche is 5 millions people big !

Imagine a market of 23 millions people, with the highest purchase power of China. A city among top 10 billionaires capitals, where a niche could be a huge market in Europe for example. That's the scale of Shanghai.

Private VC investment flooding

Venture capital is flooding as well. Chinese startups attracted $41.8 billion in 2015 with Shanghai startups alone attracting 18% of this investment. Probably less than 2015, but still a bunch of angels and investors looking for the next unicorns. With the favorable investment conditions, Shanghai is probably one of the easiest places to raise money with a solid business idea.

The Shanghai Municipal Commission of Commerce, estimated Shanghai’s total contracted foreign capital worth $58.9 billion in 2015, almost 86% up than the previous year.

Shanghai scores as top emerging new tech hub in the world. KPMG Global Technology Report.

Qualified human ressources

People are the core asset of a startup. The big majority of VCs put team qualification, education and complementarity as top 2 conditions of a startup success. Shanghai has a long history of education respect and promotion. The average education level is higher than the rest of the country offering highly qualified human resources.

The government is also relaxing regulations on internal and external labor market restrictions in Shanghai to attract foreign talent to start businesses, with a special focus on “innovative talent.”

Innovative tech mindset

The city is witnessing a boom in fresh ideas like the very popular Mobike, which is a bike-lending service that costs just 1RMB per hour. Created by a former Uber employee, it lets you roam around the city and drop your bike wherever you like.

The Shanghai government plans to launch various schemes for startups. For example, “Entrepreneurship in Pujiang Action Plan”, will have a host of entrepreneurship schools, with the aim of having 200,000 technology entrepreneurs by 2020.

Shanghai is also expecting at least 3,000 angel investors and more than 100 venture capital firms doing business in the city.

In the last KPMG Global Technology Innovation report, Shanghai scores as top emerging new tech hub in the world. At this pace, the city will lead innovation in few years. And the impulsion. Innovation and entrepreneurship are emphasized in the last 5 year strategic plan.

With such favorable conditions to start on your own, its difficult to say no to this next startup hub. It is waiting for you to dive in and smell the coffee.

Talk to us if you have any experiences, thoughts and concerns regarding startups. We might be able to help you out.

by XNT 

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