Criteria for enterprises to qualify as startups
First of all, what businesses can be considered startups and what are their characteristics?
It is generally admitted that startups refer to all kinds of enterprises that just started their activities and are planning to become big players. The founders often begin the business by themselves, or with only a few core employees.
Special note: Joint ventures and subsidiaries that are usually founded by large companies are not considered startups.
However, there are also officially adopted criteria that determine if a company is a startup. In January 2019, China introduced policy adjustments that changed the criteria for qualifying as startups.
- Before the policy adjustment: Startup companies could only have a maximum of 200 employees and total assets and annual income not exceeding RMB 30 million.
- After the policy adjustment: Startup companies can have as much as 300 employees and total assets and annual income up to RMB 50 million.
Current situation for startups in China
In the last few years, rising incomes in China lead to the growth of the middle class. This has resulted in a change in consumption practices. According to Nielsen, China’s consumer confidence index was 114 points in the fourth quarter of 2017. Furthermore, consumers are not only willing to spend more money but also to buy more luxury and non-essential products.
The Chinese market represents substantial growth potential for companies, but this also means that startups often face intense competition. Chinese companies that are accustomed with local business practices still have an advantage compared to others. However, with the right tools and strategies, entering the Chinese market can be a great opportunity.
Potential growth markets
The health care sector
Due to the aggravation of population aging, the proportion of the population over 65 exceeds 7% in many Chinese cities. According to the latest data, the proportion of the elderly is even higher in some provinces. In Liaoning, Shanghai, Shandong, Sichuan, Jiangsu and Chongqing it has reached 14%. These populations have entered the stage of deep aging. Therefore, the aging problem could lead to the development of domestic services, health care, and health industry. This will certainly provide new development opportunities for entrepreneurs in China.
The service industry is getting more and more attention from Chinese people. The emergence of high-end catering, high-end education and high-end shopping malls can well explain this phenomenon. Entrepreneurs can use these developments by focusing on services and improving the ones they offer.
Science & Technology
Science and technology are the primary productive forces nowadays, but the research and development of technology requires a lot of time and money investment. However, once you are successful in technology R&D, you are likely to be part of one of the largest markets in the future. More specifically, according to the 2019 Startup Outlook China Report of the Silicon Valley Bank, many Chinese entrepreneurs believe AI (Artificial Intelligence) is the most promising sector for the next 10 years. Entrepreneurs with deep pockets can consider investing in this area.
Bottlenecks in the development of startups in China
- Financing difficulties: As stated in the 2019 Startup Outlook China Report, more and more startups find it harder to raise capital in China. 28% of them even consider it extremely challenging.
- Talent shortage
- Rising labor and operating costs
- International trade tensions
Government’s initiatives that will benefit small businesses
Public initiatives and plans
In June 2019, China has introduced its “Mass Entrepreneurship and Innovation” initiative. It includes 89 measures for key areas affecting entrepreneurship and employment, especially 78 new preferential tax measures covering the whole life cycle of enterprises since 2013. This initiative and the national top-down strategy of innovation-driven development are of great significance to China’s entrepreneurial environment. They highlight China’s strategic goal to develop an economy driven more by innovation and less by imitation.
Through this strategy and the 13th Five-Year Science & Technology Innovation Plan (2016-2020), the Chinese government has established a comprehensive strategic blueprint for the future. Furthermore, the 13th Five-Year Plan aims at developing services, enhancing the access to education and healthcare, as well as addressing environmental issues.
Preferential Tax Policies for Startups
The Chinese government’s stimulus package that was introduced in January 2019 includes generous tax rebates for venture capital (VC) companies and relaxed standards to qualify as a startup. Since January 2019, venture capital firms and individual investors can enjoy a 70% deduction on their taxable income. This is expected to provide a major investment boost in the tech sector and bolster innovation as growth in the traditional manufacturing sector keeps slowing.
Some special tips for your startup in China
In the early stage of business, there should be a legal adviser to avoid going into the intellectual property minefield. You should especially pay attention to the trademark registration, domestic and foreign patent application, software copyright application, intellectual property and other related issues. You may also use confidentiality agreements in order to protect your business.
As it is usually difficult and takes time to enter the Chinese market as a newcomer, starting collaborations with other companies will provide you with plenty of opportunities, help you enter the market and grow faster.
However, preferably cooperate with partners of similar magnitude to prevent ideas from being plagiarized. Collaborating with big companies may in some cases be riskier for your company on this matter.
Nowadays, products that incorporate a specific know-how are more and more preferred to generic goods. Startups are therefore advised to adapt their products to this trend of a more vertical segmentation of products.