Battle Royale, Time Machine Management and Why We Should Copy More
Copying in the Chinese ecosystem
Welcome to all the new subscribers! I write a longform analysis about tech in China from the perspective of a 🐢 VC, sent out every Wednesday. If you like the content, please share with friends!
New format this week with three short vignettes, reply to this email to let me know what you think! Back to our regular longform schedule next week.
Time Machine management
Why is copying so bad?
Reading through the excellent essay Seeing Like an Algorithm by Eugene Wei this week, the following aside caught my eye：
"On one of my trips to China, I was at a dinner with a large group of Chinese entrepreneurs, and I mentioned the hubbub over Instagram copying Stories from Snapchat. One of the chief product officers of one of China's top companies laughed and remarked, "In China, if your competitor doesn't copy one of your successful features inside of two weeks, they must be incompetent." In many ways, the Chinese tech scene is the true Darwinian marketplace of ideas that Silicon Valley thinks of itself as. This bodes poorly for the relative output of Silicon Valley because the rate of idea spread and mutation occurs more quickly in China. Silicon Valley is often said to have taken over as the geographic center of technology innovation from Boston's Route 128 in part because Silicon Valley's more open labor markets allowed ideas to move freely among companies. China has taken that playbook and pushed it even further. Surviving the competitive landscape of the Chinese tech scene is like trying to climb out of that pit in The Dark Knight Rises. Terrifying. "
A reflection in three parts:
I think Eugene is wrong to compare surviving in the Chinese tech scene to trying to climb out of the Dark Knight Rises pit. I think it's far easier to climb out of that pit. At least you get a safety rope and don't have to kill everyone else with your bare hands. The Chinese tech scene is a battle royale.
In reviewing Chinese internet history, one feature that stood out was how bloody it was compared to the startup environment of the West. At the peak of the Groupon group buying craze in 2010 - 2011, over 100 clones were running around China trying to win the market. Almost all of them died a cashless death, and only after a merger could Meituan Dianping emerge as the sole survivor. To pick a more recent example, below is only a selection of the apps competing in the 2016 livestreaming wars.
Apart from the few survivors that I mentioned last week, everyone else folded or got sold. Every war in the recent history of Chinese internet has been equally savage. During the saga between DiDi, Chuxing and Uber, after a particularly long work bender one DiDi programmer had to get their contact lenses surgically removed. Mobike and Ofo's bike rental spree produced carnage photos that are eye watering in their implied burn rate. The spirit of competition isn't even limited to intra-companies, Tencent famously cultivates a fierce internal rivalry culture called sai ma (meaning racing horses - maybe it's hard for Pony to rein in the horse metaphors). When Tencent wants to launch a new project (say Wechat or a mobile version of League of Legends), several teams would be given the brief and their products pitted against each other. Losing team gets disbanded, and the winning team gets bonuses. Darwinian indeed.
Why is this? Could be that Chinese founders are quick to copy when there's an attractive new business model. Could be that the opportunity of winning in China is too attractive. Could be that there's a lot of hot money trying to find sources. Could be that China-focused VCs prefer to commit type II errors over type I errors. Could be that the history of Chinese startups (or even just modern China) validates crazy underdog stories. Could be that the mega-corporations of Alibaba, Tencent and Baidu love to fight with funded proxies. Could be all of these or could be something else. I'll let you know as I find out.
The Time Machine Management theory
In my research this week, one theory that kept cropping up was the 'Time Machine Management' theory. Originally mentioned in Softbank's 2000 Annual Report, it's a doozy of a vision:
“ Softbank is pursuing a so-called "time machine management" strategy to foster the global incubation of superior business models found through its venture capital operations in the United States. This strategy has given rise to numerous cutting-edge success stories in the Internet arena. A prime example is the world-renowned portal site Yahoo! Softbank provided early-stage financing for Yahoo! in the United States. It then extended the business model to Japan, South Korea, Germany, France, and the United Kingdom in partnership with Yahoo!" - Softbank 2000 Annual Report
I'll let William Gibson explain it. As we know, the future is already here, but it's not evenly distributed. If we can see how the future (aka the US) unfolds, investing in other regions is akin to getting into a time machine and going back in time. Since you know what will happen, you can pick the winners. In VC speak it's called 'de-risked business model'.
How did it work out for Softbank? Pretty well for one investment. Their stake in Alibaba famously returned $60 billion on a $20m initial investment (a 3,000x). This win gave legitimacy to the waves of startups made in US tech’s image. In China, the Time Machine Management theory gave birth to the strategy of Copy to China in the 2000s.
How much did Time Machine Management simply become a self-fulfilling prophecy when founders knew what VCs were pattern matching for? I wonder how many 'original' startups weren't funded in China, and whether copying was the most effective way to seem de-risked in a developing country’s riskiest asset class. I have heard of VCs in both Europe and China asking founders for their US equivalent business. Is it lazy because it assumes all innovations happen in the US first? Or is it just acknowledging that there are only so many human needs and so many business models and that someone should have made it work already?
What's so wrong with copying?
Suppose I started a new startup today and copied a bunch of features from all my competitors. Haven't I just saved my investors and my team both time and money? I've effectively outsourced the market research, product management and market validation to my competitors. Also, I know my users will have a more effortless onboarding experience since they're used to the features already.
But Lillian, you'd say, that's so uncouth and unoriginal. If your offering is not 10x better than the rest of the market, why would users even use you?
To which I'd say, where are you going to get the time, energy and inspiration to get 10x better if you're not copying everything in sight?
Copying has been framed in the West as a destination where innovation goes to die. But what if it's the starting point? Since we're mostly tech folks here, I'll spare you the literature on micro and macro innovations and jump straight to our established institution of choice, TED talks:
The copy, combine, transform theory by Kirby Ferguson:
Copy: No one starts out original. We cannot create anything new until we have a solid foundation of knowledge and understanding in our line of work. Copying is how we learn.
Transform: Taking an idea and creating variations. Major advances are usually not original ideas, but the breaking point in a long history of progress by many different individuals.
Combine: The most dramatic results happen when various ideas are combined together. By connecting ideas, creative leaps can be made.
"I invented nothing new. I simply assembled into a car the discoveries of other men behind whom were centuries of work. Had I worked fifty or ten or even five years before, I would have failed. So it is with every new thing. Progress happens when all the factors that make for it are ready, and then it is inevitable. To teach that a comparatively few men are responsible for the greatest forward steps of mankind is the worst sort of nonsense. -Henry Ford"
Like Ford, most great capitalists copied. Steve Jobs copied Xerox; Bill Gates copied Xerox, Facebook copies everyone, Uber and Lyfts are copies, etc. In one of my former lives, I was a development economist, and the history of development is littered with how nations copied each other to become innovative. The US refused to protect foreigners' copyrights until 1891 and Germany mass-produced counterfeit "made in England" goods in the 19th century, etc.
I think copying is a necessary but not sufficient condition for innovation. As it is the first phase, companies that do copy shouldn't be automatically dismissed. Going through the product histories of Tencent, everything started as a copy before being transformed into something incredibly innovative.
(KiK ⇒ WeChat ) + (Alipay ⇒ Wechat Wallet) + (App Store ⇒ Mini apps) + (Facebook posts ⇒ Moments) = Tencent $$$
I want to propose a new way of thinking about innovations in developing economies based on the above:
Copy ⇒ Localise ⇒ Combine = Innovation
This is a descriptive process for both companies and ecosystems and I’m sure I’ll talk more about this in the future. China is slowly emerging from being a copycat ecosystem to one that the West is copying from. The direction for investment has changed from Copy to China to Copy from China as Pinduoduo and TikTok are held up as new models of social buying and social media.
All the Zero to One talk leads to innovation being idolised but perhaps hinders the process to creation. To be innovative, maybe we should all copy more?
Reply to this email to let me know what you think, or find me @lillianmli where I write about what didn’t make it into the post throughout the week