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Silicon Valley wants to groom next Chinese unicorn -- in China

Airbnb coach Y Combinator joins crowd of US startup accelerators in Beijing

TOKYO -- Top U.S. startup accelerators -- businesses that provide boot-camp-like programs to develop young companies -- are expanding their presence in China despite rising trade tensions, in a sign of the growing recognition of the country as a hotbed for technology.

One of the best-known Silicon Valley accelerators, Y Combinator, which counts Dropbox and Airbnb among its alumni, announced in August it will enter China -- its first market outside the U.S.

It hired Qi Lu, the former chief operating officer of Chinese internet search leader Baidu, to run its operations there. Y Combinator's first full-fledged three-month program in China is scheduled to start in the second half of 2019 in Beijing.

The company has brought startup founders around the world to its headquarters in Mountain View, California, where it believes the rich pool of entrepreneurs, investors, big companies and schools creates the best environment for grooming a startup.

But "we realized that in China, its possible to build a startup without ever having touched down in Silicon Valley," Eric Migicovsky, a partner at Y Combinator, said in a recent interview in Tokyo.

"The investment, the corporate ecosystem of partnerships and distribution and eventually M&A are all in Beijing. So in order for Y Combinator to play a role in China, we need to be there."

Eric Migicovsky, right, and Tim Brady, partners at Y Combinator, speak to the Nikkei Asian Review in Tokyo on Sept. 28. (Photo by Tsubasa Suruga)

Y Combinator's foray into China follows the footsteps of U.S. competitors like 500 Startups and Plug and Play, which already have operations in the country. The latter, which entered the country three years ago, now has eight offices across China -- larger than its U.S. presence.

Saeed Amidi, founder and CEO of Plug and Play, said in an interview that the accelerator is looking to expand the number of sectors that it covers in Beijing and Shanghai as the cities increasingly become the world's leading markets for emerging industries like electric cars.

"In the case of mobility, electric cars, autonomous cars, connected cars... I feel China will be more advanced than Germany, Japan and the U.S." he said. In those industries, he added, "China is doing things much bigger and much better than any other country."

But Chinese tech startups' sights are not confined to their own country. Y Combinator's Migicovsky said local startups are increasingly looking overseas for growth.

"A lot of China founders have focused internally on the Chinese market. The opposite is happening now," he said, pointing to the international expansion of ride-hailing unicorn Didi Chuxing. "Founders are looking outward at Southeast Asia, Japan, U.S., Australia... and that's probably just going to grow."

Accelerators run programs to help early-stage startups grow, providing management training, office space, access to potential clients and investors, among others. They often buy a small stake in a startup and make a profit by selling it later for a higher value. Founded in 2005, Y Combinator says it has invested in 1,900 startups with a combined valuation eclipsing $100 billion. Other accelerators are backed by corporate sponsorship.

Silicon Valley used to produce most of the world's unicorns -- unlisted startups valued at $1 billion or more. But China is catching up rapidly, thanks to strong backing from Beijing and furious competition among Chinese tech giants Alibaba Group Holding and Tencent Holdings. China's share of the world's 260 unicorns has increased to 30% from 23% over the past year or so, while the U.S. share fell to 47% from 54%, according to American research firm CB Insights.

The expansion into China comes with pitfalls. Economic and political tensions are on the rise as U.S. President Donald Trump, accusing Beijing of stealing U.S. companies' technology, imposes additional tariffs for Chinese imports try to narrow a wide trade deficit. China has reciprocated, creating a tariff war between the world's two largest economies. American investment in Chinese startups may eventually come under greater scrutiny by Beijing.

Saeed Amidi, founder and CEO of Plug and Play, speaks in an interview in Tokyo on Oct. 19. (Photo by Tsubasa Suruga) 

There are also lingering concerns that the influx of capital has made Chinese startups overvalued. Plug and Play's Amidi called valuations "crazy" and that "a little correction would be good." Data from some researchers show that venture capital funding in China declined in the first half of 2018.

Still, few doubt China's clout as an innovation hub over the long term. While U.S.-based startup accelerators are also expanding elsewhere in Asia, other countries lack the depth and momentum of China. Plug and Play opened its first office in Tokyo last year, and is considering moving into other Japanese cities. But "it is really hard to find good startups," Amidi said, adding that the government and universities need to give more incentives for startups.

Y Combinator recently held events in Tokyo to call on more Japanese startups to apply to its programs in the U.S., but said it has no plans to launch a local program in Japan.

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