Despite Downturn, Tech Startups See Opportunity in China

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There's no guarantee the ongoing global economic downturn won't get worse before things start to get better. But some entrepreneurs who've set up shop in China see plenty of potential for growth and say the current environment actually helps them by reducing costs and weeding out would-be competitors.

"In terms of the economic outlook, we think it's a time of huge opportunity," said William Bao Bean, a partner at venture capital firm Softbank China & India Holdings and a director at language-learning startup iTalki.

Based in Shanghai, iTalki has users living in 200 countries who take language lessons and do language exchanges with other users in more than 100 languages. Recently, the company started to generate revenue by allowing users to sell language lessons online, collecting a commission from each transaction.

"The good thing about this market is that it is a really bad economy and people are looking for ways to work. We've had 1,100 teachers sign up on our platform in the first month," Bean said.

In addition, operating from China gives iTalki a significant cost advantage over rivals based in other countries.

"We have a very low cost base to begin with and then we've managed to further lower it. We think we're one-tenth to one-twentieth their running costs," he said.

Other startups in China also see opportunity in the economic downturn.

"I'd say the crisis is an overall net positive for us. Resources are available at lower cost," said Calvin Chin, the CEO of peer-to-peer lending site Qifang.

Based in Shanghai, Qifang matches Chinese students with lenders willing to provide small loans that help fund education-related expenses. Despite the economic slowdown and tight credit markets, the company hasn't seen a dip in the number of new lenders coming to its site.

"We haven't seen any slowdown, but we're at a small early stage still so maybe we're slower than we would've been," Chin said.

That's not to say Qifang and iTalki aren't feeling some effects from the downturn. Raising money from investors has gotten more difficult in recent months, Chin said, adding Qifang still has enough money on hand to continue operating "for a while."

Access to funding can depend on the sector where a company competes. For example, iTalki has received unsolicited offers from venture capitalists looking to invest in the online education sector, but Bean said other startups won't necessarily be so fortunate.

"Coming up with a really neat idea and then looking for institutional funding is probably not very realistic," he said.

As raising money becomes more difficult, startups that have secured financing benefit.

"I think this tougher operating environment will shake out some of the potential competition who would just copy ideas and get enough funding to cause noise in our space," Chin said.

Of course, not all startups in China rely on outside funding to get started.

Peter McDermott, the founder and CEO of embedded software startup Nth Code, arrived in Beijing in 2002 after quitting his job in the U.S. to backpack across Asia. His programming skills landed him a job at Motorola, where he worked until starting his own company in 2005.

"I wanted to take things to the next level, to see if I could start a company," he said.

McDermott didn't rely on outside investors to start Nth Code. "I was doing some small consulting jobs to get it off the ground," he said.

Last month, Nth Code -- which now was eight staff, including McDermott -- unveiled its first product, a Web-based media player for consumer electronics called Nth Code Player. The company is now looking for customers, a process that's more difficult because of the slowdown in consumer spending.

The downturn has hit consumer electronics makers particularly hard as fewer consumers are willing to buy expensive flat-screen televisions and other products. But there are still opportunities out there for a startup with something innovative.

"If you have to talk to 10 potential customers and one becomes a real sale, maybe now because of the financial situation you've got to talk to 20 and one will become a sale," McDermott said. "The odds are a little less in our favor, but I think the technology is compelling."

In the meantime, Nth Code has sufficient funds to keep operating. "I've been really careful about the money we've spent, so we have enough money in the bank to keep us going for a while. I'm not stressed out about it right now," McDermott said.

"Three months down the line, if it looks like there aren't any customers, it might be a different situation. Plan B would be to do more contracting work," he said.

If that does happen, there appear to be plenty of consulting opportunities.

In December, McDermott recorded a short video of a version of Google's Android operating system that Nth Code ported to run on Nokia's N810 Internet tablet. He posted the video on YouTube, where it has been viewed more than 33,000 times. The response to the Android video caught McDermott by surprise, but it also opened the door to new opportunities.

"We've had a number of inquiries from companies that are doing Android work of some kind, asking if we can help them out," McDermott said.

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