Podcast transcript #73: The launch of innovative projects to create a healthy start-up ecosystem in China
Find here the China Paradigm 73 where we, Daxue Consulting interview season entrepreneurs in China. Today we are with Luis Sarre to have a discussion about networking between entrepreneurs in China and discussion on how to build a start-up ecosystem in China.
Full transcript below:
MATTHIEU DAVID: Hello everyone. I am Matthieu David, the founder of Daxue Consulting; a China research company based in Beijing, Shanghai and Hong Kong and Daxue Consulting has its podcast called China Paradigm and today I am with Luis Sarre. You are the co-founder of Free Entrepreneurs; not only for entrepreneurs. I can see that you have founded all the companies that are involved in other missions, but the one that we are going to talk about today and the one you want to talk about is Free Entrepreneurs. You have been in China since 2012 so it is already a while; already 7 years and you have various experiences as an engineer and as an entrepreneur as well.
So, Free Entrepreneurs and I are reading how you introduce it yourself; it is online to an offline platform to initiate collaboration and open
LUIS SARRE: So, let me introduce myself; Luis Sarre. I have been in China since 2008. I arrived as an employee. I was working for a company and then well, I transitioned to be an entrepreneur and this started pretty much in 2012, as you mentioned. What I am doing now with Free Entrepreneurs basically as a summary I would say that we are connecting start-up ecosystems in China with a major global start-up innovation and vice versa. So, we are supporting start-ups and corporates that are located in China and they want to grow up and develop themselves and have access to market in China as well as we are helping them to connect with the outside world and we are doing similar things for other networking between entrepreneurs in China and are willing to explore China.
MATTHIEU DAVID: Could you give an example to illustrate and to make it more concrete, specific and easy to understand? Could you give an example of what you have done to connect those halves in China and in the west?
LUIS SARRE: Start-ups that are in China are looking for cross-border operations and they want to grow. We are targeting similarly in Mexico or Latin America and we help them to understand the specifics on those markets, we connect them with who could be a relevant partner in those markets and similar things we are doing in the other way; north is we are specifically some start-ups from South Korea, for instance, and they want to develop their business in different areas. We are health developers and we are explaining to them what needs to arrive in China and what needs to be competing with almost every country in China.
MATTHIEU DAVID: How do you charge them? Do you charge on the consulting? Do you charge a programme? How do you charge them?
LUIS SARRE: Yeah, we have different revenue strength models. When we are talking about the start-ups ecosystem in China basically when we commit to helping them we are getting a share on the success of the revenue that they are getting and not necessarily equity. Every case we treat differently. We are only asking for equity when we are actually participating in the development of the technology or the solution or we are co-outsourcers of the business model that it is going to be innovative in the market, but basically with the start-up ecosystem in China; the revenue that they are making or once they are making revenue and on the other side we are working with corporates or with accelerators, incubators and we get a consultancy fee from them. So, we participate in the growing-up process of their start-ups.
MATTHIEU DAVID: How do you know the sales volume they are making because they don’t have to disclose the numbers to you? So, how do you know; if you introduce them to Latin America, how much are they going to make and how much percentage should you take and so on? I know the percentage; you won’t know it because it is a contract, but how do you know the sales volume they do in Latin America?
LUIS SARRE: Well, basically we have done this in other ways. Start-ups that are coming to China to explore the market; we call it like an entrepreneurial mission. They arrive in China and we help them to understand the market, we connect them with potential customers, we actually facilitate the networking between entrepreneurs in China, and then they actually get contracts or service requests in China and then it is when we are participating. In Mexico or Latin America; we have not been in that position yet, but we are building a network or collaborators or ambassadors; local ambassadors who will take care of the revenue restraints in those countries and we will have a deal with these flag holders for entrepreneurs in those countries.
MATTHIEU DAVID: I see. It seems to be the ideal situation for start-ups because they may not have a lot of resources, they want to be effective, and they want to get sales. So when you are offering to help find them clients in China it seems like a good solution, but on your side; if they pay you only with success how are you able to actually finance those efforts to find clients because it is a lot of work, it is a lot of time to actually find clients for a very specific industry, for a very specific product, very specific services which could be B2C as well. I mean, both of them have changed.
LUIS SARRE: Yeah, this has been a process. We have started doing a lot of things without charging anything. Basically we started developing our community, our networking between entrepreneurs in China to build up the trust between these persons; basically trusting myself and the team that is filled with the entrepreneurs and then we started having knowledge, but most of this was maybe a sponsorship, a collaboration and so we just build up the networking between entrepreneurs in China without getting a lot of revenue.
These days I would not say that we commit to every single innovation project in China. We have interviews and we have conversations with a lot of different players; either corporates or start-ups and we only commit to helping those who have the network and the possibilities to bring value to the table otherwise we just honestly say, “No sorry, at this time we are not ready. We don’t have the right content, We don’t have the right channel to help you”, but if we see an opportunity we take it and we push it fast; as fast as possible in order to get the benefit because at the end we believe that a start-up ecosystem in China or early stage entrepreneurs; they need – at the end it is a business. At the end it is revenue and they need to keep growing in this area in order to develop to the full potential of their ideas.
MATTHIEU DAVID: Would you mind sharing one example of a company you have helped to introduce and find clients; like a specific product or specific industry to not necessarily tell the name of the company, but at least what they do and how you helped and how it is now?
LUIS SARRE: Well, we helped recently; at the beginning of summer we received delegations of entrepreneurs to help 15 of them, each of them with different projects.
MATTHIEU DAVID: From which country? The delegation is from where?
LUIS SARRE: Specifically from Mexico. I come from Mexico.
MATTHIEU DAVID: I see.
LUIS SARRE: We got them from Mexico and one of the projects is related to visual communication. This is very common to see now in events that you have a live team that is collecting the insights of what is being said in a conference, what is being said at an event and they put it in a graphical way; like in info-graphic. So this team; they are very creative and very unique, they have their own style and their own way to express things. When they arrived in China we did a couple of events for free to showcase their capabilities and we cupped the ice of a couple of larger start-up organisations and larger groups in China and we got a request; a faith contract for them.
So, we coached them on how to build these things. I mean you sensibiliser them on the prices and how it all works in China. They did the job and everybody was very satisfied. When they finished the opportunity or the entrepreneurial experience in China they were back in Mexico and the customer called them back again. They wanted to have another work and we managed to do it remotely which was also a big step because we broke the barrier of the frontier. They are able to deliver their work from Mexico to China, Asia or whatever. Now they are sketching big business models in order to do this in different regions.
MATTHIEU DAVID: So, what would be the percentage you would take in those cases; like it would 10%, 20 or 30%?
LUIS SARRE: I would say it depends on the volume, but yeah it is something between 5-20% of the profit.
MATTHIEU DAVID: Of the profit and not the sales?
LUIS SARRE: Exactly because if I take all the profit, it makes no sense. They will never talk to me again.
MATTHIEU DAVID: But how do you know the profit?
LUIS SARRE: It is a shared profit.
MATTHIEU DAVID: It’s a profit sharing model, I understand. It is very hard for you to know the profit because you don’t know their fixed cost. You can’t know the variable cost. It is very difficult to pick up.
LUIS SARRE: That is one of the things; our model is based on trust. If they trust me I will help them to develop their business. I will connect them with my personal networking between entrepreneurs in China. I will put my reputation and my work in the different fields or things that I am doing here and I expect the same thing on their side. It is true that maybe they are telling me that the cost is 100 and the operational cost maybe 20; it is true, but at least we have a certain level of communication where I have visibility of what is going to be the profit and there is a benefit for us. Trust is the only way long-term relationships will work. Maybe it could work one time and if it is not working a second time; well… yeah, but the good news is that we are giving strong networking between entrepreneurs in China and we are not growing exponentially, but we are growing with the – I would say – solid relationships in Latin America.
MATTHIEU DAVID: When you say network are you talking about networking between entrepreneurs in China for potential customers, are you talking about a network of whatever it is; like Accelerator or big companies and so on or is it a network in Mexico? The word network; could you define it more on how you use it here?
LUIS SARRE: Well when I am talking about network or community it is all the context of what we have been building up throughout all these years. I have been in China for 11 years so some of the contracts; some of these relationships are coming from that far in time. I am talking about corporate, I am talking about other communities, I am talking about co-working spaces; incubators, accelerators and some of them are specialised in different verticals; start-ups and relationships with universities and start-up competitions and forums. We have been working very hard to develop a community that is well connected in the start-up ecosystem in China and we are now working actively to build up these relationships in other countries. Most of them are start-ups or corporates that want to connect with Asia or China.
MATTHIEU DAVID: My initial understanding when I read your presentation you were talking about corporate programmes and corporate innovation programmes and open innovation projects in China. I was initially thinking that actually, your clients were many big companies or medium to big companies who wanted to partner with Innovation Health because of a lot of those companies – and that is what we call open innovation – those big companies or medium-sized; depending on the definition of how big it is. They look for innovation and they know they are structured; the company is not the best fit for innovation because they are not agile. So, is my understanding partially correct that it is also part of what you do or actually it is not at all and I had the wrong understanding?
LUIS SARRE: No, no, no you are right. One of the let’s say… the key thing that we are doing is that we are pushing open innovation projects in China. So, we are building the community, we are adding knowledge through different activities, but that is not enough. We are pushing the entrepreneurs and the start-ups to get things done and to get revenue, to materialise in digital or other solutions and at this point in many cases the start-ups are let’s say they have the co-idea of their solution or proposal, but it is still not refined. We are executing a lot of – it is open innovation workshops where we sit down at the same table; all kinds of… it could be the user, the manufacturer, the person that is related to regulations or maybe someone that is directing or connected in the supply chain or whatever they are developing and we just put all of them to talk around a specific idea and facilitate the conversation in order to generate ideas or the concept of… if you are doing design-driven innovation you are talking about the development of new meaning’s for products and services and that is exactly what we are trying to help start-ups through open innovation projects in China.
MATTHIEU DAVID: Would you mind sharing a specific example of an innovation workshop you worked on? You mentioned because again start-ups, but are you working with bigger groups or more established groups to work on their innovation?
LUIS SARRE: Yeah, that’s another area because you cannot talk about the s
MATTHIEU DAVID: You are the co-founder of Free Entrepreneurs. Could you tell us more about your partners and who they are?
LUIS SARRE: Yeah, my partner; his name is Amado Trejo. He is another Mexican also living here in China. We met let’s say through events and through the activities about the start-up ecosystem in China. He is focused on technologies for travel industries, technologies for the financial and digital economy. His background is public policies; this kind of background. My background is mechanical engineering, so I am focused on mobility, the artificial intelligence of things and the smart city solutions. So, we have a very clear area of work expertise and at the same time, we are a very good compliment because we are connecting the tech approach plus the public policy and financial approach in different projects.
MATTHIEU DAVID: That’s the thing actually, in your past experience in China I found it very interesting that you had experience at Crow’s Auto and Segula Technology which gave you actually an opportunity to understand technology between the west and China and as far as I remember Crow’s Auto was an Israeli, China joint venture, wasn’t it?
LUIS SARRE: Correct.
MATTHIEU DAVID: What did you learn from those experiences as Crow and Segula?
LUIS SARRE: Yeah well that is one of my competitive advantages because yes, I am a start-up myself. I am an entrepreneur very well connected and very well… yeah actively participating in the start-up ecosystem in China, but I have also more than 25 years of corporate work experience and that gives me a lot of understanding on how things work with corporate; the mechanical design engineer so I have been developing products and concepts to regular production for different industries; the automotive industry most of the time, power tools, machinery, special gadgets and lately it’s electric vehicles for the last mile of mobility so I have a very grasped understanding on how things work on the corporate side and I have founded and have done different companies throughout my life; some of them are a complete failure, but now we are working on a model that is kind of working.
MATTHIEU DAVID: So, my question was at the innovation of Innovatio and I would like to understand how you articulate both commitments; both missions at Free Entrepreneurs and Innovatio. I understand that there are links; a lot of links because it is all about innovation projects in China, it is all about testing products, creating new product services and so on, but how does it work together? How do you balance your life between those two missions?
LUIS SARRE: Well, now you are mentioning Innovatio. Innovatio is another start-up that I have here in China. In that one, we are focused on engineering services in China and bringing high-end engineering services to reach entrepreneurs and not only entrepreneurs. I have the opportunity to hire a couple of corporate customers, but with Innovatio we are doing let’s say the design itself. If we are talking about developing a functional prototype or something that requires mechanical components or it requires some cath modelling, simulation; all these things it is a little bit near or far away from entrepreneurship. So, all of…
MATTHIEU DAVID: It’s lagging a little bit. Sorry for the interruption. We are back. We were talking about Innovatio and free Entrepreneurs and how you articulate both of them and you were saying the Innovatio is more about designing and helping to build a product through reading live and model basis and sub-system engineering, digital technology, council defining, definition and so on. Could you give a specific example again for Innovatio on what you do for your clients? Is it, “I have an idea with an IOT product and you come up with specifications and then I can talk with the factory” is what you do or is it different?
LUIS SARRE: Well, what we do within
MATTHIEU DAVID: I see.
LUIS SARRE: If you push these to another level, to any IOT device, then we are talking about digital twins for automotive applications, for industrial applications, etc. and that is let’s say the next level on product development because this brings not only speed. This also brings competitive advantage and understanding of the product itself so you can improve the market or the marketing of it and it reduces the cost because everything is done virtually before you actually prepare any product.
MATTHIEU DAVID: Are you able to work on every product and how would you be able to work on your product? If I want to build a smartphone, would you be able to help with Innovatio? If I want an IOT to connect my chair to take my weight, would you be able to…? What kind of products can you help to design?
LUIS SARRE: Well, in those two projects that you have just described; they seem to be very far away from each other, but, at the end, it’s about design engineering services in China. So, it is about… of course, I cannot design every single product and I cannot support the development of every single product because I am not a specialist in every single field of knowledge, but what I can help is to define the technical requirements to translate the needs; the needs from the market, the wants from marketing into technical specifications or technical approaches.
MATTHIEU DAVID: How do you know them? Do you communicate with the factories? You have a past experience; like long experience providing engineering services in China in different companies and I understand that there is background, but technology is updating every year or even every three months. How do you understand how to communicate with the factories and the spec? I think it seems for a lot of people who are listening to us; a very difficult part of creating a product is to communicate with the regional factory and I will give you an example. We see a lot of kick-starters in the west; they have a brilliant idea, they are going to solve problems, pinpoint sin your daily lives, but when it comes to actually execute it, they fail and I remember that I paid for a product to take my health in a bowl or whatever it was and actually it never came out. It failed and I never got the product and I know one of the founders told me that actually, they failed at building it. They were not ready to build it. So, could you help us to understand what the process is and how you can make sure that the idea you have, you can build it through what you do and your services?
LUIS SARRE: Yeah just briefly; technology is evolving very fast and there are a lot of new gadgets and new things available. The challenge is to define the solution for a real problem and once you have this defined; you have identified the meaning of a new product or service and then you look to which technology level, it is in order to achieve that performance or that behavior or that service that has to be delivered and that is a very important part of it and also the feasibility analysis and for this, you need a strong team in different fields. In my case, of course, we cannot do everything, but we have partnerships. If we are talking about IoT devices; we have partners that are very strong in artificial intelligence, machine learning, cloud solutions and they will give the technical feasibility ingredient and this has to be done very early in the process of developing a product so then once the idea is relevant for a user or for an ecosystem the technology is in the level that actually can be integrated to deliver that service. The rest is development and you need to develop a fully working, pretty, clean product from the very beginning.
What we are pushing is that we need to prove that the company is going to be successful and the key is to bring to reality at a low cost, functional prototype so we can put it in the hands of users, we can put it in the hands of investors, we can put it in the hands of the different players to validate that the solution is actually going to be working. It doesn’t need to be pretty as I said. It has to be just something digital or powered that represents the solution and we can actually warrant that it is going to be a business case or otherwise it could be a disaster. We see many disasters around with kick-starters and many other start-ups that have great ideas, but they are failing to prove their products with the end-user. They are spending a lot of money developing pretty solutions, clean designs, and stylish designs, but there was no user. There was no need to solve it. The integration was not good enough. They have a lot of hopes in something that is not in their hands.
MATTHIEU DAVID: Let’s take an example; I come back with the idea that I want to connect my umbrella with a bluetooth device and make sure that when I am too far away from the umbrella, it pops up on my phone and says, “Hey, don’t forget your umbrella”; so, it is a connected umbrella so that I will not forget my umbrella anymore if I am ten meters away from the umbrella, let’s say. So I come up with this idea. Would you be able then to explain how you would create the documents and what is necessary to communicate with the factory? It is what you would do for us, right?
LUIS SARRE: Yeah well, it is not only communicating with the factory. The factory is one piece of the puzzle, but in that specific case, we will start with let’s say defining the scenario or the story that is explaining the beauty of having this feature between you and your umbrella. Once we have this we will make a concept of all the functions or features that we would like to have on the umbrella assuming that all the technology is not a problem. The technology can make it and so we need to have it connected to the cloud, we need the proximity sensor and maybe we need to have a weight sensor or maybe an insulation or UV sensor.
So, all these kinds of things we just put it together in a concept and then we screen down the possibilities and we do a little bit of research on the market on which sensors are available, at which size the sensors are because maybe there is a sensor that is sold in Europe or in the US, but if I cannot find it here in China then it makes no sense that I prepare a solution using a sensor that is not in my reach. If it is big or small or long and all these kinds of things and I will just get the bits and pieces from the vendors and the electric theme; the electrical architects, the electronic architects and the guys that are working with the connected technology; they will just make the diagram of how to connect all these pieces in order to achieve this goal and we will build a prototype and we will have an umbrella with all the instruments that we need. It is not going to be pretty, maybe it is going to be like super heavy…
MATTHIEU DAVID: How much would it cost to work with you if I want to design this umbrella; a range?
LUIS SARRE: Well, in this case, would be all the costs of the prototype or let’s say the cost of the project and then there will be a fee for my engineering services in China and that depends on different things, but it is just like a consultancy fee. If it’s one person or two people; depending on the demand it is not fixed that you need to hire people for a month or a year.
MATTHIEU DAVID: Yeah, but are we talking about 5,000 US or are we talking about 50,000 US? What are we talking about if I need your help to actually design this prototype?
LUIS SARRE: Well, if we are talking about a start-up, we are talking about a couple of thousand US.
MATTHIEU DAVID: So, less than ten thousand and more than one thousand?
LUIS SARRE: Correct; depending on the size, depending on what kind of product you are dealing with and what kind of involvement you need from my sales force or my team.
MATTHIEU DAVID: I see; very interesting. It is soon going to be the end of the talk. A few questions as we do now; what books inspired you the most?
LUIS SARRE: Well, there is one book that I really like to read from time to time. I think it is probably ten years old. I am not sure about the date, but the name is ‘Design Driven Innovation’, actually. The author is Roberto Verganti. I believe he is an American Italian guy and this book is talking about how to change the rules of designing products. It is not only about doing radical technology improvement. It is about doing radical development of new meanings and that will be; just to give a quick example: in the past, Airbnb broke the meaning of the hotel industry. Before it was, “I want to be in a hotel with all the services, my most luxury room with the nicest view”, now the meaning is that if you are a traveler and you are going to have an experience that connects with real life in a community or in a city.
MATTHIEU DAVID: Interesting. What do you read either to be up to date about China; about China economy and China’s society?
LUIS SARRE: Well, in that case, I would recommend; I read a lot of local information, let’s say, from China Daily to understand the formal point of view of different developments that are happening here. There are digital media resources like Walk the Chat or China Chat or the information that is generated by a media group; Chinese KR36 and they are media…
MATTHIEU DAVID: They are Chinese, right; KR36?
LUIS SARRE: They are Chinese. They have a very large community like in the tens of thousands of start-ups in China. So yeah their information is in Chinese. They are pushing this year to be global so those start-ups are not able to speak in English. They are connecting with companies like us although most of their information is in Chinese, but if you want to understand China, you need to connect with resources that are in Chinese, otherwise, you will miss the big picture and the other two sources that I found very, very useful is Mckenzie has a section that is insights and they have a specific section of Chinese insights. They have very good articles about technology and how things are working here and also from the world economic forum on the website they have an insight page. You have to get an account which is free and they have a lot of creative articles and information in many interesting technological fields and they have a room specifically for China. I found that one really, really… it kept me up to date on many topics.
MATTHIEU DAVID: Thanks, that is helpful. I will check them. What book on China would you recommend?
LUIS SARRE: A book on China? There is one book and it is in my wardrobe at home. I have not been very good at finishing it. I have been reading it for a long time. I need to find more time for that, but the name is ‘Country Driving’ by Peter Hessler. It’s a book that is explaining how China has evolved from a farm-driven society to factory and now high-tech, global engine and this has been happening for a very short time; like 26 years. It has taken that long to have this big jump. I have found a lot of interesting information and understanding of China’s history and how China has been evolving. I think it is very good to understand where it is going.
MATTHIEU DAVID: As an entrepreneur what productivity tool do you use; a productivity tool to manage your work, your time, your life?
LUIS SARRE: Yeah well, the productivity tool that we are using today is Teambition. It’s a project management, task management tool based on some western tools, but this one you know; if you are in China there are some tools that are not fully compatible with China and western Internet environments, but Teambition has this ability and actually it was developed by Chinese and it is fully functional with I would say that it is an improved version of some western tools and lately it was bought by Alibaba so this is giving them a lot of push and connectivity with the tools like Zoom and other tools.
MATTHIEU DAVID: Impressive. We used Teambition in the past and indeed it was a good tool and I didn’t know they were bought by Alibaba. That is great news for them. If you had extra time what idea would you like to work on?
LUIS SARRE: Which idea I would like to work on; well, just going back to my roots as a mechanical engineer, I like a lot of all these additive manufacturing tools so I would like to put more time on maybe the development of motor material, motor functional, 3D printing or let’s say additive manufacturing assembly line. I believe it is not only one machine. It requires different machines, but yeah, that could be something that I would like to do. Hopefully, I can find time to spend on that.
MATTHIEU DAVID: So, you have been in China for a while now. What is interesting to you to stay in China? What makes it so interesting and attractive?
LUIS SARRE: Well, I think one of the beauties of being in China is that everything is evolving super-fast. You can sense, you can see in the streets and you can experience yourself how everything is evolving from transportation payment systems, health records and now you have face recognition things in airports, in shops, in buildings; some buildings are fully instrumented and they are tracking in which areas you are in the building if you like the coffee or not, if you are happy or not after drinking that coffee and so on, all these things are happening at a very fast pace and that I really, really like. I think we are at the peak of the wave in technology and innovation.
MATTHIEU DAVID: The last two questions; actually they are very similar. One is what unexpected success have you analysed in China and what unexpected failure and you analysed in China? It seems the connection is not working again. I don’t know if you can hear me? So, it seems that we have to stop the podcast. Thank you for having joined us and I hope everyone liked the talk. You are reconnecting? Anyway, I take advantage of this to tell everyone that if you like the show, if you like listening to us please put a star on China Paradigm iTunes or Spotify and comment on the podcast. It will help us a lot and talk about the podcast with your friends for them to subscribe to. Now it is working. I cannot see you, but I can hear you.
LUIS SARRE: And now you are frozen.
MATTHIEU DAVID: Okay it works for me. We are recording. Maybe we can end up with this conclusion; what unexpected success have you seen in China that you’d like to talk about and analyse?
LUIS SARRE: Well yeah, the unexpected success is all the solutions and all the actions that the Chinese government and Chinese entrepreneurs are doing in a smart city. You can really see not only cameras; you can see how they are managing the traffic, managing different energy supplies and different things in the city. So, this is a very large scale initiative, but you can really see how China’s cities are evolving to be a smart and digital city and this is very, very impressive that I was not… I was taken by surprise at how the speed of this is happening.
MATTHIEU DAVID: Thank you, Luis, for joining and sorry for the listeners for the technical or technological issues we had along with the talk. I hope during the cut-off it will work fine and the editing will make it good enough. Thanks again Luis and I hope everyone enjoyed the talk. Thanks. Bye-bye, everyone.
LUIS SARRE: Thanks Matthieu, I enjoyed it a lot. Thank you.
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