It has a lower acceptance rate than any Ivy League college including Harvard Business School. But outside of the tech world, few have ever heard of Y Combinator, a US incubator that offers seed capital.
However, it has suddenly made headlines in China after one of the country’s biggest tech stars, Lu Qi, announced that he would be setting up it’s first operational base outside of the US this August.
Y Combinator runs biannual three-month incubator programmes that give start-ups training, advice and invaluable networking opportunities in return for a 7% equity stake. Successful ‘graduates’ include Airbnb, Dropbox and Reddit.
Lu Qi hopes to replicate that success in China (additionally he’ll serve as Dean of the Y Combinator Global Institute in Seattle). But it was not the career choice most commentators had been expecting following his abrupt departure as Baidu’s chief operating officer in May.
His resignation had prompted a blizzard of commentary in the domestic press and social media because he had only held the post for 486 days and was midway through sweeping operational changes to make artificial intelligence (AI) the beating heart of the internet search firm.
But in the end, it was China’s heart that was broken, ran one headline on tech website, Pandaily. It claimed Lu’s troubles at Baidu had touched a raw nerve among netizens, and there was anguished commentary about how the local boy had made good overseas, only to stumble when he returned home to join a Chinese firm.
Lu Qi grew up during the turmoil of the Cultural Revolution in a remote village in Jiangsu province before going on to make it big in the US. The man responsible for launching Microsoft’s Bing search engine was regarded as the most powerful Chinese person in Silicon Valley. “Whoever has Lu Qi will own the AI world,” was one Chinese tech industry maxim.
He was lured back to Beijing by Ma Dongmin, wife of Baidu founder, Robin Li. She had returned to Baidu to head up investments, and in the new ‘org chart’ Lu took operational control, leaving Li to run the company’s lucrative advertising and newsfeed business.
His decision to leave after just over a year was unexpected. Lu claims personal circumstances prevailed. While his family remained in the US, he spent his life in China shuttling between the office and his hotel, existing on just a few hours of sleep a night.
In an interview with Lei-phone.com, he says he decided to join Y Combinator for family and personal reasons, preferring to split his time between the two countries. “My personal connections are with the US tech world, but my cultural genes are in China,” he explained.
However, the domestic press speculates that Lu lost out in bouts of Chinese-style office politics that his prior jobs in the US had not prepared him for. Indeed, Leiphone.com argues that the palace intrigues at Baidu would have put the imperial court to shame. It reckons Lu fell victim to the “bureaucracy, factionalism and the selfishness of some of its senior executives”.
Lu was attempting to transform Baidu when he formulated the company’s “All in AI” strategy. This involved multiple job losses across unprofitable or peripheral divisions such as healthcare and food delivery. Instead, he refocused on the most profitable lines: Baidu Baike (China’s answer to Wikipedia), Baidu Maps and Baidu Zhidao, one of the country’s most popular Q&A websites. He also tried to improve Baidu’s corporate culture by personally answering even the most junior employee’s emails and forcing senior managers to do likewise, as well as setting up Q&A sessions with them via the company’s intranet.
“He emphasised efficiency in a country where hierarchy is still strong,” Pandaily reflected. But other newspapers say this managerial style did not go down well with some senior managers such as Xiang Hailong, the company’s most senior executive in charge of the core business, Baidu’s search engine.
Lu’s departure went down even less well with the company’s junior employees and its shareholders. “Baidu was just about to get on its feet,” one employee told KR-Asia.com. “It looks like we’ll slip back into a declining state again.”
Baidu’s share price dropped 7% on the news that Lu was leaving and it is currently down about 20% from its May high.
However, to put that into wider perspective, Tencent has lost a quarter of its value since its January peak and Alibaba is down a fifth since June, in line with the wider tech sell-off. That said, it is widely acknowledged that Baidu is the poor relative in the BAT tech triumvirate. Lu’s arrival was supposed to turn around its fortunes and put it at the forefront of the AI revolution (the market values of Alibaba and Tencent are both about five times that of Baidu’s).
After getting a doctorate in computer science from Carnegie Mellon in the mid-90s Lu joined an IBM research lab before spending a decade at Yahoo, with 3,000 engineers working under him. He was personally recruited to Microsoft by its then CEO Steve Ballmer, where the 56 year-old was hired for his expertise in search and AI applications.
However, some sections of the Chinese press are sceptical that Lu can make it work at Y Combinator. “This career choice is incomprehensible,” mused iFeng.com. One posting on Baijiahao, a zimeiti platform (for more on what these are see WiC413), noted the “industry is puzzled by this move given how dazzling Lu Qi’s CV is and the difficult state of the venture capital industry.” It suggested he will struggle to achieve Y Combinator’s expected rates of return in a country where competition to invest in the best companies is intense.
As we wrote in WiC421, chill winds are blowing through China’s private equity industry and smaller funds are struggling to raise capital.
The Baijiahao zimeiti believes that Y Combinator’s model of exchanging advice and training for a 7% equity stake may not be as appealing in a country where most tech start-ups see a roadmap in which they are acquired by Alibaba or Tencent.
Lee Kai-Fu’s incubator, Sinovation Ventures has enjoyed success over the last decade (it has assets under management of $2 billion and amassed 300 portfolio companies in the tech sector) so that offers a precedent of sorts.
And indeed Lee – who is also a Carnegie Mellon alumnus, and a former employee of Apple, Microsoft and Google – is bullish on Lu Qi. He describes him as “one of the few people who has a strategy and technical vision, plus true leadership abilities.”
Social media commentators tend to agree. “I look forward to see him battle with Lee Kai-Fu,” wrote one. Another added, “Awesome people are always awesome wherever they are.”
In the same interview with Leiphone.com, Lu seemed keen to emphasise just how China-focused Y Combinator’s strategy will be. “It will be very important to localise,” he commented. “It will be by China, for China, of China.”
Lu has not yet said where Y Combinator will be headquartered, but if past experience is anything to go by, it will not be Shanghai. Huxiu.com has just published a long article about why internet firms do not thrive in China’s most commercialised city – even though it’s historically the place most associated with moneymaking.
Pinduoduo (see WiC404) and Ctrip are Shanghai-based but Huxiu points out they are unusual. The vast majority of successfully listed internet firms (or as yet unlisted unicorns) are based either in Beijing or Shenzhen, or clustered around Alibaba in Hangzhou. In more recent years a new wave of software engineers have settled in Chengdu thanks to its lower operating costs and more laidback lifestyle.
But Huxiu reckons Shanghai offers a less conducive environment for start-ups because of its higher costs. Local talent often opts for careers in finance or with multinationals too. That said, Lu’s alma mater Fudan is Shanghai’s top university. That may offer an emotional reason for basing Y Combinator there…
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