David Li, a true godfather to the Chinese startup ecosystem and maker movement shares his insights in the Shenzhen startup scene, how to deal with copycats, intellectual property issues and what to do if you come to Shenzhen for the first time.

Transcript Of the interview

David, you're one of the original gangsters in Open Source Hardware in China, going all the way back to the 1990s; today you run XinCheJian, the first hackerspace in Chna and you're also a director at the Shenzhen Open Innovation Lab and that's just two of the numerous enterprises and organisations that you are involved in. Can you talk us through your story of the past couple of years and how you have seen the Chinese startup ecosystem evolve over that time?

A little bit of a background about myself. I actually moved to Shanghai in 2003 from Los Angeles, after I went through the first wave of the internet. When the bubble bursts, I looked around to see where was a good place to stay.

Somehow landed in Shanghai, really liked the place and stayed there sinced 2003. For the past 15 years, for most of the 2000s, I stayed mostly involved with the internet. Getting involved with the hardware and maker movement, got started around 2008. Kind of as a hobby.

I got an arduino board, got into exploring 3D printers and robots, those kinds of things. By about 2010, I accumulated too many things in the house. Wife got really pissed. So I started the first maker space in China, which is called XinCheJian, in Shanghai in 2010. In the beginning, when we founded XinCheJian, it was just a couple of friends.

We were really just there at the right time. I think around 2011, the publishing year of 'The Makers' by Chris Anderson and the book inspired me to look into the Maker movement. Together with professor Anna Greenspan of NYU and professor Silvia Lindtner of the University of Michigan and we started a new think tank called Hacked Matter and we started to look into the potential of the Maker movement as a bottom up innovation system. Looking at this globally, not just China and how it was going to connect to China.

Since 2011, through conferences and field trips, field research in Shenzhen and across China, we started to look into how the Maker movement was coming into China and how it was going to influence China and what it means for the Maker movement in the long run. Since 2011, we did research around those topics. That took me a lot of trips to Shenzhen and led me to really look into the bottom up innovation system in Shenzhen, or commonly known as Shanzhai.

Can you tell us what Gongban and Shanzhai are and what makes them so defining to the Chinese startup ecosystem?

Already Shanzhai started as 'doing a cheaper version of Nokia' and selling it to the developing countries. In a hidden way, this was actually a huge market. People talked about reaching 'the next billion' with the latest information gadgets, that's what Shanzhai delivered.

By around 2006 and 2007, Nokia and Moto were starting to slow down, which is when Shanzhai truly became huge. As it became huge, simply copying Nokia or Motorola was no longer a viable business. Because everyone could copy, there was no longer any differentiation.

Shanzhai started to get in the business of differentiation and innovation. They had to start developing different kinds of functionalities. And this is where it became interesting. They came from a copycat background, where intellectual property isn't really respected.

Whoever introduces a new feature, if it's popular in the market, everyone will want one. This ecosystem took an interesting path in its growth. Instead of trying to own innovation and litigate or sue everyone for infringement, they thought: "Well if you want the feature, we can just provide that feature". That's where the Gongban comes from.

Let me give a more concrete example. Let's say today I introduce a dual SIM card feature in the market and it becomes popular. Other people say they want to introduce the same feature. Instead of then spending the R&D money to reverse-engineer that design, the original manufacturer will just sell the circuit board, the design of provide them with the foundations. That's how Shanzhai works. It's de facto open source. On a very large industrial level.

People start to take this as a known quantity. If there's a feature you see on the market, there's someone you can buy that feature from and build on top of. That iteration becomes really fast. Let's say we have an idea to build a new phone. We can probably acquire 90% of things as a commodity on the market, put them together and then spend the last 5% on the very key area of change. The key differentiator. This has been done by tens of thousands of different companies, simultaneously at a two or three month iteration pace for each product. That becomes a very interesting system because that allows the ecosystem to get into all kinds of different niches.

David, this definitely sounds like a very interesting concept for the emerging markets, especially in China. But in the West, intellectual property is the holy grail of business. What is a startup model that is not based on [intellectual property] and what does that look like?

Right now, if you look at the hardware startups in the West, especially in the past two years, it has been venture-driven. Because the only reason you need that intellectual property is not to protect yourself; it's to really have a base for VC valuations.

In the old days, that kind of pattern used to translate into sales. This used to translate into visible features the market wanted. Right now, if you look at the latest patterns, and there's a really good book about this from Eric Von Hippel - it's called 'Democratizing Innovation' - it really talks about the usefulness of patterns in this area, especially for small companies. They are not really useful anymore. Right now, especially in terms of electronics, most of the innovation, most of the patterns, they are very small incremental changes, there's no radical change and the real innovation has moved from technology towards interactions and user experience. One way I would describe the Maker movement and Shanzhai is, if you think about open source hardware, they've become the browsers of the Internet of Things.

What I mean by that is a reference to back to the 90s. When the browsers started to show up and the internet started to grow. In the early 90s, people looked at internet as technology. That's why there was a browser war between Microsoft, Netscape, Sun Microsystems and Oracle. But once we passed the first bubble, people realized it didn't matter anymore. A browser is a browser. Now they stopped competing on a browser level and instead are competing on what you can build on top of a browser, html and http.

This realization started the growth of the internet industry. Coming back to today is that we are moving away from the idea that if you do a hardware startup, you need to have hardcore patterns and hardcore technologies in order to survive. That's still the same way we looked at things, the way we looked at browsers. We really need to push this to a realization that hardware is a commodity. If I can build this, some other guy in Shenzhen will be able to do this in a month at half my cost. Hardware competition is no longer a competitive advantage. Hardware startups are going from technology-centric to experience-centric.

In this transition, the open hardware will become the browser of IoT.

That's fascinating. When we speak to hardware founders, most of the time they approach things from that Maker perspective. Looking to construct something that is physical and tangible and they think of the little building blocks for something that makes sense. What you are saying, and tell us if we're not reading that correctly, is that you need to reverse that thinking. The building blocks are actually commoditized and you need to think user experience first and then just go to Shenzhen and it gets built within the next 6 months.

A quick example is one of the teams we look at. What they basically did was build a TV-stick out of the Intel processor. It basically looks like a Chromecast, but it runs Windows 10. The team spent about 6 months developing it and take it to manufacturers. They sell everything through the e-commerce channels like eBay and Amazon. Last year, they did about 80,000 units at about US$130 each.

They did this in 6 months, making 10 million dollars in revenue. That is not a very standout experience in Shenzhen. This is daily business. Right now, we are looking at a ecosystem where this is happening daily. A lot of the hardware startups we are talking about today, are people not coming from hardware backgrounds and just realizing the opportunity there. A lot of people come from an internet background. Right now, I develop on the internet as fast as I can develop an object. That's very exciting.

With the Maker movement pushing the ideas that making hardware is easy, more and more people want to do it. They also don't realize that building hardware is a daily running business in this part of the world.

I often describe Shenzhen in this way. Shenzhen is a small city in the Pearl River Delta, 15 million people, but these people are taking care of 80% of the electronic needs of 7 billion. That's how globally concentrated everything is in Shenzhen. It make Shenzhen into a very special place. That's why today we are talking about the Silicon Valley of Hardware.

What do you recommend to a startup coming to Shenzhen for the first time? Do you need to settle in Shenzhen to make it work?

You don't. Think about Shenzhen as the cloud service for IoT. When I got started in internet in 95, in my first startup, I was making physical network cables. I don't think that 20 years later, most of the startup founders don't know what a cat5 cable looks like.

They probably don't know where their server is located. You lean on Amazon or whoever is providing the cloud service to do this. For hardware, that same kind of mindset change is coming. For startups coming to Shenzhen, a couple of recommendations.

First, spend some time to understand how the ecosystem works. Never come in thinking that you are the cool new startup doing something that's never been heard of before. Most of the projects, even off of Kickstarter, we can actually find that someone has already prototyped it in the factories.

The reason the last generation did not launch it, is because the last generation of entrepreneurs in this hardware sector were looking for 50,000 units per month in sales in order to justify taking a product all the way through manufacturing.

Right now, we are looking at a new generation which can also start up with a small number of units, through Kickstarter for example, with 5,000 units. That's where the starting point is now.

The first danger is, something we've seen a lot, that the new hardware startup coming in with 5,000 units, thinking that they are Apple, trying to bargain with everyone in the ecosystem as if they are Apple with a 100 million units. That crashed a lot of startups.

You run in to two things. First of all, anybody who's serious about manufacturing would not talk to you. If you come into Shenzhen with whatever money you raised on Kickstarter and if you act like a snob, of course, the only people you are going to encounter are people who are looking to cheat you out of all your money. You'll never have an honest discussion with the ecosystem. I think the first part of this is getting the mindset straight about where they position themselves in the ecosystem.

David, can I read there as well that it's a very tightknit system and if you come in, guns blazing, thinking you are Apple, you create an image that quickly spreads throughout the system and you're going to have the same experience with other potential manufacturers?

Yeah, you come into Shenzhen, you have to recognize that you are actually very small. Give the ecosystem its respect. Shenzhen has already been building for the past 30 years. Large companies came in before. Companies like HP, Dell and other large PC manufacturers came in with 10s of millions of orders, building the foundation of Shenzhen. Then, Shanzhai, the small batch of manufacturing came in. Even with these guys considered as small batch, they are still looking at 50 to 100,000 units every month.

The new generation coming in with single orders of 5 - 10,000 have to position themselves and reach out to the ecosystem and find the right partners and combinations to actually make things happen.

Do you really need a local partner? And if you do, where does one find a local partner in Shenzhen or the Greater China ecosystem?

Right now, one of the best parts of coming to Shenzhen and one thing to recognize is the huge industrial design ecosystem in Shenzhen. Most of the hardware startup founders have no experience with manufacturers. And that number is probably only going to increase. They have great ideas. But the best people to talk to make those ideas come to reality] are probably the industrial designers in Shenzhen.

What a lot of people don't realize about Shenzhen is that Shenzhen is the number one city in terms of design in China, even before Beijing and Shanghai. Right now, there are about 4,000 design studios in Shenzhen and about a 100,000 working industrial designers. These are the best entries to find partners in Shenzhen.

Do you Baidu them? How would you recommend someone, from Hong Kong, from Singapore, who doesn't have those contacts; how would you recommend them to find those people?

Shenzhen has a really great industrial design association, the Shenzhen Industrial Design Association (SIDA). One of the recent reasons I moved from Shanghai to Shenzhen was to set up the Shenzhen Open Innovation Lab is to increase collaboration with SIDA.

We're trying to first let people understand that these industrial designers who have been helping people get into Shenzhen with just an idea and take it all the way to manufacturing. This is the strength of Shenzhen.

We gather different partners who are interested in working with small startups. Problem is that these startups don't look like their traditional customer. Their traditional customer came in with money in hand and said they wanted a crazy new electronic thing.

Industrial designers can take something from the design stage, figure out the user experience and figure out a way to bring it all the way through manufacturing and shipping. That's what Shenzhen Industrial Design been doing in the past decade?

How would you structure that partnership? Do you need to give an equity stake? Is this just a percentage of the proceeds? How would this work?

The industrial designers here are very accustomed to getting a percentage of the proceeds. Equity doesn't work for them. Equity doesn't really work to structure a partnership, especially when it comes down to manufacturing. Manufacturing is a very cash-intense and cash-driven business. Anything you can not turn into cash in a very liquid way is not very helpful for the ecosystem. A share out of the proceeds is the best way to approach the partner here.