Acquired - Season 3, Episode 2: The Xiaomi IPO

Episode Date: August 6, 2018

Acquired kicks off our China tech mini-series by teaming up with the best in the business: Hans and Zara from GGV’s 996 Podcast! Together we cover the largest technology IPO in the world since fellow China tech giant Alibaba in 2014: Xiaomi, where Hans has been an investor and board member from the very beginning. This episode is chock full of history and insight on both Xiaomi and what’s happening in China tech more broadly, and why we all should be paying attention. No matter where you live, this is definitely not one to miss!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

I had something weird going on my internet cut out too. Did you get that? Did you see that? I mean, it's fine because we're not using any kind of like web upload thing. We're just doing a but yeah, when I disappeared for a second, it was to go turn on a fan. Because I was like, maybe it's like hot and that's affecting I don't know. Oh, good. I was so I was worried. I was like, Oh, no, Ben's super pissed that we're changing. No, no, you couldn't take it anymore. Welcome to Season 3, Episode 2 of Acquired, the show about technology acquisitions and IPOs.

I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we are covering Xiaomi. You may already know a few things about Xiaomi, that they make smartphones, they're from China, and they recently IPO'd. But today, we're here to go deeper, understand what the company really is at their core, and talk about the exploding China tech sector. And we have with us today two of the best people in the world to help us dig in on these topics, Hans Tung and Zara Zhang from GGV Capital. So Hans and Zara do a podcast called 996 that you should absolutely check out

if this topic is of interest to you at all. I've listened to about half their episodes so far, and it's a fantastic resource for anyone who wants to understand what's going on with Chinese companies. One of our focuses here on season three of Acquired. Hans was an investor in the very first round of Xiaomi and was involved in the initial ideation of the company, a rare and amazing feat to be with a company from conception all the way to IPO. And in another rare feat, Hans is a top venture capitalist, both in the United States and in China. He has been ranked six times on the Forbes Midas list and is a true pioneer in venture as one of the first Silicon Valley VCs to move to China full time from 2005 to 2013. Zahra is an

investment analyst with Hans at GGV, also in their Menlo Park office. She's a former journalist, and it really, really shows on the creation of the 996 podcast. So welcome so much, Hans and Zahra. Thank you for joining us. Thank you for having us. Thank you for having us. We're going to aspire to at least do half as good as you guys do on a 996 episode. Oh, please. You guys are great. You're too modest. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow.

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They were voted by customers in the G2 rankings as the industry leader in endpoint detection and response for the eighth consecutive season, and the industry leader in managed detection and response for the eighth consecutive season and the industry leader in managed detection and response again this summer. Yep. So if you want cutting edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. So David, let's dig in on China Tech. Let's dig in. So before we get to the Xiaomi story itself, since we have Zaran Hans with us today,

and this is our first China Tech episode, we thought we'd spend a couple minutes just kind of setting the stage on what is going on in China Tech right now, because most of our listeners, we assume, are just reading the headlines. So there are a couple points that as we were doing our research, we kind of took away as like, not obvious things that most people don't realize right now about China, and would love to just get your take on it, too. So the big ones for us are, I mean, a sort of obviously huge companies are being built there. It's not just BAT, you know, Baidu, Alibaba, Tencent. It's Xiaomi, which we're covering on this episode. It's Didi, which we've also covered in the past.

It's Meituan Dianping. It's Toutiao. It's Pinduodudu, which is going public today for Tuotis. All these companies are valued over $10 billion. And they're not just US copycats. These are all super innovative companies that are innovating on their own business models, doing things that nobody's seen anywhere. And that's a big change from a couple of years ago. And you guys take like, when did this real shift start happening?

Right. I first moved to China to do VC full time back in 2005. I think in 2004, Silicon Valley Bank, in addition to being a sponsor for your show, also organized a fantastic tour for a lot of U.S. VCs on Sand Hill Road and other places go to China together. And the pace of change,

speed of growth in China was impressive. So a lot of people came back, start to either hire people in-house to send them to China or started to explore having affiliate funds. This is on the VC side? VC on the US side, that's right. And in China for five years prior, since 1999-2000, there were a lot of VCs that were looking to do investments in China. Some even tried in the 90s. And there were few IPOs of internet space in 1999, 2000, during those two years. The most famous were the portals,

Sina, Sohu, and NetEase. And obviously after 2000, the market went south and many companies were not doing well. So there was a lot of doubt as to whether it could happen. But as internet penetration took off, both on the PC side via ADSL, and then five, 10 years later via smartphone, the landscape for China changed dramatically. That's when a lot of these companies, of course, were getting started. And Xiaomi in 2010, as we'll see.

The first wave for the portals and then Baidu, Alibaba, Tencent were all started in the mid to late 1990s. The next wave, when you talk about a DD or a ByteDance, MBTWIN, Xiaomi, they all happen mostly around 2010 and later. So during that 10-year gap was the first five years, 2005 were the tough years, the lean years. Then from 2005-2010 you see the desktop PC, the ADSL wave type of companies emerging, start doing well.

And then people who gain experience from that wave ends up going after the next trend, the next wave. That was the smartphone wave. That's fascinating. You say mid to late 90s. So it really is for a lot of these companies, the initial Baidu, Alibaba, Tencent, the portals, it's more akin to Amazon than any of the more recent US tech companies. I mean, this was, they survived the dot-com era rather than being born after it. That gets lost a lot in sort of the US news cycles is that these are 20 plus year old companies. Yes. And a lot of people

think that it just came out of nowhere, but they've been around for a while. The more recent ones, the Meituan, Toutiao, slash ByteDance, Didi, Pingduoduo, and JD,

they came later. Of that bunch, JD is public, about $55 to $60 billion valuation, and they started in 2003, 2004 timeframe. Everyone else, including Xiaomi, started in 2010 and later. Yeah, I think one other point to really hit on before we get into Xiaomi

is just the pace of execution and company building and growth is like otherworldly compared to Silicon Valley. I mean, Pinduoduo is a great example. It's going public today, going to be valued $15 to $20 billion, raising over a billion dollars in the IPO. The company was founded three years ago. Right. I'll start first, and then let Zahra add her points as well. And the price range for IPO was $16 to $19, and then open at $25, $26.

And it's still trading at that range, between $25 and $27 right now as we speak. The market's going to close in less than an hour. The round was way oversubscribed. It was impressive to see a lot of people looking at it as one of the next big things in China. I think in China, everything is sort of compressed. So I always feel like one year in the US is like five years in China. And you're sort of forced to do things quickly because if you don't, others will out-compete and out-execute. So if you talk about a bubble in the US,

it's probably 20 companies doing the same thing, but a bubble in China is literally hundreds, if not thousands. So how do you stand out in that environment? It takes very, very fast execution and strong team and just a lot of determination and hard work. This is probably a good time for a quick aside. Zara, why is your show called the 996 Podcast? 996 is the term that refers to the standard work schedule of a lot of Chinese tech companies, which is 9 a.m. to 9 p.m. six days a week. So that's how people work over there.

And a lot of people are doing that voluntarily, because if they don't, they can't keep up with the pace of growth at their companies. And they want to work more because they're just so motivated to make a better life for themselves, because the rewards are so great. There's definitely a bias here in the Valley, in the US in general, if someone works too hard, something's wrong because that means that person is inefficient, doesn't know how to work life balance. But in China, the level of intensity in Zhui is quite impressive. Some people compare this to the Japanese or the Koreans in the 80s and 90s. We disagree because in other places that we have seen this kind of work ethic, it tends to be in companies that are more conglomerates, bigger, then employees are getting paid on salary, and there's less of an entrepreneurial thing involved.

Whereas this time in China, these are all startups. So even some argue only the top 20% of people get a lot of options. But what we're seeing is that the ones who didn't get as much options in the company that they work at, they're willing to go out and catch the next wave by being foundational. That's right. So you see people starting to do companies sooner, faster, quicker. Which is definitely not what happened in Korea and Japan. Correct.

Interesting. Well, that's probably the perfect segue into Xiaomi and where everybody there came from. So I'm going to kick off and I'm going to lead the history and facts. But Hans and Zara, jump in because you guys lived this. Tell us where we're going wrong. So Xiaomi history starts, as we've talked about, April 2010, the beginning of 2010. And there's really a superstar team that comes together, led by a guy named Lei Jun and folks from Google China, the former head of

engineering for Google China, Microsoft, Motorola, Academia. Kingsoft. And Kingsoft, right, of course, where we'll get into Lei Jun was the CEO of Kingsoft. But he's the leader. He's the CEO of Xiaomi. And he's a pretty interesting dude. Right. So he started as an engineer. He was born in, I think, 1969, went to school, did a CS degree in engineering, graduated in two years from Wuhan University, which is a very prestigious engineering program. He starts work as a software engineer. developer, made everything from games to word

processing software, almost like a Microsoft of China, much, much smaller than Microsoft, obviously, but same ambitions. He pretty quickly shoots through the ranks from like entry level engineer to becoming the CEO of the company within I think, seven or eight years. I mean, is that is that common? i would imagine uh that's pretty special it is definitely it is not common but also during that time he's starting working 92 93 time frame china was going through rapid changes there was no internet yet so software was the uh was where tech the action is and obviously microsoft was this you know big impressive company dominating the world from seattle and chinese company look up to Microsoft

and the smartest, brightest Chinese tech engineers want to build software. That's how Kingsoft got started. And they joined quite early as one of the first 10 employees. Wow. I thought he was already a more established company when he joined. So he was pretty early. He was pretty early. And then the company back back then the angel investor had most of the shares the ceo had a lot less than people like lincoln joining didn't get much at all but he uh persevered he ends up becoming the ceo of the company and in that process the first 17 years i was he was there before he took the company public the company evolved from a software company to a security company to a gaming company. And throughout the whole cycle, he learned how hard it was not to have options as a tool to get people to change and evolve a few times in order to find a better way to grow.

During that time, he also came up with the idea to do e-commerce and spun off a team to do what is called JoJo. And it was later sold to Amazon and become Amazon China. Wow. That's pretty awesome so he was clearly inspired by uh silicon valley early on yeah and one of the pioneers in china the internet space to to sort of evolve from software into internet go from microsoft to google to you know amazon to now to xiaomi yeah it's like the pace of you know these waves. Happening extremely quickly. Extremely, yeah.

Extremely quickly, that's right. We actually did an analysis. We looked at the top 10 highest market cap companies in the world that's publicly traded. And 10 years ago, in 2008, most of them were not tech. Most of them were oil and gas companies, wireless carriers, or financial institutions. Microsoft was the only true tech company amongst top 10 in the world back then. These days,

it's the FANX plus Alibaba and Tencent in China. So you see seven of the top 10 are tech companies, many of them are internet-focused companies. And then the market cap changed dramatically for them. And Hans, to pile onto that, so not only are the most valuable companies tech companies now, the ones that have performed the best in recent years are also tech companies. And I saw this incredible stat this morning, that is the FAANG stocks, Facebook, Amazon, Apple, Netflix, and Google were single handedly responsible for the S&P 500 being positive for the first half of 2018. If you take those stocks out of the S&P 500, it was actually down seven-tenths of a percent, which is insane to think about. This is what we're seeing in the U.S.

The gap is even wider in developing countries, where the offline world is even less efficient than the offline world here in the U.S. So you look at Alibaba, GGB was already investing in Alibaba. We invested in Alibaba, GGB was already investing in Alibaba. We invested in Alibaba in 2003. Battle of the Asian was a quote unquote, very expensive, $180 million. That's 2003, 15 years later.

That's million with an M, not a B. With an M, right. And 15 years later is half a trillion, $500 billion. And during that same span, Google actually grew by less than 10x, about 1000x. That's the thing we see that in developing countries worldwide, we will see the impact of tech internet play even bigger role than it has done in the US. Before all the internet companies became so big in China, I mean, the big Chinese companies were

the state owned enterprises, right? And it seems like now, like you were saying earlier, everybody either wants to work for these big internet companies or go be an entrepreneur themselves. It's a big change. Even five, 10 years ago, we see a lot of people come out and want to have a good job that's safe, often with the government institutions or state-owned enterprises. These days, you see a lot more people willing to work in internet companies, tech companies, because they know, you see a lot more people willing to work in internet companies, tech companies, because they know the growth is a lot faster and the chance for career advancement is a lot better.

So Lei Jun, of course, being a prime example. So he's now CEO of Kingsoft. We're in the mid-2000s and he makes kind of a surprise decision, or at least it seems in the researching like a surprise decision. At the end of 2007, he retires from Kingsoft as CEO. He eventually would come back, and I believe he's now chairman

again, but he retires day to day as CEO, takes a step back, but he doesn't really stop. He starts becoming a very prolific angel investor. And you were working with him a bunch during this time, right? You've talked about, and he's talked about too, that there were kind of three main trends that he saw at this moment in time that he thought were going to create a lot of new companies in the future. And that was the rise of social, the rise of e-commerce, particularly, and particularly in China, because there wasn't as much offline commerce developed. And then of course, the coming wave of mobile, which was a huge global trend as well. How did you first end up getting connected with him and start investing with him as he's doing all this angel investing? I didn't know he was an active angel investor. He did never publicize it. I was looking for

companies to invest in the online gaming space because you can see gaming take off, but the chance of any particular game do well is quite high. So we're looking for ways to invest in a gaming space that we're selling shovels that can be that the arms dealer you will look at media we look at tools look at variety of ways to feed into the gaming market one of the company the inventory become a company called yy and also listed in on NASDAQ and GDB's investor in it I have come across this I met a CEO got to know David quite well and David introduced me to his angel investor and that was Laydream so that's

how I got intro to Laydream the first thing he said to me was that you know he thought a lot about what he did for the 17 years at Kingsaul and he realized that in order to do well one needs to capture the right trend that has a chance to take off and over the next years, he's most bullish on these three trends, commerce, social, and mobile. It happened to be the same thesis I had, except that he obviously thought about this deeper and for far longer than I had. So it's great to meet someone who feels the same way, but also has the operational experience to be helpful to the founders like you, Max. Yeah. This whole concept of trends is super important in China tech in a way that it's different from the U.S. In the U.S., what's prized in Silicon Valley is these disruptive innovations that no one sees coming.

Everybody thinks that Facebook is a toy or Instagram is a toy. Nobody takes it seriously. And then it disrupts everything. In China, it seems like it's much more about like, there are these big trends. Let's capitalize on the trends. What's behind that? It is very interesting. Having gone to Stanford, it's always thinking about the next big idea or do something disruptive.

What rule can we break this time? Do something that's shocking and something that's fun and kind of rebellious. In China, it's so much about nation building so that in order to catch up and do well, the country needs to push a certain agenda or promote certain sectors to do better in order to build a more prosperous nation. So there are trends that you can capture. So people look at,

in order for the country to be more efficient, internet will need to play a role because it's a great way for someone in Beijing to know what's going on in other parts of the country and have people tell you what's happening on the internet. It feeds you data in a way you cannot do it on your own. So there are things that's happening in China. If you look at it, it goes, hmm, I can see how it fits to what's going on from a country development standpoint. So this trend has better chances of taking off and will not be as regulated by the government. There's sort of two things at play there. One is an advantage to a more centralized,

even if not sort of governmentally centralized, but culturally centralized group of people. In the US, everyone's running around sort of doing their own thing, trying to create, trying to disrupt, trying to find a little edge wherever they can. And in China, where there's a more unified sense of we all need to do this to be strong together, you have sort of more adherence to trends. Right. But if you go even deeper, the stuff that's happening in the US is also trend dependent. Yeah, yeah. We just don't think of that way in the US. Why should PC take off? Why shouldn't we just continue living in the mini computer world or the mainframe world? Because distributing that power to the edges makes sense.

It makes everyone more efficient. It's better for the country if everyone has a PC next to it so they can do stuff. They can be more productive. But we never describe that trend in that context. It's always like, oh, it's about freedom. It's giving you empower everyone. So what do you want to think from an empower standpoint of the individual, which is the Western way of thinking, or the Eastern way of thinking, you made a country more efficient, the result is exactly the same. Do some of these trends that are sort of being identified as we must be strong in this area,

such as mobile or such as social, have they already been sort of solidified two to three years more in Western markets as like, it was the toy, it was maybe disruptive, but not a real market yet. Now we can see it's a market and we know we have to win there. It's not fast following because the business models are tremendously different in the way that it interplays in the culture is different, but there's sort of demonstrated sort of the technology can work at scale notion. that it interplays and the culture is different, but there's sort of demonstrated sort of the technology can work at scale notion. Well, for example,

when Facebook started to show up, like you said, a lot of folks in the US viewed it as a toy. You know, how can advertisers treat this seriously? It doesn't seem like it's something that can last.

But someone like Lei Jun see it in China or Wang Xin, who was the founder of A2N, see it in China, says that is interesting. I think that's going to be a big trend because it's in the Chinese context you can see that it's a way for people to freely express what they're thinking and get less of a pushback from the government at least initially. So there are reasons why this could take off in China but it has to be modified, it has to be localized, this

model has to be different but there's something there that you can look at and go, hmm, I think this can be big, but I don't know how to make that big. So it's a combination of, you can call it fast-falling or you call it micro-innovations, adding stuff that has a C, may not have you invented a C yourself, but you see that this could be something quite big and be quite different than the original intent. So I think starting in the U.S. is an amazing place, both in Silicon Valley and New York, where you see a lot of new things happening

that most people treat as a toy. Yeah, yeah. And I think it's not so much about who's copying who, but more taking the world as your classroom and learning from everyone. I think Chinese entrepreneurs are especially eager to learn from Western entrepreneurs.

And maybe not the same can be said the other way around. Although it should be. And it's changing. If I read tech news in Chinese, like the tech crunch equivalents in China, over half of the news there is about the fans in the US. Whereas I read Bloomberg, Wall Street Journal, whatever here, maybe only five to 10% of the news is about Chinese companies. It's a lot of asymmetry in terms of interest. And Chinese entrepreneurs are very eager to come to Silicon

Valley, meet everyone, learn what's working and take it home, not copycat, but adapted to the local market because it takes a deep knowledge of what's going on in China to make a product work. When you look at Steve Jobs, he didn't invent graphic user interface. He didn't invent object-oriented programming. But when he sees that, he says, oh, that is going to be huge. And here's the reason why. Let's not over-credit the amazing historical American innovators with the true original encounters of things either. All right. So back to the Xiaomi story. Lei Jun, it's 2009. He's left Kingsoft over a year ago at

this point. And he starts jamming with one of the people who would become one of his co-founders at Xiaomi, Lin Bin, who's the head of Google's China engineering division. Now, remember, this is going to become really important in a minute. Google does not operate in China. You cannot access Google services, search maps, YouTube, whatever in China. However, the mobile and smartphone market is starting to rise. And it's pretty clear at this point that Android is going to be likely the dominant operating system in the whole world, including China. But there's this gap where there is no Google, yet there is Android in China. So they start jamming on this,

they realize this opportunity. And even that was it was still a little bit of a leap at the time Nokia was slightly different. I think Google was operating in china and about close to 20 of our kid was google so android has come out but it's very early um back then only htc phones have done well samsung phones have not so it wasn't that clear that android can beat iphone because in the early days iphone was still offered a better integrated experience so the discussion that they dream and limping had was that is it possible to build a phone using android kernel that can offer a better integrated experience by owning both a hardware and a software piece so that wasn't obvious but i'm glad you picked that out it wasn't obvious to many many other

people that it wasn't a predetermined thing that someone should do hardware and then someone else should do, Google should do Android. And marrying the two together is sufficient to offer superior experience. That wasn't obvious back then because it was so early in the cycle. Right. And that's the, you know, famous knock on the whole Android experience is that the software and the hardware are not built to be tightly coupled together. And for a company like Xiaomi that is so incredibly focused on the user experience to, you know, in an Apple-like way, you know, you can see how that would be an enormous sort of leap at the beginning of, you know, can we do this? Can we actually

create an iPhone-like experience using this decoupled hardware-software combination? Yeah. And that was the key number one challenge. And a lot of people back in China even then didn't think that was possible because no hardware company in a phone related space has ever become successful, starting from scratch. Every player we can think of kind of evolved and added the phone element on top of the infrastructure business that they were already in. So it was incredibly risky for anyone to try to make this work. Now, they decided to start the company along with seven other co-founders, I believe, seven or eight other co-founders, immediately raise $41 million at a $250 million valuation. It happened in two tranches. The first time it was roughly around

20 million pre. And the lead investor was Richard Liu at Morningside. And I gave him a lot of credit for having the guts to do that. Both he and I have known Adrian for a long time. So three, four people and a crazy idea, $20 valuation. And I remember someone told me back then, who's very smart and very experienced, Google's first round

after having a product that was out there, people were using it, it was $70 million pre. So having no product, nothing at all, not even business plan, $20 million pre so having no product nothing at all not even business plan 20 million pre is the valuation is not not cheap but if you believe in him and the team and what he's trying to do you will bet the challenge came uh one run later that was only months after the first run was done and that was at 150 million. It's years in China time. That's right. And then valuation became 150 million pre.

And they were maybe 50,000 users of MIUI, the operating system, based on the Android kernel that Xiaomi had. And then, you know, both Richard and I decided to co-lead that round together to do this. Only months later, before they actually had a first party launch the phone, the valuation jumped up to a billion post. Remember, this is 2010 in China. This is not 2018 in Silicon Valley. That's right. By the time it hits, the billion dollar valuation was already 2011. And I give Li Jun and then Tucker Shunwei, also Richard at Morningside, a lot of credit for co-leading that round between Shunwei and Morningside. So there were a number of people that had the guts, not many, but a number of people

had the guts to lead each round and step up with meaningful money at stake at that time. And so if you didn't think that the team can pull off that vision, everyone who passed on it, I think it's extremely logical and reasonable. And I would never fault them for doing that because it's crazy. It's always that way, Hans, but that's not how you drive returns. Correct. You have to somehow figure out a way to bet systematically and take enough risk to find those outliers. So one thing I want to pick up on that I think is super important to understanding what's going on at this time, Hans, you me ui which is the it's a skin on the android kernel that the company develops during this time before they have their own phone let's talk a little bit about that so there was a company i think it's

bankrupt now but there was a product and a company here in the u.s called cyanogen cyanogen mod there's a great engineer up in seattle actually who had hacked android and basically this is very very early days of android and created this skin on top of it not a full replacement of the linux-based operating system but a new ui and that was cyanogen uh ends up they start a company around that ends up getting backed by andreessen and benchmark yep uh doesn't work out but so that's going on And that essentially is the same thing that Xiaomi does for MIUI. And that's what MIUI is.

How did that all come together? Did they see Cyanogen and see that this is possible? Was it developed independently? Because it happened pretty fast. That was something that was discussed in Xiaomi early on. But I think the Chinese entrepreneurs know that their execution is far better. So they didn't have to take away anything

from what the other countries and teams were doing. And it was all open source. It's all open source. So once you know what is potentially possible, even though it's not proven yet, do you think you can execute it better and figure out a way to make a war in the ways other can't? Well, also, just in China yet with this opportunity, you can execute it better and figure out a way to make a port in the ways other can't well also

the just the you know in china yet with this opportunity i mean it's pretty amazing what lei jun and the xiaomi team does they create miui there's no phone yet they release it so that anybody with an android phone can install it that's right on their phone open source and it really takes off and it gets these super hyper engaged users on product forums and that's kind of the the root of the me fans that start which we'll get into in a minute like zara mentioned 996 i remember going to visit leijing and linbin and the rest of the team in 2010 actually min is not there he was still at google at that time and then it would be at around midnight and there would still be people in front

of me waiting to talk to leijing you realize You realize that they figured out a way to combine the best of the knowledge that they picked up while they work in the bigger companies, yet retain the nimbleness and the drive of a startup, and having the two culture be able to mesh together. It wasn't easy, but they made that work. They update the MIUI every single week. No one has ever done that anywhere else in the world. They update that every single week. So if you ever done that anywhere else in the world. They update that every single week.

So if you are a fan of open source software and you like Android, you can help. But realize that this team out of middle of nowhere in Beijing was doing something revolutionary. Yeah, yeah. I wrote in my notes, it's almost a joke. We talked about in the Tesla episode on our last episode about the Tesla being the iPhone of cars because it's a computer.

You can upgrade it. They ship over-the-air updates. It's almost like me UI is the iPhone of iPhones. Like, you know, if you have Android or you have stock Android or you have iOS, you're getting yearly updates. But the Xiaomi team, like you said, is shipping major updates every single week to this new skin that they've developed. Right. And people responded. A lot of people say this is what Android should be doing, but not you're doing it so i know in the u.s we value a lot on idea origination we place a premium on that and there's nothing wrong with doing that but i think we also get people enough credit to take an idea and you make do whatever it takes to make that work that's much harder and takes a lot more discipline and a grind for a longer period of time.

And so both have value. Yeah. What I think is just super well illustrated here between, you know, Android, which is still on, core Android, still on an annual release cycle, maybe a little faster now, but not much. You know, and Cyanogen, of course, is great, and they're, like, you know, working on stuff too, but not moving at anywhere near the same pace that Xiaomi is. No.

So when I look at this, this is not government influence. It's not like somebody give Xiaomi extra salary or subsidy or grant to ask them to move faster. It's completely from within. This is why I love tech. It's true meritocracy. So Hans, the original business plan was to build amazing phones at reasonable prices and sell them over e-commerce. What was the decision like when deciding how to enter the market around, should we build a phone first or should we make a skin of Android first?

Early on, they had the inkling that to make it work, what is now called the triathlon model, that you need to do three things well. You got to be able to do the skin and make that extremely valuable so people want it more so than the Android software originally. So that's number one. Number two, you got to be able to have a hardware

that when it's quote-unquote integrated with the software, it can offer superior experience than a decoupled solution that was out there and that was more of a dominant form of alternatives. And then number three, you've got to be able to have internet services that you can roll out to create some kind of networking effects, create some kind of moat. And there's the opportunity for that because there's no entrenched, you know, Google search or Google Maps.

I mean, there's Baidu, of course. That's right. So figure out how to do all three things well is not easy but they didn't identify early on that was a way to compete but and potentially win and for for him he also realized that none of the original team members had hardware true hardware experience having shipped a lot of phones so to focus on getting stuff right and getting user feedback and get validation on this triathlon model, they have to start with a skin with MIUI first to make that work.

Because that's what they have on the team. Before they can try. And also, it's less comprehensive. To build a phone, you've got to pay for all the IP, which they did. You've got to pay Qualcomm, which is expensive. You've got to pay a content manufacturer three months in advance, if not longer. It's not installments.

You have to pay all of it up front because they need to make sure that as a startup you're going to be around. So it's hugely capital intensive to build a phone. So before they can prove they can build a phone, they've got to make sure they can do a MUF first. Well, it's interesting. So in a lot of ways, I think those constraints

end up driving Xiaomi's next big innovation, which evolves into, you know, hunger marketing and e-commerce model. I assume it's because they didn't have enough capital, even as well capitalized as they were, to place orders for parts and get phones assembled at the scale that a Samsung is. There were only limited runs and there was such demand and so they evolved that into this hunger marketing model where now every tuesday at noon right there is a limited uh amount of supply of xiaomi phones that come available and you have to log on and buy it right at noon right a lot of people criticize them for the hunger marketing strategy but it was born out of necessity they told uh li wan cheng head of uh sales back then, that you have to figure a way to make it work. And by the way, you have nothing, no money, no budget to work with.

And so I remember one of the marketing campaigns I came up with was a campaign that just share the phones that you have ever used in your life and talk about what you like and not like about them. So it was a way for true fans to show off their tech knowledge and their status as experienced user daijing was the first who did that and he showcased like the 50 phones that he ever used and there were about 560 000 people on their own decided to participate and share what the phones they have used in their life half a million people half a million people so not spending any money at all half a million people within a few weeks time frame participate in a campaign. And that's when I know,

even before they launched the phone, that there is a market there. Lei Jing was right, that people feel that their voices are being heard. They want to platform a brand that listens to them and be willing to make changes quickly based on their input. So that's a winning strategy

that the hardware guys don't know and the internet guys don't know, and the internet guys are not going to touch hardware. So if you can figure out these gaps of capability understanding amongst different disciplines, you can build something that's the best of everything. Yeah, and to put a pretty extreme point on that, the point that Hans is making about taking community feedback, lots of companies talk about, oh, we listen to our users,

and like, oh, we go and interview them and we have empathy for them. Xiaomi literally has a forum that is a thing that they built in-house where anybody who uses a Xiaomi phone can request a feature. And it works like Reddit and there's upvoting and downvoting. And the community basically says at any given time, this is the most important thing to us that's not currently in the product. And when they roll out stuff every week, they look directly to that. I think that lots of companies have tried to do things like this, but to be able to actually successfully execute and have their product planning run on this intense heartbeat from the community is extremely unique. And Xiaomi engineers and product managers are required to spend time in that forum.

It's part of their job. They have to spend hours there per week. And answer questions. And answer questions and be engaged themselves. Could you imagine

if Google did that? They should. Again, there's no government support. There's no government subsidy. There's no government grant. Nothing. It's purely based

on execution. You care. The agent says, treat your customers as if you're fixing films for your friends. Your friends come to you and say, hey, your film's not Jun says, you know, treat your customers as if you're treating, fixing phones for your friends. Your friends come to you and say, hey, your phone's not working. You're going to bust your ass to make sure

that their needs are taken care of. So that's what he tried to do to get his colleagues to react and serve the customers better. So one other point I want to make for listeners, taking a step back, if you look at the founding team and you look at some of the original investment theses, Hans, that you've talked about and that Le Jun has talked about in how he started the company, the notion was,

we're going to manufacture these phones, they're going to be, you know, world class hardware, it's going to be a great experience, we're going to do e commerce, we're going to sell them online, which is fairly unique at this time. So we need people that are amazing at e commerce, because that's blowing up in China. And that's the strategy for selling these things. And they had that on the team. They had people who've built world-class services and run large software companies. But if you look at the things they had and didn't, they had nobody really in hardware and nobody in manufacturing. Think about anybody out there right now, you and your friends sitting around saying, let's start a company. And you're like, oh, I think we should start a SaaS company. Or maybe we could sell some things on the internet. But thinking like, I'm going to start a company and you're like, oh, I think we should start like a SaaS company or maybe like we could sell some things on the internet. But thinking like I'm going to start a hardware

company and learn how to manufacture that at scale. To me, one of the most impressive things about Xiaomi's evolution over time is that they actually did figure out that competency. For Hans, I have a question for you. Is that unique to China that they could do that because they're actually manufactured there and because you know there's so much competency around you know actual building of physical things once they mean they're being joined full-time both he and leijing together they spent a lot of time and effort to interview everybody they know whoever made phones for motorola and nokia and other major brands in china which were companies that were dying at this point in time.

Well, no, to be fair, Motorola and Nokia were doing well in China. Not in the beginning. That's right. But some of them were frustrated for the fact that these companies are moving much slower on smartphones. They were not adopting smartphones quickly.

They were not willing to use Android as their operating system. They were pushing their own, as you recall. Nokia had that awful operating system. That's right. right that's exactly right the burning platform you got it yes and and so there were people who are frustrated inside these big firms that are sort of want to come out and put their vision to the test and leijing was uh they're going to be the first to talk to them and be able to get one of them to join them to do this. It's not easy because, again, most people in these big companies haven't tasted the value of options. They haven't gone through an IPO themselves.

It's harder to leave a big company that has a prestigious job to join a no-name startup that just had a bunch of MIUI users. Well, to run through quickly what happens, I mean, short story, it works. They released the first phone the mi one handset at the end of 2011 august 16 2011 i'll never forget that date yeah and i know hans you've talked about this i know you'll never forget it more than 300 000 pre-orders in the first two days right for this phone from this company that like nobody's ever heard of before that was a skin within the first day of three hundred forty thousand within the first couple days four hundred sixty thousand it was mind-boggling and at the other party lunch party two thousand people showed up and when they can set

the phone at the end of his in present presentation he said the phone cost you know 1999 RMB which is roughly translates three hundred and ten dollar us everybody audience stood up and plotted and that's when i know okay my job is saved i did not make a mistake for doing crazy things again a lot of kudos to leijin and tuck and richard for all having the guts to put money where mouth is and the xiaomi team's amazing a lot of people don't know this but in a serious b that the one i led a lot of employees of xia Xiaomi put their personal money into the company. So they do make sure that if you want to do this, you have the option of doing so.

No pressure and no need. It's not obligation. But all those folks, 56 of them who did, are all very, very well off right now. Wow. That's awesome. I wish more companies should do that. How does that work mechanically? Do they sort of buy in?

They all put money into a SPV. SPV show up on the cap table as an investor. And they get preferred shares. They get preferred shares. They all got preferred shares. Wow. That's right. More companies broadly should do that.

That's awesome. Yeah. Well, okay. So things are going well. The next year, the Me Too comes out. They sell just under 20 million of those phones. Yeah. Well, okay. So things are going well. The next year, the Me Too comes out. They sell just under 20 million of those phones, which again, this is now a three-year-old startup. Yeah.

Amazing. It's made, you know, not the Linux kernel, the Android kernel, but like a full operating system on top of it. Two phones, bunch of services plugged into those phones and sold 20 million of them. Pretty impressive. bunch of services plugged into those phones and sold 20 million of them pretty impressive then also in 2013 they come out with their first non-phone product that that xiaomi made and still makes a tv the smart tv how did the strategy develop to go from that you know like apple like makes a few products they make great hardware but xiaomi has taken this other approach this ecosystem approach where well i'll let hans describe it but you know long story short all these scooters that you're riding there's one in their office right now are xiaomi branded scooters made by ecosystem companies so how did that strategy get developed again

leijing thought ahead and i think his uh experience as an operator entrepreneur entrepreneur, as well as an angel investor, was super helpful. He understood that for Xiaomi to be great, it can't just be a phone company. He has to buy multiple products. But if you ever try to assemble everybody in-house to do this, not many products in-house can be as big as the phone business. So you're not gonna have people who are gonna do

the greatest work doing smart devices other than a phone and maybe a TV. So he knew that he needed to figure out how to incentivize people outside of Xiaomi to do this. And so he's willing to become an investor in their companies. Minority, never control. Minority for the most part. And then be able to lend the Xiaomi brand to them and share gross profit on top of that. And then open up the xiaomi e-commerce platform to allow these devices to be sold on xiaomi and then eventually in store

when there's a store down the road and then having the supply chain to be willing to you know how hard it was for him as a startup to gain the trust of supply chain to manufacture stuff for him even after they have a great design so he wants to to make sure that Xiaomi brand can help these startups to get access to supply chain to manufacture. It's incredible for listeners who probably aren't familiar with this. The first big ecosystem product that's a hit is the air purifier, right? Made by a separate company that Xiaomi has invested in, branded Xiaomi, sold through all of Xiaomi's distribution channels, but a completely separate company that makes it. And becomes a massive hit now there's been so many other products everything from all the scooters uh again branded xiaomi scooters made by a company called ninebot which

is a separate company anything you can imagine it's pretty incredible they have over 80 products now designed and then manufactured for supply chain from over 100 companies only three of them i think are full stack Xiaomi. That's the phone, the TV, and the laptop. That's right. Only three are. And the smart TV one is also interesting. The founder or the head of the business right now is Wang Chuan, Richard Wang, and someone

that they've known for a long time. He started off wanting to do something that's more the Kindle of China, for lack of a better term, and more a reading device that has an integrated hardware software experience. And I was actually a small personal investor in that company. But it was harder to make that work in China, just a different market. And he actually invested in Xiaomi early on as a personal investor himself. So he and the agent stayed close and eventually decided that if he joined Xiaomi full-time, then the team he built at Kindle

can come in and ends up building Smart TV. And so without him joining, it may have taken a while for Xiaomi to figure out who's going to drive the next product. And the Xiaomi ecosystem only happened after Smart TV becomes something that can be a successful example, his study for others.

All right, so this is a great part of the show because this is where we're really starting to tease out what is Xiaomi as a business and how is it different? Because I think that a lot of people at first blush say, oh, maybe it's like the next Apple. They're making smartphones. Everybody's using them. They're doing a lot of the software themselves. And the question about Apple is always, can they have another iPhone? And most people think no, that they'll never have a product at that scale that's that profitable again. And what have they done about it? They've come out with the watch that's doing well. They have some of these other products that will never be as big as the iPhone. And the approach that Xiaomi took to that is, well, we have all these competencies,

and we could sort of platformize those competencies in a very Amazon-like way. So the way that Amazon opened up AWS to other people to sort of start a new business line, Xiaomi is sort of doing that same thing with their manufacturing, with their supply chain, with their branding, with their e-commerce. But rather than, you know, silently running on AWS in the background, a lot of these products are actually now Xiaomi products. And so not only... It'd be like Airbnb by Amazon, which in some sense it is, right? It runs on AWS. Yeah, but it's just a really fascinating strategic move that we just don't really see in the US.

Right. Li Jing has always been impressed by Muji Uniqlo in Japan, also Costco in the US, obviously Amazon as well, since he sold his second startup Jojo to to Amazon So he knew that there's more things that are rising middle class in developing country Like China will want to buy be on the phone So how do take advantage of that and when someone trusts the brand for one product category? Give them more products that they will want and how can you do that at a world-class design for every single product, but make the price much more affordable for the mass market,

the rising middle class in these countries? The goal all along was not just to do a phone, but how to do more than phone was much bigger of a challenge and question. And I think over time, you figure out the ecosystem approach, making the product leader for each product a true founder and entrepreneur was the best solution the everything store that's right i think he's mentioned before that his goal for xiaomi is really to allow customers to be able to shop in their store with their eyes closed they can buy anything they want and trust that it will

be of high quality and they will like the product. So it doesn't take, like, if you like the brand, you're going to like whatever it makes. So whatever Xiaomi makes, I will buy it. So that's their goal. And the beauty is that when you have the model like that, the frequency of visits per store or per e-commerce is much higher. Much, much higher, right? How often do you replace a phone? At best, six months. How often do you go to the Apple store? Even though. Much, much higher, right? How often do you replace a phone? At best, six months.

How often do you go to the Apple store? Even if you're using the free Wi-Fi. Even though it's an amazing store. You don't need to go there that often. But the Xiaomi store

becomes a place that people just love to go check out every couple weeks because there's always something new from one of the ecosystem companies. It's like Brookstone

but all the things are super useful. I was going to talk about Hugo Barrett here. I'll just mention him. Hugo Barrett is a... In部分, I will add that selling the phone over the internet was not easy,

even though e-commerce in China was doing well back in 2010, 2011. But Google had tried to sell their first phone online. The Nexus, yeah, the first Nexus. That's right. Great phone, but it was just hard to sell over the internet. Very hard. People were just like, why?

I'm used to buying offline. So it was not obvious that that can work. If the agent and the team did not do MIUI well, did not have a lot of users who would like MIUI already, and the price point wasn't that competitive, you cannot start a bust. I remember after the lunch party, I went to a barber shop to get my haircut. And I whip out a MIUI phone using it. And my barber was asking me what that was because she has never seen it before.

And she asked around. No one else has seen it after I said it's Xiaomi. But this one guy in the barber shop, one of the barbers, who is probably the most tech savvy of the bunch, and he knew Xiaomi phone because he follows what's cool and hot online. So he said, oh, this is the best phone right now.

It's so cheap, but it's world-class. The chip is the best Qualcomm chip you can find right now snapdragon and it is amazing when sue say that the other six people all turn their heads they all come here next to me want to check out the phone say oh my god it's only 1999 mb so cheap it looks so good immediately the fan me fan turned the other six folks in the barbershop, namely because someone wants to buy Xiaomi phone. And then you called up late June and you're like, can I give you more money, please? The cost of that promotion is zero.

No government subsidies needed, no government grants needed, but just by out-thinking, out-executing, it become a phenomenon in itself. Why not sell through channel? So in the US, until the iPhone, everyone's going to the AT&T store and the Verizon store to buy their thing. Is it a gross margin problem? Is it a...

Apple's in a different position. Apple doesn't have to give away as much to the channel. All the other phone companies do. And if you look at the marketing costs and sales costs, even for Apple, for most phone companies, it ends up being somewhere between 30% to 40% of sales. So if you look, Apple's gross margin on iPhones, it's roughly a bit over 50. Two-thirds, if not three-quarters of that, are sales marketing.

And then what's left is just operating overhead. So those are the three biggest cost drivers, right? Obviously, you have components, all that stuff in there, too. But beyond that, it's an expensive item. And for a phone company that's not an iPhone, then you have to give away more to the channel as well. And it's just not as, and you don't get feedback as quickly because people cannot tell you the problems themselves.

So doing it over the internet makes it a lot more efficient if you're going to make it work because the feedback's immediate, as you know. I mentioned Hugo Berra. Hugo was a very famous, celebrated Google executive. At this point, Andy Rubin has now left Google. Andy Rubin, of course, being the founder of Android, as we've covered. Hugo is basically running Android within Google. He's head of product for Android. Huge announcement.

Xiaomi recruits Hugo to move from Mountain View to Beijing and join Xiaomi. And even more curious, he's not going to head product or software. He's going to head international. And this becomes a huge, huge move for Xiaomi. And really under Hugo's leadership, Xiaomi goes into India, into Malaysia, into many other countries, particularly in Southeast Asia. To preview the end here, Xiaomi is now by far the number one smartphone brand in India, which is incredible. To my view, I don't think this was normal at the time that a Chinese tech startup would be thinking, you know, because everybody's thinking the China market is so big. There are 1.3 billion people here. Why do we need to go outside our own borders? But Xiaomi and Hugo say, we are going

to be a global brand. We are going to dominate all these other countries, even more so than US counterparts or whomever how did that all come together well i think you know limby also from google so he knows um uh he was there from before and also there were mutual friends in particular robin chan who helped to bridge the gap and then a bunch of us have met uh hugo over the years. I first hosted Hugo and Robin and JP, three folks, to visit China in 2006. It was even before Hugo joined Google at that time. And then by the time that Xiaomi tried to recruit Hugo, you already have a lot of investors in the company, including DST, Urea DST, whom Hugo knows quite well as well. So there's not enough people around the table that Hugo already knows and feel if he ever

tried to do something that's different, Xiaomi probably is the one. And he also sees the numbers of how Xiaomi has gone up. So it's a combination of a lot of factors that made it possible for something like this to happen. It was unprecedented. And it's not easy for someone who never lived in China to leave a great current job to do this. And as soon as he joined, I remember his Sina Weibo fans shot up. So Sina Weibo, you can think of it as the Twitter of China, but much bigger.

On Twitter, he had probably tens of thousands of fans. On Sina Weibo, within the first month of joining Xiaomi, he shot up to a million and more. So the impact that he was able to create in China was much bigger than even what it was doing at Google. Wow. I think he really became the international face of Xiaomi and became really like a celebrity in himself. Like people in China call him Hu Ge, which means tiger brother, which sounds like his

name. Very endearing. And people see him as the face of the company that can be appreciated by people outside of China. And that was pretty important. And he also helped to recruit a lot of great people, young people in their early 30s or late 20s to join the company,

including Manu, who runs Xiaomi India. And so a lot of people he recruited now that managed and have done well within the Xiaomi and on their own have Ended up making great great contributions So without Hugo joining Xiaomi may not have been able to attract those people to join them I think they can put all that emphasis on recruiting the right people to make things happen And he he's even planning ahead these days, trying to get younger people to do more.

He's experienced enough that he always thinks ahead about what else he needs to continue to scale the business. So on the back of all this, end of 2014, Hugo's now been in the seat for a year. They're moving into India in particular, but all these other countries. Xiaomi raises a billion dollars at a $45 billion valuation, becomes the most valuable startup in the entire world. Pretty amazing. After that, there's some hard years. Right, but about a year and a half. Yeah.

It was not as easy for Xiaomi. And we probably don't have time to cover in depth, but basically this was, so now we're in 2015, 2016. A couple things happen. One, globally, smartphones become a lot more commoditized. It had been such a huge growth market across the world for so long. But now Android's very established. It's Android.

It's iOS. And all the Android manufacturers are duking it out. And Xiaomi gets sucked into that. Also, though, e-commerce growth in particular in China plateaus itself. And so China growth, which had been incredible for the last few years, slows down a lot, even as all these other countries are coming online. That must have been a real test of faith. And as we'll see, the company makes it through this period. But on the inside, you know, I mean, because I assume India especially was really,

really growing at this point. Were you guys seeing the signs of hope that the company would get through this? I think a couple of things that happened. One, in addition to deciding to do Xiaomi ecosystem, also decided to launch a phone called Redmi. That's not as popularized. Redmi costs less than $100 to users. It's a different brand than Xiaomi, but it's in the Xiaomi family of products. And it's very effective to beat competitors who can potentially undercut them from below

by going after the market themselves. That was a controversial decision. It wasn't clear that was the right answer to do. But Li Jing eventually took the guts and made that work. And that helped them with international expansion as well. The second thing that it did well, and it's not as obvious from outside, is that the Chinese e-commerce penetration rate back in 2014, 2015 is roughly close to 10%,

which is the e-commerce penetration rate in the US. So to penetrate even further as a percentage of retail in China, it will need time to prove that it can continue to grow, which it did later. But for a brief moment in time, people need to see whether this can be Could more people shop online in China than they are in the US which invented e-commerce in the first place and that took some effort To show that yes indeed it well and by that time Xiaomi's phones have done so well in the market and have such a great market share Anybody who was willing to buy phones online at point in time have you heard of xiaomi or bob xiaomi phone yeah so you want to grow and get the another 90

percent of people who are used to buy stuff offline to also buy a phone you can't just do it online anymore and that was the lesson that they joined the team eventually figured out and start experimenting idea of doing offline store to see if it makes sense and they had a lot of xiaomi stores that were fan stores people come in and get the product fixed but can you turn that into a retail store and do a well and end up figuring out a way to make that work so in 2017 though things really turn around the company goes from flat revenue growth to 70% revenue growth in one year. Incredible. Incredible.

Much on the back of India really working. And having open stores in China. And having open stores in China. And the ecosystem finally coming along. That's now 22% of revenues. That's right. May of 2018, just recently, they announced they're going to file to go public. Estimated could raise up to $10 billion.

In May, they announced that they filed with Hong Kong Stock Exchange. Yep. That's right. Originally, the idea was to do a CDR listing, even before the Hong Kong Stock Exchange. Oh, simultaneous. Oh, simultaneous. Interesting. They ended up pulling CDR and listing just on the Hong Kong Stock Exchange.

And David, what's CDR? China Depository Receipts. So it would have allowed the company to be traded on mainland China stock exchanges. But that was going to add a lot of complexity, I would assume. Yeah. Ends up pricing July 9th at $17 Hong Kong dollars per share or a $53 billion market cap. So up a little bit from the last private round, but not too much. But then within the first week, it gains another 20%, closes at $21.45 at the end of the first week in a $61 billion market cap.

And the net of all that is it's the biggest tech IPO in the world since Alibaba in 2014, which is kind of amazing. Yeah. The team is amazing. It has a great board as well. And they collectively have done a good job of rebounding from those tough 18 months. And the offline store definitely is working out well. And it's pretty clear that strategy is exportable to other countries they're in. Xiaomi announced in 74 countries.

And I remember when I first started investing in China in 2005, the world had about a bit over a billion internet users. And now the world has about 3.5 billion. The additional 2.5 billion ads, over one third came from China. And that powered China's migration from a more or less a more industrial country to become something that's more a tech country because you have so many people online and the rates are affordable. They spend so much time online. It's better to build business on top of that.

So over the next 15 years, we're going to see another 1.5 billion people get online and most of them will be done doing their smartphone and most will be coming from countries that Xiaomi is in already. A lot of people ask me whether Xiaomi will come to the US or not. They've been talking about it, but I don't think it's a priority for them.

They should really go after the markets that they're in already and get the next 1.5 billion internet users. Right. There's so much more greenfield. Exactly. And not only are they doing that well, they also invest in companies who is providing localized services, internet services, that could be bundled into the phone. So they curate them and also invest in them. And so the traffic they can bring to these better localized solutions will be quite impressive. And we have seen a lot of Chinese internet companies got big over the last 10 years on smartphone. You will see something of similar

trajectory in these countries with startups some of which will have their apps bundled into xiaomi so i think that's what a lot of people don't truly appreciate the value of the xiaomi potential and all they see is a smartphone maybe smart tv and you know based on the android is it really compatible with android a lot of questions i hear from instant investors are still quite at a basic level, which is completely understandable because it's not an easy story to understand. But over time, people will see that it isn't just a hardware company. It's very different.

A lot. That takes us to today. Yes. You want to go into narratives? Let's do it. So what is Xiaomi today? and what is the company's business model how is it being valued in the markets i think one major thing that we have not talked about yet that is definitely the the sort of buzz of the company is they have a 54

billion dollar market cap the way that you could perceive them is like their business model is like Apple's that's primarily around selling hardware. They kind of have this one hardware product and they're starting to partner with all these other companies and have, you know, expensive retail stores to sell all those other ones. But the one hardware product they sell is at a very, very thin margin. It's not like Apple in that sense. And in fact, Lei Jun has recently announced that Xiaomi will never make more than a 5% profit margin on any hardware that it makes. So they're institutionally committing to that.

After analyzing that a little bit and reading some good articles about it, it's a very nice press release that they're nowhere close to a 5% margin. So it's like, well, okay, great. Like that sounds really charitable. That would be the way to look at it that I think a lot of the people who are pulling their hair out and saying this is so highly valued that that's sort of their argument. I think when you look at the Xiaomi business model, that what they really are doing is they're selling phones at a relatively thin margin. They are selling all of these other things that they've basically pioneered this ecosystem strategy in order to really get people familiar with the

brand, create a ton of brand trust, brand loyalty, make their stores a fun place to shop, build habit around, I go to Xiaomi and I buy things there and I buy nice things there and I buy expensive things that are important in my life. And I don't mean expensive, like they're not high dollar expensive, they're nice things at an appropriate price. And what they're really looking at from there is being able to kind of have a services business model where their high margin revenue is really all from the same thing that Apple's beating the drum on, that people are buying iCloud and people are buying apps. And I think Xiaomi is really committed to it because they don't have a high margin business model elsewhere.

It's really about kind of getting penetration with the hardware to have a very meaningful services revenue stream in people's lives. That's the Xiaomi narrative, you know, as we've talked about throughout the episode. I think, you know, as also Hans has referenced here, you know, at least in the Western press and investor base, there's also lots of questions of like, you know, on the opposite side that, hey, this is a smartphone manufacturer. Why is it arguing it should be valued like a ecosystem company or an internet services company? These multiples don't make any sense. The jury is still out and we'll talk about it in grading, but there could be a fundamental misunderstanding of what this sort of newer business model is and how it

should be valued. And there isn't necessarily a great US comp. So, you know, I think that's the exciting thing about Xiaomi right now. Hans was just saying, yeah. So tech themes? Tech themes. Let's do it. We talked a bunch about this Chinese companies having global ambitions. The US has always been a big enough market in itself and the most lucrative market that US companies tend to focus on the US and then start to pay attention to emerging markets, or China is too hard to enter, so we're not going to actually go there. I think what Xiaomi is doing from the start is that they're in the market everyone's talking about, and they're already

thinking international. And I think that that's a unique bet. And as Hans was alluding to also, that Xiaomi is, people ask them, when are you going to come to the US? That's not the relevant question. Why don't we go to the old market? Like that one's sort of taken and will be smaller at some point. So we'll focus on all these emerging markets and, you know, we think my big tech theme, and this is why I'm so glad we have Hans and Zara with us. You know, I think we've kind of shown through the Xiaomi story so far, some of the things we talked about in the beginning of the episode about how there's so much innovation coming out of China right now and all the interesting things happening. What I want to know from you guys is like, what does that mean next? Like, where are you guys looking? You've invested in a number of companies, Lime and Wish being great examples of companies that are inherently cross-border, trying to take the best of the DNA of China tech and the best of the DNA of Silicon Valley

and do something uniquely interesting with that. What is going to happen going forward? Having the benefit of seeing how China Internet Space grew over the last 10, 15 years, again, a lot of that is not government related. The reason those companies are successful is not because of government support. They just figure out a way to execute better and figure out a way to innovate on top of the idea that's kind of funny, kind of interesting, but unproven. And our experience with Autobaba made it a lot easier for us to want to take a bet on someone like Wish. And our experience with Hello Bike in China made it easier for us to want to take a bet with Line.

And our experience with Didi made it easier to want to force a bet on Grab in Southeast Asia. What we're seeing is that anyone who has, should be wanting, have a desire to learn from multiple markets. And our desire to learn and put our money at risk to work in both US and China allow us to be able to take what we know, be helpful to startup teams or founders from other countries. And we love engaging founders from other countries who are equally curious about what we're saying. I think it's really important to have an open mind, not to associate Chinese companies or products with particular preconceived notions, but really see them as products. Like how are they engaging their users? How are they being responsive and improving their products and just treating them equally as and learning from them?

It's very easy to make someone a boogeyman. It's very easy to say we are where we are because someone else did that to us. It is psychologically and logically very easy to gravitate towards that because that's the easy alternative to answer. But in reality, if anyone who's willing to learn, experiment, and execute, there's just so many things tech and internet could do. And all the inefficiencies in the offline world. We have seen what has happened with media, entertainment, transportation, retail, the impact that tech and the internet made. More offline economies will be affected by internet and tech.

And we'd rather be on the winning side and be the one that helps to make changes possible and benefit from that rather than be left behind and not be able to share the upside. Yeah. So many of these companies now are cross-border, like are taking all these learnings from China and from Silicon Valley and bringing them together. So this is the part where David and I will take grading. And while we're not as sort of harsh as we used to be,

it's still definitely a little bit of a sort of paint the bear and bull case. David, what will make this an A-plus a few years from now, looking back on it? And what will make it, let's just call it like a C minus. Not great. Yeah. Thinking about how something could become an A plus often, you're like, man, what's the analogy we always use of like, you're driving towards a cliff, you pull the e-brake, you spin around. In this case, it's almost like the ambitions are so large of Xiaomi already. Like that they actually come to fruition. That would be the A plus. The ecosystem play, the services play, which is, you know, they're still building out the, you know, internationalization and dominating all these other countries.

You know, I think the A plus is they do what they say they're going to do right yeah I completely agree I think it's they continue to be able to spot really great companies that they can bring into their ecosystem they they invest early they sell a ton of those those products and they build out the the very material services revenue that I think is the most obvious successful path for the company you know and then then C minus, there probably is existential risk in that, like, all these things are capital intensive, right? So like an F is the company doesn't have enough capital to operate. Well, they did just raise 4.7 billion of it. So you know, I think that although as we saw with Tesla, sometimes you can underestimate capital

expenditure needs. You know, I think C minusminus rate is probably like they do okay, but that they become, they don't have enough resources to fully execute on these plans and they become a HTC, a Huawei, like again, super good companies, but phone manufacturers, right? Like Leijun and Xiaomi's ambitions are to be so much more

than a phone manufacturer. Yeah, and they've had to pull back before. I mean, when they, you know, when the supply chain couldn't keep up in 2015, 2016, and they had to retreat from Brazil and Indonesia, I think, you know, they're a company that learns fast and adapts. And so I could see a world where if they're sort of writing on the wall, they react very quickly and are able to pull through it successfully, but not realizing the grand ambitions that they had hoped. That's not my bet, but that's sort of what I think the C- would be. Listeners, since we're running long, we're going to skip carve-outs this time and let Hans and Zara run, but we'll be back with carve-outs next episode. We'll get to next time.

Thank you. You guys want to sign off? Where can our listeners find you guys and interact with you, with 996, with GGV? Sure. If you Google the numbers 996 in any podcasting app, you will find us. We're on all platforms, including the Chinese ones like Himalaya FM. And we also have a listeners community. It's over a thousand people strong. That's both on WeChat groups and Slack channels. So you can join that at 996.ggvc.com slash community. And we also organize offline meetups for our listeners around the world. We're not a podcast that's telling everyone that China is better.

That's not the purpose of the podcast at all. We firmly believe that anybody that's more open-minded and willing to learn and share what they're seeing around the world will eventually become better for it. And this is why we love tech. We love the internet. We know the problems that can cause. And we also want to figure out how to learn from that and have technology and internet to make a positive contribution in society. I think it's very easy to get lost about the cool things that anyone was working on and lose sight of the impact of creating society. But we also want to make sure that internet and tech is accessible to a lot of people and people kind of have the desire to want to embrace that.

We saw how China changed in the last 10, 15 years. And a lot of people were lifted out of poverty because of the positive contribution a lot of internet companies made. They're not perfect. They have room for improvement. But the potential for positive change definitely outweighs the risk and the shortcomings. So we want to have a podcast that promotes openness and promotes idea sharing. And we feel that anybody who is willing to do that, we all gain from that. And we ourselves are gaining and learning from the people we feature on our podcast as well.

And we enjoy being here. I have a chance to interact with you two. You guys ask great questions. Thanks. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring.

Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yeah, Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools,

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and your company is ready to automate compliance and streamline security reviews like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash Acquired. Awesome. Well, thanks, Hans Zahra. Really appreciate you coming on the show. Listeners, if you want to learn more, Acquired.fm and go to, I think it's 996.ggvc.com.

All right. See you next time. Thanks, gentlemen. See you next time. Thank you.