Season 3, Episode 2: The Xiaomi IPO

0:00 I had w something weird going on, my internet cut out too. Did you get that? Um I mean it's fine'cause 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 uh fan. So 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 that No He couldn't take it anymore.

0:28 Mm. Welcome to season three, episode two 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.

0:51 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 nine nine six 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.

1:40 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. Zara 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 nine nine six podcast. So welcome so much, Hans and Zara. Thank you for joining us. Thank you for having us. Thank you for having us. We're gonna aspire to uh at least do half as good as you guys do on a nine nine six episode. Oh please great. You're too modest. All right listeners.

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4:15 In about. Eighteen months. truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reach for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.

4:30 If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell him that Ben and David sent you. So David Let's dig in on China Tech. dig in. So before we get to the Xiaomi story itself, since we have Zara and Hans with us today, and this is our first China Tech episode, we thought we'd spend a couple minutes just kinda setting the stage on what is going on in China Tech right now, because

5:00 Most of our listeners, we assume, are just reading the headlines. So there there are a couple points that as we were doing our research, we kinda 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 May Chuan Jiangping, it's To Tiao, it's Pindu Doodoo, which is going uh public today for Tis. Uh all these companies are valued over$10 billion.

5:36 And they're not just US copycats. Like 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, you know, take like when when did this real shifts start happening. Right. I uh first moved to China to uh do V C full time. back in uh two thousand five

6:00 I think in two thousand four, uh Circle Body Bank In addition to being a sponsor for your show, also organized a fantastic tour. for a lot of US VCs on Sun Hill Road. and other places go to China together. And the pace of change.

6:14 speed of growth in China was uh 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. Uh VC off on the US side, that's right. And in China for five years prior.

6:32 uh since uh nineteen ninety nine, two thousand, there were a lot of V Cs that were looking to do investments in China, um, some even tried in the ninety's And there were few IPOs of Internet Space. in ninety nine, two thousand, those doing those two years. The most famous were the portals, Sina Sohu and Edis. And they obviously after two thousand, the market uh went south and many companies were not doing well.

6:55 So there's a lot of doubt as whether it could happen, but as internet penetration Take off both on a PC side via ADSL and then five, ten years later via smartphone, the landscape of China changed dramatically. That's when a you know, a lot of these companies of course were getting started and twenty ten as we'll see. The first wave or the portals and then uh Baido, Alibaba, Ten Sen for all started in the mid to late nineteen nineties. The next wave when you talk about a D D or a

7:25 Bite dance, Mme Twine, Xiaomi, they all happen mostly around twenty ten and later. So during that uh ten year gap was um The first five years, two thousand thousand five, were the tough years, the thing years. Then from two thousand five, two thousand ten, you see the Desktop, PC, the

7:42 uh A D SL wave type of companies emerging start doing well. And then uh people who gain experience from that wave end up going after the next uh trend, the next wave. That was the smartphone wave. It's fascinating you say m mid to late nineties, so it really is for a lot of these companies, the initial Baidu Alibaba, Ten Cent, and the portals. It's more akin to Amazon than any of the more recent US tech companies. I mean, this was the 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 twenty plus year old companies. Yes. And a lot of people think that it just came out of nowhere.

8:20 But they've been around for for a while. The the more recent ones, the May Twine Totel slash bike dance. D Dodor and J D, they they came later. Of that bunch, J D is uh public about fifty five to sixty billion dollar invaluation. And they started in two thousand uh three, two thousand four time frame. Everyone else, including Xiaomi, started in twenty ten and later. Yeah. I think one other point to really hit on before we get into Xiaomi is Just the pace of

8:50 execution and company building and growth Is like otherworldly compared to Silicon Valley. I mean, Pindodio is a great example. It's going public today, gonna be valued fifteen to twenty billion dollars, raising over a billion dollars in the IPO. The company was founded three years ago. Right. I I'll start first and then let Zara add her points as well. And the price range for IPO was sixteen to nineteen dollars. Yeah. And then open at twenty five, twenty six dollars. And it's still trading at that that range between twenty five and twenty seven dollars right now as we speak. Uh the market's gonna close in less than an hour.

9:23 The around was way over subscribed. 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 in

9:44 out execute. So If you talk about a bubble in the US it's probably twenty companies doing the same thing, but a bubble in China is literally hundreds if not thousands. So how do you stand out, um, 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 Nine Nine Six Podcast?

10:09 Nine ninety six is the term that refers to the standard work schedule of a lot of Chinese tech companies, which is nine AM to nine PM six days a week. So that's how people work over there. And it's 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 a valley, uh in US in general, that if someone works too hard, something's wrong, because that means that person's inefficient uh does not work like balance.

10:45 But in China the level of intensity in Try is quite impressive. Some people compare this to the Japanese or the Koreans in the eighties and nineties. We disagree. Because the in a lot of places that we have seen this kind of work ethic, it tend to be in companies that are more conglomerates, bigger.

11:03 then employees are getting paid out salary and there's less of entrepreneurial thing involved. Whereas this time in China. Um start up so the even some argue only the top twenty percent of people get get a lot of options. But what we what we're seeing is that the ones who didn't get as much options in the in the company that that they work at, they're willing to go out and catch a next wave at being founded on next time. That's right. So they see people starting to do company sooner, faster, quicker.

11:31 Yeah. Which is definitely not what happened in Korea and Japan. Correct. Yeah. Interesting. Well That's probably the perfect segue into Xiaomi and where everybody there came from. So I'm gonna kick off and I'm gonna leave the history and facts, uh, 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 twenty ten, the beginning of twenty ten.

11:54 And there's really a superstar team that comes together, led by a guy named Leejun. And folks from Google China, the former head of engineering for Google China, Microsoft, Motorola, Academia, uh. And Kingsoft, right, of course, where where we'll get into Le Jin was the CEO of KingSoft, but he's the leader. He's the CEO of Xiaomi and uh he's a pretty interesting dude. So he started as an engineer. He was born in I think nineteen sixty nine, went to school, uh, did a C S degree in engineering, graduated in two years uh from Wuhan University, which is a very prestigious engineering program. He starts work as a software engineer. He eventually, after a couple of years, joins KingSoft. And KingSoft was

12:35 Like a early software conglomerate, right? They're a software publisher and developer made everything from games to word processing software, almost like a Microsoft uh 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? Like I would imagine uh that's pretty special. It is it definitely is not common. But also during that time he's starting working ninety two, ninety three time frame.

13:08 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 world from uh Seattle and Chinese company look up. to Microsoft in the smartest, brightest

13:25 Chinese tech engineers want to build software. That's how King's Off got started and they should join quite early as one of the first uh T employees. Oh wow. So he was pretty early. He was pretty early. The CO had a lot less. then people like you joining didn't get much at all. But he uh persevered. He ends up

13:50 uh become the CEO of the company and in the 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 hard hard it was. Now to have option as a esa tool to get people to change and evolve. A few times you're gonna find a better way to grow. During that time he also uh come idea to do e commerce.

14:15 and spent off a team to do what it's called Joyo and that was later sold to Amazon and become Amazon China. Ah. Wow. That's pretty awesome. So he was uh clearly inspired by uh Civil Valley early on. Yeah. And one of the pioneers in China in internet space to to sort of evolve from software into internet. Go from Microsoft to Google to no Amazon to now.

14:39 Yeah, it's like the pace of You know, these waves happen extremely quickly. Extremely quickly. That's right. Um We actually did analysis. We c we look at the top ten highest market cap. companies in the world that's probably traded. And ten years ago in two thousand eight.

14:55 Most of them were not tacked. I'm also oil and gas companies. wireless carriers or financial institutions. uh Microsoft was only two tech company amongst top ten in the world back then. These days it's the Fanks plus in China. So you see seven of the top ten are tech companies, many of them are internet.

15:14 Focus companies. And then um the market cap changed dramatically. For that. 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 FAIN stocks, Facebook, Amazon, Apple, Netflix, and Google were single handedly responsible for the S P five hundred being positive for the first half of twenty eighteen. If if you take those stocks out of the S P five hundred, it was actually down uh seven tenths of a percent. Which is insane to think about. This is what we're seeing in the US.

15:51 The gap is even wider in developing countries. Where the offline world's even less efficient than the offline world here in the US. So you look at Alibaba, GTV is only investing in Alibaba. Uh we invest in uh I don't know in two thousand three. Bowler Eastern was uh quote unquote very expensive, a hundred and eighty million dollars.

16:08 Uh that's two thousand three. Fifteen. Right. And fifteen years later it's a half a trillion. Uh, five hundred billion dollars. And doing that same span. Google as the group but less than ten X. Albabasa Thousand X.

16:23 That's the thing we see that in developing countries worldwide. We will see the impact of tech internet. play even bigger role. that it it has done in the US. Before

16:34 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, you know, like you were saying earlier, everybody either wants to work for Uh these big internet companies are go being entrepreneur themselves. Mm-hmm. Even five, ten years ago, we see a lot of people come out and want to have a good job that's safe. Well often with the government institutions. or state own enterprises. These days you see a lot more people willing to work internet companies technology'cause they know the growth is a lot faster and chance for a career advancement is a lot better.

17:07 So Lei June, of course, being Prime example. Uh so he's now CEO of Kingsoft. We're in the mid two thousands and he makes kind of a surprise decision, or at least it seems in the researching like a surprise decision. At the end of two thousand seven, he retires From KingSo 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. Correct. And you were working with him a bunch during this time, right? Yes. You've talked about and um he's talked about too, that there were there were kinda

17:42 three main trends that he saw at this moment in time that he thought were gonna 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 and start investing with him as he's doing all this angel investing? I I didn't know he was an active agile 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 each any other any particular game do well is quite high. So we're looking for ways to invest in a gaming space that we're selling uh shovels that can be the the arms dealer. We look at media, we look at tools, look at a variety of of ways to feed into the gaming market. One of a company uh eventually become a company called Why and also listed in uh on on Nasdaq and G D V's investor in it. I came across this and a CEO got to know David uh quite well.

18:42 And David introduced me to his NGO investor, and that was Latry. So that's how I got intro to Lighting. The first thing he said to me was that, you know, he he thought a lot about what he did for the seventeen years at uh Kingsaw and realized that in order to do well When it needs to capture the right trend. That that has a chance to take off. And over the next ten years his most bullish on these three trends.

19:03 commerce, social, and mobile. it happened to be the same thesis I had, except that I obviously I've thought about this deeper and for far longer than I than than I have. So it's it's great to meet someone who feel the same way. But also has the operational experience to be helpful. to the founder psyched. Yeah. This whole

19:22 concept of trends is super important in China tech in a way that it's is different from the US. Like in the US, what's prized, you know, in Silicon Valley is like these disruptive innovations that no one sees coming. Like everybody thinks that Facebook is a toy or you know Instagram's a toy. Nobody takes it seriously. Right. 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 what's behind that? It is very interesting. Uh you know, having got to Stanford. Let's always think about the next big idea or to do something disruptive. What rule can we can we break this time, do something that's shocking and something that's fun and kinda rebellious. In in China is sucha so much about nation building. So that and in order to catch up and do well, the country needs to push a certain agenda or promote certain certain sectors to do better in order to build a more prosperous nation. So there are trends that you can capture.

20:17 So people look at Yeah, 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 uh country and have people tell you what's happening for on the internet. It's feature 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 goes, hmm, I can see how it fits What's going on from a country development standpoint. So this trend has better chance of taking up 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

20:59 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. Go even deeper. The stuff that's happening in the US. It's also trend dependent. Yeah, yeah. Like why why should PC take off?

21:22 Why why why shouldn't we just live can do live 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 a PC next to it, so they can do stuff, can be more productive. But we never describe that spin in that context. It's always like oh that it don't 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 make a country more efficient?

21:51 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 it's not fast following because the business models are tremendously different and the way that it interplays and the culture is different, but there's sort of demonstrated sort of the technology can work at scale notion. For example, when Facebook started to to show up Like you said, some people a lot of folks in the US view it as toy.

22:29 Um you know how how can the advertisers treat this seriously. It it doesn't seem like it's something that can that can last. But uh someone like you see it in China. or Wong Qing with a thunder of a C in China says that is interesting. I think that's gonna be a big trend. 'Cause it's in in the Chinese context, you can see that it's a way for people to it.

22:48 uh freely expressed what they're thinking. And um 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 one has to be different.

23:02 But there's something there. that you y that you you can look at go, Hm, I think this can be big. But you know, I don't know how to make that big. So it's a combination of you can call it a fast following or you call it a micro innovations. Adding stuff that has a C

23:16 May not you have invented the sea yourself? But you see that this could be something quite and be quite different than original intent. So I think the US is an amazing place, both in Silicon Valley in New York, where you see a lot of New things happening.

23:28 But most people treat it as a toy. Yeah, yeah. 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. So if you read Although if I read the tech news in Chinese, like the major like the tech crunch equivalent in China, over half of the news there is about the fans in the US. Whereas

24:00 I read um Bloomberg Watch Journal, whatever here, maybe only five to ten percent of The news is about Chinese companies. It's a lot of asymmetry in terms of uh interest in Chinese entrepreneurs. are very eager to come to Silicon Valley, meet everyone, learn what's working and take it home, not copycat. Yeah. But adapt it to the local market because it takes a deep knowledge of what's going on in China to make a product work. And look at Steve Jobs. He didn't Graphic user interface.

24:33 But when he sees that He says oh that is gonna be huge. And here's the reason how. Let's not overcredit the amazing historical American innovators with the true original inventors of things either. Back to the Xiaomi story. It's two thousand nine. He's left King Soft over a year ago at this point. And he starts jamming with

24:57 one of the people who had become one of his co founders at Xiaomi, Lin Bin, who's the head of Google's China Engineering Division now remember, this is gonna 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 slightly different. I think Google was operating in China and

25:42 about close twenty percent of the market. was Google. So Android has come out, but It's very early. Um back then only H T C phones have done well, some phones have not. So it wasn't that clear that Android can

25:55 beat iPhone because in the early days iPhone was still offered a better in a great experience. So the discussion that Le Jing and Linping had was uh Is it possible to build a phone using Android kernel that to offer a better integrated experience by n owning both a hardware and a software piece? That wasn't the obvious, but I'm glad you picked that out. It wasn't obvious to m many many other people that it wasn't a predetermined thing. That uh

26:21 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 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, an in an Apple like way, you know, you could 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 this decoupled hardware software combination. Yeah, and that was the key number one challenge in A lot of people back in China even then didn't think that's possible because no hardware company in uh film related space has ever become successful, uh starting from scratch. Every player we can think of kind of evolved and added the film 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.

27:18 Now, they decide to start the company along with uh seven other co founders, I believe. Seven or eight other co founders immediately raise forty one million dollars at a two hundred and fifty million dollar valuation. The the first time it was um roughly around twenty million pre. Okay. And the lead investor was uh Rich Hulu at Morningside. And I gave him a lot of credit for having the guts uh to do that. Both he and I have known H W for a long time. So three, four people and the crazy idea twenty million dollar valuation.

27:48 And I remember someone told held told me back then who's who's very smart and very experienced Google's first round after having a product that was be out there, people were using it, it was seventy million pre So having no no product, nothing at all, not even business plan, twenty 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.

28:10 The challenge came uh one round later. That was only months after the first run was done. And that was at a hundred um. It's years in China time. That's right. And and then Bada Ving become hundred and fifty million pre. And they were uh maybe fifty thousand users of Mi U, the operating system. Yeah based on the Android kernel that Xiaomi had. And then um You know, both Richard and I decided to co lead our own together.

28:35 To do this. Only a month later, before they actually had a first party to launch the phone, the valuation jumped up to uh a billion post. Remember this is two thousand ten. This is not two thousand eighteen in Silicon Valley. That's right. By the time you hit the bin dollar valuation it was already twenty eleven. And I give um Le join and then talk a shun way. Also, Richard, uh Morningside, a lot of credit for co leading that round between Shung Wei and Morningside. So there were there were a number of people that had the guts

29:04 Um not many, but not many 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 the th the the team can pull off that vision It's uh everyone who passes on it, I think is extremely logical and reasonable. And I never and we'll never fault them for it for doing that'cause it's crazy. It's always that way, Hans, but that's not how you drive returns. You have to somehow figure a way to bet.

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31:20 That Ben and David sent you. So one thing I wanna pick up on that I think is super important understanding what's going on at this time, Hans, you mentioned Mi 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 a product in a company here in the US called Cyanogen. Uh Cyanogen mod There's 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 Andreasin and Benchmark. Uh doesn't work out. But so that's going on. And that essentially is the same thing that Xiaomi does for Mi UI. And that's what Mi U is.

32:15 How did that all come together? Did they see Cyanad cyanogen and see that this is possible? Uh was it developed independently'cause it happened pretty fast. Right. That was something that was discussed in Xiaomi early on. But I think the Chinese entrepreneurs know that Their execution is was far better. Yeah. So they didn't have to Take away anything. from what the other countries and teams were doing.

32:37 And it was all open source. It's all open source. So once you n you know what is potentially possible, even though it's not proven yet, do you think you can execute it better? Yeah. Can't. Well also the just the you know, in China yet with this opportunity, I mean, it's pretty amazing what Le Jun and the Xiaomi team does. They cre. There's no phone yet. They release it so that anybody with an Android phone can install it on their phone. And it it really takes off and it gets these super hyper engaged users on product forums, and that's kinda the the root of the Me fans that start that which we'll get into in a minute. Like Zara mentioned Dynastics, I remember going to

33:15 invisible Jing and Linbin and the rest of the team in twenty ten. I shouldn't mean it's not there. He was still at Google at that at that time. And then uh it will be at around midnight. and there will still be people in front of me waiting to talk to the drink. You realise that, you know, they figure a way to combine the Best of the

33:31 knowledge that they they 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 mess together. It wasn't easy but they made that work. They update um UI every single week. No one has ever done that anywhere else in the world. They update that every single week. So if you are a fan

33:51 of open source software and you'll like enjoy. You can help. But we also have this Team. out of the middle nowhere in Beijing was doing something revolutionary. Yeah, yeah. I wrote in my notes it's almost a joke, you know, we talked about in

34:05 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 year 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 respond to a lot of people say this is what Android should be doing, but not doing you're doing it. So I know in the US we value a lot on idea origination. We place a premium that. And there there's there's nothing wrong with doing that. But I think we're also gonna give people enough credit.

34:43 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

34:55 But both both have value. Yeah. Well, I think it's just super well illustrated here between, you know, Android, which is still on core Android's 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 this is I I when I look at this, this is not government influence. It's not like somebody give uh Xiaomi extra salary or subsidy or grant to ask them to move faster. It's uh completely from uh within.

35:26 This is why I love tech is uh It's true meritocracy. So Hans, the the original business plan was to build amazing phones at reasonable prices and sell them over e commerce. What was the decision like when decided the market around should we build a phone first or should we make a skin of Android first? Early on they doing had the inkling.

35:50 That to make it work. What is now called the triumphula model. that you need to have do three things well. You gotta 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 gotta be able to have a hardware that that when it's uh quote unquote integrated it with the software can offer superior experience than a decoupled solution that was out there.

36:13 And that was more more the dominant form of alternatives. And then number three, you gotta be able to have internet services that you can roll out to create some kind of networking effects, create some kind of moat. Yeah. And there's the opportunity for that because there's no entrenched, you know. Google search or Google Maps. I mean there's no of course, but that's right. So y y uh figure away how to do all three things well is not easy, but they doing identify early on that was a a way to to compete. But And and potentially one.

36:40 And for for him, he also realized that none of the original team members had hardware true hardware experience, having ship a lot of phones. So to focus on getting stuff right and getting user feedback to get validation on this triangle model could work. They have to start with a skin with uh with me UI first to make that. Be before before they can try. And also it's just it's less complicated. To build a phone, you gotta pay for all IP and which they did. You gotta pay uh Qualcomm, which is expensive. You gotta pay uh Contra Manufacturer three months in events, if not longer. It's not installments. You have to pay all of the upfront because they need to make sure that as a startup you're gonna be around. So it's hugely capital intensive. To to build the phone so before they can prove they can build a phone they gotta make sure they can do immune system. In a lot of ways, I think those constraints

37:29 end up driving Xiaomi's next big innovation, which evolves into, you know, hunger marketing. And uh 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 hungry 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. uh marketing 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 it came up with was a a campaign that should share The phones that you have ever used in your life.

38:22 And talk about what you like and not like about them. So it's a way for true fans to show off. Yeah. tech knowledge and their status as experienced user. Dejun was the first who did that and he showcased like the 50 phones that he ever used. And they were about five hundred sixty thousand People.

38:40 on their own decided participate and share what 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's a market there. They they was right, that people feel that their voice is not being heard. They want to platform a brand and listen to them and be willing to make changes quickly input. So that's a winning strategy that the hardware guys don't know and the internet guys are not gonna 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.

39:20 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 show me engineers are and product managers are are required to spend time in that forum. It's part of their job. Like they have to spend hours there.

40:12 Per week. And answer questions. And answer questions and be engaged themselves. Could you imagine if Google did that? Like 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. They just says, you know, treat your customers as if you're treating fixing from for your friends. Your friends come to you and say, Hey, your phone's not working, you're gonna bust your ass to make sure that their needs are taken care of. So that that's what he tried to do to get his colleagues to react and and serve the customers better. So one other point I wanna 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 in how he started the company, the notion was we're going to manufacture these phones. They're gonna be, you know, world class hardware, it's gonna be a great experience. We're going to do e commerce, we're gonna 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 you know people who've built world class services and run large software companies. But if you look at the things they had in Dent, they had nobody really in hardware and nobody in manufacturing.

41:21 Think about you know anybody out there right now, you and your friend sitting around saying, Let's start a company, and you're like, uh, 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 gonna start a hardware company and learn how to manufacture that at scale. To me, the one of the most impressive things about Xiaomi's you know, evolution over time is that they actually did figure out that competency. For Hans, I've 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 uh, you know, actual building of physical things? Once they've been them being joined full time, both he and leaching together, they Spend a lot of time and effort to interview everybody they know.

42:05 Whoever made phones for Motorola and Nokia and other major brands in China. Which were companies that were dying at this point in time. Not in the beginning. That's right, but some of them were frustrated for the fact that these companies are moving much slower than smartphones. they weren't adopting smartphones quickly. They were not willing to use Android as their operating system. They were pushing their own, as you recall. So these uh had that awful out of the burning. 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.

42:41 And Leijing was uh Le Jing Ling were the first to talk to them and be able to get one of them to uh to join them to do this. It's not easy because again, most uh people in these big companies haven't taste uh value of uh options. They haven't gone through an IPO themselves. Yeah. So they don't it's hard of to leave a big company that's a prestigious job to join a no name startup. That just had a bunch of um E UI users. Well, to run through quickly what happens, I mean short story, it works. They uh they released the first phone, the Mi One handset, at the end of twenty eleven. Uh August sixteenth, twenty eleven. I'll never forget that. And I know, Hans, you've talked about this. I know you'll never forget it. More than three hundred thousand pre orders in the first two days, right?

43:26 For this phone from this company that like nobody's ever heard of before. Within the first day of three hundred and forty thousand. Within the first couple of days four hundred and sixty thousand. It was mind boggling. And at the at the party uh lunch party, two thousand people showed up and when they just said the phone at the end of his impressent presentation, he said the phone cost, you know, nineteen ninety nine R and B, which is roughly translates three hundred and ten dollar US. Everybody in the audience still up and applauded. 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 Le Jane and Tuck and Richard for all having the gust to put money where her mouth is. And the the the the the Xiaomi team's amazing. A lot of people don't know this, but in a serious speed uh the one I I led. A lot of employees of Xiaomi put their personal money into the company.

44:13 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. All those folks fo fifty six 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 uh They they all put money into a SPV and SPV show up on the cap table.

44:38 As an investment. 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 twenty million of those phones. Which again, this is now a Three year old startup. Yeah. Amazing. That's made, you know, not the Linux kernel, the Android kernel, but like a full operating system on top of it.

45:03 Two phones. Bunch of services plugged into those phones. Yeah. And sold twenty million of them. Pretty impressive. Then Also in twenty thirteen, they come out with their first non phone product that that Xiaomi made and still makes a TV. A smart TV. How did the strategy develop to go from that, you know, like Apple like makes a few products, they make great hardware.

45:23 But Xiaomi is taking 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 writing, there's one in their office right now are Xiaomi branded scooters made by ecosystem companies. So how did that strategy get developed? Again, they they thought ahead, and I think his uh experience as an operator entrepreneur as well as a N investor was super helpful. He understood that for Xiaomi to be great, it can just be on the be a phone company. He has to buy multiple products.

45:57 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 don't do the greatest work doing uh smart devices other than a phone and maybe a maybe a T V. So he knew that he needed to figure out what to incentivise

46:15 People outside of Shaw me 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 um be able to then the shell me brand to them and share gross profit. on top of that, and then open up the Xiaomi e commerce platform to allow these device pieces was sold on Xiaomi and store it down the road. And then um having the um uh supply chain. to be willing to 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 make sure that Xiaomi Brand can help these startups to get access to supply chain to manufacture. It's incredible for listeners who, you know, probably aren't familiar with this. I mean the the first big

46:58 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 it becomes a massive hit. And now there's been so many other products, everything from barbikes 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 they have uh over eighty products now designed and then manufacturing for supply chain from uh over a hundred 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 R. And the uh the smart TV one's also interesting. the founder or the the head of the business right now is uh Wang Chuan Richel Wang, and someone that H has known for a long time. He started off want to do something that's more the Kindle.

47:46 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 a small personal investor in that in that company. But it was harder to make that work in China. Just just a different market. So he and they even stay close and then eventually decide that if he joins Xiaomi full time, then the team he built at Kindle can come in and build smart TV. And uh and so without him joining it may may have taken a while for Shaman to figure out who's gonna drive The next product. The next product. And in the Shami system only happen after smart TV becomes a uh something that can be a successful example can study for others. All right listeners.

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50:17 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. 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 that's that profitable again. And uh, you know, what have they done about it? They've come out with the watch that's doing well. They 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 platformiz 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 Airbnb by you know by Amazon. Which in some sense it is, right? It runs on AWS.

51:21 Yeah, but it's just a really fascinating strategic move that we just don't really see in in the US. Right, Li Jin is um has always been impressed by a Muji Uniclo. In Japan. Also Costco in the US, obviously Amazon as well, can since since he sold Second start up, Joyo, to uh to Amazon. So

51:40 He knew that There's more things that are rising middle class in developing country like China will want to buy beyond the phone. So how to 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?

52:01 But it make the price much more affordable for the mass market, the 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 uh over time he figured out the ecosystem approach, making uh 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. So they they can buy anything they want and trust that it will be of high quality and that they will like the product. So it doesn't take a

52:40 Like if you like the brand, you're gonna like whatever it makes. So whatever Xiaomi makes, I will buy it. So that's their goal. And the beauty the beauty is that when you have that model like that, then the frequency of visits Per store or per short. Muigher. Much much higher, right? How often do you replace the phone at best? Six months. Even though it's an amazing store, right? You don't need to go there that often. But the Xiang store becomes a place that people just go live go check out every couple of weeks. Yeah. Uh because always something new from one of the ecosystem companies. It's like Brookstone, but all the things are super useful. I was gonna talk about Hugo Barra here. I'll I'll just mention him, uh Hugo Barry. I will add that selling the phone over internet was not easy, even though e commerce in China was doing well back in two thousand ten, twenty eleven, but uh Google had tried to sell their first

53:29 It's first. Yeah, the first next one. Great foam. But it was just hard to sell anyway. So it was not obvious that that can work. If they and the team did not do me UI well. did not have a lot of users who were like Me UI already. And the price bone wasn't that competitive. You cannot start a bus. I remember after the lunch party, I went to a barber shop to get my hair cut.

53:53 in uh a whip out of the I mean one phone using it and my babber was asking me w what I was'cause she has never seen them before. And she asked around, no one else has seen it as after I said it's Xiaomi. But there's one guy in in the barber shop, one one of the barbers, who is probably the most tax savvy of the bunch. And he knew Xiaomi phone because he he, you know, 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. Oh, the 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 hats, they all come in next to me, wanna s check out a phone, say, Oh my god, it's only nineteen ninety nine M B, so cheap. It looks so good. Immediately the fan me fan.

54:35 turn the other six um folks in the in the in the barbershop you need to be someone who wants to buy Xiaomi phone. Well and then you complain to it 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, you become a phenomenon in itself. Why not sell through channel? So you know in the US until you know the iPhone, everyone's going to the ATT store and the Verizon store to buy their thing. Is it a gross margin problem? Is it a I'm posting a different position. Apple can doesn't have to give away as much To the channel. All the other phone companies do. And if you look at a marketing cost and sales costs, even for Apple, for most phone companies, it ends up being somewhere between 30 to 40 percent of sales. So you look Apple's the gross margin on iPhones roughly a bit over fifty.

55:21 Two thirds of it if not three quarters of that of sales marketing. Oh. Then then what's left is just operating overhead. So those are the three biggest cost drivers, right? Obviously you have components and all that stuff in there too. But beyond that, it's ex an expensive item. And for 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 uh and you don't get feedback as quickly because people cannot tell you the problems, uh themselves. So Doing it over the internet makes it a lot more efficient if you can make it work'cause the feedback's immediate as you know. I mentioned Hugo Barra. 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. Uh Hugo is basically running Android within Google. He's head of head of product for Android. Huge announcement. Xiaomi recruits Hugo to move from Mountain View to Beijing and join

56:12 Xiaomi. And even more curious, he's not going to head product or software, he's gonna head international. And this becomes a huge, huge move for Showmy and and really under Hugo's leadership, Xiaomi goes into India, into Malaysia, into many other countries, uh, particularly in Southeast Asia, to preview the end here. Xiaomi is now by far the number one smartphone brand in India, which is incredible. So my view, I 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, they're 1.3 billion people here. Why do we need to go outside our own borders? But Xiaomi and Hugo say We're gonna be a global brand. We're gonna dominate all these other countries even more so than US counterparts or whomever. How did that all come together? Well, I think you know Lin Bin also from Google, so he knows um uh whoever of him before.

57:05 And also there were mutual friends in particular, Robin Chan. who uh help to bridge the gap. And then a bunch of us have met. Uh Hugo over the years. I first hosted Hugo and Robin and and uh JP three folks uh to visit China in two thousand uh six.

57:23 before Hugo joined um Google at that time. And then by by the time that uh Xiaomi tried to recruit Hugo, you already have a lot of investors in the company, including uh DST. URI at D S T. um whom Hugo knows quite well as well. So there's not enough people around the table. that uh Hugo Dino and feel if he ever tried to do something that's different. Xiaomi public is the one, then he also see the numbers of a Xiaomi has has gone up.

57:48 So it is 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 had never lived in China to leave a current a great current job to do this. And as soon as he joined, I remember his seen our Webo fans shot up. So seeing on web well, you can think of it as a Twitter of China, but much bigger. On Twitter he had probably uh tens of thousands of fans. on um Sinan 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. Oh.

58:22 I think he really became the international face of Xiaomi and became really like a celebrity in himself. Like people in China call him Hugo, which means Tiger Brother sounds like his name. Um very endearing. And people see him as a the phase of the company that can be appreciated by people outside of China. And that was pretty important. Right. And he also helped to recruit a lot of great people, young people in their early thirties or late twenties to join the company, including Manu, who runs uh Sumi India. And so a lot of people he recruited

58:56 now that uh managed and and have have done well within the Xiaomi and on their own have um end up making great great contributions. So without Hugo joining, Shami may not have been able to attract those people to join them. uh I think they didn't put all the 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 this do more. He he's experienced enough that he always think ahead about what else he needs to continue to scale the business.

59:25 So on the back of all this End of twenty fourteen, Hugo's now been in the seat for a year. They're getting moving into India in particular, but all all these other countries. Xiaomi raises a billion dollars at a forty five billion dollar valuation, becomes the most valuable startup in the entire world. Pretty amazing. After that There's some hard years. What about a year and a half? Yeah. It was not as easy for some. And uh we probably don't have time to cover in depth, but I mean basically this was so now we're in twenty fifteen, twenty sixteen. A couple things happen.

59:57 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, uh, 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 uh 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 uh happened. One, they ging, you know, addition to deciding to do Shamiko system, uh Also decide to launch a phone called Red Me.

1:00:47 That's not as po popularized. Ret me cost less than a hundred dollars. to users. It's a different brand than Xiaomi, but it's in the Xiaomi family of products. and it's very effective to be competitor from Who can't 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 uh to do, but they eventually took the guts and make that work.

1:01:11 and that help them with the international expansion as well. The second thing that it did well. And it's uh it's not as obvious from outside as uh The um Chinese e commerce penetration rate back in twenty fourteen, twenty fifteen is roughly close to uh ten percent. Which is the e commerce penetration rate in the US. Yeah. So to penetrate even further as a percentage of uh retail in China.

1:01:33 it it will need time to prove that it can continue to grow, which he did later. Yeah. 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 will. And by that time Xiaomi's phones have done so well in the market. They have such a Great market share. Anybody who was willing to buy phones online at that point in time, have you heard of Xiaomi or bought Xiaomi phone. So you wanna grow and get the another ninety 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 do and the team

1:02:11 Eventually figure it out. And start experimenting idea of doing offline store to see if it makes sense. And um they had a lot of show me stores that were fan stores, people come in and get the product fixed. But can you turn that into a retail store and do it well and end up thinking a way to make that work.

1:02:29 So in two thousand seventeen though. things really turn around, the company goes from flat revenue growth to seventy percent Revenue growth. Uh incredible. Much on the back of India really working and and and having often stores in China. And having open stores in China and ecosystem finally coming along along that's now twenty two percent of revenues. That's right. May of twenty eighteen.

1:02:50 Just recently, they announced they're gonna file to go public. Estimated could raise up to ten billion dollars. In May they announced that they file with Hong Kong stock exchange. Yep. That's right. Um originally the idea was to do a CDR listing, even but before the stock uh Hong Kong stock exchange. Oh simultaneous. Oh simultaneous, interesting. You end up pulling CDR and listing just on the Hong Kong stock exchange. And David what's C D R Uh China depository receipts. Uh so it would have allowed the company to be traded on mainland China uh stock exchanges, but that was gonna add a lot of complexity, I would assume. Um Ends up pricing July ninth at seventeen Hong Kong dollars per share or a fifty three billion dollar 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 twenty percent, closes at twenty one forty five at the end of the first week in a sixty one billion dollar market cap.

1:03:45 And the net of all that is it's the biggest IPO, tech IPO in the world since Alibaba. Alibaba interviews the rest of it. Which is kind of amazing. Yeah. Um The team is is amazing. It has a great board as well. And the collective have done a a good job of rebounding from those uh tough eighteen months. And the offensive definitely is working out well, and it's pretty clear that Strategy is exportable. to other countries they're in. Xiaomi announcing seventy four countries.

1:04:14 And I remember when I first invest started investing in China in two thousand five, the World had about a bit over a billion uh internet users. And now the world has about three point five billion. the additional two point five billion ads over w one third came from uh China. And that power China's uh 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 on online and then the rates are affordable. You spend so much time online, it's better to build business on top of that. So over the next fifteen years, we want to see another one point five billion people get online.

1:04:50 And most of them will be done doing their smartphone and most of them 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 one point five billion internet users. Right. Exactly. And uh not only are they doing that well, they also invest in companies who who is providing localized

1:05:16 Services, Internet Services. And that could be bundled into the phone. So they they curate them and also invest in them. And so the traffic they can bring to these better localized solutions. will be quite impressive.

1:05:29 And we have seen a lot of Chinese energy companies got big over the last ten years on smartphone. You 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

1:05:44 Don't truly appreciate the value of the Xiaomi uh potential. And all they see is a smartphone, maybe smart TV, and you know, based on the NJ, is it really compatible with Nj? A lot of questions I hear from institute investors are still quite at a basic level, which is completely understandable'cause not an easy story to understand. But over time people will see that it isn't just a hardware company. It's very different. Phew. A lot. That's Takes us to today.

1:06:12 Yes. You wanna go into narratives? Let's do it. So what is Xiaomi today? And what is the company's business model? How is it being

1:06:23 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 fifty four 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. So in fact Le June has recently announced that Xiaomi will never make more than a five percent profit margin on any hardware that it makes. So they're they're institutionally committing to that.

1:07:12 after analysing that a little bit and and reading some good articles about it, it's a very nice press release. that they're nowhere close to a five percent margin. So it's like, well okay, great. Like that sounds really charitable.

1:07:29 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 value, that 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 these other things that they've 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 high dollar expensive. They're nice things at an appropriate price. And

1:08:15 what they're really looking at from there is being able to kind of have a 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 only narrative, you know, as we've talked about throughout the episode. I think, you know, as as also Hans has has referenced here, you know At least in the Western

1:08:53 Press and investor base. There's also lots of questions of like, you know, on the opposite side that uh Hey, this is a smartphone manufacturer. Why is it uh arguing it should be valued like a ecosystem company or an internet services company, these multiples don't make any sense. The 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 it.

1:09:25 So Tech themes? Tech themes. Most do it. Um, we talked a bunch about this. Chinese companies having global ambitions. The US has always been a big enough market in itself and the 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

1:09:48 You know, what Xiaomi's 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 That's a unique bet. And as Hans was alluding to also that you know, Xiaomi is is uh people ask them like when are you gonna come to the US? That's not the relevant question. Why would 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, th we'll be the future there. So I mean I think My big tech theme and uh uh this is why I'm so glad we have Hans and Zara with us.

1:10:19 You know, I think we've kinda 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 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 gonna happen going forward? having the benefit of seeing how China internet space grew over the last ten, fifteen years

1:10:58 Again, m a lot of that is not government related. The reason those companies are successful is not because of government support. Um they just figure out a way to execute better and figure out a way to innovate. Uh on top of idea that's kind of funny, kind of interesting, but unproven. In our experience with the Audible, I made a lot easier for us to want to take a bet on someone like Wish. And our experience with Hellow Bike in China uh made it easier for us to want to take a bet with Line. And our experience with D D made it easier to want to for us to bet on Grab in South Asia. What were things that Anyone who has

1:11:31 uh won't have a desire to learn from multiple markets and our desire to learn f and put our money to a risk to work. in both US and China allow us to be able to Take what we know be helpful. to start up teams or founders from

1:11:47 Other countries. And we love engaging Funders from other countries who are equally curious. about what we're seeing. I think it's really important to have an open mind. Just not to associate Chinese companies or products with particular preconceived notions, but really see them as

1:12:03 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. 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 if anyone who's willing to learn, experiment and and execute th there's just so many things tech internet.

1:12:33 could do and the e all the e efficiency in the all final role. We have seen what has happened with media, entertainment, transportation, retail, the impact that tech in the internet made. more offline economies will be affected. by internet attack and you'd rather be on the winning side And be the one that that helped to make changes possible and benefit from that, rather than be left behind and uh and not be able to share the upside. Yeah. So many of these companies now are

1:12:58 Are cross border. Like are taking all these learnings from from China and from Silicon Valley and bringing them together. So this is the part where David and I will take grading and uh 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 barren bull case, David What will make this an A plus a few years from now, looking back on it, and we know what will make it Let's just call like a C minus. Not great.

1:13:24 Yeah. thinking about how something could become an A plus often you're like, man, what's the like Uh the analogy we always use of like you're driving towards a cliff, you pull the e break, you spin around, like 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. Um, you know, I think the A plus is

1:13:55 They do what they say they're gonna do, right? Yeah, I 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 uh successful path for the company. You know, and then C minus um Th there probably is existential risk in that like all of 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 four point seven billion of it. So You know, I think that although as we saw with Tesla, sometimes you can underestimate capital expenditure needs.

1:14:36 You know, I think C minus rate is l 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, um a Huawei, like uh again Super good companies, but

1:14:53 Phone manufacturers, right? Like Le Jun and and Xiaomi's ambitions are to be so much more than a phone manufacturer. Um Yeah, and they've had to pull back before. I mean when they uh you know, when the supply chain couldn't keep up in twenty fifteen, twenty sixteen and they had to retreat from Brazil and Indonesia. I I think you know, they're they're a company that learns fast and adapts, and so I could see a world where if if they're sort of writing on the wall they react very quickly and and are able to pull through it successfully, but not you know, realizing the the grand ambitions that they had hoped. It's not my bet, but that's sort of what I think the C minus would be. Listeners, since we're running long, we're gonna gonna skip carve outs this time, um, and let Hans and Zara run, but we'll be back with Car Vouz next episode. We'll get to next time.

1:15:35 Thank you. You guys want to sign off. Sure. If you Google the numbers nine nine six in any podcasting app, you will find us. We're on all platforms, including the Chinese ones like Shimalaya F M. And we also have a listeners community. Um, it's over a thousand people strong. That's both on WeChat groups and Slack channels. So you can join that at nine nine six dot ggvc dot 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's better. That's not the purpose of the podcast at all. We firmly believe that.

1:16:18 Anybody that's more open minded and willing to learn and share what they're seeing around the world. what eventually become better for it. And this is why We love tech, we love internet.

1:16:28 We know of the problems that can cause. Um we also want to figure out how to learn from that. and us have technology and internet to make positive contribution in society. I think it's very easy to get lost about the the cool things that anyone of us working on and lose sight of the impact creates in society. Блиосон Мер да інтернет так із аксиси.

1:16:50 to a lot of people and people uh kind of have the desire to want to embrace that. We saw how China change. In the last ten, fifteen years. And a lot of people were left out of poverty because of of the positive contribution a lot of internet companies made. They're not perfect. They have rooms for improvement.

1:17:05 But the potential for positive change. definitely outweighs the risk and uh the shortcomings. So We want to have a podcast that promotes uh openness and promotes idea sharing. And we feel that anybody who's willing to do that would uh we all gain from that. And we ourselves are gaining and learning from the people we feature on our podcast as well. And then we enjoy being here, have a chance to interact with you two. You guys ask great questions. Thanks. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig.

1:17:36 Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah. In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly.

1:17:58 The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next. This is where StatsIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed. to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Awesome. Well thanks Hansara. Really appreciate you coming on the show. Listeners, if you want to learn more, uh acquire.fm and go to I think it's nine nine six.ggvc.com. All right, see you next time.

1:18:43 Thanks, gentlemen. Thank you.

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