Season 3, Episode 2 The Xiaomi IPO

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guests Hans Tung and Zara Zhang from GGV Capital, delve into the remarkable journey of Xiaomi, a company that transcended its origins as a smartphone manufacturer to become a multi-faceted consumer electronics and internet services powerhouse. They explore Xiaomi's innovative business model, which combines high-quality hardware with a unique ecosystem strategy and a commitment to low profit margins, aiming to build consumer trust and loyalty. The discussion also touches on Xiaomi's global ambitions, particularly its success in India, and the company's ability to adapt and thrive amidst a rapidly changing tech landscape. Hans and Zara, who also host the 996 Podcast, offer insights into the broader Chinese tech sector and the importance of cross-border learning and execution in today's interconnected world.

Summary Notes

Internet Connectivity Issues

  • Ben Gilbert (Speaker A) experienced a temporary internet outage.
  • The outage did not impact the recording since they were not using web upload.
  • Ben turned on a fan to address potential overheating issues.

"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. 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."

The quote explains Ben's actions to resolve a technical issue that briefly interrupted the session, highlighting the practical step taken (turning on a fan) to mitigate any potential overheating that might be affecting his equipment.

Introduction to Acquired Season Three, Episode Two

  • Hosts Ben Gilbert and David Rosenthal introduce the episode, focusing on Xiaomi and the broader Chinese tech sector.
  • They introduce guests Hans Tung and Zara Zhang from GGV Capital, who also host the 996 podcast.

"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."

This set of quotes marks the beginning of the episode, where the hosts greet the audience and set the stage for the discussion on Xiaomi and the Chinese tech industry, also acknowledging their guests' expertise.

Introduction to Guests Hans Tung and Zara Zhang

  • Hans Tung is an early investor in Xiaomi, present from its inception to IPO.
  • Tung is recognized as a top venture capitalist in the U.S. and China and has been on the Forbes Midas list six times.
  • Zara Zhang is an investment analyst at GGV and a former journalist, contributing significantly to the creation of the 996 podcast.

"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."

The quote highlights Hans Tung's involvement with Xiaomi from its earliest stage, emphasizing the rarity and significance of accompanying a company through to its IPO.

Sponsorship from Pilot

  • Pilot is a company that provides accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot is the largest startup-focused accounting firm in the U.S., backed by notable investors such as Sequoia and Jeff Bezos.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner Pilot for startups and growth companies of all kinds."

The quote introduces Pilot as a sponsor, emphasizing its role in supporting startups and growth companies with financial services, which aligns with the theme of focusing on core business strengths.

Sponsorship from Statsig

  • Statsig is a feature management and experimentation platform for product teams.
  • The platform is designed to help teams ship features faster, automate A/B testing, and measure the impact on core business metrics.
  • Statsig is used by notable companies such as Notion, Brex, and OpenAI.

"So now Statsig is the modern version of that promise and available to all companies building great products. Statsig is a feature management and experimentation platform that helps product teams ship faster, automate A/B testing and see the impact every feature is having on the core business metrics."

The quote explains the purpose of Statsig, highlighting its capabilities in product development and experimentation, which is relevant to companies looking to innovate and improve their offerings efficiently.

Overview of China Tech Sector

  • China's tech sector has seen explosive growth, with companies like Xiaomi, DD, Meituan Dianping, and Pinduoduo achieving valuations over $10 billion.
  • These companies are not simply imitating U.S. models but are innovating with unique business models.

"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."

The quote sets the stage for a broader discussion on the current state of the tech industry in China, indicating the significance of the Chinese market in the global tech landscape.

Early Venture Capital in China

  • Hans Tung moved to China in 2005 to pursue venture capital opportunities.
  • Early internet companies like Baidu, Alibaba, and Tencent started in the mid to late 1990s.
  • The growth of internet penetration and smartphone adoption dramatically changed China's tech landscape.

"I first moved to China to do VC full time back in 2005."

The quote marks the beginning of Hans Tung's venture capital career in China, which coincided with the rapid development of China's tech sector.

Evolution of Chinese Tech Companies

  • Initial Chinese internet companies were portals like Sina, Sohu, and Netease.
  • A new wave of companies emerged around 2010, including Xiaomi, which capitalized on the smartphone revolution.
  • The companies that thrived adapted and evolved through different technological phases.

"The first wave were 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 byte dance. Mitwan Xiaomi. They all happen mostly around 2010 and later."

The quote outlines the different generations of Chinese tech companies, from early portals to the more recent mobile-focused enterprises like Xiaomi, highlighting the evolutionary nature of the tech industry in China.

Work Ethic in Chinese Tech Companies

  • Chinese tech employees often work a 9-9-6 schedule (9 am to 9 pm, 6 days a week).
  • This intense work culture is driven by competition and the desire for rapid career advancement.

"Nine nine six is the term that refers to the standard work schedule of a lot of chinese tech companies, which is 09:00 a.m. To 09:00 p.m. Six days a week."

The quote defines the 9-9-6 work schedule, illustrating the demanding work culture within China's tech sector, which is often seen as a necessary element for success and competitiveness.

Xiaomi's Founding and Leadership

  • Xiaomi was founded in April 2010 by a team including Lei Jun, who previously led Kingsoft.
  • Lei Jun became an angel investor after retiring from Kingsoft, focusing on e-commerce, mobile, and social networking trends.

"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."

The quote introduces the founding of Xiaomi and its leader, Lei Jun, setting the stage for a discussion on the company's origins and the vision of its founding team.

Connection with Angel Investor Leijing

  • Hans Tung's interest in the online gaming space led to his encounter with Leijing through a mutual connection.
  • Leijing's focus on capturing the right trends aligned with Hans's thesis on commerce, social, and mobile.
  • The shared vision and operational experience of Leijing were pivotal in Hans's decision to invest.

"David introduced me to his angel investor, and that was Leijing... The first thing he said to me was that he thought a lot about what he did for the 17 years at Kingsaw and realized that in order to do well, one needs to capture the right trend that has a chance to take off."

Hans Tung was introduced to Leijing by David, and they shared a similar investment thesis on key trends, which led to their collaboration.

  • Trends in China are seen as nation-building tools, whereas in the US, innovation is often disruptive and unexpected.
  • Hans Tung notes the cultural and developmental differences in trend adoption between China and the US.
  • In both countries, trends are used to push efficiency and productivity, though the narratives differ.

"In China, it's so much about nation building... In order for the country to be more efficient, Internet will need to play a role... So there are trends that you can capture so people look at."

Hans Tung explains how China focuses on trends to build and improve the nation, which is different from the disruptive innovation mindset of the US.

Perception and Adaptation of Western Technologies

  • Chinese entrepreneurs are keen to learn from Western innovations and adapt them for the local market.
  • Zara Zhang points out the asymmetry in interest between Western and Chinese tech news coverage.
  • The adaptation of technology is seen as a form of innovation in its own right.

"I think chinese entrepreneurs are especially eager to learn from western entrepreneurs... So if you read, although it should... I read tech news in chinese... Over half of the news there is about the fans in the US."

Zara Zhang describes the eagerness of Chinese entrepreneurs to learn from the West and the disproportionate coverage of Western tech news in Chinese media.

Xiaomi's Founding and MIUI Development

  • Lei Jun and Lin Bin recognized the opportunity to create a superior Android experience in the absence of Google services in China.
  • Hans Tung discusses the early stages of Xiaomi's development and their focus on integrating hardware and software.
  • MIUI, Xiaomi's skin for the Android kernel, was developed to provide frequent updates and engage users.

"The discussion that Jung 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?"

Hans Tung reflects on the initial conversations between Lei Jun and Lin Bin about creating an integrated phone experience, which led to the development of MIUI.

Xiaomi's Growth and Investment Rounds

  • Xiaomi's initial funding rounds were supported by a few investors who believed in the team's vision.
  • The company's valuation quickly escalated with each funding round, reflecting investor confidence.
  • Hans Tung highlights the challenges and risks involved in investing in a hardware startup like Xiaomi.

"So three or four people in a crazy idea, $20 million valuation... But if you believe in him, in the team, and what he's trying to do, you will bet... The valuation jumped up to a billion post."

Hans Tung discusses the rapid increase in Xiaomi's valuation and the belief investors had in the team's ability to execute their vision.

Xiaomi's Business Model and Market Entry Strategy

  • Xiaomi's "triathlon model" involved developing a superior software skin, integrating hardware and software, and rolling out Internet services.
  • The decision to develop MIUI before building a phone was strategic and capital-efficient.
  • The company faced the challenge of entering a market with established players and creating a unique value proposition.

"Early on, de Jung had an inkling that to make it work... you got to be able to have a hardware that when it's quote unquote integrated with a software, can offer superior experience than a decoupled solution that was out there."

Hans Tung explains the strategic thinking behind Xiaomi's initial focus on software development (MIUI) before venturing into hardware production.

Innovation and Execution

  • Xiaomi's approach to innovation was not about original invention but about execution and adaptation.
  • The company's weekly updates to MIUI demonstrated their commitment to continuous improvement.
  • The success of Xiaomi is attributed to their ability to execute ideas effectively and respond to user feedback.

"But I think we also get people enough credit to take an idea and 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."

Hans Tung emphasizes the importance of execution in innovation, suggesting that adapting and improving upon existing ideas is as valuable as originating them.

Community-Driven Product Development

  • Xiaomi's success is attributed to listening to customer feedback and quickly implementing changes.
  • They have an in-house forum similar to Reddit where users can request features for Xiaomi phones.
  • The community upvotes and downvotes feature requests which directly influence product updates.
  • Xiaomi engineers and product managers are required to engage with the forum as part of their job.
  • The strategy of incorporating user feedback is unique and a key factor in Xiaomi's product planning.

"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 down voting, and the community basically says, at any given time, this is the most important thing to us that's not currently in the product."

This quote emphasizes the interactive platform Xiaomi has created to involve its customer base in product development, which sets it apart from many other companies.

Xiaomi's Founding and E-commerce Strategy

  • Xiaomi's founding team had expertise in e-commerce and software but lacked experience in hardware and manufacturing.
  • They recruited talent from established phone manufacturers like Motorola and Nokia.
  • Xiaomi's initial strategy involved selling high-quality hardware online, which was unique at the time.
  • The company overcame the hardware learning curve, which is considered impressive and potentially unique to China due to local manufacturing competencies.

"If you look at the founding team and you look at some of the original investment theses...the notion was, we're going to manufacture these phones. They're going to be 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."

This quote outlines Xiaomi's initial business strategy, focusing on manufacturing world-class hardware and leveraging e-commerce for sales.

Xiaomi's Early Success and Employee Investment

  • Xiaomi's first phone release saw massive pre-orders, confirming the company's successful approach.
  • Employees had the opportunity to invest in the company, which resulted in significant financial benefits for them.
  • This employee investment model is highlighted as a practice that more companies should adopt.

"Within the first day of 340,000. Within the first couple of days, 460,000. Wow. It was mind boggling. And at the party, lunch party, 2000 people showed up."

This quote illustrates the immediate success of Xiaomi's first phone release, which was a significant milestone for the company and its employees who invested.

Expanding Product Lines and Ecosystem Strategy

  • Xiaomi expanded beyond phones to other products like smart TVs and air purifiers.
  • The company invested in other firms to create a suite of products under the Xiaomi brand.
  • Only a few products are fully developed by Xiaomi, with others coming from ecosystem companies.
  • Xiaomi's strategy allows for frequent customer engagement and a diverse product offering.

"They have over 80 products now designed and then manufacturer supply chain from over 100 companies."

This quote highlights the scale of Xiaomi's ecosystem strategy, with a wide array of products designed and manufactured by a network of companies.

Strategic Positioning and Brand Trust

  • Xiaomi's goal is to create a brand that customers can trust blindly.
  • The company's approach is compared to Amazon's AWS, where Xiaomi's competencies are platformized.
  • Xiaomi's brand strategy is likened to Muji, Uniqlo, and Costco, aiming to cater to a rising middle class with affordable, high-quality products.

"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."

This quote conveys Xiaomi's ambition to build a brand so trustworthy that customers would feel confident purchasing any product without hesitation.

International Expansion and Leadership

  • Xiaomi's international expansion was led by Hugo Barra, a former Google executive.
  • The company's global strategy paid off, especially in India, where Xiaomi became the top smartphone brand.
  • Xiaomi's hiring practices under Hugo Barra attracted young talent that contributed significantly to the company's growth.

"Well, I think limbin also from Google, so he knows Hugo Barra from before. And also there were mutual friends, in particular, Robin Chen, who helped to bridge the gap."

This quote explains the connections that facilitated Hugo Barra's recruitment to Xiaomi and underscores the importance of strategic hiring in the company's international expansion.

Xiaomi's Valuation and Growth

  • Xiaomi becomes the most valuable startup in the world, then faces challenging years.
  • In 2015-2016, smartphone market commoditization and plateauing e-commerce growth in China slowed Xiaomi's momentum.
  • Xiaomi's strategies, including the launch of the Redmi brand and offline stores, helped it weather the tough period.
  • By 2017, Xiaomi's revenue growth surged by 70%, driven by expansion in India and establishment of offline stores in China.
  • In May 2018, Xiaomi filed to go public on the Hong Kong Stock Exchange, raising up to $10 billion.

"n, becomes the most valuable startup in the entire world. Pretty amazing. After that, there's some hard years."

This quote summarizes Xiaomi's rapid rise to become the most valuable startup and the subsequent difficult period it faced.

"So in 2017, though, things really turn around. The company goes from flat revenue growth to 70% revenue growth in one year."

This quote highlights Xiaomi's remarkable turnaround in 2017, with a significant revenue growth that marked a recovery from the previous years' challenges.

Xiaomi's Product and Market Expansion

  • Xiaomi's Redmi brand, costing less than $100, was launched to target the lower-end market and compete internationally.
  • The growth of e-commerce in China, initially comparable to the US, was crucial for Xiaomi's online sales strategy.
  • Xiaomi transitioned to offline retail to capture the larger market of consumers who still shopped in physical stores.
  • The company's international expansion was bolstered by the global increase in internet users, particularly in countries where Xiaomi was already present.

"One, Beijing, in addition to deciding to do Xiaomi ecosystem, also decided to launch a phone called Redmi as not as popularized."

This quote explains Xiaomi's strategic decision to create the Redmi brand, which played a key role in capturing a segment of the market that was sensitive to price.

"And by that time, Xiaomi's phones have done so well in the market and have such a great market share."

The quote emphasizes Xiaomi's success in capturing significant market share, which was critical in establishing its brand and facilitating further growth.

Xiaomi's IPO and Market Perception

  • Xiaomi's IPO in July 2018 was the largest tech IPO since Alibaba, reflecting its strong recovery and market position.
  • The IPO pricing resulted in a $53 billion market cap, with a subsequent increase to $61 billion after the first week of trading.
  • There are debates on whether Xiaomi should be valued as a hardware company or an ecosystem company due to its diverse business model.

"In May, they announced that they file with Hong Kong stock Exchange."

This quote marks the significant milestone of Xiaomi's public offering, indicating its readiness to access capital markets and expand its investor base.

"Ends up pricing July 9 at hk$17 per share or a $53 billion market cap."

The quote provides specific details about Xiaomi's IPO pricing and the initial market capitalization, which is a measure of the company's perceived value at the time of going public.

Xiaomi's Business Model and Future Prospects

  • Xiaomi's business model is often compared to Apple's, focusing on hardware sales with thin profit margins.
  • Xiaomi commits to not exceeding a 5% profit margin on hardware, positioning itself as a value-oriented brand.
  • The company's long-term strategy involves building brand loyalty and transitioning to a high-margin services business model.
  • Xiaomi's success hinges on its ability to integrate its ecosystem with services and expand internationally, targeting emerging markets.

"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."

This quote reflects Xiaomi's commitment to maintaining low profit margins on hardware, which is a key aspect of its value proposition and competitive strategy.

"It's really about kind of getting penetration with the hardware to have a very meaningful services revenue stream in people's lives."

The quote explains Xiaomi's strategy of using hardware as a means to build a customer base for its more profitable services revenue stream, mirroring a trend seen in other tech companies.

Global Ambitions and Cross-Border Innovation

  • Xiaomi's international focus from the outset differentiates it from US companies that traditionally prioritize domestic markets.
  • The company's strategy to target emerging markets aligns with the growth of internet users globally.
  • Xiaomi invests in localized internet services that can be integrated into its ecosystem, enhancing the value proposition for users in various countries.

"I think what Xiaomi is doing from the start is they're in the market everyone's talking about and they're already thinking international."

This quote highlights Xiaomi's global perspective and ambition to capture international markets, which is a core part of its growth strategy.

"You will see something of similar trajectory in these countries with startups, some of which will have their apps bundled into Xiaomi."

The quote discusses Xiaomi's approach to investing in startups and integrating their services, which can lead to mutual growth and an enhanced ecosystem for users.

The Importance of Openness and Learning

  • The podcast hosts emphasize the importance of being open-minded and learning from various markets.
  • They advocate for not holding preconceived notions about Chinese companies but evaluating them based on user engagement and product improvement.
  • The hosts believe in the potential of tech and the internet to contribute positively to society and lift people out of poverty.

"We firmly believe that anybody that's more open minded and willing to learn and share what they're seeing around the world would eventually become better for it."

This quote captures the ethos of the podcast hosts, who encourage learning from global perspectives to foster improvement and success in the tech industry.

"We want to have a podcast that promotes openness and promotes idea sharing."

The quote reflects the hosts' desire to create a platform for sharing ideas and fostering a community that values open-mindedness and collaboration in the tech sector.

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