Acquired - The Xiaomi IPO

0:00I had something weird going on 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 that. But yeah, when I disappeared for a second, it was to go turn on a fan because I was like, maybe it's like hot and that's affecting. I don't know. Oh, good. I was so, I was worried it was like, oh no, Ben's super pissed that we're changing that. No. No. You couldn't take it anymore.

0:38Welcome to season three episode two of acquired the show about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenfall. And we are your hosts. Today we are covering Xiaomi.

0:51You 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 Tong and Zara Zhang from GGV Capital. So Hans and Zara do a podcast called 996 that you should absolutely check out if this topic is of interest to you at all.

1:20I've listened to about half their episodes so far and it's a fantastic resource for anyone who wants to understand what's going on with Chinese companies, one of our focuses here on season three of acquired. Hans was an investor in the very first round of Xiaomi and was involved in the initial ideation of the company, a rare and amazing feat to be with a company from conception all the way to IPO. And in another rare feat, Hans is a top venture capitalist both in the United States and in China.

1:46He has been ranked six times on the Forbes Midas list and is a true pioneer adventure 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 996 podcast. So welcome so much Hans and Zara, thank you for joining us.

2:09Thank you for having us. Thank you for having us. We're going to aspire to at least do half as good as you guys do on a 996 episode. Oh, please. It's great. You're too modest. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora, the agentic operating system that is redefining how the world's best legal teams work.

2:33Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

2:56They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review where you...

3:09drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagores Bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

3:28And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time LaGora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months truly insane numbers and that is the real test

4:21Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. 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 logora.com slash acquired and just tell them that Ben and David sent you. So David, let's dig in on China tech. Let's dig in. So before we get to the Xiaomi story itself, since we have our enhanced with us today, and this is our first China Tech episode, we thought we'd spend a couple minutes just kind of setting the stage on what is going on in China Tech right now, because most of our listeners we assume are just reading the headlines. So there are a couple points that as we were doing our research, we kind of took away as like not obvious things that most people don't realize right now about China. And would love to just get

5:14Here 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 B-A-T, you know, Baidu, Alibaba, Tencent. It's Xiaomi, which we're covering on this episode. It's D-D, which we've also covered in the past. It's May 20, I'm ping. It's Totiao. It's Pinduodudo, which is going public today for tourists. All these companies are valued over $10 billion, and they're not just...

5:38U.S. 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 did this real shift start happening? Right. I first moved to China to do VC full-time back in 2005. I think in 2004, Second Body Bank, you know, Edition being a sponsor for your show, I also organized a fantastic tour.

6:07for a lot of U.S. VCs on Central Road and other places go to China together. And the pace of change speed of growth in China was impressive. So a lot of people came back, start to either hire people in-house to send them to China or start to explore having a field of funds. This is on the VCs side. VCs are from the U.S. side, that's right. And in China for five years prior since 1999, 2000, there were a lot of VCs that were looking to do investments in China, some even tried in the 90s, and there were a few IPOs of internet space in 1999, 2000, those two years, the most famous world of portals, Sena, Sohu and Netis. And obviously after 2000, the market went south, and many companies were not doing well. So there's a lot of doubt as whether it could happen, but as internet penetration

7:00take off both on a PC side via ADSL and then 5-10 years later via smartphone. The landscape will change dramatically. That's when a lot of these companies, of course, were getting started in 2010 as we'll see. The first way for the portals and then the Baidu, Adibaba, Tencent were all started in the mid to late 1990s.

7:22The next wave, when you talk about a DD or a bite dance and a twine, a Xiaomi will happen mostly around 2010 and later. So during that 10 year gap was the first five years, 2000 five were the tough years, the thing years. Then from 2005, 2010, you see the desktop, PC, the ADSL wave type of companies emerging, start doing well.

7:47And then people who gain experience from that wave ends up going after the next trend, the next wave, that was a smartphone wave. It's fascinating, you say mid to late 90s, so it really is for a lot of these companies, the initial Baidu, Alibaba, Tencent, and the Portals, it's more akin to Amazon than any of the more recent US tech companies. I mean, this was, they survived the .com era rather than being born after it. That gets lost a lot in, so the US news cycles is that these are 20 plus year old companies. Yes, and I'll be worse than that, they just come out of nowhere.

8:21but they've been around for her for a while. The more recent ones that make Twine total slash by Gens, D.D. Pingo Dua and JD, they came later. Of that bunch, JD is public about 55 to 60 billion dollar evaluation and they started in 2003, 2004 time frame. Everyone else including Xiaomi started in 2010 and later. Yeah, I think one other point to really hit on before we get into Xiaomi is the pace of...

8:50execution and company building and growth is like otherworldly compared to Silicon Valley. I mean, Pindo do a great example. It's going public today. Going to be valued 15 to 20 billion dollars, raising over a billion dollars in the IPO. The company was founded three years ago. I'll start first and then let Zara at her points as well. And the price range for IPO was 16 to 19 dollars. And then open at 25, 26 dollars.

9:16and it's still trading at that range. It's been $25, $27 right now, so we speak. The market is going to be closing in less than an hour. 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 and out-execute.

9:46If you talk about a bubble in the US, it's probably 20 companies doing the same thing, but a bubble in China is literally hundreds, if not thousands. So how do you stand out in that environment? It takes very, very fast execution and strong team and just a lot of determination and hard work. This is probably a good time for a quick aside. Zara, why is your show called the 996 podcast?

10:0996 is the term that refers to a standard work schedule of a lot of Chinese tech companies, which is 9 a.m. to 9 p.m. six days a week. So that's how people work over there. And 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. It's definitely a bias here in a valley.

10:37In the US in general, if someone works too hard, something's wrong because that person is inefficient. There's not a lot of work like balance. But in China, the level of intensity and joy is quite impressive. Some people compared this to the Japanese sort of Koreans in the 80s and 90s. We disagree.

10:56Because in the other place that we have seen this kind of work ethic, it tend to be in companies that are more conglomerates, bigger than employees are getting paid on salary, and there's less of entrepreneurial thing involved. Whereas this time in China, these are all startups. So even some argue only the top.

11:1620% people get a lot of options, but what we were seeing is that the ones who didn't get as much options in the company that they work at, they were willing to go out and catch a next wave that being found in those next round companies. That's right. So these two people starting to do come sooner, faster, quicker and 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.

11:42So I'm going to kick off and I'm going to lead the history and facts. But Hansons are jumping because you guys lived this. Tell us where we're going wrong. So Xiaomi history starts as we've talked about April 2010, the beginning of 2010. And there's really a superstar team that comes together led by a guy named Leijun and folks from Google China, the former head of engineering for Google China, Microsoft, Motorola, academia, and Microsoft.

12:07And Kigsaw, right, of course, where we'll get into legend was the CEO of Kigsaw. But he's the leader. He's the CEO of Xiaomi. And he's a pretty interesting dude. Right. So he started as an engineer. He was born in, I think, 1969, went to school, did a CS degree in engineering, graduated in two years from Wuhan University, which is a very prestigious engineering program. He starts work as a software engineer. He eventually, after a couple of years, joins Kigsaw and Kigsaw was like a early software conglomerate, right? There was software publisher and developer made everything from games to word processing software, almost like a Microsoft of China, much smaller than Microsoft obviously, but same ambitions. He pretty quickly shoots through the ranks from entry-level engineer to becoming the CEO of the company within, I think, seven or eight years. Is that common? I would imagine that's pretty special. It definitely is not common.

13:04But also thinking that time, he's starting working in 92, 93 time frame. China was going through rapid changes. There was no internet yet. So software was where tech, the action is. And obviously Microsoft was this big, impressive company dominating the world from Seattle and Chinese company look up to Microsoft. And the smartest, brightest Chinese tech engineers want to build software.

13:28That's how Kings Off got started and they joined quite early as one of the first 10 employees. I thought he was already a more established company when he joined. So he was pretty early. He was pretty early. And then the company back then, the NGO investor had most of the shares. The CEO had a lot less.

13:44then people like they can join him didn't get much at all. But he persevered, he ended up becoming a CEO of the company. And in the process, the first 17 years, he was there before he took the company public, the company evolved from a software company to a security company to a gaming company. And throughout the whole cycle, he learned how hard it was now to have options as a tool to get people to change and evolve a few times even to find a better way to grow.

14:12During that time, he also came up with the idea to do e-commerce and spend off a team to do what it's called Joyo. And that was their soul to Amazon and become Amazon China. Wow. That's pretty awesome. So he was, according inspired by Silicon Valley early on. Yeah. And one of the pioneers in China, internet space, to sort of evolve from software into internet. Go from Microsoft to Google to, you know, Amazon to now. Show me. Yeah, it's like the pace of You know, these waves happen extremely quickly. Extremely quickly. Extremely quickly. That's right. We actually did an analysis. We look at the top 10 highest market cap companies in the world that's probably traded in 10 years ago in 2008. Most of them were not tech. Most of them were oil and gas companies, wireless carriers or financial institutions.

15:01Microsoft was only two tech companies amongst top 10 in the world back then. These days, it's the thanks plus out about 10 cents in China. So you see several of the top 10 tech companies, many of them are internet-focused companies. And then the market cap changed dramatically.

15:19For the enhanced 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 Fang stocks, Facebook, Amazon, Apple, Netflix and Google were single headedly responsible for the S&P 500.

15:39being positive for the first half of 2018. If you take those stocks out of the S&P 500, it was actually down 7 tenths of a percent, which is insane to think about. This is what we're seeing in the US, the gap is even wider in developed pin countries, where the offline world is even less sufficient than the offline world here in the US. So you look at Alibaba, GTV was already investing in Alibaba. We invested Alibaba in 2003. Valetian was a quote unquote very expensive, $180 million.

16:08That's 2003 15 years later that's million with an M with an M not right and 15 years later is a half a trillion 500 billion dollars in doing that same span Google actually grew by less than 10x on about 1000x That's the thing we see that in developing countries worldwide We will see the impact of tech internet play even bigger role than it has done in the US before All the internet companies became so big in China. I mean, the big Chinese companies for the state owned enterprises, right? And it seems like now, you know, like you were saying earlier, everybody either wants to work for these big internet companies or go be an entrepreneur themselves. It's a big change. Even five, 10 years ago, we see a lot of people come out and want to have a good job that's safe, well, often with the government institutions or state owned enterprises.

16:58These days, you see a lot more people willing to work in internet companies, take it on me, because I know the growth is a lot faster, and change for a career advancement is a lot better. So, Legion, of course, being prime example. So, he's now CEO of Kingsoft, we're in the mid.

17:132000s and he makes kind of a surprise decision or at least it seems in the researching like a surprise decision at the end of 2007 he retires from Kingsoft a CEO he eventually would come back and I believe he's now chairman again but he retires day-to-day a CEO takes a step back but he doesn't really stop he starts becoming a very prolific angel investor and you were working with him a bunch during this time right yes you've talked about and he's talked about too that they were they were kind of three main trends that he saw at this moment in time that he thought we're gonna create a lot of new companies in the future. And that was the rise of social, the rise of e-commerce particularly, and been particularly in China because there wasn't as much offline commerce developed. And then of course the coming wave of mobile, which was a huge global trend as well. How did you first end up getting connected with him and start investing with him as he's doing all this angel investing? I didn't know he was an active angel investor. He didn't ever publicize it. I was looking for companies to invest.

18:10in the online gaming space because you can see gaming takeoff, but the chance of any of the any particular game do well is quite high. So we're looking for ways to invest in a gaming space that we're selling shovels that can be the arm-stealer. We look at media, we look at tools, we look at a variety of ways to feed into the gaming market. One of the companies eventually become, come to call YY and also listed on NASDAQ and GTV's investor in it. I have come across this meta-CEO got to know David quite well, and David introduced me to his engine investor, and that was Legend. So that's how I got introred to Legend. The first thing he said to me was that, you know, he thought a lot about what he did for the 17 years at King's Office, and he realized that in order to do well, when he's to capture the right trend, that has a chance to take off.

19:00and over the next 10 years, his most bullish on these three trends, commerce, social and mobile. It happened to be the same thesis I had, except that he thought about this deeper and for far longer than I had. So it's great to meet someone who feel the same way, but also has the operational experience to be helpful to the founders like you back. Yeah, and this whole concept of...

19:24Trends is super important in China tech in a way that it's is different from the US Yes, in 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 right nobody takes it seriously And then it disrupts everything in China It seems like it's much more about like there are these big trends. Let's capitalize on the trends, right? What's behind that? It is very interesting, you know having got to Stanford. It's always thinking about the next big idea or do something disruptive

19:53what the rule can be, can we break this time through something that's shocking and something that's fun and kind of rebellious. In China, it's such a so much about nation-building so that in order to catch up and do well, the country needs to push a certain agenda or promote certain sectors to do better in order to build a more prosperous nation. So there are trends that you can capture. So people look at in order for the country to be more efficient.

20:21Internet will need to play a role because there's a great way for someone in Beijing to know what's going on. in other parts of the country and have people tell you what's happening on the internet. It's a feature of data, you know, where you cannot do it on your own. So there are things that's happening in China. If you look at it, it goes, hmm, I can see how it fits to what's going from a country development standpoint. So this trend has a better chance of taking up and will not be as regulated by the government. There's sort of two things that play there. One is an advantage to a more centralized, even if not sort of governmentally centralized, but culturally centralized.

20:54group of people in the US, everyone's running around sort of doing their own thing, trying to create, trying to disrupt, trying to find a little edge wherever they can. And in China, where there's a more unified sense of, we all need to do this to be strong together, you have sort of more adherence to trends. Right. But if you go even deeper, the stuff that's happening in the US is also trend dependent. Yeah. Yeah. We just don't think of that way in the US. Like why should PC take off?

21:22Why should we just live continuing the mini computer world or the mainframe world? Because distributing that power to the edges makes sense. It makes everyone more efficient. It's better for the country. If everyone has a PC next to it, so they can do stuff. It can be more productive. But we never described that trend in that context. It's always like, oh, it's all freedoms. It's getting you empowered everyone. So what are you going to think from an empower standpoint of the individual, which is the western way of thinking, or the eastern way of thinking you made the country more efficient?

21:51The 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 was maybe disruptive but not a real market yet now we can see it's a market and we know we have to win there it's not fast following because the business models are tremendously different in the way that it interplays in the culture is different but there's sort of demonstrated sort of the technology can work at scale of notion. Well, for example, when Facebook started to show up, like you said, some people, a lot of folks in the US view that as toy, you know, how a cow can advertise a treat this seriously. It doesn't seem like it's something that can be back on last.

22:36But someone in the Asian city in China, or a one-sheeng with a founder of a clan, see it in China, says, that is interesting. I think that's going to be a big trend. Because in the Chinese context, you can see that it's a way for people to freely express what they're thinking and get less of a pushback from the government, at least initially. So there are reasons why this could take off in China, but it has to be modified, it has to be localized. This model has to be different, but there's something there that you can look at, I think this can be big, but I know how to make that big. So, it's a combination of, you can call it fast-following or you call it micro-innovations. Adding stuff that has to see may not, you have invented to see yourself, but you see that this could be something quite different than a racial intent. So, I think suddenly the US is an amazing place, the both things that are about in New York, where you see a lot of new things happening, but most people treat it as a toy. Yeah, yeah.

23:31I 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 it's changing, it's changing. If I read tech news in Chinese, like the major, like the tech crunch equivalents in China, over half of the news there is about the fans in the US, whereas I read Bloomberg, Washington or whatever here, maybe only five to 10% of...

24:05The news is about Chinese companies. It's a lot of asymmetry in terms of interest. And Chinese entrepreneurs are very eager to come to Silicon Valley, meet everyone, learn what's working, and take it home, not copycat. Yeah. But adapted to the local market because it takes a deep knowledge of what's going on in China to make a product work. You're gonna see jobs. You didn't benefit graphic user interface. Right? Right. Does the entrepreneur? He didn't benefit object or into programming.

24:34But when he sees that, he says, oh, that is going to be huge. And here's the reason how, right? Yeah, yeah. Let's not overcredit the amazing historical American innovators with true original cultures of things either. All right. So back to the Xiaomi story. Lei Jun, it's 2009. He's left Kingsoft over a year ago at this point. And he starts jamming with...

24:58one 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 going to become really important in a minute. Google does not operate in China. You cannot access Google services, search, maps, YouTube, whatever in China. However, the mobile and smartphone market is starting to rise and it's pretty clear at this point that Android is going to be...

25:23likely 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 well, close to 20% of market was Google. So Android has come out, but It's very early. Back then only HTC phones have done well, Samsung phones have not. So it wasn't that clear that Android can beat iPhone because in the early days, iPhone was still offered a better, integrated experience. So the discussion that they doing and being happy was that...

26:04It's possible to build a phone using Android kernel that can offer a better integrated experience by owning both a hardware and a software piece. So that wasn't obvious, but I'm glad you picked that out. It wasn't obvious to many other people that it wasn't a predetermined thing that someone should do hardware and then someone else to 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.

26:31And that's the famous knock on the whole Android experience is that the software in 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 in an Apple-like way, you can see how that would be an enormous leap at the beginning of can we do this? Can we actually create an iPhone-like experience using this decoupled hardware software combination? Yeah, and that was the key number one challenge.

26:59A lot of people back in China even then didn't think that's possible because no hardware company in phone related space has ever become successful starting from scratch. Every player we can think of kind of evolve and added the phone element on top of the infrastructure business that they were already in. So it was incredibly risky for anyone to try to make this work. Now they decided to start the company along with seven other co-founders I believe, seven or eight other co-founders immediately raised $41 million at a $250 million valuation. The cabin two tranches. The first time it was roughly around 20 million pre. And the lean investor was Richard Lu and Morningside. And I gave him a lot of credit for having the guts to do that. Both he and I have known, they've been for a long time. So three, four people, an crazy idea, 20 million of valuation. And I remember someone told me back then who was very smart and very experienced.

27:53Google's first round after having a product that was to be out there, people were using it. It was 70 million pre. So having no product, nothing, and I'm not even business applying. 20 million pre is the valuation is not cheap. But if you're believing him and the team and what he's trying to do, you will bet.

28:11The challenge came one run later. That was only months after the first run was done. That was at 100 years in China time. That's right. And the validation become 150 million pre. And they were maybe 50,000 users of MIUI, the operating system based on the Android kernel that Xiaomi had. And then, you know, both Richard and I decided to coldly that around together to do this.

28:36Only a month later, before they actually had a first party to launch the phone, the valuation jumped up to a billion post. This is 2010 in China. This is not 2018 until it can be valid. That's right. But the time you hit the billion dollar valuation was only 2011, and I give they doing it in Takah Shunwei.

28:55Also Richard, and Morningside, a lot of credit for co-leading that round between Zhongwei and Morningside. So there were a number of people that had the guts, not many, but a number of other guts to lead each round and step up with meaningful money, a stake at that time. And so if you didn't think that the team can pull off that vision, everyone who passed on it, I think, is extremely logical and reasonable. And I know we'll never fault them for it for doing that, because it's crazy.

29:23It's always that way, Hans, but that's not how you drive returns. Correct. You have to somehow figure our way to bet systematically and take enough risk to find those outliers. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year, an audit or a static PDF, then everyone would not, and you're done.

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31:23So one thing I want to pick up on that I think is super important understanding what's going on at this time. Hans, you mentioned MIUI, which is the, it's a skin on the Android kernel that the company develops during this time before they have their own phone. Let's talk a little bit about that. So there was a company, I think it's bankrupt now, but there was a product and a company here in the US called cyanogen. A cyanogen mod, there was 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 say, Anogen ends up, they started company around that, ends up getting backed by Andreessen and Benchmark, doesn't work out. But so that's going on. And that essentially is the same thing that Xiaomi does for me UI. And that's what me UI is.

32:15How did that all come together? Did they see Cyanogen and see that this is possible? Was it developed independently? Because it happened pretty fast. There was something that was discussed in Xiaomi early on. But I think the Chinese entrepreneurs know that their executions were far better. So they didn't have to take away anything from what the other countries and teams were doing. And it was all open source. It's all open source. So once you know what is potentially possible, even though it's not proven yet.

32:44Do you think you can execute it better? Yeah. And figure out where to make a war in the ways other kept? Well, also, just that you don't win Shiny yet with this opportunity. I mean, it's pretty amazing what Legion and the Xiaomi team does. They create me UI. There's no phone yet.

32:59they release it so that anybody with an Android phone can install it on their phone. And it really takes off and it gets these super hyper-engaged users on product forums, and that's kind of the root of the MeeFans that start, which we'll get into in a minute. Like Zara mentioned, that S6, I remember going to embezzling a limbin and a rest of the team in 2010.

33:19I should have minutes out there. He was still at Google at that time. And then it would be around midnight. And there would be people in front of me waiting to talk to the Beijing. You realize that they figure a way to combine the best of the knowledge that they picked up while they work in the bigger companies, yet they retain the nimbleness and the drive of a startup. And having the two culture be able to mesh together, it wasn't easy, but it made that work. They update MIUI.

33:45every single week. No one has ever done that anywhere else in the world. They updated that every single week. So if you are a fan of open source software and you like Android, you can help. But we also had this team out on the middle of nowhere in Beijing was doing something revolutionary. Yeah. Yeah. I wrote in my notes. It's almost a joke. We talked about it.

34:05the Tesla episode on our last episode about the Tesla being the iPhone of cars because, you know, it's a computer. You can generate it, they ship over the air updates. It's almost like, me UI is the iPhone of iPhones. Like, you know, if you have Android or you have stock Android or you have iOS, you're getting yearly updates.

34:21But the Xiaomi team, like you said, is shipping major updates every single week to this new skin that they've developed. Right. And people responded, like people said, this is what Andrew should be doing, but not doing, you're doing it. So I know in the US, we value a lot on ideal origination. We place a premium on that. And there's nothing wrong with doing that. But I think we also know people enough credit to take an idea and you make do whatever it takes to make that work. That's much harder.

34:50and he's a lot more disciplined in the grind for the longer period of time. And so, both high value. Yeah. Well, I think it's just super well illustrated here between, you know, Android, which is still on, core Android, still on an annual release cycle. Maybe a little faster now, but not much. You know, in Syedogen, of course, it's great and they're like, you know, working on stuff too, but not moving it anywhere near the same pace that Xiaomi is. No.

35:14So when I look at this, it's not government influence. It's not like somebody give Xiaomi XQA salary or subsidy or grant to ask them to move faster. It's completely from within. This is why I love tech. It's true meritocracy.

35:31So, Hans, the original business plan was to build amazing phones at reasonable prices and sell them over e-commerce. What was the decision like when deciding how to enter the market around should we build a phone first or should we make a skin of Android first? Early on, Beijing had an inkling that to make it work, what is now called the Triancellum model.

35:54that you need to have to do three things well. You got to be able to do the skin and make that extremely valuable so people want it more so than the end or several originally. So that's number one. Number two, you got to be able to have a hardware that when it's...

36:07what integrated with the software can offer superior experience in a decoupled solution that was out there and that was more a dominant form of alternatives. And in number three, you've got to be able to have internet services that you can roll out to create some kind of networking effects, create some kind of mode that makes it. And there's the opportunity for that because there's no entrenched, you know, Google search or Google maps. I mean, there's a lot of facts, but that's right.

36:30So the figure way how to do all three things well is not easy, but they didn't identify early on. That was a way to compete, but and potentially when. And for him, he also realized that none of the original team members had hardware, true hardware experience, hadn't shipped a lot of phones. So to focus on getting stuff right and getting user feedback, to get validation on this triumphant model co-work, they have to start with a skin with MIUI first to make that work. Because that's what they had on the team before they can try. And also, it's the last couple of minutes.

37:02To build a phone, you've got to pay for all IP and wish they did. You've got to pay Qualcomm which is expensive. You've got to pay a content manufacturer three months in advance. It's not longer. It's nine installments. You have to pay all the upfront because they need to make sure that as a startup, you're going to be around. So it's hugely capital intensive to build a phone. So before they can prove they can build a phone, they've got to make sure they can do a new one. So in a lot of ways, I think those constraints, end up driving Xiaomi's next big innovation, which evolves into, you know, hunger marketing and e-commerce model. I assume it's because they didn't have enough capital even as well capitalized as they were to place orders for parts and get phones assembled at the scale that a Samsung is. There were only limited runs and there was such demand. And so they evolved that into this hunger marketing model where now every Tuesday at noon, right, there is a limited amount of supply of Xiaomi phones that come available.

37:58and you have to log on and buy it right at noon. Right. I don't know if people criticize him for the hunger marketing strategy, but it was born on an necessity. They just told Li Wencheng head of marketing sales back then that you have to figure a way to make a work. And by the way, you have nothing, no money, no budget to work with. And so I remember one of the marketing companies that came up with was a campaign that just share the phones that you have ever used in your life and talk about what you like and not like about them. So it was a way for two fans to show off.

38:28their technology and their status as experienced user. Beijing was the first who did that and he showcased like the 50 phones that he ever used. And they were about 560,000 people on their own because they had to participate and share what the phones they have used in their lives. Half a million people. Half a million people. So not spending any money at all.

38:48half a million people within a few weeks time frame participating in a campaign. And that's when I know even before they launched the phone that there's a market there. They didn't was right that people feel that their voice is not being heard.

39:01They want to platform a brand that listen to them and be willing to make changes quickly based on their input. So that's the winning strategy that the hardware guys don't know and the inner guys are not going to touch hardware. So if you can figure out these gaps of capability, understanding amongst different disciplines, you can build something that's the best of everything. Yeah, and to put a pretty extreme point on that.

39:23The 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.

39:32Xiaomi 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 up voting 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 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.

40:03and show me engineers and product managers are required to spend time in that forum. It's part of their job. Like they have to spend hours there per week and answer questions and answer questions and be engaged themselves. Could you imagine if Google did that? Like, they should. Yeah. Again, there's no government support. There's no government subsidy. There's no government grant. Nothing. There's purely based on execution. You care. The agent says, you know, treat your customers as if you're treating fixing phones for your friends. Your friends come to you and say, Hey, your phone's now working. You're going to bust your ass to make sure that their knees are taken care of. So that's what he tried to do to get his colleagues to react and serve the customers better.

40:42So one other point I want to make for listeners, taking a step back, if you look at the founding team and you look at some of the original investment theses, Hans, that you've talked about and that Legend has talked about in how he started the company. 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.

41:04people that are amazing at e-commerce because that's blowing up in China and that's the strategy for selling these things. They had that on the team. They had people who have built world-class services and run large software companies. But if you look at the things they had and didn't, they had nobody really in hardware and nobody in manufacturing. Think about anybody out there right now, you and your friends sitting around saying, let's start a company and you're like, I think we should start like a SaaS company, or maybe we could sell some things on the internet. But thinking like, I'm going to start a hardware company and learn how to

41:33facture that it's scale. To me, one of the most impressive things about Xiaomi's evolution over time is that they actually did figure out that competency. For Hans, I have a question for you. Is that unique to China that they could do that because they're actually manufactured there and because there's so much competency around actual building of physical things? Once they've been joined full time, both he and Leaching Together, they spent a lot of time and effort to interview everybody they know, whoever make phones for Motorola Nokia and other major brands in China, which were companies that were dying at this point in time. No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no,

42:23They won't adopt you in smartphones quickly. They will not willing to use Android as their operating system. They will push in their own as you recall. So these, uh, that's right. That's exactly right. The burning platform. Yes. And so there were people who are frustrating said these big firms that are.

42:39sort of want to come out and put their vision to the test. And Leijing was originally being the first to talk to them and be able to get one of them to join them into this. It's not easy because, again, most people in these big companies haven't tasted a value of options. They haven't gone through an IPO themselves. It's hard to leave a big company that has a procedures job to join a known name startup that just had a bunch of MIUI users.

43:05Well, to run through quickly what happens, I mean, short story, it works. They released the first phone, the Mi1 handset at the end of 2011. Aqua 16, 2011. I'll never forget that. And I know, Hans, you've talked about this. I know you'll never forget it. More than 300,000 pre-orders in the first two days, right?

43:26For this phone from this company that like nobody's ever heard up before that was a skin within the first day of 340,000 within the first couple days 460,000 Wow, it was mind-boggling and at the at the party lunch party 2,000 people showed up and when they can say the phone at the end of his and present presentation He said the phone cost you know 1999 R&B which is roughly translates $310 US everybody audience still don't want to applaud it, and that's when I know okay my job is safe. I did not make a mistake for doing crazy things. Again, a lot of kudos to Layjane and Tuck and Richard for all having the gust for money where I'm out of this. And the Xiaomi teams are amazing. A lot of people don't know this, but in a serious bid that the one I led, a lot of employees of Xiaomi put their personal money into the company. So Layjane made sure that if you want to do this, you have the option of doing so. No pressure and no need. There's no obligation.

44:20But all those folks, 56 of them who did, are all very, very well right now. Wow. That's awesome. I wish more companies should do that. How does that work mechanically? Do they sort of buy in... They also put money into a SPV and SPV show up on the cap table as an ambassador. And they get preferred shares. They get a preferred shares. Wow. They all got preferred shares. Wow. That's right. More companies broadly should do that. That's awesome. Yeah.

44:45Well, okay, so things are going well. The next year, the Mi 2 comes out. They sell just under 20 million of those phones. Which again, this is now a three-year-old startup. Amazing. It's made, you know, not the Linux kernel, the Android kernel, but like a full operating system on top of it. Two phones, bunch of services plugged into those phones and sold 20 million of them. Pretty impressive. Then also in 2013, they come out with their first non-phone product that Xiaomi made and still makes a TV. How did the strategy develop to go from that Apple makes a few products, they make great hardware, but Xiaomi has taken this other approach, this ecosystem approach where...

45:28Well, 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 didn't thought ahead, and I think his experience as an operator, entrepreneur, as well as a angel investor was super helpful. He understood that...

45:52for Xiaomi to be great. He can just be on the phone company. He has multiple products. But if you ever try to assemble everybody in-house to do this, not many products in-house can be as big as the phone business. So you're not going to have people who are going to do the greatest work doing smart devices other than a phone and maybe a TV. So he knew that he needed to figure out what to incentivize.

46:15People outside of Xiaomi to do this and so he's willing to become an investor in their companies Minority never control minority for the most part and then be able to lend a Xiaomi brand to them and share gross profit on top of that And then open up the Xiaomi e-commerce platform to allow these device to be able to sold on Xiaomi and then have a way to store it down the road and then having the 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. The first big ecosystem product that's a hit is the air purifier, right? Made by a separate company that Xiaomi has invested in.

47:04branded Xiaomi, sold through all of Xiaomi's distribution channels, but a completely separate company that makes it, and it becomes a massive hit. Now there's been so many other products, everything from all those scooters. Again, branded Xiaomi scooters made by a company called Ninebot, which is a separate company. Anything you can imagine, it's pretty incredible. They have over 80 products now designed and then manufacturers supply chain from over a hundred companies. Only three of them, I think, are full stack Xiaomi. That's the phone, the TV and the laptop.

47:34That's right, only three are. And the smart TV one is also interesting. The founder or the head of the business right now is Wang Tren, Richard Wang, and someone that agent is known for a long time. He started off wanting to do something that's more of a kindle.

47:46of China for lack of a better term and more reading device that has an integrated hardware software experience. And I was actually a small personal investor in that company. But it was harder to make that work in China, just a different market. And he actually invested in Xiaomi early on as a personal investor himself. So here they can stay close and then eventually decide that if he joined Xiaomi full time, then the team he built at Kendall can come in and build smart TV.

48:15And so without him joining, he may have taken a while for Xiaomi to figure out who's going to drive the next product. And in the Xiaomi ecosystem, it only happened after Smart TV becomes something that can be a successful example. His study for others. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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50:06So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. 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 blushed say, oh, maybe it's like the next Apple. They're making smartphones. Everybody's using them. They're doing a lot of the software themselves. And the question about Apple is always can they have another iPhone? And most people think no.

50:36that they'll never have a product of that scale that's that profitable again. And what have they done about it? They've come out with the watch that's doing well. They have some of these other products that will never be as big as the iPhone. And the approach that Xiaomi took to that is, well, we have all these competencies.

50:50And we could sort of platformize those competencies in a very Amazon-like way, so the way that Amazon opened up AWS to other people to sort of start a new business line. Xiaomi is sort of doing that same thing with their manufacturing, with their supply chain, with their branding, with their e-commerce. But rather than, you know, silently running on AWS in the background, a lot of these products are actually...

51:12Now Xiaomi products. And so not only it would be like Airbnb by Amazon, which in some sense it is, right? It runs on AWS. Yeah. But it's just a really fascinating strategic move that we just don't really see in the US. Right. Legion is has always been impressed by a Mugi Uniclo in Japan, also Costco in the US. Obviously Amazon's well, since he sold his second startup, Jojo.

51:39to Amazon. So he knew that there's more things that are rising middle class in developing country like China will want to buy it be on the phone. So how do you 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.

52:01But it makes the price much more affordable for the mass market that the rising middle class in these countries. The goal all along was not just to do a phone, but how to do more than phone was much bigger of a challenge and question. And I think over time, you figure out the ecosystem approach, making the product leader for each product a true founder and entrepreneur was the best solution. The everything story. That's right.

52:26I 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 can buy anything they want and trust that it will be of high quality and they will like the product. So it doesn't take like if you like the brand, you're going to like whatever it makes. So whatever Xiaomi makes out by it. So that's their goal. And the beauty is that when you have the model like that, then frequency of visits per store or per.

52:56Much run higher, right? How often do you replace a phone at best? Six months? You go to the Apple Store. Even though it's an amazing store, right? You don't need to go there that often. But the Xiaomi Store becomes a place that people would go check out every couple weeks. Because there's always something new from one of the ecosystem companies.

53:10It's like Brookstone, but all the things are super useful. I was going to talk about Hugo Barra here. I'll just mention him. Hugo Barra. I will add that song on the phone on the internet was not easy. Even though e-commerce in China was doing well back in 2010, 2011, but Google had tried to sell their first phone online. Great phone.

53:32but it was just hard to self-linear. People just like, you know, why? I'm used to buying an offline. So it was not obvious that that can work. If they during the team did not do me UI well, did not have a lot of users who would like me UI already in the price pool and wasn't that competitive, you cannot start a bus. I remember after the lunch party, I went to a barbershop to get my haircut. And with that, I mean, I'm using it. And my barber was asking me what I was because she has never seen it before.

54:00And she asked around, no one else has seen it after I said, it's Xiaomi. But there's one guy in the barbershop, one of the barbers, who is probably the most tax savvy of the bunch. And he knew Xiaomi phone because 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. All that the chip is the best Qualcomm tip you can find right now is Snapdragon. And it is amazing.

54:23When Sue said that, the other six people all turn their heads. They all come to me when it's check out the phones and, oh my god, it's only 1999 and B. It's so cheap. It looks so good. Immediately, the fan, me fan, turned the other six...

54:36Folks in the in the in the barbershop need me because someone wants to buy Xiaomi phone And then you cosplay too, but you're like can I give you more money please? The cost of that promotion is zero no government sub of these needed no government grants needed But just by out thinking out executing you becoming phenomenal and so why not sell through channel? So you know in the US until you know the iPhone everyone's going to the AT&T store on the Verizon store to buy the thing is it a gross margin problem? Is it a right? I post 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, ends up being somewhere between 30 to 40% of sales. So if you look at Apple, it's a gross margin on iPhones, roughly a bit over 50, two thirds, if not three quarters of that are sales marketing. And then what's left is just operating overhead.

55:27So those are the three biggest cost drivers, right? Obviously you have components out of that stuff in there too. But beyond that, it's an expensive item. And for phone climbing, that's not a iPhone. Then you have to give away more to the channel as well. And it's just not as, and you don't get feedback as quickly because people cannot tell you the problems themselves. So doing the over the internet makes a lot more efficient if you can make it work. There's the feedbacks immediate as you know. I mentioned Higabara. Higabara was a Very famous, celebrated Google executive. At this point, Andy Rubin has now left Google, Andy Rubin, of course, being the founder of Android, as we've covered. Hugo is basically running Android within Google. He's head of product for Android. Huge announcement. Xiaomi recruits Hugo to move from Mountain View to Beijing and join Xiaomi. And even more curious, he's not going to head product or software. He's going to head international. And this becomes a huge, huge move for Xiaomi. And really under

56:24Hugo's leadership, Xiaomi goes into India, into Malaysia, into many other countries, particularly in Southeast Asia, to preview the end here. Xiaomi is now by far the number one smartphone brand in India, which is incredible. So, maybe I don't think this was normal at the time that 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 are going to be a global brand. We are going to dominate all these other countries even more so than US counterparts or whomever. How did that all come together? Well, I think, you know, the business from Google. So he knows who a marathon before. And also there were mutual friends in particular, Robin Chen, who helped to bridge that gap. And then a bunch of us have met.

57:13Hugo over the years. I first hosted Hugo and Robin and JP three folks to visit China in 2006. So we performed Hugo joined Google at that time. And then by the time that Shami Chai Recruit Hugo, they already have a lot of investors in the company, including DST.

57:33Yuri at DST, whom Hugo knows quite well as well. So there's not enough people around the table that Hugo already know and feel if he ever tried to do something that's different, Xiaomi probably is the one. And he also seen a number of Xiaomi has gone up. So it is a combination of a lot of factors that made it possible for something like this to happen. He was unprecedented. And it's not easy for someone who had never lived in China to leave a great current job to do this. And as soon as he joined, I remember he's seen how we both fans shot up.

58:03So, you can think of it as a Twitter of China by much bigger. On Twitter, he had tens of thousands of fans on CNWable within the first month of joining Xiaomi. He shut up to a million and more. So, the impact that he was able to create in China was much bigger than even what it was doing at Google. Wow.

58:23I think he really became the international phase of Xiaomi and became really like a celebrity in himself. Like people in China call him Hu Gle, which means Tiger brother, which sounds like his name. Very endearing, and people see him as 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.

58:48young people in their early 30s or late 20s to join the company including Manu who runs Xiaomi India. And so a lot of people he recruited now that managed and have done well within the Xiaomi and on their own have ended up making great, great contributions. So without you joining Xiaomi may not have been able to attract those people to join them. I think they can put all that emphasis on recruiting the right people.

59:13to make things happen, and he's even planning ahead these days, trying to get younger people to do more. He's experienced enough that he always think ahead about what else he needs to continue to scale the business. So on the back of all this, end of 2014, he goes now been in the seat for a year, they get moving into India in particular, but all these other countries, Xiaomi.

59:34raises a billion dollars at a 45 billion dollar valuation becomes the most valuable startup in the entire world. Pretty amazing. After that, there's some hard years. Right? What about a year and a half? Yeah. It was not as easy for Saudi. And we probably don't have time to cover in depth, but I mean, basically, this was, so now we're in 2015, 2016, a couple of things happen. One globally smartphones.

1:00:00become a lot more commoditized. It had been such a huge growth market across the world for so long. But now, Android's very established. It's Android. It's iOS. And all the Android manufacturers are duking it out and Xiaomi gets sucked into that. Also, though, e-commerce growth in particular in China, plateaus itself. And so China growth, which had been incredible for the last few years, slows down a lot even as all these other countries are coming online. That must have been a real test of faith. And as we'll see, the company makes it.

1:00:30through 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? I hope that the company would get through this. I think a couple of things that happened. One, Beijing, you know, just into deciding to do Xiaomi ecosystem, also decided to launch a phone call to read me. That's not as popularized. Read me costs less than $100 to users. It's a different brand than Xiaomi. But it's in a Xiaomi family of products. And it's very effective to beat competitor from who can put into your undercut them from below by going after the market themselves. That was a controversial decision. It wasn't clear that I was the right answer to do, but they didn't eventually took the guts and make that work and that helped them with international expansion as well. The second thing that they did well, and it's not obviously from all sides, the e-commerce penetration rate back in 2014, 2015 is roughly close to 10%.

1:01:26which is the e-commerce penetration rate in the US. So to penetrate even further as a percentage of retail in China, it will need time to prove that it can continue to grow. Which you did later. But for a brief moment in time, people need to see whether this can be more people shop online in China than there are in the US which invented e-commerce in the first place. And that took some effort to show that yes indeed well. And by that time Xiaomi's phones have done so well in the market. They have such a great market share.

1:01:56Anybody who was willing to buy phones online that put in time. Have you heard of Xiaomi or bought Xiaomi phone? So you want to grow and get the not only 90% of people who are used to buy stuff offline to also buy a phone You can't just do it online anymore And that was the lesson that they joined the team eventually figured out and start experimenting an idea of doing offline store to see if it makes sense and they had a lot of Xiaomi stores that were fan stores, people come in and get the product fixed, but can you turn that into a retail store and do a well and I'm thinking I'll wait until it makes that work. So in 2017 though, things really turn around. The company goes from flat revenue growth to 70% revenue growth. It was incredible. Incredible. Much on the back of India really working and having all fun stores in China. And having open stores in China and ecosystem finally coming along. That's now 22% of revenues. That's right. May of 2018.

1:02:51Just recently, they announced they're going to file a go public estimated could raise up to $10 billion in May. They announced that they file with Hong Kong Stock Exchange. Yep. Yep. For originally, the idea was to do a CDR listing even before the stock, Hong Kong Stock Exchange. Oh, simultaneously. It was simultaneously interesting. They ended up pulling CDR and listing just on the Hong Kong Stock Exchange. And David, what's CDR?

1:03:14China depository receipts, so it would have allowed the company to be traded on mainland China stock exchanges, but that was gonna add a lot of complexity. I would assume. Yeah.

1:03:26Ends up pricing July 9th at $17 Hong Kong dollars per share or a $53 billion market cap So up a little bit from the last private round but not too much But then within the first week it gains another 20% closes at 21 45 at the end of the first week in a 61 billion dollar market cap And the net of all that is it's the biggest IPO tech IPO in the world since Alibaba Alibaba, which is kind of amazing. Yeah, the team is as amazing as it has a great board as well. And they collectively have done a good job of rebounding for those tough 18 months. And the off-lands store definitely is working out well. And it's pretty clear that strategy is exportable to other countries are in. Xiaomi announcing 74 countries.

1:04:15And I remember when I first started investing in China, in 2005, the world had about a bit over a billion internet users. And now the world has about 3.5 billion. The additional 2.5 billion ads over one-third came from China.

1:04:31and that power China's migration from a more or less a more industrial country to become something that's more tech country because we have so many people online and the rates are affordable. So much time online is better than the bill of business on top of that. So over the next 15 years, we're gonna see another 1.5 billion people get online and most of them will be doing their smartphone and most will be coming from countries that Xiaomi is in already. A lot of people ask me whether Xiaomi will come to the US or not.

1:04:59They've been talking about it, but I don't think it's a priority for them. They should really go after the markets that they're in already and get the next $1.5 billion internet users. Right, there's so much more greenfield. That's my example. And not only are they doing that well, they also invest in companies who is providing localized services, internet services that could be bundled into the phone.

1:05:20So they curate them and also invest in them. And so the traffic they can bring to these better localized solutions will be quite impressive. And we have seen a lot of Chinese industries got big over the last 10 years on smartphone. You will see something of similar trajectory in these countries with startups, some of which will have their apps bundled into Xiaomi. So I think that's what a lot of people truly appreciate the value of the Xiaomi potential.

1:05:48and all they see is a smartphone, maybe smart TV, and, you know, based on the Android, is a really compatible with the Android. A lot of questions I hear from Eastern investors are still quite at a basic level, which is completely understandable, because not an easy story to understand, but over time people will see that it isn't just a hardware company. It's very different. Whew, a lot. That takes us to today. Yes. You want to go into narratives? Let's do it.

1:06:17So what is Xiaomi today? And what is the company's business model? How is it being valued in the markets? I think one major thing that we have not talked about yet that is definitely the sort of buzz of the company is they have a $54 billion 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 expensive retail stores to sell all those other ones. But the one hardware product they sell is at a very, very thin margin. It's not like Apple in that sense. And in fact, Layjun has recently announced that Xiaomi will never make more than a 5%.

1:07:07profit margin on any hardware that it makes. So they're, they're institutionally committing to that. After analyzing that a little bit and reading some good articles about it, it's a very nice press release that there are no more close to a 5% margin. So it's like, okay, great. Like that sounds really charitable.

1:07:29That would be the way to look at it that I think a lot of the people who are pulling their hair out and saying this is so highly valued that sort of their argument. I think when you look at the Xiaomi business model that what they really are doing is they're selling phones at a relatively thin margin. They are selling all of these other things that they've basically pioneered this ecosystem strategy in order to really get people familiar with the brand, create a ton of brand trust.

1:07:57brand 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 what they're really looking at from there is being able to kind of have a services business model where their high margin revenue is really all from the same thing that Apple's beating the drum on that people are buying iCloud and people are buying apps and I think Xiaomi is really committed to it because they don't have a high margin business model elsewhere. It's really about kind of getting penetration with the hardware to have a very meaningful services revenue stream in people's lives.

1:08:43That's the jammy narrative. As we've talked about throughout the episode, I think it also has referenced here, at least in the Western press and investor base, there's also lots of questions of the opposite side that, hey, this is a smartphone manufacturer. Why is it arguing it should be valued like an ecosystem company or an internet services company? These multiples don't make any sense.

1:09:10the 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 U.S. comp. So, you know, I think that's the exciting thing about Xiaomi right now. Hans was just saying, yep. So, tech themes? Tech themes. Let's do it.

1:09:30We talked a bunch about this Chinese companies having global ambitions. The US has always been a big enough market in itself and the most lucrative market that US companies tend to focus on the US and then start to pay attention to emerging markets or China is too hard to enter so we're not going to actually go there. I think you know what Xiaomi is doing from the start is 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 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 we'll be the future there so I mean I think my big

1:10:16Tech theme and so I'm so glad we have Hans and Zorro with us. You know, I think we've kind of shown through the Xiaomi story so far. Some of the things we talked about in the beginning of the episode about how there's so much innovation coming out of China right now and all the interesting things happening. What I want to know from you guys is like, what does that mean next? Like where are you guys looking? You've invested in a number of companies lime and wish being great examples of companies that are inherently cross-border, trying to take the best of the DNA of China tech and the best of the DNA of Silicon Valley and do something uniquely interesting with that, what is going to happen going forward? Having the benefit of seeing how China in a space guru over the last 10-15 years, again, a lot of that is not.

1:11:01government related. The reason those companies are successful is not because the government support. They just figure out ways to execute better and figure out ways to innovate on top of the idea that's kind of funny, kind of interesting, but improving. In our experiments with Audubub, I made a lot easier for us to want to take a bet on someone I could wish. And our experience with Hollow Bike in China made it easier for us to want to take a bet with line. And our experience with DD made it easier to want to force the bet on grab and solidize that. What we're seeing is that anyone who has should be willing to have a desire to learn from multiple markets. And our desire to learn 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 other countries. And we love engaging founders from other countries who are equally curious about what we're saying.

1:11:54I 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 products. Like how are they engaging their users? How are they being responsive and improving their products and just treating them equally as I'm learning from them? It's very easy to make someone a boogie man. It's very easy to say where we are because someone else did that to us.

1:12:20psychologically and logically very easy to gravitate towards that because that's the easy alternative to answer. But in reality, if anyone who's willing to learn, experiment and execute, there's just so many things tech internet could do and all the efficiencies in the offline world. We have seen what has happened with media, entertainment, transportation, retail, the impact that tech and internet made.

1:12:43more offline economies will be affected by internet tech and you'd rather be on the winning side and be the one that helped to make changes possible and better for from that rather than be left behind and not be able to share the upside. So many of these companies now are cross-border like are taking all these learnings from China and from Silicon Valley.

1:13:05So this is the part where David and I will take grading. And while we're not as sort of harsh as we used to be, it's still definitely a little bit of a sort of paint the bear in bowl 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 it like a C minus, not great. Yeah. Thinking about how something could become an A plus often, you're like, man, what's the like?

1:13:30The analogy we always use of your driving towards a cliff, you pull the e-brake, you spin around. In this case, it's almost like the ambitions are so large of Xiaomi already. They actually come to fruition. That would be the A+. The ecosystem play, the services play, which is, they're still building out the internationalization and dominating all these other countries. I think the A+.

1:13:56They do what they say they're going to do, right? Yeah, I completely agree. I think they continue to be able to spot really great companies that they can bring into their ecosystem. They invest early. They sell a ton of those products and they build out the very material services revenue that I think is the most obvious successful path for the company. You know, and then see minus.

1:14:19There probably is existential risk in that like all these things are capital intensive, right? So like an F is the company doesn't have enough capital to operate. Well, they did just raise 4.7 billion of it. So you know, I think that although as we saw with Tesla, sometimes you can underestimate capital expenditure needs, you know, I think C minus rate is probably like they do okay, but that they become they don't have enough resources to fully execute on these plans and they become a HTC, a Huawei, like, again, super good companies, but phone manufacturers, right? Like late June and Xiaomi's ambitions are to be so much more than a phone manufacturer.

1:15:01Yeah, and they've had to pull back before. I mean, when the supply chain couldn't keep up in 2015, 2016, and they had to retreat from Brazil and Indonesia, I think they're a company that learns fast and adapts, and so I could see a world where, if they're writing on the wall, they react very quickly and are able to pull through it successfully, but not realizing the grand ambitions that they had hoped. That's not my bet, but that's sort of what I think the C-minus would be.

1:15:26Listener, since we're running long, we're gonna skip carveouts this time and let Hansons are run, but we'll be back with carveouts next episode. We'll get to next time.

1:15:35Thank you. You guys want to sign off? Where can our listeners find you guys and interact with you with 996 with GGV? Sure. If you Google the numbers 996 in any podcasting app you will find us. We're on all platforms, including the Chinese ones like Shimala FM. And we also have a listeners community. It's over a thousand people strong. That's both on WeChat groups and Slack channels. So you can join that at 996.GGVC.com.

1:16:05and 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 anybody that's more open-minded and willing to learn and share what they're seeing around the world will eventually become better for it. And this is why we love tech, we love internet, we know other problems that can cause.

1:16:31and we also want to figure out how to learn from that and how to have technology and internet to make positive contribution in society. I think it's very easy to get lost about the cool things that anyone I was working on and lose sight of the impact in society, but we also want to make sure that internet and tech is accessible to a lot of people and people kind of have the desire to want to embrace that. We saw how China changed in our 10-15 years.

1:16:58And a lot of people were lifted out of poverty because of the positive contribution a lot of internet companies made. They're not perfect. They have room for improvement, but the potential for positive change definitely always the risk and the shortcomings. So we want to have a podcast that promotes openness and promotes idea sharing. And we feel that anybody who's willing to do that, what 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 join being here. I have a chance to interact with you too.

1:17:27You guys ask me questions. Thanks. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. 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. Yep.

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1:18:31Awesome. Well, thanks, Hans Zara. Really appreciate you coming on the show. Listeners, if you want to learn more, acquire.fm and go to, I think it's 996.ggvc.com. All right. See you next time. Thanks, gentlemen. Thanks, Dave. Thank you.