Xiaonei deal post-mortem: who is smart here?

As a follow-up to our previous post, and since there are still some ideas and rumors in the air, we thought about trying to understand better who is smart in this deal and, possibly, who got the shorter end of the stick to balance business thermodynamics.

Let’s start with an easy one: Softbank

We met briefly with Masayoshi Son last year during the GSM Asia congress in Macau where his speech was easily in the top 3 for vision and delivery, but more importantly we have been looking at Softbank as a group since the year 2000. If Softbank has hundreds of minority participations in unclear ventures (including a defunct one trying to sell diamonds online, where a friend was working – tough job), our opinion is that a deal of this size is monitored by the man himself and we will unfairly assume that it makes sense.

Son’s long-term vision proved right more than once with their Yahoo JV, the introduction of half-priced broadband, their takeover of Vodafone’s failing mobile biz, and a number of other investments, including Alibaba at a time where there was just a handful of boys running the company. So that’s it, we think Softbank saw in Xiaonei something similar to what Murdoch saw in MySpace.

Now, whether or not Xiaonei will bring interesting revenues remains to be seen. Pacific Epoch digged out some numbers

• 22 million registered users
• 12.7 million daily users by March,
• Xiaonei recorded 280 million page views per month
• Reportedly generating RMB 5-6 million per month in advertising revenue (that’s about 700K USD, or 10 million USD a year – so they’ll need about 40 years to cover the investment amount).

Another one that seems alright: OPI

Despite their lack of creativity, it’s difficult to say that a company receiving half a billion USD investment is not achieving something, so we’ll put them in the winning pack. However, an investment is not a M&A and the money does not go into the founders’ pockets that easily. They will eventually need to reach milestones and deliver something.

Grands winners: Doll Capital Management and the first round boys

We loved the quote from David Chao of DCM reported by VentureBeat, saying that the blue color is en vogue and that it reminded him of IBM. Good on you, Dave! Let’s face it: investors care about exits, generally not about entrepreneurs, clients or building good businesses. More than ever, your perception is your reality. According to a rumor (whatever that means), Softbank bought them out in this round, so they made their money. Save some champagne for us ^_^

Loser: Facebook

Sadly, Facebook has not properly entered the Chinese market yet, and this additional investment in an already solid player will make it all the more difficult for FB. Absentees are always wrong.

Special prize: Wang Xing

As the original founder of Xiaonei in December 2005. He reportedly sold to OPI in October 2006 (11 months later) for 2 million USD (he likely split some with other co-founders, and paid his taxes, so maybe has 1 million USD left?). If you consider the complete story, he probably did not get the best deal he could have. He left OPI in July 2007 to set up a Twitter clone, then went on to create another FB clone in November.

Sadly, it seems the industrious Wang Xing, who definitely puts the hours in building companies, made “only” 2 million USD and probably spent quite a bit of it setting up its two following businesses.

Could that be a lesson for aspiring net entrepreneurs?

If you consider the odds of “making it” among the 200 Chinese YouTubes and numerous FB-like SNS, the rare ones who make it can still pass on the largest share to later investors.

A few words of wisdom from Pony Ma

What does Pony Ma, CEO of Tencent can tell us about this? When he started QQ back in the years, he was far from alone on the market, but one by one its competitors abandoned as they could not find revenue models. As Pony Ma puts it (from memory) “Unlike my friends, I did not have any other idea for services, so I had no other choice but to stick to IM and find a way”. If Wang Xing had eaten fangbianmian a bit longer with Xiaonei, or sticked to a Twitter-like – now raising 60 million USD – he would have made a much better return.

In a way, it’s not that different from the MySpace boys – who each made much much less than the 580 million USD from News Corp could suggest. But they were “frontmen” for an in-house venture. Wang Xing was co-founder.

Our takeway lessons

• Get good people to advise you, or you’ll get a cheap deal
• Sticking longer can pay off (as most competitors abandon early) – though sticking longer does not guarantee anything (we have examples)
• Turning Internet ventures into proper businesses is still not an issue to attract investment in China
• This investment will push even more aspiring entrepreneur to jump onto the C2C bandwagon, building super-harsh competition in China and give more power to investors to abuse them. Fortunately, there are many VCs in China who need to invest (why are they in China if they don’t invest?), rebalancing power a bit as it brings competition among VCs.
• Businesses living as a mathematical “derivative” of venture activity will have great results! Lawyers to monitor deals and for due diligence, consultancies (like yours truly) to separate signal from noise.