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I 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 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. I was like, oh no, Ben's super pissed that we're changing that. No. No. You couldn't take it anymore. Welcome 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. You may already know a few things about Xiaomi that they make smartphones. They're from China and they recently IPO'd. But today, we're here to go deeper, understand what the company really is at their core and talk about the exploding China tech sector. And we have with us today two of the best people in the world to help us dig in on these topics. Hans 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. I've listened to about half their episodes so far and it's a fantastic resource for anyone who wants to understand what's going on with Chinese companies, one of our focuses here on season three of Acquired. Hans was an investor in the very first round of Xiaomi and was involved in the initial ideation of the company, a rare and amazing feat to be with a company from conception all the way to IPO. And at another rare feat, Hans is a top venture capitalist both in the United States and in China. He has been ranked six times on the Forbes Midas list and is a true pioneer in venture as one of the first Silicon Valley VCs to move to China full time from 2005 to 2013. Zara is an investment analyst with Hans at GGV also in their Menlo Park office. She's a former journalist and it really, really shows on the creation of the 996 podcast. So welcome so much Hans and Zara. Thank you for joining us. Thank you for having us. Thank you for having us. We're 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. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. And really, as we use your show for research a lot, I listened to your episode of the story of Akyo Marina before we did our Sony episodes. This incredible primer. You know, he's actually a good example of why people listen to founders and to acquired because all of his great entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes. Who are their heroes? And the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. 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 Zaren Hans with us today, and this is our first China tech episode, we thought we'd spend a couple minutes just kind of setting the stage on what is going on in China tech right now, because most of our listeners we assume are just reading the headlines. So there are a couple points that as we were doing our research, we kind of took away as like not obvious things that most people don't realize right now about China. And would love to just get your take on it too. So the big ones for us are, I mean, a sort of obviously huge companies are being built there. It's not just BAT, you know, Baidu Alibaba Tencent. It's Xiaomi which we're covering on this episode. It's DD, which we've also covered in the past. It's May 20, I'm ping. It's TOTIO. It's Pin Duodudo, which is going public today for TOTUS. All these companies are valued over $10 billion. And they're not just US copycats. Like these are all super innovative companies that are innovating on their own business models, doing things that nobody's seen anywhere. And that's a big change from a couple of years ago. And you guys take like, when did this real shift start happening? Right. I first moved to China to do VC full-time back in 2005. I think in 2004, Silicon Valley Bank, you know, Edition being a sponsor for your show, also organized a fantastic tour for a lot of US MVCs on Send Hill Road and other places to 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 hire people in-house to send them to China or start to explore having a few leaf ones. This is on the VC side. VC off from the US side. That's right. And in China for five years prior since 1999, 2000, there were a lot of VCs that were looking to do investments in China. Some even tried in the 90s and there were a few IPOs of Internet space in 1999, 2000, those two years. And the most famous were the portals, the Sina, so who were nettings. 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 take off, both on the PC side via ADSL and then five, ten years later via a smartphone, the landscape will China change dramatically. That's when a lot of these companies, of course, were getting started in, you know, Xiaomi in 2010 as we'll see. The first wave were the portals and then the Baidu, Adibaba, Tencent were all started in the mid to late 1990s. The next wave, when you talk about a DD or a Baid dance and a Twine, a Xiaomi, they all happen mostly around 2010 and later. So during that 10 year gap was the first five years, 2000, 2005 were the tough years, the Lingniers. And from 2005 to 2010, you see the desktop, PC, the ADSL wave type of companies emerging, start doing well. And then people who gain experience from that wave, ends up going after the next trend, the next wave, that was the smartphone wave. It's fascinating. You say mid to late 90s. So it really is for a lot of these companies, the initial Baidu, Adibaba, 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 sort of the US news cycles is that these are 20 plus year old companies. Yes. And I thought people were saying that they just came out of nowhere, but they've been around for a while. The more recent ones that make Twine total slash Baidu dance, DD, Pinggledoa and JD, they came later. That bunch, JD is public about 55 to 60 billion dollar evaluation and they started in 2003, 2004 timeframe. Everyone else, including Xiaomi, started in 2010 and later. Yeah. I think one other point to really hit on before we get into Xiaomi is just the pace of execution and company building and growth is like otherworldly compared to Silicon Valley. I mean, Pinggledoa is 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 Lazara had her points as well. The price range for IPO was $16 to $19. And then open at $25.26. And it's still trading at that range between $25.27 right now. So we speak on the market and close in a set of hours. 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. So if you talk about a bubble in the US, this is probably 20 companies doing the same thing, but a bubble in China is literally hundreds if not thousands. So how do you stand out in that environment? It takes very, very fast execution and strong team and just a lot of determination and hard work. This is probably a good time for a quick aside. Zara, why is your show called the 996 podcast? 996 is the term that refers to 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. There's definitely a bias here in a valley, in US in general. If someone works too hard, something's wrong because I mean, that person is inefficient. There's not a work like balance. But in China, the level of intensity in dry is quite impressive. Some people compare this to the Japanese or the Koreans in the 80s and 90s. We disagree because in other places, we have seen this kind of work ethic. The tend to be in companies that are more conglomerates, bigger than employees who are getting paid on salary and there's less of entrepreneurial thing involved. Whereas this time in China, these are all startups. Zara will start up. So even some argue only the top 20% people get a lot of options. But what we're seeing is that once we didn't get as much options in the company that they work at, they will need to go out and catch the next wave that being found in the companies. That's right. So these people starting to do come sooner, faster, quicker. And it's definitely not what happened in Korea and Japan. Correct. Interesting. Well, that's probably the perfect segue into Xiaomi and where everybody there came from. So I'm going to kick off and I'm going to lead the history in fact. But Hansen Zara, jump in because you guys lived this. Tell us where we're going wrong. So Xiaomi history starts as we've talked about April 2010, the beginning of 2010. And there's really a superstar team that comes together led by a guy named Leijun and folks from Google China, the former head of engineering for Google China, Microsoft, Motorola, academia, and Kingsoft. And Kingsoft, right. And there's a lot of people around here where we'll get into Leijun was the CEO of Kingsoft. But he's the leader. He's the CEO of Xiaomi and he's a pretty interesting dude. Right. So he started as an engineer. He was born in, I think, 1969. Went to school, did a CS degree in engineering, graduated in two years from Wuhan University, which is a very prestigious engineering program. He starts work as a software engineer. He eventually, after a couple years, joins Kingsoft and Kingsoft was like a early software conglomerate, right? A 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. I mean, is that common? I would imagine that's pretty special. It definitely is not common. But also thinking that time, he's starting working 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. That's how Kingsoft got started. And they joined quite early as one of the first 10 employees in the industry. It 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 end job investor had most of the shares. The CEO had a lot less than people like they can join him didn't get much at all. But he persevered. He ends up becoming the CEO of the company. And in that process, the first 17 years, I was there before he took the company public, the company evolved from a software company to a security company to a gaming company. And throughout the whole cycle, he learned hard to us not to have option as a tool to get people to change and evolve a few times to find a better way to grow. During that time, he also came up with the idea to do e-commerce and spent off a team to do what it's called Joyo. And they just sold to Amazon and become Amazon China. Wow. That's pretty awesome. So he was a clear inspired by Silicon Valley early on. And one of the pioneers in China, internet space, to sort of evolve from software into internet, go from Microsoft to Google to Amazon to now. Show me. Yeah, it's like the pace of these waves. It's extremely quickly. It's like extremely quickly. Yeah, extremely quickly. That's right. We actually did analysis. We look at the top 10 highest market cap companies in the world that's probably traded. And 10 years ago in 2008, most of them were not tech. The most were oil and gas companies, wireless carriers, or financial institutions. Microsoft was only two tech companies amongst top 10 in the world back then. These days, it's the thanks plus out of all that are in China. So you see several of the top 10 are tech companies. Many of them are internet focused companies. And then the market cap changed dramatically for them. And Hans, to pile onto that, so not only are the most valuable companies, tech companies. Now, the ones that have performed the best in recent years are also tech companies. And I saw this incredible stat this morning that is the Fang stocks, Facebook, Amazon, Apple, Netflix, and Google were single-handedly responsible for the S&P 500 being positive for the first half of 2018. If you take those stocks out of the S&P 500, it was actually down 7th, 10th of a percent, which is insane to think about. This is what we see 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 Audi Baba, GGB is the Odinvesting Audi Baba. We invested in Audi Baba in 2003. Valetian was a quote unquote very expensive, $180 million. That's 2003. 15 years later. That's million within M. That's damn. Not, not, not right. And 15 years later is a habit trillion, $500 billion in doing that same span. Google actually grew by less than 10x, on Baba's 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, 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 5-10 years ago, we see a lot of people come out and want to have a good job that's safe, often with government institutions or state owned enterprises. These days you see a lot more people willing to work in internet companies, tech companies, because they know the growth is a lot faster. And the chance 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-2000s. And he makes kind of a surprise decision, or at least it seems in the research, 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 as CEO, takes a step back, but he doesn't really stop. He starts becoming a very prolific angel investor. And you were working with him a bunch during this time, right? Yes. And he's talked about, too, that there were kind of three main trends that he saw at this moment in time that he thought we're going to create a lot of new companies in the future. And that was the rise of social, the rise of e-commerce particularly, and in particular 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 in the online gaming space because you can see gaming take off. 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 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 came across this and met a CEO, got to know David quite well and David introduced me to his angel investor and that was Lajring. So that's how I got in trouble, two Lajring. The first thing he said to me was that he thought a lot about what he did for the 17 years at King's Office and realized that in order to do well, when he's to capture the right trend that has a chance to take off. And 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 a far longer than I had. So it's great to meet someone who feel the same way, but also has the opportunity to be helpful to the funders like you back. This whole concept of trends is super important in China tech in a way that it's different from the US. Yes. In the US, what's prized in Silicon Valley is these disruptive innovations that no one sees coming like everybody thinks that Facebook is a toy or you know, Instagram is a toy. Nobody takes it seriously and then it disrupts everything. In China, it seems like it's much more about like, there are these big trends, let's capitalize on the trends. 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. What rule can we break this time? Do something that's shocking and something that's fun and kind of rebellious. In China, it's such a, it's so much about nation building so that in order to catch up and do well, the country needs to push a certain agenda or promote certain, certain sectors to do better in order to build a more prosperous nation. So there are trends that you can capture. So people look at in order for the country to be more efficient, internet will need to play a role because it's a great way for someone in Beijing to know what's going on in other parts of the country and have people tell you what's happening. So 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 goes, hmm, I can see how it fits to what's going from a country development standpoint. So this trend has better tense of taking up and will not be as regulated about a 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 group of people in the US, everyone's running around sort of doing their own thing, trying to create, trying to disrupt, trying to find a little edge wherever they can. And in China, where there's a more unified sense of, we all need to do this to be strong together, you have sort of more adherence to trends. Right. But if you go even deeper, the stuff that's happening in the US is also trend dependent. Yeah. Yeah. We just don't think of that way in the US. Like why should PC take off? Why 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 as well of freedom is giving you power everyone. So what are you going to think from an empowers standpoint of the individual, which is the western way of thinking or the eastern way of thinking you made the country more efficient? The result is exactly the same. Do some of these trends that are sort of being identified as we must be strong in this area, such as mobile or such as social, have they already been sort of solidified two to three years more in western markets as like it was the toy. It was maybe disruptive, but not a real market yet. Now we can see it's a market and we know we have to win there. It's not fast following because the business models are tremendously different in the way that it interplays and the culture is different. But there's sort of demonstrated sort of the technology can work at scale on notion. 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 will Calcana advert has to treat this seriously? It doesn't seem like it's something that can be back on last. But someone in the Asian Sea, the China or a one-sheeng with a founder of a plant sea, the China says, that is interesting. I think that's going to be a big trend because in the Chinese context, you can see that is a way for people to do it 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 you have to be modified, you have 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. The same stuff that has to see may not even be the sea yourself, but you see that this could be something quite different than originally. So I think starting the US is an amazing place. The both things are about in New York where you see a lot of new things happening that most people treat as toy. Yeah, yeah. I think it's not so much about who's copying who, but more taking the world as your classroom and learning from everyone. I think Chinese entrepreneurs are especially eager to learn from Western entrepreneurs. And maybe not the same can be said the other way around. So if you read, although it's changing, it's changing. Yeah, it's changing. If I read tech news in Chinese, like the major, like the tech crunchy 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 the news is about Chinese companies. It's a lot of asymmetry in terms of interest. And Chinese entrepreneurs are very eager to come to Silicon Valley, meet everyone, learn what's working and take it home, not copycat. But adapted to the local market because it takes a deep knowledge of what's going on in China to make a product work. You look at C jobs, you didn't have graphic user interface. Right? Right to the end. Right. You didn't have object or in the programming. But when you see that, you said, oh, that is going to be huge. And here's the reason how. Right? Let's not over credit the amazing historical American innovators with true origin of cultures of things either. All right. So back to the Xiaomi story. Leijun, it's 2009. He's left Kingsoft over a year ago at this point. And he starts jamming with one of the people who would become one of his co-founders at Xiaomi, Lin Bin, who's the head of Google's China engineering division. Now, remember, this is going to become really important in a minute. Google does not operate in China. You cannot access Google services, search, maps, YouTube, whatever in China. However, the mobile and smartphone market is starting to rise. And it's pretty clear at this point that Android is going to be likely the dominant operating system in the whole world, including China. But there's this gap where there is no Google, yet there is Android in China. So they start jamming on this. They realize this opportunity. And even that was, it was still a little bit of a leap at the time. Nokia was. It's slightly slightly different. I think Google was operating in China, and well, it's close to 20% of the market with 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, iniquitous experience. So the discussion that Leijun and Lin Bin had was that it's possible to build a phone using Android kernel that can offer a better, iniquitous experience by owning both a hardware and a software piece. So that wasn't obvious, but I'm glad you picked that out. It wasn't obvious to many, many other people that it wasn't a predetermined thing that someone should do hardware, and then someone else would 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. And 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 to 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. And a lot of people back in China even then didn't think it was possible because no hardware company in a phone related space has ever become successful starting from scratch. Every player we can think of kind of 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. So they immediately raised $41 million at a $250 million valuation. Kevin, two tranches. The first time it was roughly around 20 million pre. And the lead investor was Richard Lu and Morningside. 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 or four people in an crazy idea, 20 million of evaluation. And I remember someone told me back then who was very smart and very experienced. Google's first round after having a product that was out there, people were using it. It was 70 million pre. So having no product, nothing, and I'm not even business-wise, 20 million pre is the evaluation that is not cheap. But if you're believing him and the team and what he's trying to do, you were bet. The challenge came when run later. There was only months after the first round was done. That was at 100. It's years in China time. It's not very, that's right. And then evaluation became 150 million pre. And they were maybe 50,000 users of MIUI, the operating system, based on the Android kernel that Xiaomi had. And then both Richard and I decided to coldly that round together to do this. Only a month later, before they actually had a first party to launch a phone, the evaluation jumped up to a billion post. So remember, this is 2010 in China. This is not 2018 until the Silicon Valley. That's right. But the time it hits, I've been down to the valuation was only 2011. And I give Lei Jun and then Takah Shunwei also Richard and Morningside, a lot of credit for co-leading that round between Shunwei and Morningside. So there were a number of people that had the guts, not many, but a number of other guts to lead each round and step up with meaningful money at stake at that time. And so if you didn't think that the team can pull off that vision, everyone who passed on it, I think, is extremely logical and reasonable. And I know we'll never fault them for it for doing that because it's crazy. It's always that way, Hans, but that's not how you drive returns. Correct. I'm sure you have to somehow figure out how to bet systematically and take enough risk to finance outliers. So 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 in a company here in the US called Sayanogen. Sayanogen mod, there was great engineer up in Seattle actually, who had hacked Android. And basically this is a 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 now a Sayanogen ends up, they started company around that, ends up getting backed by Android, send it benchmark, doesn't work out. But so that's going on. And that essentially is the same thing that Xiaomi does for MIUI. And that's what MIUI is. How did that all come together? Did they see Sayanogen and see that this is possible? Was it developed independently? Because it happened pretty fast. Right. 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 room source. So once you know what is potentially possible, even though it's not proven yet, do you think you can execute it better and figure out where to make a warrant in the way other kept? Well, also just that you know in China yet with this opportunity, I mean, it's pretty amazing what Legion and the Xiaomi team does. They create MIUI. Right. There's no phone yet. It's it so that anybody with an Android phone can install on their phone. Open source. And it really takes off and it gets these super hyper engaged users on product forums. And that's kind of the root of the MIFans that start which we'll get into in a minute. Like Zara mentioned that in Essex, I remember going to visit Legion and Linbin in the rest of the team in 2010. I should have been in Zara 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 Legion. We realized that they figure a way to combine the best of the knowledge that they picked up while they work in the bigger companies yet to retain the nimbleness and the drive of a startup and having the two culture be able to mess together. It wasn't easy but it made that work. The update MIUI every single week. No one has ever done that anywhere else in the world. They update that every single week. So if you are a fan of Open Source software and you like Android, you can help. We always had this team on a middle know where in Beijing was doing something revolutionary. Yeah, yeah. I wrote in my notes. It's almost a joke. We talked about in the Tesla episode on our last episode about the Tesla being the iPhone of cars because it's a computer. You can track it. They ship over the air updates. It's almost like MIUI is the iPhone of iPhones. If you have Android or you have stock Android or you have iOS, you're getting yearly updates. But the Xiaomi team, like you said, is shipping major updates every single week to this new skin that they've developed. And people respond to it. Like people say, this is what Android should be doing, but not doing, you're doing it. So I know in the US, we value a lot on ideal origination. We place a premium on that. And there's nothing wrong with doing that. But I think we also give people enough credit to take an idea and you make do whatever it takes to make that work. That's much harder and takes a lot more discipline and a grind for longer period of time. So both have value. Yeah. What I think it's just super well illustrated here between Android, which is still on, core Android, still on an annual release cycle. Maybe a little faster now, but not much. You know, in Sayagin, of course, it's great and they're like working on stuff too, but not moving it anywhere near the same pace that Xiaomi is. No. So this is, I want to look at this. This is not government influence. It's not like somebody give Xiaomi X-RUS salary or subsidy or grant to ask them to move faster is completely from within. This is why I love tech is it's true meritocracy. So Hans, the original business plan was to build amazing phones at reasonable prices and sell them over e-commerce. What was the decision like when deciding how to enter the market around? Should we build a phone first or should we make a skin of Android first? Early on, they doing had to incline that to make it work, what it's now called the triantial model that 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 wanted more so than the Android software originally. So that's number one. Number two, you got to be able to have a hardware that when it's integrated with a software it can offer superior experience and a decoupled solution that was out there and that was more a dominant form of alternatives. And then number three, you 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 Google search or Google maps. I mean, there's not much of a fact that. That's right. So figure out how to do all three things well is not easy. But they doing a dinner fight early on. That was a way to compete. But and potentially went in for him. He also realized that none of the original team members had hardware, true hardware experience, haven't shipped a lot of phones. So to focus on getting stuff right and getting user feedback and get validation on this trial and phone model co-work, they have to start with a skin with MIUI first to make that work. Because that's what I had on the team before they can try. And also it's less common principle. To build a phone, you got to pay for all IP and which they did. You got to pay Qualcomm which is expensive. You got to pay a content manufacturer three months in advance if not longer. It's nine installments. You have to pay all the upfront because they 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 got to make sure they can do a mirror. 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 capitalizes they were to place orders for parts and get phones assembled at the scale that a Samsung is. They 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 and you have to log on and buy it right at noon. All of the people criticized them for the hunger marketing strategy but it was born on necessity. They gene told Li Wencheng head of marketing sales back then that you have to figure away to make a work. And finally you have nothing, no money, no budget to work with. 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 their 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 there were about 560,000 people on their own because they had to participate and share what the phones that have used in their life. Half a million people. So not spending any money at all, half a million people within a few weeks timeframe participating in a campaign. And that's when I know even before they launched the phone that there's a market there. Beijing was right that people feel that their voices are being heard. They want to platform a brand that listened to them and be willing to make changes quickly based on their input. So that's a winning strategy that the hardware guys don't know and the internet guys are not going to touch hardware. So if you can figure out these gaps of capability, understanding amongst different disciplines, you can build something that's the best of everything. Yeah. And to put a pretty extreme point on that, the point that Hans is making about taking community feedback, lots of companies talk about, oh, we listen to our users and like, oh, we go and interview them and we have empathy for them. Xiaomi literally has a forum that is a thing that they built in house where anybody who uses a Xiaomi phone can request a feature and it works like Reddit. And there's 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. And Xiaomi 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. Can 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 is purely based on execution. You care. They just says, you know, treat your customers as if you're treating fixing phones for your friends. Your friends come to you and say, hey, your phone's not working. You're going to bust your ass to make sure that their needs are taken care of. So that's what he tried to do to get his colleagues to react and serve the customers better. So one other point I want to make for listeners, taking a step back, if you look at the founding team and you look at some of the original investment thesis, Hans that you've talked about and that Lijun 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. So we need people that are amazing at e-commerce because that's blowing up in China and that's the strategy for selling these things. They had that on the team. They had people who 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 like we could sell some things on the internet. But thinking like, I'm going to start a hardware company and learn how to manufacture that at scale. To me, one of the most impressive things about Xiaomi's evolution over time is that they actually did figure out that competency. For Hans, I have a question for you. Is that unique to China that they could do that because they're actually manufactured there and because there's so much competency around actual building of physical things? So when they're being joined full-time, both here and leaching together, they spend a lot of time and effort to interview everybody they know, whoever makes phones for Motorola Nokia and other major brands in China. Which were companies that were dying at this point in time? No, no, no, that's a big fair. Not quite yet. Motorola Nokia were doing well in China. But not in the beginning. That's right. But some of them were frustrated for the fact that these companies are moving much slower on smartphones. They want to adopt smartphones quickly. They want to use Android as their operating system. They're pushing their own as you recall. So these are. That's right. That's exactly right. The burning platform. Yes. And so there were people who were frustrating to say these big firms that are sort of want to come out and put their vision to the test. And leaching was originally being with the first to talk to them and be able to get one of them to join them and do this. It's not easy because again, no people in these big companies haven't tasted value of options. They haven't gone through and I peeled 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. Well, 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. A6-10 2011. I'll never forget that. I think. Yeah. And I know Hansi talked about this. I know you'll never forget it. More than 300,000 pre-orders in the first two days, right? For this phone from this company that nobody's ever heard of before. I almost think it was a skin. Within the first day, 340,000 within the first couple days, 460,000. Wow. It was mind-boggling. And at the party, lunch party, 2,000 people showed up. And when they just said the phone at the end of his impressive presentation, he said the phone cost, you know, 1999 RMB, which is roughly the trans days, $310 US, everybody audience still don't have them plotted. 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 Leijane and Tak and Richard for all having the guts to put money where I'm out of this. And the Xiaomi theme is amazing. A lot of people don't know this. But in a serious bid that one I led, a lot of employees of Xiaomi put their personal money into the company. So Leijane 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, but 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 get all the extra money into a SPV, a SPV show up on the cap table. That's an investment. And they get preferred shares. They get a preferred shares. Wow. They all got preferred shares. Wow. That's right. The more companies broadly should do that, that's awesome. Yeah. Well, okay. So this year, the Mi 2 comes out. They sell just under 20 million of those phones. But again, this is now a three year old startup. Yeah. Amazing. It's made, you know, not the Linux kernel, the Android kernel, but like a full operating system on top of it. Two phones. Bunch of services plugged into those phones. And sold 20 million of them. Pretty impressive. Then also in 2013, they come out with their first non-phone product that Xiaomi made and still makes a TV. That's right. And how did the strategy develop to go from that, you know, like Apple, like makes a few products, they make great hardware. But Xiaomi has taken this other approach, this ecosystem approach where, well, let Hans describe it. But, you know, long story short, all these scooters that you're writing, there's one in their office right now, are Xiaomi branded scooters made by ecosystem companies. So how did that strategy get developed? Again, they, they just thought ahead. And I think his experience as an operator, entrepreneur, as well as a angel investor was super helpful. He understood that for Xiaomi to be great, he can just be on the phone company. He has the one 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 the phone and maybe a TV. So he knew that he needed to figure out if incentivize people outside of Xiaomi to do this. And so he's willing to become an investor in their companies. Minority, never control, minority for the most part. And then be able to lend the Xiaomi brand to them and share gross profit on top of that. And then open up the Xiaomi e-commerce platform to allow these devices to be as sold on Xiaomi and then eventually store it down the road. And then having the supply chain to be willing, you know how hard it was for a hamburger in the business of 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 probably aren't familiar with this, the first big ecosystem product that's a hit is the air purifier, right? Made by a separate company that Xiaomi has invested in, branded Xiaomi sold through all of Xiaomi's distribution channels. But a completely separate company that makes it and it becomes a massive hit. Now there's been so many other products, everything from all the scooters. And again, branded Xiaomi scooters made by a company called Ninebot, which is a separate company. Anything you can imagine, it's pretty incredible. They have over 80 products now designed and then manufactured for supply chain from over 100 companies. Only three of them, I think, are full stack Xiaomi. That's the phone, the TV and the laptop. That's right. Only three are. And the smart TV one is also interesting. The founder or the head of the business right now is Wang Tuan, Richard Wang and someone that they've known for a long time, he started off wanting to do something that's more the kindle of China, a lack of a better term and more reading device that has integrated hardware software experience. And I was actually a small personal investor in that company. But it was harder to make that work in China, just a different market. And he actually invested in Xiaomi early on as a personal investor himself. So he and they even stay close and then eventually decide that if he joined Xiaomi full time, then the team he built at Kindle can come in and build smart TV. And so without him joining, he may have taken a while for Xiaomi to figure out who's going to drive the next product. And the Xiaomi who doesn't only happen after smart TV becomes something that can be a successful example. His study for others. All right. So this is a great part of the show because this is where we're really starting to tease out what is Xiaomi as a business and how is it different because I think that a lot of people at first blush say, oh, maybe it's like the next Apple. They're making smartphones. Everybody's using them. They're doing a lot of the software themselves. The question about Apple is always can they have another iPhone? And most people think no, that they'll never have a product at that scale that's that profitable again. And what have they done about it? They've come out with the watch that's doing well. They have some of these other products that will never be as big as the iPhone. And the approach that Xiaomi took to that is well, we have all these competencies and we could sort of platformize those competencies in a very Amazon-like way. So the way that Amazon opened up AWS to other people to sort of start a new business line, Xiaomi is sort of doing that same thing with their manufacturing, with their supply chain, with their branding, with their e-commerce. But rather than silently running on AWS in the background, a lot of these products are actually now 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 as well, since he sold his second startup, Joyo, to Amazon. So he knew that there's more things that are rising middle class in developing a country like China will want to buy, 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, but 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, he figured out the ecosystem approach, making the product leader for each product a true founder and entrepreneur was the best solution. The everything store. That's right. I think he's mentioned before that his goal for Xiaomi is really to allow customers to be able to shop in their store with their eyes closed. 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 phone is much higher. Much 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. You don't need to go there that often. But the Xiaomi store becomes a place that people just go to go check out every couple weeks. Because there was always something new from one of the ecosystem companies. It's like Brooks Don, but all the things are super useful. I was going to talk about Hugo Barra here. I'll just mention him. Hugo Barra. In 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 online. The next one. Yeah, the next one. Very phone, but it was just hard to sell the internet. People just like, you know, why? I'm used to buying offline. So it was not obvious that that can work. If they joined 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. 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 about the me, I'm phone using it. And my barber was asking me what I was because she hasn't never seen them before. And 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. Oh, the chip is the best Qualcomm TIP you can find right now, SnapDragon. And it is amazing. When Sue said that, the other six people all turn their heads. They all come to their next to me. And they're like, oh, my God, it's only 1999. I mean, so cheap. It looks so good. Immediately, the fan, me fan, turned the other six folks in the barbershop, even because someone wants to buy Xiaomi phone. And then you cosplay too. And you're like, can I give you more money? Please. The cost of that promotion is zero. No government stuff is needed. No government grants needed. But just by outthinking, outexecuting, you become a phenomenon. Why not sell through channel? So in the US until 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. Apple is in a different position. Apple can't, 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 cost, even for Apple, for most phone companies, ends up being somewhere between 30 to 40% of sales. So you look Apple is a gross margin on iPhones. It's roughly a bit over 50. Two thirds, if not three quarters of that are sales marketing. And what's left is operating overhead. So those are the three biggest cost drivers. Obviously you have components out of that stuff in there too. But beyond that, it's an expensive item. And for phone companies, that's not an iPhone. Then you have to give away more to the channel as well. And it's just not as... And you don't get feedback as quickly, because people cannot tell you the problems themselves. So doing over the internet makes a lot more efficient. If you can make it work, there's the feedbacks immediate as you know. I mentioned Hikobera. Hikobera 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. Hikobera is basically running Android within Google. He's head of product for Android. Huge announcement. Xiaomi recruits Hikobera to move for Mountain View, to Beijing, and join Xiaomi. And even more curious, he's not going to head product or software. He's going to head international. And this becomes a huge, huge move for Xiaomi. And really under Hugo's leadership, Xiaomi goes into India, into Malaysia, into many other countries, particularly in Southeast Asia, to preview the end here. Xiaomi is now by far the number one smartphone brand in India, which is incredible. So maybe I don't think this was normal at the time that... I'm proud that Chinese tech startup would be thinking, you know, because everybody's thinking that China market is so big, there's 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 of whom ever. How did that all come together? Well, I think, you know, Nibbidna is from Google, so he knows who Avera from 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 Hugo over the years. I first hosted Hugo and Robin and JP three folks to visit China in 2006. So we were going to be performing Hugo joined Google at that time. And then by the time that Xiaomi tried to recruit Hugo, they already have a lot of investors in the company, including a UST, a Uriah DST, whom Hugo knows quite well as well. So there's not enough people around the table that Hugo, you know, feel if he ever tried to do something that's different, Xiaomi probably is the one. And he also seen a number of us. Xiaomi has gone up. So it is a combination of a lot of factors that made it possible for something like this to happen. It was unprecedented. And it's not easy for someone who had never lived in China to leave a current, a great current job to do this. And as soon as he joined, I remember his scene on Weibo fans shot up. So scene on Weibo, you can think of it as a Twitter of China by much bigger. On Twitter, he had tens of thousand fans on scene on Weibo within the first month of joining Xiaomi, he shot up to a million and more. So the impact that he was able to create in China was much bigger than even what it was doing at Google. Wow. I think he really became the international phase of Xiaomi and it became really like a celebrity in himself. Like people in China call him Hu Gle, which means Tiger brother. It sounds like his name. Very endearing. 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, young people in their early 30s or late 20s to join the company, including Manu who runs Xiaomi India. And so a lot of people he recruited now that managed and have done well within the Xiaomi and on their own have ended up making great, great contributions. So without 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 to 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 raises 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 Xiaomi. 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 become a lot more commoditized. It had been such a huge growth market across the world for so long, but now Android's very established. It's Android. It's iOS. And all the Android manufacturers are duking it out and Xiaomi gets sucked into that. Also though, e-commerce growth in particular in China, plateaus itself, and so China growth, which had been incredible for the last few years, slows down a lot, even as all these other countries are coming online, that must have been a real test of faith. And as we'll see, the company makes it through this period. But on the inside, 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, they did, you know, just in two, deciding to do Xiaomi ecosystem. Also, decided to launch a phone call to red me. That's not as popularized. Red 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 as obvious from the Aussie, the Chinese e-commerce penetration rate back in 2014-2015, is roughly close to 10%, which is the e-commerce penetration rate in the US. So to penetrate even further as 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. They were willing to buy phones online at put in time. Have you heard of Xiaomi or Ba Xiaomi phone? So you want to grow and get the 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 it 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. And you turn that into a retail store and do a well and I'm thinking of waiting to make 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 an offline store 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, just recently, they announced they're going to file a go public. We could raise up to $10 billion in May. They announced that they file with Hong Kong Stock Exchange. Yep. That's right. For originally, the idea was to do a CDR listing. But before the stock, Hong Kong Stock Exchange. Oh, simultaneously. Oh, simultaneously. Interesting. They ended up pulling CDR and listing just on the Hong Kong Stock Exchange. And David, what's CDR? China depository receipts. So it would have allowed the company to be traded on mainland China Stock Exchange. But that was going to add a lot of complexity, I would assume. Yeah. Ends up pricing July 9th at $17 Hong Kong dollars per share. Or a $53 billion market cap. So up a little bit from the last private round. But not too much. But then within the first week, it gains another 20%. Clothes is 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. It's Alibaba. Alibaba. Which is kind of amazing. Yeah. The team is as amazing. It has a great board as well. And they collectively have done a good job of rebounding for those tough 18 months. And the Alphanage Store definitely is working out well. And it's pretty clear that strategy is exportable to other countries they're in. Xiaomi announcing 74 countries. And I remember when I first started investing in China in 2005, the world had about a bit over a billion in a night users. And now the world has about 3.5 billion. The additional 2.5 billion ads over one third came from China. And 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. This so much time online is better than the bill of business on top of that. So over the next 15 years, we want to 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. They've been talking about it, but I don't think it's a priority for them. They should really go after the markets that they're in already and get the next 1.5 billion internet users. Right. There's so much more greenfield. Exactly. And now only are they doing that well. They also invest in companies who is providing localized services, internet services that could be bundled into the phone. So they curate them and also invest in them. And so the traffic they can bring to these better localized solutions will be quite impressive. And we have seen a lot of Chinese internet companies got big over the last 10 years on smartphone. You will see something of similar trajectory in these countries with startups, some of which will have their apps bundled into Xiaomi. So I think that's what a lot of people truly appreciate the value of the Xiaomi potential. And all they see is a smartphone, maybe smart TV. And based on the Android is a really compatible with the Android. A lot of questions I hear from the student 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. So what is Xiaomi today? And what is the company's business model? How is it being valued in the markets? I think one major thing that we have not talked about yet that is definitely the 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 apples that's primarily around selling hardware. They 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, Lei Jun has recently announced that Xiaomi will never make more than a 5% profit margin on any hardware that it makes. So they're institutionally committing to that. They're analyzing that a little bit and reading some good articles about it. It's a very nice press release that they're no or close to a 5% margin. So it's like, okay, great. Like that sounds really charitable. That would be the way to look at it that I think a lot of the people who are pulling their hair out and saying, this is so highly valued that sort of their argument. I think when you look at the Xiaomi business model that what they really are doing is they're selling phones at a relatively thin margin. They are selling all of these other things that they've basically pioneered this ecosystem strategy in order to really get people familiar with the brand, create a ton of brand trust, brand loyalty, make their stores a fun place to shop, build habit around, I go to Xiaomi and I buy things there and I buy nice things there and I buy expensive things that are important in my life. They're not high dollar expensive, they're nice things at an appropriate price. 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 eye cloud and people are buying apps and I think Xiaomi is really committed to it because they don't have a high margin business model elsewhere. It's really about kind of getting penetration with the hardware to have a very meaningful services revenue stream in people's lives. That's the Xiaomi narrative. 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 like, you know, on 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. The jury is still out and we'll talk about it in grading but there could be a fundamental misunderstanding of what this sort of newer business model is and how it should be valued and there isn't necessarily a great US comp. So, you know, I think that's the exciting thing about Xiaomi right now. Hans was just saying, yep. So tech themes. Tech themes. Let's do it. We talked a bunch about this. Chinese companies having global ambitions. The US has always been a big enough market in itself and the most lucrative market that US companies tend to focus on the US and then start to pay attention to emerging markets or China is too hard to enter so we're not going to actually go there. I think, 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 unique bet. So, Hans was alluding to also that, you know, Xiaomi is people ask them like, when are you going to 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 tech theme and so I'm so glad we have Hans and Zara with us. You know, I think we've kind of shown through the Xiaomi story so far. One 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, Lyme 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 that space grew over the last 10, 15 years, again, a lot of that is not government related. The reason those companies are successful is not because 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 a funny kind of interesting but improving. In our experiment with Autobahn, it made a lot easier for us to want to take a bet on someone like Wish and our experience with Hello Bike in China made it easier for us to want to take a bet with Lyme. Our experience with DD made it easier for us to 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. Our desire to 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. We love engaging founders from other countries who are equally curious about what we're seeing. I think it's really important to have an open mind, not to associate Chinese companies or products with particular preconceived notions, but really see them as products. Like how are they engaging their users? How are they being responsive and improving their products and just treating them equally as learning from them? It's very easy to make someone a boogie man. It's very easy to say where we are, where we are, if someone else did that to us. It is psychologically and logically very easy to gravitate towards that because that's the easy alternative to answer. But in reality, if anyone who's willing to learn, experiment and execute, there's just so many things tech internet could do. All the efficiencies in the offline world, we have seen what has happened with media, entertainment, transportation, retail, the impact that tech in the internet made. Our 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 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 and bringing them together. So this is the part where David and I will take grading. And while we're not as 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 what will make it, let's just call it like a C-minus, not great. Yeah. Thinking about how something could become an A-plus often, you're like, man, what's the analogy we always use of? You're driving towards a cliff, you pull the e-break, you spin around. In this case, it's almost like the ambitions are so large of Xiaomi already. Like, they actually come to fruition. That would be the A-plus. The ecosystem play, the services play, which is, you know, they're still building out the internationalization and dominating all these other countries. You know, I think the A-plus is, they do what they say they're going to do, right? Yeah, I completely agree. I think 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 C-minus, there probably is existential risk in that like all of these things are capital intensive, right? So like an F is, the company doesn't have enough capital to operate. Well, they did just raise 4.7 billion of it. So, you know, I think that although as we saw with Tesla, sometimes you can underestimate the 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, Lee Jun and Xiaomi's ambitions are to be so much more than a phone manufacturer. Yeah, and they've had to pull back before. I mean, when the supply chain couldn't keep up in 2015, 2016 and they had to retreat from Brazil and Indonesia, I think, you know, there are a company that learns fast and adapts and so I could see a world where if they're sort of writing on the wall, they react very quickly and are able to pull through it successfully, but not, you know, realizing the grand ambitions that they had hoped. It's not my bet, but that's sort of what I think the C-minus would be. Listener, since we're running long, we're going to skip carve outs this time and let Hansons are run, but we'll be back with carve outs next episode. We'll get you next time. Thank you. You guys want to sign off? Where can our listeners find you guys and interact with you with 996 with GGB? Sure. If you're 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. We're both on WeChat groups and Slack channels, so you can join that at 996.ggbc.com slash community. And we also organize offline meetups for our listeners around the world. We're not a podcast that's telling everyone that China's better. That's not the purpose of the podcast at all. We firmly believe that 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. 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 of the 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. And a lot of people were left 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 be risk in the shortcomings. So we want to have a podcast that promotes openness and promotes idea sharing. And we feel that anybody who is willing to do that will 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 at the Chensei Interact with you two. You guys ask great questions. Thanks. Awesome. 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.gvc.com. All right. See you next time. Thanks, gentlemen. Thanks, Tim. Just got this.么