AVCJ China Awards: VC Deal of the Year – Dianping.com

Sequoia Capital first found out about Dianping.com because its employees were using it. Back in 2006, the restaurant listings and reviews site was only three years old and coverage was still largely restricted to Shanghai, but its reputation was impeccable.

"With review sites in China it's very difficult to tell if the comments are real, but Dianping was careful about this and controlled its brand very effectively," says Steven Ji, a partner at Sequoia.

The VC firm was the sole participant in a Series A round of funding worth $1 million. Google led a second round of funding in 2007, but the big pay-off came last year. TrustBridge Partners led a $100 million Series C round, which also featured Lightspeed Venture Partners, Qiming and Sequoia.

This striking validation of Dianping's business model reportedly valued the company at $1 billion and the transaction was subsequently named Venture Capital Deal of the Year at the AVCJ China Awards.

Not just another clone

It is tempting to label Dianping a Yelp clone, following the all-too-familiar pattern of internet-based business models being transplanted from North America to China with mixed success. However, Dianping predates its US counterpart by about two years.

As of the end of 2011, Dianping had in excess of 42 million active users posting 20 million reviews per month, and a network of more than 1.5 million member merchants.

The company has local operations in more than 20 first- and second-tier cities in China, led by Shanghai, Beijing and Guangzhou, but its reach is far wider. It is estimated that users from approximately 2,300 cities post reviews. "Even if you go to small places in central China, users are generating content even before Dianping has a presence there," says Sequoia's Ji.

What this means is that when the company does enter these cities and seeks advertising revenue from local restaurants, it has a ready-made platform.

J.P. Gan, managing partner at Qiming, claim the company has created a very "sticky" community that is difficult for would-be competitors to emulate - even cash-rich and user-heavy internet behemoths like Baidu and Tencent. "Dianping has accumulated a loyal and unbiased group of bloggers who enjoy going to restaurants and reviewing them," Gan says. "You can't build up this kind of business overnight."

Dianping has been profitable since 2008, largely thanks to the traction it gets from word-of-mouth advertising. One of the main reasons for the $100 million Series C round was to raise capital that can be put towards developing new products and services.

In addition to geographical expansion, Dianping is already targeting retailers beyond the food and drink space and has launched a mobile internet offering. The company envisages becoming a one-stop marketing solution and, to this end, a group-buying service was launched last year. Much of the capital put in by the four VC firms has ended up here.

Evade the black hole

Group-buying sites are widely seen as a black hole in China. The flood of entrants into the segment in 2010 and 2011 forced down prices and profit margins, and a round consolidation is inevitable. But Gan argues this may actually be of benefit to Dianping because it offers something its rivals cannot.

"They are already in contact with local merchants about advertising, so group-buying becomes part of a comprehensive marketing package," he says. "A hotpot restaurant, for example, doesn't get a lot of business in summer, so it might want to try banner ads; in winter, when it gets more business, group buying offers are a better option."

Now that Dianping is generating sufficient cash flow to meet its day-to-day needs, a Series D round of funding it unlikely, although the VC firms would be delighted to participate should the opportunity arise. Meanwhile, the logical exit route - an IPO in the US - isn't on the agenda either. The onus is on building the business and consolidating market share in the lucrative social-local-mobile space.

"We are not looking to Dianping for a short-term IPO," Ji says. "The firm wants to build new functions that provide value to customers by closing the loop between users and merchants, thereby making transactions easier."

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• Topics
• Performance
• Venture
• Early-stage
• Technology
• Greater China
• AVCJ Awards
• China
• Venture
• TMT
• Sequoia Capital
• Qiming Venture Partners