Q&A: Danke Apartment's Derek Shen

Q: How big an adjustment was it going from LinkedIn, a listed global technology company, to a Chinese start-up?

A: It was not a big transition. There have been two major changes for me in the past: when I moved from the US to China with Google in 2006; and when I left Google to launch my own start-up Nuomi, a group-buying service platform, in 2010. After Nuomi’s acquisition by Baidu in 2013, I joined LinkedIn and spearheaded its China division as founder and president, while several other employees left to set up their own businesses. Danke was one of them and I made an angel investment. I then became executive chairman of the company on leaving LinkedIn China last year. My focus is the company’s overall strategy, talent acquisition, and fundraising. Apartment rental is a very capital-intensive business. I am also responsible for handling high-level government relations.

Q: Had the market already gained traction when you invested?    

A: Danke was officially launched in January 2015 after my angel investment. My initial idea was to build a marketplace-type internet business because it would be easier to scale up. The founder-CEO preferred to start a company that provided apartment rental services – renting apartments from landlords and then leasing them out. I wasn’t fully convinced there was enough growth potential, but I had chosen to invest in a talented entrepreneur, so I trusted in his instincts. Starting last year, the government shifted policy to encourage rental rather than home purchasing, with a view to curbing prices. In 2015, no one could see clearly how the long-term rental market would develop over the next three to five years. When you see an opportunity, you need to react quickly, essentially betting on the market to a certain degree. 

Q: How does Danke’s online rental business work?

A: We use internet-based technology to enable the traditional rental market to operate more efficiently and transparently. The traditional rental market is a typical customer-to-customer (C2C) market, with numerous landlords leasing homes to individual renters. There are real estate agents in the middle who provide sometimes dubious information on pricing and terms. Some apartments are also very old and landlords don’t bother to renovate them. Danke has a C2B2C model, and it’s the B in the middle that makes the difference. Using our online database and artificial intelligence technology, we generate leasing information in specific areas and secure large-scale apartments from landlords by offering reasonable rental prices. Given the large volume of properties, we can renovate at high quality but lower cost. After leasing out, we provide one-stop, free services in areas such as cleaning, maintenance, and wireless internet. 

Q: How does Danke differentiate itself from other long-term apartment rental platforms? 

A: There are two ways to look at the long-term leasing vertical. One is by format: de-centralized, like Danke and Ziroom, and centralized, such as Mofang. Operating costs are lower under the centralized model because the operator owns the whole building, but the pace of expansion is slow because it’s difficult to acquire high-quality properties for leasing purposes. The de-centralized model requires the operator to acquire individual apartments, so costs are higher, but the business can scale quickly. The other way to distinguish different players in the long-term leasing vertical is by company background. Ziroom is backed by HomeLink, a traditional real estate agency with an emphasis on offline operations. Contrast that with Danke, which started as an internet company and is strong in data analysis, online assessment, and pricing capabilities.  

Q: Baidu, Alibaba Group and Tencent Holdings (BAT) have expanded into many verticals. How much space is left for start-ups to grow? 

A: The last decade of China’s internet economy was more about online development and the BAT are pure online companies. Now, in the US or China, there is a little scope for pure internet companies to grow. Amazon’s acquisition of Whole Foods was a sign that the company has hit its ceiling in terms of online expansion and needs to find opportunities offline. So, the second phase of the internet economy is about using technology to disrupt traditional businesses. Danke doesn’t need to pick a side between the BAT because those companies’ online traffic will not necessarily be beneficial to Danke’s business. Long-term leasing is a huge market. It was worth RMB1.3 trillion ($206 billion) last year and is expected to reach RMB3 trillion over the next five years. The major players combined account for less than 2% of the market. My anticipation is in three years there will be two or three companies managing over one million leasing properties each, with valuations of more than $10 billion. Why the high valuations? Because once a company reaches critical mass, it can provide many value-added services to users – such as insurance, personal loans or furniture rental – and expand into different ecosystems.   

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