Deal focus: Freemium works for Dianxiaomi

It has become received wisdom that consumer-facing and business-facing start-ups are fundamentally different and 2C expansion plan is incompatible with a 2B world.

Dianxiaomi, a China-based enterprise resource planning (ERP) service provider for cross-border e-commerce merchants, claims to be the exception to the rule. The company has adopted a freemium as a means of achieving scale and turned profitable in a relatively short period of time.

“In the past, start-ups used the freemium model in SaaS [software-as-a-service], but they failed. As a result, investors in SaaS don’t believe freemium can work,” said Yanshu Zou, a principal at Huaxing Growth Capital, a private equity unit of China Renaissance. “I was surprised to discover that Dianxiaomi turned profitable with this model.”

Huaxing recently led a USD 100m Series C round for the company, together with Tiger Global Management. Additional commitments came from existing investors GGV Capital, CDH Investments, and Gaorong Capital. The latter three provided about USD 44.3m in Series B funding last year with support from Kunlun Fund.

Founded in 2014, Dianxiaomi initially focused on ERP services for Chinese merchants selling via US-based e-commerce platform Wish, covering product publication, order management, logistics, and customer service. It then expanded to eBay and Amazon.

The company now collaborates with some 50 major e-commerce platforms, more than 800 logistics providers and 60 warehouses globally. It facilitates the processing of more than CNY 300bn (USD 47.5bn) in orders a year for around 1.2m merchants globally. Annual growth is said to have exceeded 100% in recent years.

Basic functions have been free of charge since day one, ensuring a large customer base and relatively low customer acquisition costs. The company hasn’t retained a sales team for years, preferring to rely on word-of-mouth marketing and product-led growth.

“It offers standardised products. At the beginning, it may be hard for customers to accept this standard, but when they do, growth is fast,” said Zou, adding that Dianxiaomi has achieved a satisfying free customer to paying customer conversion rate. The benchmark in foreign markets is about 10-15%.

This conversion is driven by value-add services. While product publication and order management services are free, small merchants often lack the resources to cover tracking and fulfilment. If these services are available for a reasonable price, they are willing to pay for them.

“To some extent, free services establish a threshold and this moat will only get higher and higher. At the same time, paid services require continuous product development and refinement,” said Zou. She believes Dianxiaomi has a strong enough value proposition aimed at targeted customers to withstand competitive threats from large internet platforms.

Following an undisclosed round in 2016, the company swiftly went cash flow positive and had no need for external funding. However, as online sales in international markets spiked in response to COVID-19, it became clear there was a large opportunity to address. According to the Organisation for Economic Cooperation and Development (OECD), online orders rose 80% year-on-year in Asia Pacific and Europe and 150% in North America.

At the same time, operating in multiple markets presents challenges. The mainstream e-commerce platforms are different in each country, while operating rules for product publication, logistics, payments, and after-sales services are equally varied and complex. Yet merchants want a one-stop solution that works across different e-commerce platforms.

The Series C proceeds will go towards recruitment, product development, service upgrades, and further international expansion. Dianxiaomi now has offices in Indonesia, Malaysia, and the UK, while its BigSeller and UpSeller platforms already have strong followings in Southeast Asia and Latin America, respectively. A new product, Sellfox, is being rolled out for medium and large-sized customers.

“When a product launches in a new market, there is an initial investment period because all users are accessing services for free,” said Zou. “When you have limited capital, you control your expansion speed, but when your capital is relatively abundant, you can penetrate that market much faster.”

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• Topics
• Greater China
• Expansion
• Technology
• Support services
• Consumer
• China
• China Renaissance
• Tiger Global Management
• GGV Capital
• e-commerce
• TMT
• Growth capital
• CDH Investments Management
• Gaorong Capital