AVCJ China Awards: VC Professional of the Year – Lei Jun

"This hit me hard. It was like someone had destroyed what we had spent years creating. Microsoft will always be our enemy," Lei said in a television interview a few years ago. He then spent 90 days in trying to WAP Office in Kingsoft stores and realized why it hadn't worked. "We focused on producing something we liked, but never researched what users preferred."

As a result, Lei lost out on the global internet boom. The late 1990s saw a legion of millionaires emerge from Silicon Valley start-ups and a few of China's nascent internet companies caught the end of the wave. For software companies, however, it was difficult to match the success of Google or Yahoo. And the Chinese equivalents of these providers had yet to emerge.

"Lei missed the first internet bubble. The likes of Tencent Holdings, Alibaba Group and Baidu were nothing more than junior start-ups when he started working at Kingsoft," says Hans Tung, Beijing managing partner at Qiming Venture Partners, who worked with Lei for several year.

But in Joyo.com, an online retailer of books, music and videos, Lei had his first success story. The company was founded in 2000, in the early stages of Chinese e-commerce, and within four years had been acquired by Amazon for $75 million.

Going solo

Having served as Kingsoft CEO for nearly a decade, Lei stepped down in 2007 shortly after taking the company public in Hong Kong. He then embarked on a second career as an angel investor.

Lei identified three themes likely to drive the next generation of internet start-ups: e-commerce, social networking and mobile. Early targets included social networking site YY, clothing retailer Vancl, and mobile browser UCWeb. YY went public in the US last year and Vancl is expected to follow suit, while UCWebis expected to be acquired by Alibaba.

Richard Liu, a partner at Morningside Technologies, which has backed YY since inception, notes that Lei has an innate ability to spot companies with potential. He is also happy to hold on to portfolio companies for a long period of time and help them grow. Lei invested $1 million in YY eight years ago and, based on the company's current valuation of $1.5 billion, he has made a paper gain of nearly 100x. Yet he has still to exit.

"Other angel investors wouldn't have the patience to hold on to a company for such a long period," says Liu. "They usually give up and cash out in the fourth or fifth round of funding."

Another characteristic of Lei's investment approach is he only invests in industries he understands and alongside entrepreneurs that he knows well. Vancl CEO Chen Nian, for example, founded Joyo with Lei.

In total, Lei has seeded about 20 companies and he continues to support them on an institutional basis through Shunwei Capital Partners, the venture capital firm he set up in 2011.

So far, Morningside has collaborated with Lei on seven deals and Qiming on four, including Vancl. Tung volunteers that if anyone else had walked in and made the same pitch, he wouldn't have invested in many.

For all his success, Lei describes super angel investing as a hobby, not a job. However, his long-held ambition was to penetrate the mobile phone market, something that has been achieved with Xiaomi. "The creation of Xiaomi combines those three key investment themes into one product," Tung explains.

Lei's idea was to create a high quality but marketing-lite smart phone brand, and he first pitched it to Liu and Tung in 2009. "We were on the phone from 9 p.m. to 9 a.m. discussing the business model," Liu told AVCJ last year. "We had to change batteries and chargers several times. We wanted to identity the next big wave and getting the timing right."

Morningside and Qiming provided $10 million in seed funding in 2009 alongside the founders. They were joined by IDG Capital Partners in the $41 million Series A round in December 2010. A Series B round worth $92 million came one year later, with Beijing Shunwei Venture Capital, Qualcomm Ventures and Temasek Holdings joining the existing investors.

Innovative approach

Lei's approach stood out in two respects. First, he didn't just want to launch a new smart phone but create an ecosystem around it as well. By covering both the hardware and software angles, Xiaomi could essentially mimic the Apple approach and tie in customers on the basis of user experience. Second, Lei wanted to compete on cost. The idea was to strip out marketing and distribution expenditure by launching, promoting and selling the smart phone online.

After focusing on R&D in the first year, Xiaomi's debut handset, the MI-ONE, launched in August 2011 with a price tag of RMB1,999($310), less than half the cost of smart phones with comparable specifications. There were 300,000 pre-orders in the first 34 hours.

"Everyone has been surprised by now how fast it has grown," Tung says. "Xiaomi is the fastest start-up to reach $1 billion in revenue and achieve profitability. Google did in year six, Facebook in year seven, Amazon reached the revenue target quicker but it took nine years to achieve profitability."

Validation of Xiaomi's approach was provided by Yuri Milner of DST Advisors who led a $216 million third round of funding in June - valuing the company at $4 billion - with Government of Singapore Investment Corp. (GIC) also involved. However, Lei is in no hurry to take the business public and has ruled out an IPO before 2016. "What Xiaomi products have been launched now only accounted for 20% of what we discussed in the beginning," Liu says.

There are rumors of a Xiaomi Internet TV product, but all Tung will say is that the company is going international, from Greater China to Taiwan and Hong Kong, and then Southeast Asia. "Of course the US and European markets are part of the plan," he adds. "Korea has Samsung. Why can't China have its own brand reach the same level of achievement?"

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• Topics
• Greater China
• Venture
• China
• AVCJ Awards
• Venture
• Morningside Technologies
• Qiming Venture Partners