Including $1.1 Billion Raised in Latest Funding, Valuation Would Be More Than $46 Billion
Now that the Chinese smartphone maker has raised $1.1 billion, giving it a valuation of more than $46 billion including the fresh capital, the real test for the company will be living up to investors’ high expectations.
Xiaomi’s current valuation puts it above all other startups currently backed by venture capitalists, including Uber Technologies, Inc., the taxi-booking app which earlier this month said a new round of funding valued it at $41 billion. Only Facebook Inc. in 2011 raised capital at a higher valuation from private investors—an investment from Goldman Sachs valued the social network at $50 billion at the time.
The Beijing-based technology startup, led by its founder Lei Jun, rose to the top of the Chinese smartphone market—the world’s largest with more than 500 million users—in just four years. Now, investors are hoping that Xiaomi can build a more lucrative business around not just cheap smartphones, but software and services to users of its devices, while replicating its success in other Internet-connected home electronics.
For Xiaomi, selling its smartphones at rock-bottom prices is a way to acquire users for apps and other services, and growing hopes for that business model is at the heart of its surging valuation, according to a person familiar with Xiaomi’s latest round of funding.
Xiaomi’s Mr. Lei confirmed the funding round in an announcement on his Chinese microblog page Monday. Investors included All-Stars Investment Ltd., Russian investment firm DST Global, Singapore sovereign-wealth fund GIC Pte. Ltd., and Yunfeng Capital, a private-equity firm affiliated with Alibaba Group Holding Ltd. Executive Chairman Jack Ma .
“This round of funding is an affirmation of Xiaomi’s achievements in more than four years of business and a prelude to a new stage of development,” Mr. Lei wrote.
Mr. Lei’s vision for Xiaomi was already clear even before he founded the company in April 2010, according to Hans Tung, a managing partner at GGV Capital and an early investor in Xiaomi. In January 2010, Mr. Tung met with Mr. Lei to hear his pitch at the lobby of a luxury hotel in Beijing.
“I thought, ‘you got a lot of guts to go after the phone market. That hardware sector is hard,’” Mr. Tung recalled in a recent interview. Mr. Lei’s pitch to Mr. Tung was that he would bring hardware, software and apps together like Apple Inc. had done. But unlike Apple, Mr. Lei’s company would sell its products mainly through the Internet.
Mr. Tung said part of what convinced him was Mr. Lei’s previous experience in e-commerce, online games and business software.
Xiaomi overtook Samsung Electronics Co. in the second quarter of this year to become the largest smartphone vendor by shipments in China. This year, it expects to sell 60 million smartphones globally, up from 18.7 million in 2013.
To measure Xiaomi’s success, the important numbers aren't just smartphone sales for each quarter, but the number of existing users for its own mobile interface called MIUI, a heavily customized version of Google Inc. ’s Android. MIUI, equipped with its own app store, is Xiaomi’s key platform for online services. Xiaomi said there were 85 million active MIUI users as of last month.
Xiaomi said that as of Nov. 25, the total number of downloads from its app store had reached 10 billion, double the number in July and up tenfold compared with September last year. Xiaomi’s app store thrives in part because most of Google’s services, including the Google Play app store, are blocked in China.
Running a platform that distributes apps and other services and taking a cut from their revenue can be more profitable than selling hardware. For example, Chinese Internet giant Tencent Holdings Ltd. , whose main businesses are online games and social networks, had a net profit margin of 29% in the third quarter. Because Xiaomi is still private, it doesn’t disclose profit margins. But according to a confidential document viewed by The Wall Street Journal last month, Xiaomi H.K. Ltd., the unit of Xiaomi that directly or indirectly controls the company’s domestic and Taiwan units, had a profit margin of 13%.
Another key component of Xiaomi’s strategy is its growing investment portfolio.
The company has bought stakes in a number of other Chinese tech companies from online video firms Youku Tudou Inc. and Xunlei Ltd. and game developer Westhouse Group to health app maker iHealth. To expand its hardware offerings beyond smartphones, Xiaomi earlier this month invested in home-appliance maker Midea GroupCo.
Still, Xiaomi isn't without challenges. Competition is intensifying in China as other major handset makers such as Lenovo Group Ltd. , Huawei Technologies Co. and ZTE Corp. are taking a page out of Xiaomi’s playbook to sell phones online.
“Xiaomi has started a phenomenon in the Chinese market, and we have studied Xiaomi’s business model,” said Ni Fei, head of the Chinese smartphone brand Nubia, a unit of ZTE Corp. ZTE launched Nubia as a subbrand in 2012 to focus on online sales and social-media marketing.
But Mr. Tung of GGV Capital said Xiaomi’s business model isn't easy to replicate. The company often upgrades its software and services by interacting with users through online forums and listening to their complaints.
“That way of doing things is easy for me to describe as a business model, but very hard to actually execute,” he said.
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