By Juro Osawa, Gillian Wong and Rick Carew
HONG KONG--It's official: Xiaomi Corp. is the world's most
valuable technology startup.
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 Group Co.
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.
--Douglas MacMillan contributed to this article.
Write to Juro Osawa at juro.osawa@wsj.com and Rick Carew at
rick.carew@gmail.com
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