Can China’s Internet celebrities run successful businesses?

After a record year of fund raising in 2015, the euphoria may be ebbing for China’s venture capital firms

PUBLISHED : Sunday, 23 October, 2016, 2:34pm
UPDATED : Sunday, 23 October, 2016, 10:57pm

Luo Yonghao had a vision when he founded Smartisan in 2012: China was ripe for a home-made smartphone that was so beautifully and artistically crafted that it could rival Apple Inc’s iPhones and Samsung Electronic Co.’s Galaxy.

Four years later, and after burning through 300 million yuan of investors’ funds, the reality hasn’t quite lived up to the vision for the former English teacher and Internet celebrity, who has no manufacturing experience. He’s sold 1 million of his cheapest phone, an 899 yuan ($140) model with modest specifications called the U1, reporting a 600 million yuan loss in the 18 months since the start of 2015.

Luo’s product launches, far from being the standard-setting staple on China’s technology circuit, has descended into annual variety shows, where he collects between 100 yuan and 600 yuan a ticket for the audience to listen to his repartee and revue.

If the 2016 launch of Smartisan’s T2 phone disappointed his fans, Luo admitted as much.

“To be frank, there is not much innovation in hardware this time, which makes me guilty to those loyal supporters of Smartisan,” he said during his Shanghai product launch last week. “The past few years have been very difficult, but I have a great determination that has supported me to carry on to today.”

Flushed with easy financing and a dearth of investment options, Chinese venture capital funds and private equity investors -- including government-backed funds -- tripled their money under management to a record 2.2 trillion yuan (US$330 billion) in 2015, according to Zero2IPO Group, a consultancy.

These funds are throwing money at the country’s startups like Smartisan and fast-food delivery company Huang Taiji, in the hope that one of them could be lifted by economic growth in the world’s most populous market into the next Alibaba Group or Tencent Holdings.

That has made China home to the largest herd of so-called unicorns, where at least 79 private companies are valued at more than US$1 billion each, according to Shanghai-based IResearch.

After a record year of fund raising in 2015, the euphoria may be ebbing. China’s venture capital firms raised US$400 million in the second quarter, with the number of deals done involving Chinese companies dropping 12 per cent, the lowest in almost three years, according to London consultancy Preqin Ltd.

There’s the increasing realisation that some of these venture capitalists are “not very professional,” said Chen Jing, research director at Hong Kong-based Asia Vision Technology and an online commentator on innovation.

Some venture capitalists are easily swayed by persuasive narratives, so self-promotion and story-telling go down very well with them, even if the end result is putting money behind stories that can’t be executed, he said.

“It helps catch eyeballs,” Chen said. “It doesn’t work if there are only hard work but no eyeballs.”

Weibo: Smartisan charms techies, Jumei’s Chen on defensive

Born in 1972, Luo taught English at New Oriental Education & Technology Group Inc. in Beijing for six years until he ventured off to start a blogging website called bullog.cn

The website, established because of Luo’s frustration with censorship in mainstream blogs, , gathered more than a million page views in less than two years, turning him into a celebrity. It was shut down in 2009 after three years of operation. It now hosts a successor site called bulloger.com, hosted outside China.

In 2012, Luo turned his sights, and his Internet celebrity status, to making phones. Smartisan’s investors included angel investor Wu Yongming, who poured 9 million yuan into the smartphone maker. PurpleSky Capital, a Shanghai-based early-stage investor of Internet companies, invested 70 million yuan in 2013 together with its Nasdaq-listed social network platform Momo Inc.

In 2014, PurpleSky followed up with another round of investments, injecting 200 million yuan into Smartisan with three other firms, including Citic Securities’ investment arm Goldstone Investment Co.

Luo also pledged more than 2 million of Smartisan’s shares as collateral for an unspecified amount of loans from Alibaba, owner of the South China Morning Post, according to the corporate credit database of the State Administration for Industry & Commerce. Alibaba’s spokesperson declined to comment.

To help execute his vision, Luo hired Koninklijke Philips NV’s head of industrial design Li Jianye, clothing designer Luo Zixiong, and appointed Fang Chi as chief designer for the phone’s user interface.

With his team, Luo promised a standout product committed to “the pursuit of details” and “perfection” in this “environment of highly homogenous competition.”

The website promoting his new flagship T2 phone has a declaration: “Answering Arrogance with Pride, And Prejudice with Persistence”.

Smartisan launched five models of Android-based smart phones since its establishment. Its flagship model is the M1L, with a 5.3 inch screen, selling for 2,799 yuan ($415).

His first model, the T1, was launched in 2014 and priced at 3,000 yuan, above what larger brands like Huawei, ZTE, Oppo or Vivo were going for.

“It’s not just selling the products, but also the philosophy, the value and the lifestyle,” Luo said in an April interview with the Southern People Weekly, citing the mantra of his hero and former Apple CEO Steve Jobs.

It was aimed at millennial users and enthusiasts of culture and art.

The reality was sobering, amid complaints and chatter of quality problems, including broken screen frames, and light “leaking out” on the side of the phone’s screen. He’s sold 255,000 of the T1, Luo said in August last year.

“The story is great, the price is relatively high, but the quality is far from that,” said Mark J. Greeven, a research fellow at the National Institute for Innovation Management.

Huang Taiji, a four-year-old startup that delivers Chinese fast food in five cities, is another company that has gathered considerable celebrity status through its astute marketing approach through social media, including Facebook -- which is blocked in China. Like Luo, HuanG Taiji’s founder He Chang has a gift of the gab, and knows how to weave a good narrative.

Huang Taiji recently closed five of its 10 kitchens to control spiralling costs amid increasing competition, according to He’s interview with the Economic Weekly.

Entrepreneurs like Luo and He are “media guys, someone who really knows how to do internet marketing, how to create fans, how to convince people”, said Greeven, who’s also an associate professor of Zhejiang University.

However, “they may not always understand their products well enough… they appear to have limited experience in how to manage the people and how to get the knowledge… but the product in the end is above anything,” he said.

All this leaves Smartisan with a lot of celebrity buzz around Luo, with no market for its product, said Ma Bo, a Beijing-based independent telecom analyst.

“The fact that the founder of an innovative startup is like a pop star is actually not helping build customers’ trust, but it will do if it’s the founder of a traditional technology company,” Ma said.

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