77 Investments in 3 Years, 4 Unicorns, Portfolio Revenues of 15 Billion RMB: Why Xiaomi’s Ecosystem Strategy is the Future

Article #1 in the Xiaomi Series (Edited by Adam Bao)

Shunwei Capital
May 21, 2017 · 8 min read
Collection of Xiaomi products

Empty headlines proclaiming ‘The Fall of Xiaomi’ have littered the internet since the company missed its first smartphone sales target back in 2015. But Xiaomi is not just a cheap handset manufacturer. In fact, Xiaomi’s $45b valuation has always been built on the promise that it could build a network of products and services — an ecosystem that includes not just smartphones, but also Mi branded fitness bands, power banks, air filters, smart home devices, and other technology products. And after a few years of incubation, this vision is coming into fruition.

At Shunwei, we believe Xiaomi’s ecosystem story to be one of the most interesting and innovative coming out of China. Having invested in a few ecosystem companies, Shunwei is uniquely equipped to share insights based on deep existing knowledge and ongoing conversations with the main actors.

We begin our coverage by translating an article first shared on Toutiao by L, Picar, and 穆澄 (link here). Given its length, we have split the original article into two sections, with Part I providing the introduction and Part II describing the value exchange. This will be the first in a series of Shunwei articles and interviews covering Xiaomi.

In early 2017, IDC’s Worldwide Quarterly Mobile Phone Tracker indicated that Xiaomi (Mi) smartphone sales had fallen out of the top 5 globally. Yet a closer look at the full set of figures illustrates that the ecosystem of products and companies built around the famed Mi brand has turned in a strong performance.

In terms of sales volume:

  • Mi is ranked top in China, and second in the world for the sales of its Mi fitness band at 23 million pieces

Currently, over 50 million devices from the Mi ecosystem have been connected and/or activated.

Just looking at the sales numbers may be a little abstract for some. December 2016, at the China Mobile Worldwide Partner Conference, Xiaomi founder Lei Jun revealed in his address that after a few years of operation, the Mi ecosystem now comprises of 77 companies and generates annual revenue of as much as 15 billion RMB.

Xiaomi Founder and CEO: Lei Jun

An ecosystem with 15 billion RMB of income… It is challenging for a start-up to become a household name within the span of one or two years and to achieve a certain level of revenue and healthy profit margins. This is probably one of the reasons why start-ups are so willing to join the Mi ecosystem. Take the example of MeetVR, one of the companies within the Mi ecosystem. Upon joining the ecosystem, the company received extraordinary media coverage, and advanced its R&D and product development much faster than expected. It took the company merely four months to release a product.

Company founder Li Shuxin told reporters: “The Mi ecosystem has accumulated many resources and put in place an outstanding team in the span of three years. As part of the ecosystem, we have achieved rapid development and sustainability here. This is perhaps something that a company working on its own cannot achieve.”

A typical Xiaomi user once told Reporters: “Usually, when I want to try out a new type of tech gadget, I will first head over to the Mi online mall. With the Xiaomi branding, product quality wouldn’t be too bad, and most importantly, the cost of trying out the new tech is low.” This reflects the mass user base that Xiaomi addresses.

Mi.com

Clearly, many start-ups have been able to push their products to market and gain user awareness quickly after entering the Mi ecosystem and gaining access to Xiaomi’s support and endorsement, user base, marketing channels and even supply chain. The annual revenue of 15 billion RMB from 77 enterprises is the result of joint efforts by Xiaomi and the ecosystem start ups.

Furthermore, note that these start-up founders are not nobodies. In fact, some of them are successful serial entrepreneurs. They have clear ideas about what they want for their brands and products, and their relationships with Xiaomi are upgraded over time as the start-ups grow and develop. This is a very efficient way to build up successful start ups and grow valuations quickly.

First of all: how does one enter the Mi ecosystem?

In 2013, Xiaomi founder Lei Jun unveiled the Mi ecosystem program with planned investment in 100 companies within a five-year period. The intention was to replicate the Xiaomi model within these companies, and to take steps towards building a Xiaomi empire through the establishment of the ecosystem.

According to Lei Jun, the criteria for a start-up to obtain Xiaomi’s backing would be: the company’s business must have sufficient market scale, and there must be sufficient user demand for the company’s products. Furthermore, the company’s products must meet the needs of Xiaomi users. The company should also be staffed by a strong team and its values, consistent with those of Xiaomi’s.

In terms of value alignment, Xiaomi requires start-up founders to pay high importance to the user, and agree with the company’s product philosophy of delivering high-quality products at value-for-money prices.

According to Li Yong, founder of 8H, a member of the Mi ecosystem: “At the beginning, we had chosen Xiaomi as an investor as we agreed with Lei Jun’s approach of making quality products and delivering surprises to the consumer. We believed that as long as we adhered to this idea we would succeed.” And so 8H became part of the Mi ecosystem.

Apart from the values emphasized by Lei Jun, aspiring ecosystem members must also fit into the ecosystem’s areas of focus. In earlier interviews with the media, Xiaomi co-founder Liu De stated that the Mi ecosystem is centered on six areas:

  1. Mobile phone accessories, such as earphones, power banks and Bluetooth speakers

These companies entered the Mi ecosystem either by means of incubation or investment. Currently, among the 77 companies in the ecosystem, 30 have already released products, and four are unicorns valued over USD 1 billion. 16 companies in the ecosystem have an annual revenue of over 100 million RMB. Three companies have revenue of over 1 billion RMB.

Entering the ecosystem: organization and management approach

“The traditional company is like a pine tree, which needs 50 years or even 100 years to grow. However, when it collapses, it does so in what is a sudden massive event. Today’s internet companies are more like bamboo plants: as long as the timing is right, they can grow right after an evening shower,” said Liu De in a media interview.

However, he also admitted that there are flaws with bamboo plants as well, such as a short life cycle. Nevertheless, the bamboo does not die off after it grows into a bamboo forest, and this is what MI wants to be: a “bamboo forest”.

Growing bamboo shoots

Hence, Xiaomi has worked to create a “bamboo forest” around Mi products by means of investing in start-ups that then become part of the Mi ecosystem. Underground, the roots of the bamboo grow far and wide, and sprout new shoots to begin the cycle of life anew. The bamboo plants are also closely interlinked in the soil.

Shared roots and exchange is most fundamental to the Mi ecosystem. Common branding, aesthetics, and value-for-money pricing make products from these start-ups look like they have all been created by the same company. These products are then retailed through the common channels that are Mi.com and Xiaomi fan clubs. This approach helps to spread risk around. If anything untoward happens to one start-up, the overall conglomerate will be hardly affected.

This is Xiaomi’s organizational concept, and also the growth and development logic for the Mi ecosystem. However, enterprises within the Mi ecosystem are equal players and develop autonomously.

In media interviews, Liu De has compared the process of ecosystem investing to looking for a wife, who does not need to be “managed” post-marriage because first, “husband and wife” share their assets and hence have aligned interests, and second, the two’s values are definitely aligned.

Xiaomi’s role here is to help these start-ups establish aligned interests to ensure that the entire team is the biggest stakeholder. Further, Xiaomi also encourages the start-up to imagine and create independently and to develop their own brands and channels.

That is, while it participates actively and in an in-depth manner, Xiaomi does not “manage” or control start-ups within its ecosystem. The growth of individual companies is determined by the company itself. Within this setup, ecosystem members are not Xiaomi ’s “subsidiary companies” but rather “younger siblings”.

As Li Shuxin put it: “Xiaomi does not have a controlling stake in any one company. This is a very open system that helps companies to go from 0 to 1. Thereafter, it is up to the company to determine its development path, a process that Xiaomi does not interfere in.”

In addition, Li also told reporters that “the ecosystem concept is based on a system of harmonious unification rather than that of a parent company-subsidiary company setup. Xiaomi provides the company with high-quality resources, and each company works to find resources that work for it. The company works together with the Xiaomi team. There is no management relationship between both parties, which are really seeking to work well with each other.”

Xiaomi’s refusal to take a controlling stake in ecosystem companies is a smart approach by Lei Jun. It is also a key reason why the ecosystem has been able to develop and grow. According to GGV partner and investor in Xiaomi Hans Tung, Lei Jun had been an angel investor for three to four years prior to going into entrepreneurship. Hence, he understands how teams can be motivated. “This endeavor would have been impossible had Xiaomi chosen to take controlling stakes in ecosystem enterprises.”

Article #2 in the Xiaomi series will further examine the value exchange between Xiaomi and its ecosystem partners (link here).

Below is a table containing information on ecosystem members that have already released products on the market.

Shunwei Capital

Early stage VC founded by Lei Jun (Xiaomi CEO) and Tuck Lye…

Shunwei Capital

Early stage VC founded by Lei Jun (Xiaomi CEO) and Tuck Lye Koh. Manages $2 billion USD with over 200 portfolio companies invested.

Shunwei Capital

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Early stage VC founded by Lei Jun (Xiaomi CEO) and Tuck Lye Koh. Manages $2 billion USD with over 200 portfolio companies invested.

Shunwei Capital

Early stage VC founded by Lei Jun (Xiaomi CEO) and Tuck Lye Koh. Manages $2 billion USD with over 200 portfolio companies invested.