A few weeks ago TechInAsia reached out to me in the wake of Huami, a Xiaomi investment, going public, and wrote a piece about the Xiaomi ecosystem. As usual, our exchange turned into a couple of quotes, so here are a few more ideas. An edited version of this article was first published on TechInAsia.
Xiaomi is a big player in hardware
The Chinese smartphone maker Xiaomi is not only a giant by market share, but has also done dozens of investments (including into two HAX startups: the smart lighting company Yeelink, and another undisclosed).
The power of their distribution channels and community makes them a kind of “kingmaker”:
- Customers trust the quality of the Xiaomi brands.
- Xiaomi’s website and offline stores (though not ‘official’) get huge traffic.
- High sales volume and lower ad spend allow for a price advantage.
In addition to investment and distribution, Xiaomi is also understood to help with product development, so that it fits within its ecosystem and matches customers expectations.
Kings or Vassals? The Huami case
Already, some of Xiaomi’s investments have likely become unicorns.
While it didn’t reach that status post-IPO, the fitness tracker maker Huami has a valuation of almost $600M — almost half of Fitbit.
While it is said to be below the previous private valuation, it is undoubtedly a great outcome. The ROI for investors is great, and the founders managed to build a sustainable business while keeping a large chunk of equity.
Now, how sustainable is sustainable? Huami primarily sells in China, and via Xiaomi.
The opportunity for such ecosystem companies is to piggyback on Xiaomi’s brand equity and global expansion (particularly in other emerging markets like India). The challenge is to build their own brand and channels.
Also, several of those companies are essentially making commodities: battery packs, headphones, etc. For which brand recognition and low-cost distribution are key to their survival.
Exit Options: IPO Only?
Being mindful of both the asymptote and the inflexion point is critical for exits.
In most cases, startups exit via M&A (over 90%, vs IPO, LBO, etc.), and overall the window of opportunity via M&A is larger.
Regarding Huami, it went public while it was still able to display growth (both revenue and profit). Why did it chose NYSE instead of Shanghai, Shenzhen or even HK? (where multiples might have been better as investors know the company better). Maybe it’s a question of legal structure (same as the current issue for Xiaomi, and no option for double listing)?
For an M&A, Xiaomi companies might have a harder time when they rely heavily on Xiaomi for distribution: it creates too much uncertainty for a buyer who might not be able to achieve the expected post-M&A bump, and might even suffer if Xiaomi decides to alter or severe its relation.
This leaves only Xiaomi as a potential buyer. But Xiaomi has shown little interest so far in acquiring its portfolio companies (in addition to the conflict of interest due to the power it wields). Maybe because it is also unable to benefit from the “post-M&A bump” because it’s already maximizing the opportunity of its sales channels?
Can a “Mini-Mi” Fly on its own?
Huami is potentially capping their current growth phase in China. They are following Xiaomi in other markets like India.
Their other challenge will be to see whether they can develop competitive products under their own brand and outside of Xiaomi’s channels — where they lose significant competitive advantages. Time will tell.
The More High-Tech Investments Seem Fine
The personal mobility/robotics startup Ninebot, for instance, is, alongside DJI, one of the up-and-coming global tech brands from China.
Their acquisition of Segway in 2015 cemented their position by adding a well-known brand, global distribution and patent portfolio. It also shows there are more than one way to win.
Xiaomi’s Strategy = Digital P&G?
Not ‘consumer electronics’, not ‘smart living’. The way I look at it, Xiaomi is trying to become a kind of ‘digital P&G’. The latter is famous for its many household products, and — I remember that from discussions at a talk I gave years ago at their annual Asia R&D conference — for the many touch points they have with their customers. P&G ‘touches’ you up to 10 times a day! When you wash your hands, brush your teeth, clean your clothes, do the dishes, etc.
In fact, Coca-Cola is a bit like that too: they try to cover as many of the 10 drinks you might take in a day: water, soft drink, carbonated, tea, fruit juice, etc.
For Xiaomi, there is also value in increasing the “touchpoints” with customers, and having access to data.
Should hardware startups take money from Xiaomi?
Apparently Chinese hardware startups say ‘if you want to grow big quickly, join Xiaomi; but if you want to grow really big, then don’t.’
Despite the bravado, I think most startups would be happy to get funding from Xiaomi. Only those with huge momentum would turn them down in favor of another investor.
Now, can a Xiaomi company become the next DJI?
Xiaomi mostly invests in mass-market products so it’s not a fit for every company. Also, as it is a strategic investor, it can make some startups dependent and prevent them from building a larger and more autonomous company. That said, Ninebot seems to be doing well, somewhat independently.
And if you’re not convinced about the company, here is your chance: