In China's freewheeling and hyper-growth Internet market, homegrown tech companies such as Baidu.com (BIDU), Dangdang.com, and Alibaba.com have strong-armed U.S. rivals like Google (GOOG), Amazon (AMZN), and eBay (EBAY) from gaining much ground in the online search and e-commerce markets. Now entrepreneur Joe Chen similarly hopes to make the rapidly growing arena for Web. 2.0 interactive social networking sites a no-go zone for potential competitors like Rupert Murdoch's News Corp. (NWS)
Chen is the founder, chairman, and chief executive officer of Oak Pacific Interactive, a Beijing-based holding company that operates Mop.com, China's top social networking site, as well as other Web 2.0 offerings aimed at mainland college students and online gaming fans. And he's operating in the most fertile of environments.
China's personal computer market is growing at a 21% annualized rate, vs. just 2.6% in the U.S., and the mainland market is on track to be the world's biggest by early next decade. Talk of rising computer sales "is like music to us," he crows. China should also eclipse the U.S. in terms of online users (there are roughly 140 million now) during the same time frame.
Cultivating Lenovo Ties
Chen, a 37-year-old native of Wuhan, has spent the last four years focusing on how to take advantage of all this. He founded Oak Pacific in late 2002, with help from some U.S. investors. He has enlisted some top-name U.S. venture capital and private equity funds, including Silicon Valley's Doll Capital Management and Greenwich (Conn.)-based General Atlantic. "He is a rising star," says Fu Xinghua, an analyst in Beijing with market research firm Analysys International.
And he has made sure to establish important local ties. One of Oak Pacific's top investors is Legend Holdings, the state-backed company that is the controlling shareholder in Lenovo (LNVGF), the country's dominant PC vendor. Last year, for instance, they joined forces to promote Lenovo gear and Oak Pacific services on several hundred university campuses.
For a privately held startup like Oak Pacific, the Lenovo connection offers the chance to take advantage of a company with one of the best-known brands in the country—not to mention some of the deepest pockets. Lenovo picked up most of the costs of the promotion, Chen says. "We were sort of free-riding," he says.
Not Scared of Paper Tigers
Chen will need all the help that powerful friends can offer, since his industry is about to go through a major change. For months, China's Internet world has been abuzz with rumors about what U.S. giant MySpace will be doing in China. Chinese-born Wendi Deng, the wife of Rupert Murdoch, who is in turn chairman of MySpace parent News Corp., made a much-publicized trip to Beijing last year; ever since, people have been speculating about when and how the media giant will enter China's Web 2.0 market.
Even though Oak Pacific's Mop.com currently is one of the most viewed Web sites in China, the industry is in its infancy and there's plenty of room for a global leader like MySpace to swoop in and clean up. Chen says he doesn't buy that argument. Instead, he says that U.S. Internet companies are like paper tigers when they try to crack the Chinese market.
"Look at Yahoo!, look at eBay, look at Google," he says. All of them entered China with great expectations but they have stumbled against smaller, but more local, competition. News Corp.'s Web 2.0 company will encounter similar difficulties, he predicts. "MySpace is fighting an impossible war," says Chen.
And if there's anyone who knows about China's Internet jungle, it's Joe Chen.
He's an industry veteran, having launched ChinaRen, a Web 1.0 portal, in 1999 and then cashing out before the Internet bubble burst by selling the company to Sohu.com (SOHU) for $33 million. The payoff may have been nice, but Chen now says that the experience was "not that satisfying."
He stuck around Sohu for a few months, then left for Texas, where he made an ill-fated effort to start an optical networking company. The timing could hardly have been worse, with the industry reeling from the collapse of the Internet bubble and the aftermath of the Sept. 11 terrorist attacks. "No one returned my calls," he remembers. Would-be investors "were nowhere to be found."
Finally, Chen gave up his plan to start a U.S. company. Instead, he started talking with a potential investor about returning to China and launching a wireless services startup. The two met regularly over breakfasts of Egg McMuffins and croissants at a McDonald's in the Dallas area. "I was the big spender," he says. "It was kind of disturbing—my only chance for an angel investor was going low budget."
Investors Like Chen's Style
Still, the talks paid off ,and Chen won backing for his newest company. By then his focus had shifted back to China, and soon Chen had moved his wife and two children to Beijing and started what was to become Oak Pacific. He acquired Mop.com in 2003, the first of several acquisitions in a strategy to build a portfolio of Web 2.0 companies.
Among the company's other sites: Xiaonei, a Facebook-like company focusing on college students; DoNews, a tech blogging site; and Wowar.com, a fan site for players of the popular World of Warcraft online game. Helping to fund these deals was a $48 million injection from General Atlantic, DCM, Legend Holdings, and other investors last year, one of the biggest investments in a Chinese Internet company.
General Atlantic decided to go with Oak Pacific largely because of the confidence that partners had in Chen's leadership, says Vince Feng, managing director at General Atlantic in Hong Kong. Chen can connect with young people in a way that is not common, Feng says. "He really understands that user base, yet he knows how to run a business," he says. "He's a manager who somehow still has that kid in him."
Focusing On Facebook Rivals
Feng points to the time when he and others expressed doubts about whether the company that was to become Xiaonei was limiting itself by focusing on college students. "I was a naysayer," says Feng. But Chen convinced them to give him a chance. He launched a marketing campaign, sending people to campuses to hand out promotional T-shirts along with free chicken wings. The campaign was a hit, with students queuing up to get their free food and shirts. The site has become one of China's most popular Facebook imitators. "I still have no clue why that worked," admits Feng.
With MySpace on the horizon, Chen has adjusted strategy, focusing primarily on Mop and Xiaonei, and putting on the back burner plans to build a Chinese answer to Craig's List, the U.S. classified site. "You have several balls rolling, and some are rolling faster, so you want to make sure you put your most talented people on those rolling the fastest," he says.
That means pouring more effort into building up those brands. Oak Pacific has opened a research and development center in Wuhan, for instance, to help come up with new services, and Chen is continuing to promote his company by visiting university campuses and talking with students.
The pace is only going to pick up, he promises. "It's like snowboarding. We are sort of in the middle of the hill, and a lot of people say okay, it's time to slow down. I say no. Keep on rolling. Give G force. Roll faster," he says. That's one of the most important things Chen says he learned from his ChinaRen days. "If you don't grow, if you are not paranoid, in the Internet space you get taken over," he says. MySpace, beware. Joe Chen is not going down without a fight.