Xiaomi On Its 5th Birthday

Editor’s note: Hans Tung is a Managing Partner at GGV Capital and an early investor in Xiaomi Technology.

GGV Capital recently celebrated the 15th birthday of its long-time friend and former portfolio company, Alibaba, which went public in 2014. In April, we again celebrated the birthday of another dear friend, Xiaomi Technology .

Five years ago, I had the great fortune of being one of Xiaomi’s earliest investors, and I continue to marvel at its pace of execution. Today the company is among the top five smartphone makers in the world, and its sharp revenue growth has outperformed the comparative first five years of both Google and Facebook. In 2014 alone Xiaomi sold 62 million phones for US$12 billion in gross sales, becoming the most valuable, privately held company in the world with an estimated US$45 billion valuation.

And yet Xiaomi is not well-understood by many. I am frequently asked about the company’s roots, ambitions and hurdles. So, what is Xiaomi anyway?

Xiaomi represents a lifestyle especially to young consumers in China. Beyond smartphones, Xiaomi provides their first TV, their first tablet, their first wearable device, their first headphones, their first air purifier, etc. I was fortunately there at its very first Mi1 launch party in Beijing on August 16, 2011, felt the passion from its thousands of young fans first hand, and saw 450K phones preordered online in 34 hours.

Ben Thompson of Stratechery characterized Xiaomi as “the first ‘Internet of Things’ company: unlike Google (Nest), Apple (HomeKit), or even Samsung (SmartThings), all of whom are offering some sort of open SDK to tie everything together (a necessity given that most of their customers already have appliances that won’t be replaced anytime soon), Xiaomi is integrating everything itself and selling everything one needs on Mi.com to a fan base primed to outfit their homes for the very first time. It’s absolutely a vertical strategy.”

Xiaomi’s success in the highly competitive Chinese market establishes it as a trend setter and forerunner internationally, especially in emerging markets such as Brazil, India and Indonesia. Together with China, these are four of the top five largest countries (by population). But importantly, they share a comparable consumer profile to the highly dense, rapidly urbanizing Chinese market where the entire household, not just the smartphone, is up for grabs.

Having had a front-row seat in watching Xiaomi’s future unfold, startups with global ambitions can learn a lot from this company about how to innovate, grow and face critics.

Product Is Everything

Xiaomi often comes under fire for its purported lack of product originality. And they know (to paraphrase Thomson) that the further they get from their mega fans in China, the less impact intangibles such as CEO celebrity, rock-concert product announcements, powerful social media presence, etc. will have.

The product must be a winner in its own right with a direct connection to customers that is tuned to their specific needs. Xiaomi has already seen initial encouraging signs from non-Chinese fans in South East Asia and India responding well to its products.

Speed Matters

Xiaomi updates its MiUI operating system every week. Input from beta testers made on Mi.com is regularly incorporated into the product. This disciplined listening and responsive product evolution quickly converts users into fans and fans into a marketing machine. It has also allowed Xiaomi to ignore critics and become one of the first hardware products to respond and adapt based on customer requests.

Customers Are First

Xiaomi sells its products online, mostly from its own Mi.com site and bypasses offline retailers. This approach creates a powerful one-on-one relationship that benefits both the customer and Xiaomi. Xiaomi knows precisely what customers love, what they hate, and can communicate fixes and updates directly.

The customer service team is central to the company’s strategy and is empowered to treat customers as their own friends and to help their “friends” with their problems. All Xiaomi executives spend time in customer service to gain firsthand experience with the hot issues troubling their customers.

An Ecosystem Is a Must-Have

Xiaomi cannot build every gadget needed to realize the Xiaomi lifestyle and simultaneously ramp up global expansion. The company smartly encourages and works with VCs to back startups as part of its ecosystem in order to expand its platform and offer its customers many more low-cost products and services. Value is created in the overall growth of the ecosystem, which creates a branded experience for the customer and alignment of interest between Xiaomi and the companies in the ecosystem.

Business Model Innovation Wins

Xiaomi has openly shared that its operating expenses (including sales, marketing and G&A) are around 5 percent of total sales. Similar to Costco and Walmart, Xiaomi passes along almost this entire savings to its customers in the form of low prices on all Xiaomi products — and without sacrificing quality.

Many startups I meet today are obsessed with the Apple model of maintaining high gross margins. Yet new transparent business models, tuned to global expansion, are focused on expanding the size of the pie versus the value of a high margin slice.

Share, Share, Share

Xiaomi is generous with sharing equity/options with co-founders and employees. All of the company’s seven co-founders are capable of starting their own businesses yet CEO Lei Jun has been able to recruit and retain them to help achieve his ambitious vision. Over the years, I have met many entrepreneurs who nickel and dime on equity – and then complain about how hard it is to recruit experienced talent.

There are more than 2 billion smartphones in the world today – mostly in the U.S. and China. By the end of 2020, there will be more than 4 billion smartphones. This shift to the mobile Internet, where many consumers will purchase multiple “firsts” is bigger than anything we have seen from the web, especially because of the rapid adoption and impact of mobile-everything in emerging markets.

Lessons from Xiaomi will continue to be applicable across industries and geographies. We see an increasing number of founding teams such as Xiaomi with international experience and a mobile-first view from many cities in the US and China. As we watch and work with this new breed of world-class team, I can’t help but wonder where we’ll find the next Xiaomi.