Tao Zhang talks about site monetization, fake reviews, and how U.S. companies and entrepreneurs can get started in China.

Tao Zhang

This week kicks off a special series of interviews with Chinese entrepreneurs. With the help of Georg Godula from http://www.web2asia.com/, I’ve been getting interviews with some of the very top guys in China (ie those websites you’ve seen in Alexa’s top 100 listing, but never had any clue what they are about!)

China is an incredible market, here are some stats:
- 300M people online (biggest in the world)
- average US$200/month income
- multiple $1 BILLION/year dollar business models already existing, built on this low income population of internet users

However, China has 1.3 billion people in the country, so many more will be coming online soon AND you can expect their monthly income to increase dramatically too, raising CPMs a lot. Bottom line: watch out for China, because this is going to change the internet landscape significantly.

Our first interview is with Tao Zhang who is the CEO of Dianping.com — basically the Chinese version of Yelp (that started 2 years before Yelp did!). Some of the points we discuss include:
- how they handle fake reviews
- how the site is monetized (its profitable — Judys Book + others failed in this market),
- their funding from Sequoia and Google
- How US companies can expand to China
- How US entrepreneurs can get started in China


Full Interview Audio and Transcript

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High Speed Audio Interview:
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Personal Info

Hobbies and Interests: Reading, Hiking, Poker

Favourite Sports Teams: Brazilian National Soccer Team

Favourite Books:

Favourite Entrepreneurs: Jeff Bezos, Steve Jobs

Company website: www.dianping.com

Fast Track Interview

Adrian Bye: I’m actually in the offices of Dianping talking with Tao Zhang who is the CEO and Founder of Dianping. Dianping is loosely described as the Chinese version of Yelp. Tao’s going to tell us a little bit more about the company and what they’re doing.

Tao Zhang: Sure. Dianping is a site where consumers share their experiences on city life-related opinions, like restaurants, night clubs, etc. Dianping was founded in early 2003 as a restaurant review site, which is actually two years before Yelp was started. We were first funded by Sequoia China and later funded by Google China. Currently, Dianping has about 10 million unique visitors each month. We have over 8 million reviews submitted by the users, and we cover over 300 cities in China.

A little bit on my background. I grew up in Shanghai, went to the States in 1994 and lived there for 10 years. I went to DePauw University in Indiana. After college, I worked for three years at a consulting firm based in Chicago, and then went to Wharton School in Philadelphia for my MBA. I came back to China in 2003 and started my business.

Adrian Bye: Let’s talk a little bit about your site. How did you start your traffic in the beginning?

Tao Zhang: It grew very slow and steady; I never really saw a spiking of traffic. Growth has always been at 10 to 15 percent for the past many years. At the beginning, it was just me. I was doing all the programming, the site maintenance, the content, and all. The first users I got were my friends, high school friends, people who still remembered me after 10 years, and my family. I convinced my 70-year-old dad to go to the web and start using my service; he had never been to a website before. I also did postings on community sites and other forums. It was self-advertising that said, “This is a great website. You can get full information.” In the beginning, what is really important is the quality of the users and the people who can write reviews versus those who just come to visit.

Adrian Bye: Do you have any major competitors? Is anyone else there getting say, five million visitors a month?

Tao Zhang: Not really. This kind of model is tough to do. A lot of copy cats are on their way, but we never really see anybody do exactly what we are doing.

Adrian Bye: Why is that?

Dianping.comTao Zhang: It’s sort of a community thing. It’s not easy to build a community and sometimes luck needs to be involved. There are several people doing what Yelp wants to do, like Judy’s book, right? They all got funded, but only Yelp survived. It takes some time, patience, luck, and not necessarily money to build a community. Money is actually not that important.

Adrian Bye: You bring up an interesting point with the copy cats. One of the things we’ve heard on this trip is how big a problem it is having business models copied right here in China because there’s not much legal protection. A lot of guys are very aggressive and will chase a working business model very quickly. Do you feel in your case that the community is a strong enough barrier-to-entry that it’s hard for people to replicate it?

Tao Zhang: Yes, I think so. What kind of legal protection do you really have for business models? Business models exist everywhere in the U.S. You see Yelp’s model; you can copy their model. In China, it’s the same thing. You can’t keep copy cats away.

The key thing is that we have key competitive differentiators. The community of a loyal group of users in each city is our number one differentiator. Among the four to five million young people in Shanghai, how many people really want to write reviews? One percent? The number of people who will contribute is very finite. That’s our biggest asset.

Number two is as the business grows, the brand becomes important. In the US, you have The Zagat Survey. In Europe, you have Michelin Guide. In these kinds of life guides, the brand actually plays a part. Because Dianping is a trusted brand, the reviews or the ratings from Dianping are actually worth a lot more.

Adrian Bye: I’m interested to understand a little more on traffic. What approaches are working for you to get traffic?

Tao's photoTao Zhang: It is through word-of-mouth and friends using the tell-a-friend link. It’s not through some kind of public campaign or marketing campaign. We’ve done a lot of that, but it’s not very effective. The best traffic comes from people telling friends. The second is through search engines that bring a lot of traffic. We do a pretty good job in SEO through Baidu, the number one Chinese search engine, and Google.

Adrian Bye: Can you tell us a little about your funding? It’s pretty interesting that you’re based here in Shanghai and you convinced Sequoia to give you funding, followed by Google.

Tao Zhang: Sequoia China was established in late 2005 and is based out of Shanghai, Beijing and Hong Kong. We started doing our first round of funding in mid-2005. We actually did some distant fundraising in Silicon Valley in the early part of 2005, which didn’t work out. We came back to China and looked for funding.

Sequoia China was just getting established at that time, and we knew Neil Shen, who is the founder of Ctrip and also the founding partner for Sequoia China. We are one of the very first companies funded by Sequoia China. The first round was closed in mid-2006, and a year later we closed with Google China.

Adrian Bye: That seems like an unusual investment with Google. Is it a conflict of interest? Why would Google invest with you?

Tao Zhang: My understanding is Google’s strategy was for search, mobile and local. We definitely fit both the local and the mobile side. In China, one of their strategies to compete with Baidu was to put more focus on the local search site.

Adrian Bye: Are you profitable today?

Tao Zhang: Yes. We are profitable. Since November of last year, we are both net income positive and cash flow positive.

Adrian Bye: Congratulations. Will you raise more money in the future?

Tao Zhang: Probably, but we are not sure yet. We might do a round in a year from now.

Adrian Bye: The guys who are going to be listening to this will be saying, “They’ve already gotten some blue chip companies to invest in them. They’re profitable. They’re growing. Why on earth would they want to raise more money?”

Tao Zhang: It’s definitely not because the company needs the money. It’s definitely for different reasons. One could be a pre-IPO where you need a kind of mezzanine run to just have some money. It’s expensive to go IPO. Also it could be that you want to disseminate. There could be some old angel investors or old investors they are not patient anymore and want to get out.

Adrian Bye: Back to your site. Fake reviews are a big problem. I’ve seen in the news that people are asking if TripAdvisor is even worth paying attention to anymore because so many hotels are spamming it. TripAdvisor even puts warnings on certain pages saying, “We believe a lot of the reviews on this page may be fake so be extra careful.” How are you handling fake reviews?

Tao Zhang: That’s a big problem. As we become influential, more people try to spam and trick our website. We always just try to do better. We have certain policies in place. From the technical perspective, we actually control what kind of reviews are shown.

We have an eBay kind of star system for every user. Depending on your activities on the site, you get certain points. If the user logs on, they get a point. If they write reviews, they get points. It’s a credibility score. For your review to show on the first page, your credibility score would have to cross this threshold. That technique actually gets rid of a lot of fake reviews. We also look at IPs, log in name, password and such.

It’s impossible to get to a 100 percent non-fake and have every review be authentic. That would be a goal, but it’s not going to happen. The spammers just become more sophisticated.

Adrian Bye: You guys are profitably making money, yet Judy’s Book had imploded and most other sites hadn’t done well on this space. The revenue you can generate per user is lower in China than in the U.S. How do you survive?

Tao Zhang: The key reason why Judy’s Book imploded is because they really hadn’t built up traffic or a user base. For us, the traffic is good, and we have become influential in the industry. The most important thing is the restaurant who advertises with us sees results. They see their business go up, so they renew their contracts.

Adrian Bye: How you are monetizing the site?

Tao's photoTao Zhang: One priority is keywords. You can buy keywords, such as hotpot. If you buy the keyword, your sponsor link is more prominent.

Adrian Bye: Do you have a natural search results and then paid search results when I search for hotpot? And what’s your highest keyword and its dollar value?

Tao Zhang: Yes. The highest keyword and dollar value is Sze chuan at $1,000 USD a month. We charge on a monthly basis not on a per-click basis yet. We also use area keywords too. Within Shanghai, you have different business areas, such as Peoples Park and Suzhou Wei. These keywords are actually more popular and the highest is around $1,000 USD.

Another part for us is coupons, which are popular too. The restaurant can put a coupon on the website. The users then can print or download it to their mobile phone and redeem the coupon at the restaurant. We usually combine the coupon and the keywords together to be the most effective.

Adrian Bye: One other thing that’s interesting, Yelp uses a sales force. I guess you’re able to drive that harder than a site like Yelp because you can have more people, and it’s cost effective. Could you tell us a little about the dynamics of how that actually works?

Tao Zhang: Sure. In our case, the average sales person’s annual base salary plus the sales commission is 100,000 RMB or $15,000 USD. The worth a sales person can bring is over half million RMB, which is about $90,000 USD a year.

That’s why net margins for internet companies in China are amazing. For any company, if they can have double digit in their margin, it is a good company. Microsoft and Google have maybe 20 to 25 percent in their margin.

We are not to the point of net margins yet because we have to scale up, but in China, the net margin is very big. All the good companies, such as Tencent, Alibaba, Baidu, Ctrip, NetEase, have about 30 to 40 percent in their margins. I don’t see that changing in the next 5 to 10 years. The cost structure won’t change either. It might in 10 to 20 years from now.

Adrian Bye: A lot of our audience is from America. They are going to be interested in two topics. Some are going to be interested in starting a business in China. How do they get started? The other is if they already have a US company, how might they expand into China?

Tao Zhang: What I’ve noticed so far is that it’s hard to see a success story for international business to compete in the China market. P&G is doing well here. McDonalds is not that bad. For internet, Google is still heading there and might be okay. Besides that nobody is really doing that well.

There are different explanations for that. For example, the operations side could be tough. The key element with the internet is that it’s so much a part of people’s life; it’s very close to what consumers really want and need. You really have to understand what the consumer wants.

Adrian Bye: You have to be right on that mindset. If you are an American company trying to get into the Chinese mindset, it’s very different.

Tao Zhang: It would be very different. You have to have Chinese people. It’s hard for a foreigner to run a Chinese company here. You have to understand what Chinese people and the local people want. It’s tough even for the Chinese; it’s actually hard. A lot more success stories are founded by local Chinese like Tencent and Alibaba versus by returnees.

Adrian Bye: If a company is doing well and they want to expand into China, how do you suggest they do it?

Tao Zhang: They have to have a local team with a local person to run it with a lot of independence and authority. They need very little interference from the headquarters, such as getting approvals for a product change, UI change, or financial change. That’s what happened to Inchnet and eBay. That’s why Inchnet failed.

The internet is a very fast evolving industry. The people who are doing the internet business tend to be pretty good people among the Chinese entrepreneurs because they are pretty capable and very fast. You have to have a very independent operation.

Adrian Bye: And good entrepreneurs are going to say, “No way.”

Tao's photoTao Zhang: You might attract lower-quality entrepreneurs. If you happen to get lucky to attract high-quality entrepreneurs, their hands are tied, and they cannot compete with the other entrepreneurs. As I said earlier, the money is not that important. It is more a commodity in a sense, especially for a foreign internet company to do all of what you need in order to balance cost.

Adrian Bye: As we’re wrapping up, could you give us some more general pointers for Americans wanting to understand the Chinese market. It’s obviously very interesting for a lot of people. You have massive scalability, incredible cost efficiencies, and a country that’s growing dramatically. How can Americans profit from that?

Tao Zhang: For the internet industry, as I’ve said earlier, you have to have a team who really understands the Chinese market. Then delegate the decision making to that team. It’s tough to compete in the internet business in China. The failure rate is pretty high. MySpace just changed their CEOs in China. I don’t think they will succeed in China. Facebook has no chance of succeeding either. You really have to tap into your resources and have training or some kind of models. If you don’t know China, you will definitely have a problem. If you know China very well, then you have a big advantage.