Personal Info

Hobbies and Interests: Art collecting, golf.

Sports teams: Manchester United.

Favourite Books: Books by and about Confucius.

Favourite Entrepreneurs: Bill Gates, Steve Jobs.

Company website: http://www.kongzhong.com

Fast Track Interview

Adrian Bye: I’m here with Nick Yang in his offices outside of Beijing. Nick has founded and built a couple of companies. Nick, maybe you can just tell us a little bit about who you are and where you come from.

Nick Yang: I consider myself a professional entrepreneur. I’m 34 years old and starting my third company. My dad went to the States in 1983 when the Chinese government sent him to study engineering, and we ended up staying in the States. In 1999, I graduated from Stanford and started my first company.

What I decided to do was come back to Tsinghua University in China to start the company. I came back with two of my partners who I also graduated from Stanford with: Yunfan Zhou and Joe Chen. We actually raised $250,000 in capital for our company from about 20 of our classmates in the States.

Adrian Bye: What drove you to go back to China?

Nick Yang: The three of us went back to China in 1998 prior to our graduation because one of Yunfan’s family friends owns a big company in China and wanted him to work for him. We saw what was going on in China and decided that instead of working for him we’d start our own thing.

We felt that everything had sprung to life. It was almost like spring with all the little plants shooting new leaves. We were at the brink of a big and tremendous opportunity, like at the brink of a tidal wave. We were like surfers looking for a big wave. We felt that the waves were coming, and we just had to get in front of those waves.

Adrian Bye: What happened after you got back to China?

Nick Yang: We needed people, so we went to the top engineering university here in Tsinghua. We then went to the dormitories of the computer-engineering department, and we started knocking on doors and saying, "You guys are computer engineers. We are Stanford graduates, and we are starting an internet company. Do you guys want to work for us?"

A lot of students decided to work for us. As a result, we had to find a place outside of Tsinghua where the students could go to work and go back to their classes. That’s why we set up shop right outside Tsinghua.

We built a community site with the students called ChinaRen. The name is a combination of the English name of China and the Chinese pronunciation for people. This is a site for Chinese people, and it’s a fusion of the east and west. Our western background was our education; the Chinese culture and Chinese philosophies was the eastern side. We ended up selling the company to Sohu for $35 million of Sohu stock.

Adrian Bye: Why didn’t you just retire on a beach some place?

Nick Yang: We ended up in Sohu, for a year and a half and very depressed because the entire industry was depressing at that time. After 2002, we saw this new tidal wave coming up. Remember, we’re surfers. Whenever there’s a wave, you can be sure we’re going to get in front of it.

We have realized that the mobile wave will be even bigger than the internet wave, which we are still at the beginning of today. We decided to start another company called KongZhong.

Adrian Bye: And how did you get funding this time?

Nick Yang: It was very tough in 2002 to get funding because all of the VCs were just coming off the first bubble. Nobody wanted to invest. It ended up that only one leading VC, DFJ, decided we were the one. They invested $3 million for 33 percent, and that’s the only round we raised. We had also put in $500,000 when we started. We went public after only one round of fundraising, two years and two months after the setup of the company.

Adrian Bye: You’re still related to that company, right?

Nick Yang: I am still related with the company. I’m still the founder, the Vice Chairman, but I have resigned as President and CTO, so I don’t have a day to day role.

Adrian Bye: Can you tell us a little bit about what KongZhong does?

Nick Yang: KongZhong is a leading player in the mobile internet business in China. The business is called wireless band services, which is premium SMS, ring tones, logos, image downloads, mobile games, mobile communities, etc.

Adrian Bye: Where does the revenue come from?

Nick Yang: It comes from revenue sharing from the operators. We work with the major Telco operators in China: China Mobile, China Unicom, and China Telecom. Another revenue source is through mobile advertising where we get direct payments from major brands.

Adrian Bye: You have a U.S. education and are building businesses here in China. That must give you quite a head start, right?

Nick Yang: In the beginning it did because of the information asymmetry between the US and China. We saw how things were done in the West, adapted it to China, and did really well. Right now, with the information flow being so freely available on the internet, especially on technology and business, a lot of the Chinese entrepreneurs can actually have the same worldview as us. Now we have less of an advantage.

Adrian Bye: Now you are starting a search company called Monkey King Search right? Nick, maybe you can tell us a little bit about your plans for your search company?

Nick Yang: I’m involved with Monkey King Search in China because it’s always been my passion to build a search engine. We’ve been building things before like KongZhong, which is about services, mobile games, etc. These I consider soft drinks, like Coke, Pepsi, and iced tea. You can live without those, but you can’t live without tap water. I think a search engine is fundamentally as important to people’s lives as tap water, and I want to make a difference in people’s lives.

In many sectors of the Chinese internet, there are a lot of public companies, but in the search engine business there’s only one. Baidu is the one public search engine company of China. That number is too small. There should be at least another one that could go public.

Adrian Bye: I’m sure it can be done but how?

Nick Yang: I believe the idea is a conceptual search engine not a keyword search engine. You hear that talked a lot, but it’s actually very difficult to do. I really believe that search engine is a technology challenge.

There are basically two strategies in building search engines. One is a technology strategy. The other is a human strategy. There are also two extremes. One extreme is Google, which uses artificial intelligence, machine learning, and machine everything. Then there’s the other extreme, which is Naver in Korea. All their results are human produced, not in real time, but they just keep on producing it. We’re more toward the technology field because I believe in the future of artificial intelligence and machine learning.

Adrian Bye: How do you know there’s a market for this? Have you done sample test results, shown those to users, and said, "Users, if you had answers like these from a search engine would this be better for you than Baidu?" How do you validate what you’re doing?

Nick Yang: I don’t trust study groups. I don’t trust surveys. I don’t trust any of that. My personal belief is that a true entrepreneur has to be the passionate guy and the passionate user. That’s who I am. I’m the user checking for myself.

The current search engine doesn’t solve my problems. I have been searching for myself, and if I feel this is a good search engine, people will like it. It’s like they say, "The dog eats the dog food." I’m building it for myself, my teammates, and my employees.

I build things that are used by hundreds and millions of people in ChinaRen, in Sohu, and in KongZhong. I pretty much know what the general population thinks, and I feel that the current leading search engine sucks. That’s why I’m doing this.

Adrian Bye: This time around you’re funding it yourself, right?

Nick Yang: Yes, I’m self-funding this. I’m going to raise funding at the end of this year or early next year. I’ll probably raise one round, and then hope for an IPO.

Adrian Bye: One of the things I’ve been hearing while I’m here in China is that management is a real problem. You can’t scale up like you can in the US because people become very individualistic. It’s like there is a cap on how big you can get companies. Is that understanding correct?

Nick Yang: It’s the difference in culture. If you’re in Germany or Japan, it’s very easy to scale up very big because of the people’s culture. German workers and Japanese workers are very similar. They’re like robots and just toil away. In China, people think a lot more, and these guys are not as team oriented as in Japan or Germany. People here are very creative and very entrepreneurial.

With the right manager, the right motivator, the right coach, it could be done. It just takes a lot more work. You have to line people’s objectives with yours. Since we’re much more entrepreneur-focused in China, the head guy or the boss has to be the smartest and most capable guy in the company. Otherwise, people will leave you. There’s no way you can hire someone better than you.

For example in marketing, the head guy has to be the smartest marketing guy in the company. Otherwise, the guy will leave. It would be like, "Why should I work for this dumb guy? Why is he the boss? Why is the money I earn taking such a big cut by him?" In China, people think that way. You’ll have to be the smartest guy in your company. You can’t get guys who are smarter than you to work for you.

Adrian Bye: How many people work for you now? And what’s the organizational structure?

Nick Yang: I have 40 people working for me. I actually have a very innovative way of management. We have what we call the Senate. I told the company that we run a constitution monarchy. There are certain things I decide. There are certain things the Senate decides. The Senate is a representation of the teams. Every 10 guys have one Senator. The Senate decides on things such as budgeting, salaries, and compensations.

Adrian Bye: Why are you doing it that way?

Nick Yang: Because you get more involvement from the company and from the employees when they feel part of the team.

I actually learned this from the Swiss government. Have you been to Switzerland? The Swiss Government doesn’t have a head of state. It has a Council and in terms of foreign affairs, such as traveling overseas, it rotates. For example, this month it’s this guy and the next month that guy. There are about 20 guys who run the country.

That’s how I run things here and people feel they’re really part of the team because we have so much empowerment. Some issues, such as "Where do we go for our spring trip?" or "How do we spend our team building budget?" are decided by the entire employee body. Other things are decided by the Senate.

Adrian Bye: How is it working so far?

Nick Yang: Very well. People are very involved and happy that they have such empowerment. Any other type of company is a pyramid scheme. It’s like who decides for the salary and the bonus? It’s your boss. I’m doing a whole new system here.

Adrian Bye: One of the books I recently read said that because the Chinese are so entrepreneurial, there’s a sense of right or wrong, but Chinese people still just do what they want to do. As a result, you always need to have a strong system in place so Chinese people will understand that there’s consequences if you do the wrong thing. There’s not this internal code that a lot of other western societies have where there’s a feeling of right or wrong. Would you agree with that?

Nick Yang: Not necessarily. In China, people consider three codes. There’s only one code in the US, there’s a code of law, which means that the code of law rules the land in the United States. If you do something wrong but the police didn’t use the proper procedures, you’ll be let go.

Traditionally in China we have three codes: the code of heaven, the code of law, which is the code of country, and the code of all emotions. For example, in China, a woman kills her husband because her husband beats her a lot. In the United States, the law says how you’re punished, so that is how you’re punished. In China, the law of emotions could let her have a very light punishment because a very wide scheme Hall of Judge can decide.

It’s more of those three codes governing China rather than just one in the United States. People here have a lot of emotions, so that’s how things work here. That’s why relationships are more important here.

Personal Info

Hobbies and Interests: Travel, Books and Ping Pong Tennis.

Favourite Books: Books by Lu You and Confucius.

Favourite Entrepreneurs: Jack Welch, Robin Li from Baidu, Charles Zhang from Sohu.

Personal blog: http://user.qzone.qq.com/622005602?ptlang=2052

Company website: http://www.ku6.com

Fast Track Interview

Adrian Bye: I am in Beijing and talking with Kevin Li who is the CEO of Ku6.com. Ku6 is one of the top video sites on the internet in China. It’s the equivalent of YouTube. Kevin, we’re here to learn about you so tell us who you are and take it away.

Kevin Li: I am from Northeast China and majored in mathematics at Nankai University in Tianjin. I used to work for Sohu.com as the Senior Vice President and the Editor in Chief for five to six years. Three years ago, I quit at Sohu, and I founded Ku6.com, which is a video sharing website. After we launched Ku6, I started to find venture capital. In early 2007, we got capital from two or three ventures companies.

Our operating model is a combination between YouTube with short videos and Hulu with long videos, movies, and television shows. We currently have more than 20 million unique visitors per day and 250 million page views a day. Our revenue was a little more than $10 million last year, and we have around 200 employees.

Adrian Bye: Where did the idea for Ku6 come from?

Kevin Li: While I worked in Sohu, I found that people uploaded their music on websites. I thought if people can upload music on a website, why don’t we encourage them to upload videos to a website. At Sohu, it was difficult to make this idea a reality, so I decided to quit Sohu and fund Ku6 by pulling 2 million RMB from my own pocket. Then I hired some staff to start this project.

Adrian Bye: You’ve never lived or studied in the US, right?

Kevin Li: I am 100 percent Chinese with zero U.S. education. I am "Tu Bie." In China, we call the people who study at the U.S. and come back to China "Hai Gui." The people like me who are 100 percent local, we call "Tu Bie." For example, Tudou’s founder, Gary, is Hai Gui because he studied in France. I am a totally pure Tu Bie.

Adrian Bye: That’s interesting. Are there a lot of guys like you who are Chinese with no outside experience? It seems like a lot of successful internet guys have studied outside of China.

Kevin Li: Most of the first generation of Chinese internet founders came from studying in the U.S. The second and the third generations are more local guys because we learned the internet directly from the U.S. For example, Sohu and Baidu came from the U.S., but the second generation has QQ. More and more, you’ll find local people are more suitable for start ups because we know more about local. We don’t need to live, study, and work in the U.S.

Adrian Bye: You said you raised money. Who did you raise money from?

Kevin Li: I had shared my business model called UGA – User Generated Advertising – with DFJ. The next month we had several meetings, and we got $10 million investment from DFJ. Besides DFJ, we have partnered with DP Capital, and Baidu is our investor also.

Adrian Bye: Can you explain your UGA business model?

Kevin Li: With the model, I can organize many people who are experts in online video creator and record them when they make online videos. I then ask them to invite our good customer advertising into their content. We call this model User Generated Advertising. The content is advertising, and I share revenue with those content providers. For example, I negotiated a deal with Coca Cola where I organized an advertisement video for Coca Cola.

Adrian Bye: But Coca Cola is very strict about controlling its brand, and I don’t believe that Coca Cola would want users making advertising for them.

Kevin Li: Normally, they organize a professional advertising company to make their professional advertising. They found that if they put this professional advertising online, nobody will look at it. If they make use of grassroots advertising, then people will watch this kind of video. Coca Cola, Microsoft, Intel, and all of these great brand companies let us organize this UGA campaign for them. Of course, they can control the content.

Adrian Bye: How is the advertisement selected? Does Coca Cola approve them or can anyone make and run it?

Kevin Li: No. We organize them, and they are selected by Coca-Cola. Only qualified videos can be uploaded online, so we can guarantee that the branding will not be a violation.

Adrian Bye: What are some of the popular examples of advertisements people are making?

Kevin Li: They make new short films or edit different movies and then re-edit the advertisement.

Adrian Bye: In China, there were over 200 video sites and now most of them are gone. What you are doing is very difficult. How are you making this work?

Kevin Li: In China if you run a successful video website, there are four challenges. First is government regulation. In early 2008, China had a law that only government-owned websites could run video websites. Finally, they changed this rule. Now, in China, to run a video website, you need government relations to know and understand the government and what you can and cannot do. Because I used to be the Editor in Chief of Sohu.com, I have rich experience in government relations. Formally, Ku6 is the first video sharing website to get the government license.

The second challenge is copyright, which is becoming more important in China. As I told you, we are a combination of Hulu and YouTube. Hulu’s model uses some movies and some TV. Those areas have copyright issues here. From 2008 until now, we have paid a lot of attention to copyright issues with DVDs. We buy the copyright or we share all the advertising revenue with the content provider, so the only motive is that we are making money together. In other words, I share revenue with the original content provider if I can make an advertisement. If they don’t want to put their movie on here, I just delete it.

The third challenge is bandwidth. I pay a lot of money for bandwidth. I cannot tell you the exact number, but the good thing is that this year our annual bandwidth cost was reduced to one-third, which reduced a huge bandwidth cost.

Adrian Bye: And how did you reduce it?

Kevin Li: Through our new P2P technology and our advanced CDN technology. Also through our business partnerships with a commission deal; if you cannot control that bandwidth cost, you’re dead because it costs a lot of money.

The fourth challenge is the business model. The first year at Ku6, I didn’t even break even. The fourth year, I broke even. Compared to our competitors, our advertising revenue is relatively higher than theirs. If you ask me why I beat so many competitors, it’s because I met these four challenges better than they did.

Adrian Bye: I’ve talked with people who make websites in China. They have found that if they make simple western-style websites, nobody in China uses them. If they make noisy Chinese style websites with lots of noise and advertising, Chinese people love them and use them. You’re a Chinese guy. Can you explain why?

Kevin Li: I don’t know why people like this. Maybe the reason is that in the U.S. you have many channels to find new media and new information. In the U.S, Yahoo is not the only channel for you to find information. You can find information with other news writers and TV stations. Over here in China, it’s difficult to find information and news. People in China lack information, so they look for more information in one page. In China, Sohu and Sina are the main media information channels for us, so people need information more here than in the U.S.

Adrian Bye: Yes, give people what they want, right? How do you see that you compete with PPLive?

Kevin Li: We have different models. We are all P2P and use a method for people to look at videos faster. If you are watching videos in PPLive, you’ll have to upload PPLive P2P. If you look at a video in Ku6, you don’t need to download our client end. With PPLive, if the people don’t download the client, they cannot watch PPLive video. But here, even if you don’t download the client, you can watch it.

Adrian Bye: When you got started, where did your traffic come from?

Kevin Li: As I mentioned earlier, Baidu is one of our investors. When YouTube was acquired by Google, Baidu thought about their video strategy. They decided to invest in one company instead of doing it by themselves or buying one. They chose Ku6, and they gave us a lot of resources. Our first traffic mainly came from Baidu.

Adrian Bye: How did that happen that you got the investment from Baidu?

Kevin Li: Baidu talked with almost every good video website in China and they chose me because they trusted me. Since I used to be at Sohu.com, I have some reputation in this internet area, and they trusted me.

Adrian Bye: I’m interested to understand how you manage your relations with the Chinese government. In the reading that I have been doing about China, when you do something like a video site in China, you have a partner which is the Chinese government. It is not a business partner, but the content you display must be generally in line with what the Chinese government wants, and there are things you can’t run on your site.

If you have users uploading videos, there must be a lot of uploaded content that the Chinese government doesn’t want. How is that handled?

Kevin Li: There are two kinds of ways to manage a video website over here. One model is that no matter what people upload, you let them look and share with each other. By doing so, a lot of sexy videos or videos of political figures are uploaded. In fact, several of our main competitors do it this way. But I did a different thing.

In the first period of our website, I set up a big video monitor team in Xian in central China. I have 80 people there who monitor every video before it is uploaded to our website. We have a very detailed standard for our internal monitor.

Adrian Bye: How long does the review process take?

Kevin Li: Anywhere from 1 minute to 7 minutes because we have new technology. For example, we have a pool with bad videos. If you upload a new video to our site with a scene from another bad video in the pool, you will be cancelled.

Adrian Bye: What happens when a user uploads something bad? Do you report it to the Chinese government? Is there any process or do you just delete it?

Kevin Li: We put the bad video into our internal pool and delete it from the site.

Adrian Bye: That helps control what goes onto the site, but there’re still regulations you have to follow with the Beijing government. What kinds of relations do you maintain with the government?

Kevin Li: In China, government management of media websites is not very strict. They just care about some of the bad videos. For example, you better not upload any sexy videos or political videos on our website. Besides this, you can do anything you want. That’s the only regulation from the government.

Adrian Bye: From the West, we know how to reach the U.S. government. How do things work with the Chinese government? Who do you talk to?

Kevin Li: They have one department in charge of video websites that also has meetings with us. At these meetings, we get clear initiatives and general principles to follow.

Adrian Bye: One of the things I’ve been learning about China is that people are very individual, and often times they don’t want to work for someone else. They want to be independent or run their own business. They’re very entrepreneurial. How do you keep 200 people all focused on building Ku6?

Kevin Li: The number of people who want to be entrepreneurs is very little. It’s too hard to be a successful entrepreneur here. Most of the people want to work in a company and people here like working in a group or a team, so it is not difficult for us to manage our staff.

Adrian Bye: You don’t have any problems?

Kevin Li: Yes, we have problems. Every company has problems. I don’t always have problems because people want to be entrepreneurs. That’s not my first problem with employees.

Personal Info

Hobbies and Interests: Traveling, Reading.

Favourite Books:

• A History of Western Philosophy by Bertrand Russell
• The Selfish Gene by Richard Dawkins

Favourite Entrepreneurs: Google Founders.

Company website: http://www.yeepay.com

Fast Track Interview

Adrian Bye: I’m in Beijing, China and talking with Chen Yu who is the co-founder of YeePay. YeePay is a payments company based right here in Beijing. Chen, can you tell us about yourself and where you come from?

Chen Yu: I was born and raised in China, but I lived in the States for about 10 years. I was in Chicago for three years and in Silicon Valley for seven years. I actually went to college here in Beijing, and after the Tiananmen Square crackdown, I spent a year in the Chinese military as well. Then I went to graduate school in the States. I worked in the States mostly in the IT industry for about eight years before I moved back to China and founded this company.

We started YeePay in August 2003, and we officially announced the service in early 2005. We are one of the leading payment service providers here in China.

We provide a variety of payment service products that merchants can use to collect payments from their consumers. We work with many merchants across all different industries from e-commerce to digital entertainment, like online gaming websites, as well as major airlines and travel agents.

Adrian Bye: What kind of volume are you processing right now through YeePay?

Chen Yu: We process roughly $400 to $500 million per month. Last year, we actually grew about five times compared to 2007. This is a very fast growing market, because the starting point in China is really low. For example, if you compare the payment segment to a lot of other internet segments, payment is one of the areas that we are so behind in.

More people actually have either a credit card or debit card, but the problem is that a lot of people do not know how to use these debit cards or credit cards for online payments. As of last year in China, the number of online payment users was around 50 to 60 million, which compared to the overall market is just a small percentage.

Adrian Bye: Are these billion dollar internet companies in China being built on a base of 50 to 60 million users?

Chen Yu: Not necessarily. Not all these internet companies necessarily have to collect online payments from their users because they have different business models. Many of them rely on advertising where you don’t need a payment mechanism to collect money from your users.

Even gaming companies don’t necessarily rely on E-payment. They have what we call the prepaid card system with a distribution network where physical prepaid cards are sold by vendors. In other words, people can go to any newsstand or convenience store to buy a prepaid game card and use that as a payment method.

These cards are very similar to mobile phone prepaid cards except these cards are issued by vendors and online game operators. You can actually buy a China mobile prepaid card and also use that as a form of cash to pay for other games. In other words, instead of using the mobile prepaid card to recharge your phone bill, you can use that $20 card to pay for online games. That’s what we call a universal prepaid card.

Adrian Bye: Can you talk about debit cards and credit cards and how they work in China?

Chen Yu: Absolutely. Overall the debit card and credit card penetration in China is still relatively low, but it’s taking off very rapidly. Over one billion debit cards are issued by various banks in China. The overall population of China is 1.3, if you assume that one person has two or three cards that would translate into 20 to 30 percent of the people actually have bank cards.

People still heavily rely on the legacy payment system, such as cash on delivery, postal wires, and bank wires. E-payment is just taking off in this market because there is now a very practical need for it.

In regards to the cards, all the banks are required to connect into China UnionPay network. As a result, every bank issues their own debit cards or credit cards, but ultimately they have to brand this card as China UnionPay cards. Many of these cards also have the Visa and Mastercard logo but don’t really go through those networks.

Adrian Bye: Do consumers feel comfortable buying things online with their debit cards?

Chen Yu: A lot of people still do not feel comfortable buying things online. It’s probably because of a cultural thing. Asian people, in general, believe in tangible things, so in a way trust is a much bigger issue than payment and the technology itself. People here usually do not trust each other even when they’re doing business face to face, let alone when they’re doing business over the internet. On the other hand it’s changing, especially for the younger generation because they’re quicker when it comes to adopting new technology and new ways of payment.

Adrian Bye: I’ve heard that in Germany there is no such thing as a chargeback. When you charge something on your account, there is no right to turn it back. How do chargebacks and refunds work in China?

Chen Yu: That’s pretty much also the case in China. There’s no credit card chargeback. As a consumer, you can’t say I don’t want to pay for this or this was not a transaction made by me. You don’t really have the right to say that because it’s very limited protection for the end users here in China. Overall, the end users bear the ultimate responsibility for their own card.

This is both good and bad. The bad thing is that it probably slows the adoption of credit cards while the good thing is that there is less risk for the banks and payment operators.

Refunds work in a different way because they are actually initiated by the merchants. If a merchant agrees and initiates a refund to you, you can get your money back.

Adrian Bye: If there is no chargebacks and no refunds, what about fraud?

Chen Yu: There is still fraud. As long as you are dealing with money, you can expect a certain level of fraud because people might use stolen cards to pay for online transactions. Sometimes if they can prove that those cards were indeed stolen by someone else who made the payment, the bank has to refund the charges. There might be some on the merchant’s side as well who are involved in fraudulent transactions.

As a payment company, you need to be able to detect those fraud transactions, and you need to have a very sophisticated risk management system to constantly monitor all the transactions. We do have a dedicated risk management team who actually plays this role.

The other, more fundamental difference in China is that most people use debit cards for online payment even when using credit cards. In other words when you’re using a credit card for an online payment, we treat it as if it’s a debit card payment because all transactions are considered debit card transactions protected by a password. As a result, there is more protection for the transaction intrinsically.

It is not like in the U.S., where you simply go to the merchant’s website, put in your credit card number, expiration data, and authorize payment. In China, it’s a very complicated process, and the user experience is not as friendly as what you see in many other countries. Here you have to enter your card number, your password from the card-issuing bank, and then there is also a check code to make sure you are a human being instead of a robot. Theoretically, it’s definitely much safer because all transactions are protected by a password. You can’t just authorize a transaction by giving out your credit card number and expiration date.

Adrian Bye: Another model used a lot in the U.S. is recurring billing where you sign up for something and then are billed $10 or $20 a month. Do you have the ability to do that?

Chen Yu: We have a product called ePass for recurring billing. Essentially it’s a service that allows you to set up your own YeePay account and link that with a bank card. By default, the banks would not allow you to charge something automatically without issuing a password because all transactions are protected by a password.

Adrian Bye: In other words, the consumer can’t authorize it if it’s recurring every month. The password can only be used at the time each transaction is made unless they sign up with that system and they explicitly give it to you. Does that mean you don’t end up having much recurring billing?

Chen Yu: We have very limited adoption, but we do see that as a trend probably in the future. It comes down to the trust issue and probably a cultural factor. Because the Chinese people tend to trust in more tangible things, recurring billing is something far in the future.

Adrian Bye: Can you talk about mobile payment and how that works?

Chen Yu: When we talk about mobile payment in China, we are mostly referring to remote transactions, not retail situations. It is where you are using your mobile phone to pay remote transactions that happen on the internet or mobile network. We also have different methods for mobile payment. One form is to use a mobile bank card payment gateway, which allows you to use your debit cards or credit cards on the mobile phone by putting in your card number and password to authorize the payment just as if you’re doing it online. The adoption of that kind of payment is still relatively small.

Alternatively what we have is universal prepaid card payment on the mobile phone, which is the most popular form of mobile payment. It’s the same as using the universal prepaid card online. People can just go to a convenience store, buy any prepaid card, and use the card’s PIN number as a form of cash to pay on the mobile phone by entering that PIN number on your mobile phone either through a WAP interface or directly in an application.

Adrian Bye: What types of industries use mobile billing?

Chen Yu: Mostly digital contents like gaming, fortune telling services, weather forecasts, and all kinds of digital content services that you can buy from your mobile phone.

Adrian Bye: I know direct response TV is quite big here in China. How do people pay for that sort of stuff?

Chen Yu: You can pay either when you order the goods or you can pay upon the arrival of the goods. In the former case, you can use a debit card or credit card through the telephone to pay for the transaction. In the latter case when you pay upon the arrival of the good, you can pay in cash, which is cash on delivery or you can pay through a mobile terminal the delivery guy uses. The mobile terminal has really taken off and is supported by more and more vendors.

Adrian Bye: Is there anything that you want to talk about that we haven’t covered?

Chen Yu: One thing I can touch upon is that we are not the only player here in the Chinese payment market. If you ask us what are the major differentiators that we have compared to some of our competitors, it is mostly in three areas.

The first thing is we provide total solutions. Not only do we do support online payment we also support telephone payment as well as mobile payment. Not only do we support bank card payment we also support universal prepaid card payments. Our philosophy is to give the maximum options to the end users and the merchants.

The second thing is that we are industry-focused. We are trying to provide custom-made solutions for different verticals. For example the requirements of the airline industry could be very different from the requirements of the online gaming industry.

The third area is that in addition to the core payment service we also provide a lot of value-added services. For example, we actually have online platforms that help our online game operators promote their contents and products. We also have a credit lending service where we lend travel agents money so they can buy tickets from the airline, but at the same time we also help them collect the money when they sell the ticket. Their money has to go through our system first, so the risks are totally manageable.

Personal Info

Hobbies and Interests: Climbing.

Favourite Books: “Huangdi waijing jing” – a old Chinese medicine and philosophy book.

Favourite Entrepreneurs: Warren Buffett, Shi Yuzhu, CEO of Giant Entertainment.

Company website: http://www.kaixin001.com

Fast Track Interview

Adrian Bye: I’m here in the office of Kaixin001 in Beijing, China, with the founder who is Chi Yu and the VP of Marketing who is Liu Qian.

This is a very interesting interview. It is the first time, as far as I know, that there is an English language interview with these guys. One of the things that is very interesting in this company is that their native language is Chinese, and they don’t have to speak English.

Let’s start with the guys telling us a bit about themselves.

Chi Yu: I’m from South China and has been in Beijing for more than 18 years. I worked in Sina where I saw that SNS would have a beautiful future very quickly. I left Sina and set up the Kaixin company at the end of 2007.

Liu Qian, the VP of Marketing also worked for Sina for over 10 years. He too found that SNS in China had a good possibility, and he joined the team here at the beginning of this year.

Adrian Bye: The business model for Kaixin is very interesting. It seemed that the Chinese market was very full with no need for a new social networking site. Then came Kaixin. How did you come up with the idea that this would work?

Chi Yu: First of all, we don’t believe the market is full. It is just the beginning for the social network in China. There are maybe 20 or 30 social media companies in China. Some of them we need, but the rest we do not because their business models are not good. We do believe that Kaixin will be a new concept in social networking in China.

Adrian Bye: My understanding is that Kaixin001 got started through tell-a-friend addresses. For example, people would sign up in their address book and then they invite all of their friends, and all their friends, and all their friends. Is this correct?

Chi Yu: We do use this way to invite more users for Kaixin001. The users think Kaixin001 is a good social network and then invite their friends. The system does not push them to invite more users. The users invite their friends by themselves.

Adrian Bye: What you are saying is the viral marketing is permission-based?

Chi Yu: We see it as word-of-mouth. Users also use IM, such as MSN and QQ, to invite friends. Because the users feel our website is very fun, they share with friends through IM. For example, a user tells somebody, “This website is very fun. Come here and join us.” These are all done by the users themselves typing in the IM. We do not use automated systems. We do know that some SNS companies in China email invitations to the entire user’s address book without the user’s permission.

Adrian Bye: Americans in China who use Chinese internet say to me, “Kaixin001 has so many emails, but my employees love Kaixin. They all use it.” It seems to be a very interesting difference between the West and China in the amount of email marketing you can do for a social network. Do you think that is the case?

Chi Yu: The email invitation is common in China, and some companies do a lot of work this way. We did not want to do that for our business. Instead, we used ways to develop the database of the users. For example, at the beginning, the first users of Kaixin001 called their friends via the telephone and said, "We set up a social network.”

Adrian Bye: By telephone or by call center?

Chi Yu: All of our staff called all of our friends. They registered in Kaixin, and then they invited their friends.

Adrian Bye: How many users did you get from phone calls?

Chi Yu: Maybe only several hundred. Then they informed the Sina, and Sina informed the Soho and Ala.

Adrian Bye: That is brilliant. I’ve never heard of a social networking started by telephone. That’s amazing. You guys have grown very fast. How long ago did you start?

Chi Yu: We set up the website in October 2007. Then we tested it in beta from January 2008 until March 2008 when we actually launched.

Adrian Bye: How many registered and active users do you have now?

Chi Yu: We have 38 million registrations. About one-third are active and log in everyday.

Adrian Bye: Why do you think they’re so active?

Chi Yu: The users needed this kind of service. They have not experienced this before. Most Chinese workers are hard working and need some place to release and relax, and they can find fun from Kaixin001. The online relationship between friends also involves more content than offline, so they can also build more trust online.

Adrian Bye: When we register a website in the U.S. or in English, we always make sure we get dot-com, and we get a very clear name. For us to register a domain like Kaixin001.com, we would never have a number in a name. Why did you do it this way?

Chi Yu: When we started, we did not have enough money to buy Kaixin.com. The domain name was owned by a USA domain trader, and the price was very high. We could not afford it at that time.

Adrian Bye: I haven’t used Kaixin because of the Chinese, but what I read was that Kaixin001 is a copy of Facebook, and Kaixin is a copy of Kaixin001. It’s like a big circle of copying. Is that accurate?

Chi Yu: Kaixin001 is the same as Facebook in that they are the same social network system. Kaixin001 has its own content, product and features, and the user’s experience is quite different from Facebook.

It’s okay that somebody copies Kaixin001. It’s easy to copy, but copying the name is a problem.

Adrian Bye: For us in the US, we don’t understand this level of copying within the same market. You are in the middle of very competitive market.

Chi Yu: There are a dozen companies named Kaixin. For example, one of these other companies very rudely uses the email invitation. They copy the names and even copy the name Kaixin. It’s a type of imitation, but their content is automatically by the system. Then they send to many users at the same time. Sometimes the users then don’t understand that it is not our Kaixin service, and they become very angry.

Adrian Bye: It affects your brand. They were using very aggressive, non-permission based invitations while you are aggressive but permission based.

I want to talk more about the name and want to understand the reason for registering a domain Kaixin001. In English, if I want to register happy.com and I didn’t have the money to buy the domain, I would register happyday.com or happylife.com. I would then call the social network happylife. Whereas you didn’t do that. You named it Kaixin001. Is it more normal to put numbers in the domain in China?

Chi Yu: It’s common use for numbers in an URL name or domain name in China. We are the first one to use 001 in a domain name though.

Adrian Bye: It is interesting that you do things your way and don’t care about the U.S. You are showing the way for many more Chinese companies.

Chi Yu: We don’t understand the habit of the overseas users, so we don’t focus much energy on that.

Adrian Bye: Actually, let’s talk about that. Do you have plans to expand outside China?

Chi Yu: Not yet. Even in Asia, we know the habits of users and the cultures are so different. For example, in Japan the famous SNS is Mixi, and its culture is so different.

Adrian Bye: Really interesting. Back to the structure of your company, how many employees do you have?

Chi Yu: It increased to 60 about three months ago.

Adrian Bye: For me that’s very interesting that you copied a lot of what Facebook has and also some other games with 60 employees. That’s amazing leverage to be so big with so few people. Maybe you can talk about how not many people have a big influence. It’s very impressive.

Chi Yu: Some of the employees have had good experience in management, development, and marketing. They can use their experience in the Kaixin001. They also have a very efficient work style, and they can do a lot in a short time.

Adrian Bye: In my experience and in talking with a lot of people and industries, the best internet companies are like yours: small team, big results. Once a company gets too big, problems happen like at MySpace whereas you guys are doing alright.

Chi Yu: Actually we already control the business scale now. If there are more people, there will be more problems. We control the scale of the staff, but not because we cannot pay their salary. We think it’s a risk to grow the staff so quickly.

Adrian Bye: Very clever. The big question a lot of people have about Kaixin001 is if or when will you open the network to third-party applications.

Chi Yu: We do have a plan, but we won’t open the application market.

Adrian Bye: Will you partially open the network?

Chi Yu: Yes, partially. The business model in China and the USA is quite different. The company who develops the applications only focus on making money not on the users. We are focused on the users, so we will not completely open the market. Maybe if we open the market for application companies, but not to private companies or users who can develop.

Adrian Bye: Does this mean some companies will be allowed to develop and some not? What is your time frame for this?

Chi Yu: We don’t have a timetable, and it will depend on the application company and how they are creating their new product.

Adrian Bye: If the applications become very complex it makes it hard for you to make them, and you will grow bigger with other companies making the applications. If they are simple, then it’s easy for you to continue making them yourself. Is the level of complexity in the applications the balance of whether you’ll open or not open?

Chi Yu: We will cooperate with application companies who can develop very difficult or complicated software on the business consideration of the user not on the application itself.

The focus on the user is the main factor for finding a partner. As far as the easy applications, we would also like to find a partner who thinks about the user. We also want to partner with someone we trust.

Adrian Bye: When you give the business, does that mean you would charge them to be on the network or would it be free?

Chi Yu: In this field, our business model is that the application is free. When we have the income from the advertisements or the users, we would share with the third-party or the application companies.

Adrian Bye: If you have an application that makes a lot of money because it is very good and users pay a lot for it but it is aggressive with the users and some become angry, will you put it on the network?

Chi Yu: This is one of the reasons we are looking for a partner very carefully. Maybe the other company only focuses on the money or the market not the user’s feelings or experience. We are focused on the user’s feelings or trust and do not want to let down our users.

Adrian Bye: You want the applications that make the most money but respects the users’ trust. Is that right?

Chi Yu: We would change the order to first focus is the users and then to make money. Kaixin001 values its users, and we hope all the users will trust us from the beginning to the end.