A couple of months ago I had the chance to do an interview with a friend and our advisor, Ming-To YU. I finally have time to publicize it and hope that it could shine light for some hardware founders.
Ming-To YU was most recently the CFO of Xiaomi. Before joining the fast-rising Chinese startup, he had been the CFO and Spokesperson for the powerhouse semiconductor firm Mediatek for more than a decade. He was instrumental in the early years of Xiaomi's remarkable growth.
- Interviewer: Jerry Yang (JY)
- Interviewee: Ming-To Yu (MY)
JY: When did you join Xiaomi as a CFO and for how long?
MY: I joined Xiaomi about right after its Series C with Temasek with a valuation of $1B. At that moment they were starting to see momentum and wanted to be able to raise enough fund to do massive scaling and seize the market opportunity. I was invited by Lei Jun to join in 2011. I quit the CFO job at the end of 2012, lasting for about 1.5 years. I remain an advisor to the company and I am still involved in the company closely.
JY: At which funding stage was Xiaomi while you were there?
MY: When I joined, we just finished Series C. During my CFO term we successfully raised Series D of $160M with DST and GIC at a $4B valuation.
JY: What was the product status back then?
MY: We raised Series C before the release of Xiaomi’s first smartphone in August 2011. At $1B it was a very high valuation but the investors bought into the vision of Lei Jun, who had been a successful entrepreneur that brought Kingsoft to IPO in Hong Kong. Plus China is just too large a market.
We started raising Series D in the first half 2012 and were able to close it within a couple of months.
Fast forward to 2014. Given the explosive sales growth, Xiaomi was aggressively pursued by many investors. That last round set up the humongous $45B valuation that we all know today. In the same year Xiaomi shipped more than 60 million smartphones as well. It became easy for investors to draw a bright future for the company.
JY: Given the rumored struggle for Xiaomi now, do you think the high valuation was a good thing or a bad thing?
MY: Well, it’s always both good and bad, right? For example, Hugo Barra has been the high-profile face of Xiaomi in the West as well as in India. However, it took Xiaomi more than 1.5 years of discussion with him to bring him on-board in September 2013. The ever-rising valuation back then definitely helped the recruitment.
The downside obviously is that for each high valuation, the company has to aim at even higher valuation in the next round. The scope therefore had to go from being merely a smartphone maker to covering several major investment themes, among all, IoT and Big Data. Looking back the high valuation probably constrained the company’s strategy a bit.
JY: Why did Lei Jun go for such an aggressive growth path?
MY: Well, right from the very beginning Lei Jun made it clear that he was out to create a large internet company that could battle the three internet giants in China: BAT (Baidu, Alibaba and Tencent). All the strategies were set up to reach an enormous scale as fast as possible. It’s an entirely different ambition than just a random hardware startup. Looking back without this ambition Xiaomi wouldn’t have grown so fast.
JY: It’s rumored that Xiaomi sells smartphones at cost and wants to make money instead as the e-commerce channel for its users. Is that true?
MY: Well, not exactly. When I first joined Xiaomi, we actually had pretty decent gross margin. By choosing to sell only directly on-line to the “Mi-fans”, instead of working with telecom companies or retail channels, Xiaomi could save the channel margin for its own. This was also why initially the company was able to raise capital relatively easily.
The margin started to trend lower due to competition. And when Xiaomi entered India, it was a market with enough competition and Xiaomi’s existing backend and logistics advantages in China could not be directly transferred to India. That hurt the margin over there.
JY: Throughout the fundraising, was Lei Jun deeply involved?
MY: Of course! He was the driving force behind all the fundraising. In fact, this is the most important advice I could give to entrepreneurs: fundraising is the most important job for the founders, because without cash the company cannot run. It wouldn’t matter then how good your product is or how brilliant your vision is then. Therefore the founders should always be fundraising.
Also the founders have to consider all possibilities in fundraising. You have to be flexible in your strategy and be able to consider all potential investors. When I was raising funds at Xiaomi, I had at least 10 investors who said no to me. It took only two years of development afterward for Xiaomi to become what every investor fought to join. Without enough flexibility to close those early rounds, Xiaomi wouldn’t have reached the later stage.
JY: In addition to fundraising, any other advice?
MY: Obviously the cash flow management is top priority. The founders have to have a clear view about the cash flow projections of the firm. The receivables and payables in hardware startups are more traditional than software startups. Work out in details the working capital cycle. Pay attention to inventory management. In the early stage of Xiaomi we were both applauded and criticized for the “starvation sales” tactic, a Chinese term that describes artificial shortage of supply to excite the demands. The truth is that we only had so much cash at hand. We were very careful about the inventory, opting on the side of shortage than the side of overstocking. Result-wise, it’s more often shortage than not. As for whether that really had the side benefit in creating demands, I couldn’t really comment. All I could say is that was more a result of capital constraint than a marketing strategy decision. If we have had much more fund to start with, we might have done things differently.
JY: Thank you very much for offering so many useful advices to hardware entrepreneurs, Ming-To.
MY: My pleasure.