Taken from SI FNTN board:China Article...
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BUSINESS WEEK ONLINE ASIA
BY BRUCE EINHORN
APRIL 11, 2000
Can This Chinese Portal Cling to the Fast Track?
After eTang's quick start, investors are wondering about its
business model and the future of Net IPOs
It has all the makings of a classic success story.
Haisong Tang, the son of poor Chinese peasants,
goes to Shanghai's Fudan University to study laser
physics, lands a job at McKinsey & Co., then earns
an MBA from Harvard. He starts a portal,
eTang.com, raising tens of millions from top U.S.
venture capitalists. He markets like mad, distributing
50,000 hats emblazoned with the eTang name and
spending half a million dollars for a TV spot during
Chinese New Year -- China's equivalent of Super
Bowl advertising. His goal: build one of China's most
recognizable names for sales of consumer
products, both in cyberspace and in real-life shops.
"We are trying to create an online/offline lifestyle
brand," says Tang. "We want to be like Virgin,
Swatch, Wonderbra, Avis."
But not everything is going according to the script.
While he had hoped for a fast IPO, Tang had to put
his plans on hold as Beijing hindered efforts by
Chinese portals to go public. Now, the logjam has
broken -- but Asian Internet stocks have collapsed.
Meanwhile, critics of the 31-year-old scoff at the
company's business model. They claim eTang got
millions from U.S. investors such as Draper Fisher
and Sevin Rosen despite what critics call flaws in
the model. Sitting in his new office in Shanghai, the
paint so fresh that the fumes still fill the meeting
room, Tang decries what he sees as a conspiracy
to muddy his reputation. "The more successful
eTang is going to be," he declares, "the more people
will try to tear me down."
The rapid rise of eTang demonstrates the great potential of Chinese
dot-coms -- and the great risks. Foreign investors have been tripping over
themselves in their rush to buy up stakes in local startups. Financiers figure
that Chinese-themed dot-coms can score big gains not only on Nasdaq but
also on Hong Kong's new second board, the Growth Enterprise Market. But
the promise of fast rewards, says Bo Feng, a venture capitalist in Shanghai
who works with Silicon Valley powerhouse Robertson Stephens, is a threat
to the long-term prospects of China's fledgling e-businesses. While Feng
admonishes companies to "follow the fundamentals," he says, "a lot of
companies say 'What do you know? Look at eTang.'"
Look at eTang indeed. Like many other Chinese dot-coms, eTang is a
creation of an investment bubble that just went pop. As the euphoria ends
and hard-headed realism sets in, investors should be asking more and more
questions about companies like eTang.
GENERATION YELLOW. Last year, Tang and his partners decided to skip the
usual business-building steps, in which dot-coms typically scrape together a
few hundred thousand dollars' worth of seed money. Instead, they went
straight to raising big-time venture capital. He and his partner -- fellow
Harvard MBA Dave Chang -- told investors that eTang would not be an
ordinary general-interest portal. Instead, eTang would build "a lifestyle brand"
focused on Chinese aged 18-35, whom the entrepreneurs dubbed
"Generation Yellow." The eTang vision "is about an attitude, a new optimism,
a new pragmatism to do things the Generation Yellow way," explains Chief
Financial Officer Dale LeFebvre, a Harvard classmate of Tang's. They would
build the eTang portal and then use the brand to sell a broad line of
consumer products. "eTang has a completely different model than anyone
else," LeFebvre boasts.
Some Asian investors found the plan vague. "It was very difficult to grasp
what [Tang] really wanted to do," says Feng, who quickly said no. But
investors outside Asia jumped. Last June, eTang picked up $4.5 million, with
investors putting a valuation of $13.5 million on the entire company -- which
consisted of Tang, Chang, and a business plan. In November, they launched
the site in Shanghai. Just a month later, investors put in an additional $43
million -- putting a value of $195 million on the fledgling company.
Numbers like those quickly attracted skeptics. And Tang found himself in the
spotlight. Allegations surfaced that in 1997, while at Harvard, Tang was
arrested and charged with domestic abuse and battery. A Massachusetts
judge dismissed the charges on the condition that Tang not commit another
offense within 90 days of the dismissal. Tang complied with the condition,
and the charges were dropped. Tang denies any wrongdoing. Nonetheless,
Goldman, Sachs & Co., which had offered him a job, rescinded its offer.
LATECOMER. While he does not discuss the subject with investors himself,
Tang says he gave them names of former colleagues and therefore, "my
investors know everything that happened in my past." Steve Dow, a partner
with Sevin Rosen Funds in Palo Alto, Calif., which has invested over $4
million in eTang, says he knows about Tang's past, but it had no bearing on
his decision to invest with the company. "Personal issues that happened
long ago that didn't affect the business didn't seem to be an issue" when
investing, says Dow, adding that Sevin Rosen has "great confidence" in
Tang and his team.
But eTang is a latecomer to the Chinese market. And the marketplace for
portals is crowded, with bigger rivals like Sohu and Netease enjoying critical
first-mover advantages. "Anyone who wants to catch up is going to have to
spend big bucks," says Duncan Clark, partner with consulting group BDA
China. And the price tag will go much higher, he adds, if eTang intends to
follow through on its promises and build up an offline business to sell
watches, mobile phones, and other gadgets.
Undeterred, Tang and his partners say they are building up the Web site,
developing channels in areas like jobs, finance, and women's issues. Tang
says the page views now top 2 million daily. The company is "growing really
fast," he says. Still, there are many challenges to overcome before it's clear
that Tang's story will have a happy ending.
Einhorn is Business Week's Hong Kong-based Asian technology correspondent. His
column appears every Monday on Business Week Online. Sheri Prasso and Susann
Rutledge also contributed from Business Week in New York
EDITED BY DOUGLAS HARBRECHT |
