Extra Buzz 008: Leo Chen of Jumei - From China Tech's Golden Boy to Has-Been

Hi Extra Buzzers,

Another two weeks have zipped by and some of you have been presumably acclimating yourself to the “new normal” while the rest of us -- like myself here in California -- anxiously anticipate its arrival. Until then, we continue to experiment here at Tech Buzz as more of you find yourselves without a commute and more screen time than you thought possible:

We released an experimental episode on Luckin Coffee (just before it halted trading last week!). Actually, it was an audio-book like reading of the newsletter you received, complete with sound effects from our talented editor. We might have some more “different” episodes for you in the upcoming weeks … stay tuned!

Designed for investors but open all Extra Buzzers, we have another webinar next Thursday April 30, 7-8PM PST focused on livestreaming. Our guest is Mr. Shang Koo, CFO of m17.asia, a livestreaming company serving Taiwan and Japan. Shang also previously worked as CFO of Jiayuan, China’s largest dating site, and still lives in Shanghai. Sign up here or simply reply to this email to attend.

More casual in format are our virtual happy hours, designed for discussion around an interesting topic but also for maximum interaction in the form of breakout rooms. Our next one, scheduled for Thursday May 7, 6-7PM PST is about the differences between a FAANG vs. a BAT, led by a product manager who’s worked in both.

We hope you can join us! Finally, as always, please share us with more subscribers you think might be interested in reading in-depth stories about China tech!

Stay well!

Rui & Ying

How Leo Chen’s Fall from Grace Gives us a Brief History of Chinese eCommerce & Tech Entrepreneurship

Technology has brought with it constant disruption. In our everyday lives and of course also in the fortunes of the companies that build our daily realities. It’s been noted that the average tenure of a company in the S&P 500 has shrank by nearly 30% in the last half century or so. But it is still 24 years. That’s essentially the entire history of the internet as we know it. And in the little space we care about -- China tech -- many stars have risen and fallen in this short span of time. But few have done so as spectacularly, or as quickly, really, as the one we’ll examine today -- Jumei Youpin (“Jumei”).

In terms of China tech trainwrecks, we’ve covered Renren (Tech Buzz Episode 30), China’s once-popular Facebook clone that went from $9Bn in market capitalization at its height, to being effectively worthless today. I’ve also watched, with horrid fascination, the ongoing bankruptcy of once-highflying Jia Yueting, founder of LeEco, whose many shenanigans -- or as Chinese media has called them, “capital games” -- I’ve still not wrapped my head around. But the Jumei story deserves special mention. Ou (English name: Leo) Chen was, at his height, one of the most influential self-made (paper) billionaires in China internet history, and he changed the game for young entrepreneurs.

Leo in his more flamboyant billionaire days.

Before You Start, Beef Up Your Pedigree

When Leo burst onto the scene in 2012, two years after founding Jumei Youpin, he was China tech’s golden boy wonder. No amount of superlatives can explain his towering stature in a field that was still an afterthought for most people. Sure, the internet was cool and it was improving people’s lives in a very measurable way, but it was filled with funny-looking people like Jack Ma, reclusive geeks like Pony Ma, or sharp-tongued eccentrics like Zhou Hongyi. Leo, however, was decidedly cool. Consider this -- a gifted student, he enrolled in Singapore’s Nanyang Technological University at age 16, and apparently found sufficient spare time to become a star esports player on the side. (It was Warcraft 3, if you must know.) That gave him the idea to start an esports startup called GG.Game (a bit redundant if you ask me!), which quickly gained some users, but no observable business model. As he tells it, the difficulties encountered during fundraising inspired him to apply to Stanford for an MBA, since he saw first-hand how a name-brand business degree would ensure him all the dollars he could need for his entrepreneurial dreams. That last part at least proved correct. It pains me to say this as a Berkeley grad, but if you think Stanford is well-regarded here in Silicon Valley, it’s got a legendary reputation in China.

Leo’s belief that you could lean on a Stanford (or Harvard) MBA (or dropout status) to get funding was correct. I’d argue it is still correct today, I certainly don’t know of any exceptions. But back to Leo, he recruited another Stanford classmate Yusen Dai and started work on a gaming related company. His Stanford connections got him an introduction to Bob Xu (#24 on Forbes Midas List 2020), whose eventual fund, Zhenfund, was initially conceived of as a way to invest in Chinese talent who had studied in elite institutions overseas, la creme de la creme. Since Leo was the personification of Bob’s investment thesis, he naturally put in some angel funding, proving correct Leo’s initial hunch about the golden touch of a Stanford degree. And again, with Stanford on his resume, Leo also successfully applied for a year-long mentorship under none other than Lei Jun, the founder of Xiaomi.

Forget Passion, Do What is Expeditious

Alas, the gaming concept was doomed to fail, but it was 2010, and an important battle was raging all over Zhongguancun, and that was the War of A Thousand Groupons (Tech Buzz Ep. 10). Leo saw that cosmetics were selling like hot cakes but no one was taking advantage of the vertical opportunity. And so, out of desperation as much as insight, two gamer dudes began to sell lipsticks and face cream. They were following Lei Jun’s advice that one should not be in the business that one likes, but the one that provides the biggest market opportunity. It was clearly good advice because Sequoia China soon invested in their Series A. Bob’s shares got rolled over, and Jumei, by using the flash sales / groupon model, began to show every sign of being an accidental rocketship.

But it was a rocketship in a sea of e-commerce rocketships. For context, Chinese e-commerce was growing at a 30% CAGR every year. From 2010 to 2014, when Jumei IPOed, e-commerce in China nearly tripled. A lot of digital businesses were birthed around this time as more and more entrepreneurs saw the explosion in opportunity with the rapid ramp of smartphone ownership and usage, not least of which is a company you’d recognize: Bytedance (founded March 2012). Which is not to say that Jumei was all luck, but auspicious timing certainly helped.

And Sell, Sell, Sell Yourself

Jumei’s business model was simple -- sell as many cosmetics as you can, whether it be from third parties or directly from its own procured inventory, all the while using promotions to drive traffic. There is nothing to see here. The only thing it did differently was its marketing. In particular, its advertising campaign starring CEO Leo was so memorable that it would change, forever, Chinese consumers’ and investors’ expectations of the “tech founder.” Prior to him, tech founders were not cool. They might be rich, and Baidu’s Robin Li was even considered good looking by some, but they were all old(er), and just didn’t capture the public’s imagination like that. But Leo showed that they could be young, hip, and dare I say it? Hot. For a whole generation growing up at the time, it was all of a sudden possible to be both a kick-ass CEO and a (subtle) sex symbol. For the first time, celebrity, based on charisma alone, was being fused with and actively nurtured one’s business success. Leo ushered in the age of the influencer-CEO, and vice versa, an age that is well and alive today.

Here’s how it happened: back in 2011, with just $6mm raised in his Series A, the funds were insufficient to hire a proper celebrity spokesperson. In a stroke of genius (or narcissism, your pick) Leo came up with the audacious idea of being his own spokesperson. That’s right. He collaborated with a popular singer to come up with a company theme song, called “I speak for myself.” The words go something like this:

“You don’t have to take our youth seriously / But you’ll see whose age we’re living in
… You can refuse my present / I will choose my future”

In July 2011, it was made into a TV commercial and plastered all over Beijing’s bus stops and Jumei became known as the internet startup with that ridiculously good-looking CEO (realistically: slightly above average) and a ludicrously plotted music video for a commercial. Seriously, watch it, it’s pretty epic. Leo became a nationwide celebrity overnight and got 40mm Weibo followers almost instantaneously, doubling the godfather of Chinese e-commerce, Jack Ma himself. (Remember that Weibo had just been launched, in August 2009.) And he had done all this before turning 30. He became one of the most sought after guests on all types of variety shows, like any A-list actor. His hunch was correct. For a trendy product category like cosmetics, which mostly appealed to your 20-30something office ladies, a well-shot commercial starring a well-dressed, smart-looking, confident founder made his customers swoon by the millions and pay up by the hundreds of millions. The message also resonated. In China especially, where historically age and experience are venerated and youth dismissed, these young shoppers felt seen and validated. So much so that for its first year as a public company, Jumei’s 2014 full-year net GMV was just a bit over $1Bn, and net revenues were $630mm. More importantly, it had been consistently profitable since less than two years after founding. That October, Leo made his debut appearance on Forbes’ annual China Rich List at $1.3Bn in net worth, coming in at #164, thanks to his 41% ownership in Jumei. (He dropped off the next year and has never made it back.)

Screen grab from the famous TV commercial. “I am Leo Chen, I speak for myself.”

Be Like Leo

It’s hard to disentangle just how much of Jumei’s success was due to Leo’s ace marketing campaign, and how much of it was the product category and business model and what one might call “the time and place,” but it’s pretty obvious his success jumpstarted a whole era of founders as influencers, and vice versa. After him, we would have Luo Yonghao of Smartisan fame, whose ups and downs since then I wrote about in Extra Buzz 005: China’s Fan Economy (although it must be said that Luo lands on the opposite end of sex appeal). JD would get a boost from CEO Richard Liu’s mega-influencer wife Nancy, Lei Jun would also become synonymous with Xiaomi, as would his nemesis Mingzhu Dong of GREE. The CEO as Chief Sales Officer would become the default playbook.

And now, in 2020, we have Austin, Viya and the whole livestreaming e-commerce explosion, which takes charisma and looks to a whole new level. Sure, there are cults of personality everywhere (just look at Elon Musk), but Leo opened the door for the under 30 to be taken seriously in China -- it helped that he was, after all, the youngest CEO ever on the NYSE at IPO. Clearly, this had a huge impact on the post-80s kids in China who hadn’t yet realized that startup entrepreneurship was the path to unimaginable wealth and fame. It’s hard to imagine now, but in the early 2010s, before Alibaba’s 2014 IPO and the birth of thousands of venture funds and accelerators, that was not a well-understood path. But Leo had shown that not only was it available and attractive, but that you didn’t need to be some super-technical-genius-nerd to do it. You could be normal (or very good) looking, and have an MBA instead. And you could do something everyone understood -- like sell makeup. Suddenly, opportunity was everywhere.

Of course, I’m simplifying a bit. The government really turned on the spotlight on tech entrepreneurship around 2014. Capital flooded in. There was that obvious rampup in smartphones. GDP was still growing strong, as was the middle class. As usual, a confluence of favorable factors existed and combined to make for an amazing environment for startups. But Jumei’s success obviously helped. It also strengthened the narrative that returnees (with elite pedigrees, preferably) could come back to China and become wildly successful. Everyone was happy to fund the next Leo Chen and Yusen Dai, and for a while, being abroad made you golden. This was when the best ideas were still coming from abroad, and somehow, being able to say that you studied there, and had encountered the product or service firsthand, maybe even went to the same school as the founder you were trying to copy, gave you legitimacy, credibility, and some kind of entrepreneurial advantage.

Where It Went Wrong

Jumei, along with its same cohort of consumer companies like VANCL (another sad unicorn death and also tutored by Lei Jun), engaged in really sophisticated, well-designed marketing campaigns that really turned around people’s perceptions of online brands, which had previously stopped at “cheap,” “Taobao” and “trash.” Unfortunately, while Jumei was able to convey the sentiment of quality, it failed to deliver so in reality (as did VANCL). It was plagued by fake goods, which was not just inexcusable, but physically dangerous when it comes to products one puts on one’s skin. Its reputation was quickly tarnished, and Leo’s personal reputation was destroyed as well. He was accused to have fabricated some parts of his entrepreneurial past by former cofounder Forrest Li, who stuck to the original gaming vision and is now a billionaire in his own right. (What say you, Lei Jun?) Leo became a laughingstock of sorts -- oh that guy, the one with the highbrow ads and suave looks but actually sells low-quality fakes.

Of course, Jumei’s over-reliance on one product category -- one with no barrier to entry, once every other e-commerce company saw the opportunity -- also guaranteed its demise. Operational inefficiencies and poor management did it in as well. Once flashy marketing and dramatic storytelling became the norm in China tech, consumers demanded quality -- in product and after-sale service. That was not Jumei’s strong suit. Leo simply went in search of one new story after another. First there was expansion into mother & baby products, then it was buying a (phone) battery-sharing company and related patents. Clearly Leo attributed his previous success to having picked the right “racetrack,” as Chinese VCs liked to put it, and he was betting that he had found a bigger race in “the sharing economy” than vertical ecommerce. We won’t know for a while. Jumei’s privatization, ignoring the 10:1 reverse share split, was completed at an effective $2 per share on April 14, representing a loss of 91% of its value since IPO.

In the End ...

China’s ecommerce industry has changed tremendously since Leo Chen and his buddy decided to take a gamble on selling discounted cosmetics online. From 2010 to 2019, it has grown over 13x. Beautiful marketing campaigns are expected (Luckin’s little blue cup ads, anyone?), as are clever collaborations, and well-coiffed, social-media savvy CEOs (perhaps Leo’s gift to Lei Jun). Young, hip management teams are no longer looked upon with skepticism, but chased after and adored, by consumers, investors and media alike. Overseas returnees are still heavily recruited, but subject to much more scrutiny and not universally exalted. Consumers demand the best prices and the best quality, and are increasingly expecting that the brand treats them like their best friend, too. We’ve now moved from a time when the consumer cares about the founder’s story to one where the founder has to at least pretend to care about the consumer’s story. And in China’s digital economy, e-commerce is leading the charge in every way. Jumei, who officially turns ten years old in September, is an ancient relic, reminding us of far simpler and cruder times. And even though its IPO was not even six years ago, minting the youngest Chinese self-made billionaire at the time, one article on its privatization began like this: “If Jumei Youpin hadn’t announced its successful privatization, we probably wouldn’t have remembered that such a company existed.” Indeed, soon, I’m pretty sure, no one will.