China Entrepreneur: A ticket to ride?

The most crucial tradeoff an entrepreneur makes between taking outside cash and making his own way to future riches often boils down to confidence. It is those who stay firm in the face of adversity that eventually make the biggest gains, simply because they still hold the majority of their firm rather than turning to the VC industry.

Despite having spent eight years building up his company, Jeff Huang, the short, neatly built CEO and founder of Shanghai's biggest online ticketing company still owns 90% of his stock. Given the Jiangsu native's off-the-chart energy levels, intensity and charisma it is not a complete surprise that he has so far trusted his own instincts and hard work.

Not for him the common experience of entrepreneurs who lose faith in their own projects and sacrifice majority ownership of their company for desperately needed cash.

"It's not that I'm obsessive about keeping control of the company. But it's my project, and I want to see it out," says Huang who has so far financed his company primarily through retained earnings and the bare minimum of outside financial support.

Huang estimates that his company has 25% of the total events ticketing market in Shanghai, with 25% going to several recently set up copy cat websites, and the remaining 50% still sold through traditional means - at the box office and through brokers. The company is profitable and made sales of three million dollars in the past year, after breaking even in 2002. The size of the traditional market, ripe for takeover by superior technology, provides the potential for robust future growth, says Huang.

Huang's experience points to a key characteristic of domestic venture capitalists, namely their desire for control once they have invested.

"Domestic venture capitalists are not happy with a minority stake. They want a majority stake and total control," says Huang, who not surprisingly was unwilling to go down such a route.

On top of a strong educational background in computer science, from his BSc at Harbin Institute of Technology, through to the doctorate he gave up halfway, Huang quickly learnt the commercial skills which enabled him to keep his independence.

"In the early 1990's I couldn't help noticing how people would stand on street corners speaking into enormous mobile phone in very loud voices. They were obviously showing off, but the point I noticed was how much they were willing to spend on these bricks," recalls Huang, who says he immediately spotted this is as a significant trend.

However, his first foray into technology was not a success.

"It just goes to show how events can take unexpected turns and how you have to stay flexible," says Huang, who started working with a voice mail company after quitting his Ph.D programme at the elite Jiaotong University in Shanghai.

The funds and the technology of the voice mail venture was provided by US-company Octel, but failed to spark due to what Huang says was a cultural Chinese aversion to leaving messages, at least at the time.

"At the time, people thought it was unnatural to leave a message after the tone - they just hung up," he says.

Yet while the business model was faulty, the voicemail technology later became the lucrative basis for 'interactive voice response', whereby customers use and pay for entertainment and work-related services through their mobile phones.

Huang took some important lessons from the experience.

"I learnt that it didn't really matter whether you had the best technology or the best people if you didn't have a proper business model," says Huang.

That information also played an important role during his later negotiations with Western venture capitalists.

It was not the case that non-Chinese venture capitalists were better informed or less greedy than domestic VCs - they just made different mistakes, in Huang's view.

"People kept asking me why I didn't have more of a 'dream team' - by which they meant returned Chinese scholars with MBAs from Harvard, Princeton or Stanford," says Huang, clearly still somewhat irritated at the recollection, especially as he had decided not to avail himself of the chance to go abroad.

Indeed, in capital-strapped China, hiring a returnee with an MBA from such a prestigious university would have involved the kind of cash more suitable to a much larger company.

Foreign VCs also kept asking why his model wasn't more like a US business.

"It's ridiculous to imagine that a Chinese company should have exactly the same business model as a US model. You only have to look at the difference in payment systems, " points out Huang, referring to the phenomenon of Chinese banks not having sufficiently developed credit card platforms to foster online services.

With regard to ticketing, for example, a clear difference with the US model is that most events tickets to such prestigious events as performances by pop band F4, are not bought by individuals. Rather, they are bought up by the thousands by companies to provide treats for their staff, or to be distributed to the company's important contacts and clients.

That, says Huang, makes new, tech-heavy applications like the downloading of a bar code for an event in return for a fee, enabling the phone to be swiped over a scanner upon arrival at, somewhat of a red herring in China - and a further illustration of his belief in the overriding importance of the business model.

Huang also worked in a networking company, but it was when he made contact with expats in Shanghai that he began to see another great trend developing: the Internet.

"The first thing these expats were always looking for when they set up their homes was an Internet account. But even as late as 1995, China Telecom was completely unequipped to understand and profit from this trend. At that time, there were only about 4000 Internet accounts in the whole of Shanghai. I became an unofficial consultant for expats in setting up such accounts," says Huang, once again revealing his commercial eye.

It was through this route, in which he learnt about technology, venture capital and international trends, that Huang eventually came to his existing venture, whereby he sells events tickets through two websites, www.tickets.com.cn and www.hotcinema.com.

True to his belief in adapting to local conditions, tickets are sent on the same day via couriers, thus using China's cheap labour to his advantage (rather than the post office common in the US and Europe); and payment is made either through cash on delivery or via the Internet services increasingly provided by China's local Banks. The China Mobile internet platform Monternet is also developing a system whereby orders made via mobile phone are charged to the buyer's mobile phone bank-linked account - an elegant solution to the payment problem.

Selling tickets does not seem like the kind of business model that lends itself to high margins. Huang readily admits that margins on ticket sales are not more than 10%, since for the customer the booking and delivery service is free. It's solely the event organizer who pays.

"I predict that in the future we will actually be making a loss on ticket sales. Where we see high margin opportunities is in ancillary services such as providing advance information to our VIP customers about the arrival of new and highly prized events to enable them to make reservations; as well as games and quizzes such as, for example, how many Oscars Chinese films like 'Hero' might win. Profits are also generated by the event organizer sub-contracting the promotion of the events via my websites and my partner telecommunications companies," says Huang.

What does the future hold for Huang? Whether or not his company finally flies, there is the ring of truth in Huang's assertion that he would not do anything else.

With Huang's talents, he could be making a very comfortable living in a number of areas, much like his college contemporaries.

But he speaks of other phenomenally successful tech entrepreneurs such as Sohu's founder Charles Zhang without any apparent envy, indeed with admiration.

"What's Zhang going to be remembered for? It's not going to be the size of his bank account. No, he's a historical figure in the development of China, since he was the first entrepreneur to persuade foreign venture capitalist that China was a country which was producing viable companies. That was an amazing achievement and I just hope I can do something equally meaningful," he concludes.