Half of Google?

Forrest Zhang is that unusual creature in China, an entrepreneur twice over. Having already set up the family web-hosting and domain registrationg firm, China.net, with his brother and father, he decided to branch out on his own. "China.net is now a mature company with a stable cashflow. I originated the company, secured two rounds of financing for it, and have left it in the capable hands of my brother," he comments.

Sitting in the lobby of Beijing's Hyatt Hotel, Zhang is dressed in a navy blue tank top, an expensive patterned shirt and dark trousers. A clue to his personality is perhaps the small tuft of beard he allows to grow on the front of his chin. That little touch makes him look like an executive in the music or film business than one of the shaven headed, leather-jacketed entrepreneurs the north of China tends to throw up.

Despite the existence of many media titles devoted to Chinese entrepreneurs, the status of being one is still controversial in China. Take Zhang's decision to leave China.net.

Local media and even his own staff speculated that the second round investor had decided that Zhang was better discarded. Such rumours were fuelled by the belief that nobody would willingly give up a senior position in an already successful firm to dive into something far more risky.

"Going into business on your own in China still has connotations of becoming an outlaw - something that a respectable person would avoid," says Zhang with a twinkle in his eyes, perhaps relishing the parallel between him and the characters in China's most famous novel, 'The Water Margin'. The latter revolves around a group of outlaws who fight the central government and give money to the poor.

Zhang is no outlaw, however. The risks of going into the new business are mitigated by his continued ownership of a large chunk of the equity of China.net. Indeed, a few years ago, a Chinese magazine put him amongst the top 500 richest people in China. In his ten year business career, he has also built up a great deal of experience, not to mention contacts, to help him through the next stage.

It is not yet clear whether Zhang will take on the mantle of the pure entrepreneur. In the US, such people are known as 'serial entrepreneurs' and move from one project to another.

They are good with ideas, creativity, bursts of hard work and charisma, but they shrink from the task of managing their investment for the next ten years. They would rather move on to something different and exciting.

Zhang won't come clean on what his preference is. He can not really, since his new venture has already got a substantial investment from a Japanese investor. Such investors invest under the assumption that the management is top rate and will remain with the company. Not surprisingly, Zhang says he is dedicated to building up the new venture and to oversee its initial public offering by 2006.

The new company is in an exciting space. The news of Google's extraordinary IPO sent shock wave through the China search engine industry and created a deal of introspection concerning a similarly successful business model for China.

Zhang denies, however, that his company is a 'me too' model of Google. On the contrary, he says he had the idea for 'contextualized advertising' more than five years ago while he was at China.net, but he preferred to put his idea on the back burner until China.net had 'grown up'.

Zhang's business model corresponds to half of Google's. That is, Zhang's company, tixa.com, does not feature the superb search technology of Google. Although it does have its own proprietary search engine, it is not intended for people to browse with.

Google makes money from the search engine by selling key words to advertisers, so that their names or product will come up early when a search term such as 'Caribbean Holiday' is typed into Google.com.

Since tixa does not have a websearch start page, like Google, tixa does not compete with Google in that area. Tixa does have the same model as Google in terms of contextualized advertising, however. Both Google and Tixa are paid by the advertiser based on the click through rate of a web surfer following an advertiser's link to, for example, a 'Caribbean Holiday'. The contextualized advertising element refers to the web surfer being exposed to the relevant advertisement based on the content of the webpage that he is browsing.

"So we need a search engine to search the net for browsers looking at online articles featuring services or products which are being sold by advertisers. However, the search technology doesn't have to be super refined, since the search is pretty simple," explains Zhang.

The big upside of such a big strategy is that by not offering a search engine, the company avoids competing with the five portal sites in China which do use search technology as a core offering. That is important, since Zhang needs the net surfers who use the portals. It is the pages called up by the browsers at the portals that Zhang uses to plant the advertisement sniffed out by his search engine technology. Zhang pays the portals a fee for putting ads on their pages and is himself paid by the advertiser based only the click through rate of browsers. He has similar, smaller deals with hundreds of other online media outlets.

"This business model is a huge breakthrough," notes Zhang," since it finally makes web advertising profitable. The previous conception of making money, that you had to choose between business to business or business to consumer, has been altered by Google, which generates revenue from business customers looking to sell to consumers."

Indeed, for many years, advertising on the web was restricted to 'banner ads' which advertisers, more in hope than a realistic expectation of success, draped around web pages. The chances of a potential customer actually stumbling across one of the ads placed on a specific web page, given the huge size of the Web, were tiny - making advertisers reluctant to invest. Under the new model, the ad follows the customer clicking around the web, rather than the other way around.

Business is brisk, asserts Zhang, partly because thanks to his previous position at China.net, he has extensive contacts amongst China's small to medium enterprises.

Currently, revenue is Rmb 1 million per month, and he estimates Tixa will be churning out five times that by the time the company is ready for an IPO next year. First round investment has already gone smoothly, with a major investment from Japan's Matsui Sumitomo, and Zhang is now on the look for out second round investors.

When it comes to competition, Zhang is optimistic. Despite his respect for heavyweights Google and also Yahoo!, he reckons that they have not done well in China.

"China is not their main focus, for a start. Secondly, business here is local. You need local language and local contacts. Neither Google or Yahoo! have shown they really understand that," says Zhang.

As for Chinese competitors, Zhang estimates that he already has a good grip on the market. In addition, the contracts he has signed with the portals, whereby he gains access to their web pages for his advertisers are exclusive - although he doesn't say for how long.

However, legal protection is perhaps not as great a barrier to entry as a tremendous brand name or modern technology. And that could be the crucial difference to Google. Google's search excellence enabled it to build a unique web presence and generate a great deal of good will. It will be interesting to see how Zhang' more 'tech-light' model fares.