The Zhang team
If a good team means complementing one another's differences, then it is clear Forrest and Stan Zhang fit the bill.
Forrest Zhang, the younger brother, wears a well-cut suit without a tie, while his brother wears the uniform computer geeks have made famous all over the world.
It is no surprise Forrest is the visionary and the strategist, even though his background is a lot less technical than his brother's. Yet Stan, the technical expert, exudes an air of likeable reliability, which must have gone down well with the company's foreign investors who have been the main backers of the company since its inception.
The brothers co-founded www.net.cn as a web hosting and domain name registry company back in the mid-1990s.
It is now the No.1 ranked company in China in that area, but the company's evolution was not always smooth.
"By mainland standards we're pretty long lived," remarks Forrest." We have accumulated a great deal of experience. Many of the companies that were founded during that time over-expanded and collapsed following the bursting of the dotcom bubble in 2000".
Back then, Forrest was working in export-import, while Stan had entered the IT field working for a Hong Kong-listed company.
That was an exciting time to be an entrepreneur and Forrest soon became aware that something quite new and quite revolutionary, the Internet, was trickling into China. He convinced his brother this was the wave of the future and the brothers plunged into a new entrepreneurial lifestyle.
The first few years were tough, but the brothers persevered. By 1999 they were rewarded with an investment by IDG, a corporate finance and venture capital boutique investment bank founded by a bunch of ex-Lehman Brothers bankers and specializing in the Internet.
Internet fever rapidly reached boiling point with 1999 being the year Internet search companies such as 8848 and the portals Sohu, Sina and Netease went public.
"In many ways, that was a very difficult year for us, since the new investors were keen on marketing and packaging us for a quick exit. We saw ourselves as a virtual infrastructure company trying to produce the best possible platform for Chinese corporate users. But IDG had different ideas. They looked at the hype surrounding Amazon.com and tried to push us in that direction," says Forrest.
www.net.cn's experience was not at all unique. As the bubble expanded to ludicrous heights, many companies were faced with the choice of sticking to the original game plan, or trying to take advantage of a once in a lifetime opportunity.
"Initially we went along with the IDG idea, but as everybody now knows, China wasn't ready for e-commerce in those days. Even now, e-commerce seems to be especially suited to a relatively narrow range of products such as DVDs and books," says Forrest.
One aspect of the IDG investment which the brothers look back to with bemusement was the urging to spend more money.
"They were always going on about increasing the 'burn rate'. Apparently, the more money you wasted, the more you would be attractive to investors," says Stan, shaking his head at the recollection of those heady days.
The brothers eventually agreed with IDG that it would be best for the company if they did not depart from their original intention of building a 'normal' company supported by solid cash flows and sound business plans.
Another development, which challenged the brothers 'common sense was an M&A effort by a business-to-business start up which had been phenomenally successful in attracting foreign funding.
"They were very high profile and very arrogant. They were sitting on lots of cash, but not turning much profit. They were interested in us because of our huge customer base and steady revenue flows," says Forrest.
The decision to give them the cold shoulder was vindicated when the company collapsed in 2001 but only after absorbing $30 to $40 million in start up capital.
"Resisting the pressure to become an e-commerce company and the proposed merger were two crucial tests in our development," says Stan.
He adds they were not taken in by the 'eyeballs', page views and other metrics used to distract investor attention from the absence of profit.
"We felt we should focus on old-fashioned revenue," explains Forrest.
Instead, the brothers accepted some help from Newbridge Capital. A financial investor seemed less threatening than a necessarily hands-on strategic investor, but the company was also intent on re-packaging net.cn into something that could complete a rapid IPO, in this case an Internet data center.
"At that time, everybody looked at the success of iAsiaworks which became the biggest IDC from Asia listed on Nasdaq," says Forrest.
The brothers declined the proposed metamorphosis, and were vindicated when many Asian IDCs, including iAsiaworks, went bust in the bubble fall-out of 2001 and 2002.
Interestingly, the brothers were not fazed by the collapse.
"We were pretty sure the markets were being irrational, both when they went up and when they went down. And we could see none of the business plans we had been proposed had really managed to tap the real potential of the Internet," says Stan.
But the company had to take a hard look at itself at this point, since it had essentially been kept afloat by injections of foreign capital.
"In 2000 we had been advised to go for market share rather than profit. But after the bubble popped it suddenly became very important to focus on revenue and cost reduction. In 2001 we saw a 15% improvement in revenue while our cash flow broke even in November 2001,"says Stan.
2003 continued the re-engineering process, with the Internet system being revamped and a new focus on customer service and sales and marketing.
"That year we turned the corner with a $2 million in earnings before interest, tax and depreciation and amortization (EBITDA),"says Stan.
"Web hosting and domain name registration is very scalable. Profit appears remarkable when the revenue reaches a certain threshold, because the cost and expense stay fixed
Since profit margins are currently 55%, he has a point.
2004 has so far exceeded the brothers 'expectation.
"It's an interesting business to be in. The field is actually quite crowded with many of the telecoms companies such as China Netcom and China Telecom or portals such as 263.net and Sohu believing they can take away our lunch. But they haven't. It's not all about having lots of money to invest. They underestimated the unique mix of hardware, software and managerial expertise this back office operation requires. It also helps that we were in this field pretty early and have a big customer base with high renewal rates," explains Stan.
In a recent survey of 500 customers, 82% proved to be business customers and 86% had web sites, which were kept up to date.
"During the bubble, the renewal rate was very low but now it's very high, giving us a lot of recurring revenue. We now have 400,000 names registered in the system, "says Stan.
Web hosting and domain name registration is a complicated and bureaucratic procedure, especially when the different categories of domain names need to be registered internationally. In addition, ready made software cannot be bought off the shelf. It has to be expressly written to be able to work with the different registries.
An interesting aspect of the company is that it claims to be pricing-proof. Price undercutting is perennial feature of the China market, but net.cn say they can keep higher prices than their competitors.
"There are numerous small companies which do under-price us, but they haven't made an impact on our customer base," says Stan.
The market is still fragmented, however, with the company having a market share of 20%.
"The smaller domain name and web hosting companies serve the millions of SMEs that exist in China," explains Stan, although 20% of a vast market is still impressive.
Following the extremes of the past few years, the company now seems to be in a position to make some solid expansion. Eight offices across China are planned by year end, with a strong focus on the richer southern provinces.
The company has matured in other ways. Forrest has left the company to start his own search technology company tixa.com.
"I've had a tremendous time helping to grow the company. But I am an entrepreneur at heart. Net.cn is now a mature company and I wanted to try something new."
The brothers 'father also has given up any executive role, although the family still own 39% of the company, with Newbridge on 47% and IDG on 15%.
"Being a family company was crucial during the early stage. But given we are looking to IPO in the next year or so, we want to professionalize the management. The only Zhang with an active role is now me, "says Stan.
Foreign venture capital comes across as much as a liability as a crutch in this story, but the brothers acknowledge they would have been nowhere without it.
"Chinese banks would never have given us a loan, and even Chinese venture capitalists wouldn't dream of just handing over large sums of cash to local businessmen, because the legal environment is so weak. We were very lucky to find such expert and brave investors as IDG," points out Forrest.
It seems that foreign capital and local businessmen can sometimes make a pretty good team after all.