Startups face pressure in China

BEIJING - Susan Su needed sleep.

Insomnia had gripped her for weeks. She had worked through another weekend. It didn't feel like a fresh Monday morning.

To make matters worse, this was no ordinary week: The startup headed by Su and her husband, Jacques Ding, was poised to unveil a new Web design -- an expensive bet that they prayed might attract more of China's coveted online consumers.

It had been more than 18 months since Su and Ding put their hard-won middle-class life on the line in an attempt to become China's next Internet superstars. They had given up comfortable jobs in marketing and tech and plowed their savings into founding HiU, a social-networking site for yuppies like themselves. Their site would attract users by offering hyperlocal news and information, arranged by neighborhoods, and would charge advertisers to reach specific audiences.

But on Nov. 20, just 48 hours before the debut of the refashioned site, the techies were telling her they had a problem.

"We don't have enough time to make everything ready," said Zhang Chunyun, the 32-year-old chief technology officer. "If there are many empty pages, users will think those are mistakes. I prefer to postpone it a day."

Su was worried. A day could become a week. And everybody sitting around her -- the well-dressed sales reps, the human resources manager, the programmer -- they all cost money. So did the conference table, for that matter, and the fish tank in the lobby and every pen on every desk in their 22nd-floor headquarters in a newly built Beijing office tower. She couldn't afford a delay.

"We're sticking with the plan," she said.

With the deadline bearing down, triage was the only option. "Make sure the big functions have no problems," she said, "and, for smaller things, we can put up a page that says, 'Coming soon!' "

By now, she was used to compromises. They once planned for 30 different services on the site, but they winnowed that to the core essentials: neighborhood listings, local ads, forums and the like. They had started with 10 computer programmers, but mounting expenses forced them to fire half of them.

Su, 36, and Ding, 32, were discovering the cruel odds of the world's most closely watched Internet boom.

Almost three years after the world began investing in China's growing Internet, it had grown to 137 million Web users, second only to the U.S. in scale.

Yet, startups were outpacing the audience. Most Chinese Web users did nothing more than play games, download music or chat on the same cluster of dominant sites, leaving little for innovators.

"Every day we hear about another Internet firm that has closed, even those with venture capital funding," said Liu Xiaoxuan, an analyst for Zero2IPO, an advisory firm that links investors with Chinese entrepreneurs. Of the new ones cropping up, Liu said: "Ninety-nine percent of them will go down."

Su was getting frustrated.

"Both the quantity and quality of the online audience in China is exaggerated," she said.

Ding, meanwhile, was hunting for a way to break through. He was convinced that if HiU could broaden its audience enough to reach a critical mass, then it might burst into new layers of users. He proposed a radical solution: start over.

Altered Site

Like Web 2.0 firms in the West, he concluded, they would have to give users a far greater chance to connect with each other.

A receptionist works behind the logo for Baidu.com, a Chinese-language search engine. AP photo

So the programmers began work on a vastly altered site that could trawl Chinese news sources, blogs, Web forums and bulletin boards for information and funnel it into mini-communities tied to China's residential neighborhoods.

It would be China's approximation of an American community newspaper.

But that strategy created its own problems. They were spending so much on developing technology that they could not afford to hire a proven sales force.

They had some energetic 20-somethings, but they lost time teaching them the basics -- clean hands and shoes when meeting clients; at least two suitable business suits so that one was always clean.

Ding and Su even tried a new approach to hunting for investors. They ditched their tailored suits in favor of jeans and sweaters. After all, if foreign venture capitalists had an idea of how a scruffy startup should look, they were happy to oblige.

As they entered their second winter in business, the wear and tear on the couple was unmistakable. They had put on weight from too many dinners at their desks.

They were smoking more than before. And they were worrying about money. Approaching their two-year anniversary in the online world, they had yet to break even.

They had been among the first of their friends to reach a comfortable life.

But now they were watching it slip through their fingers.

"The money I've invested in HiU could buy me a middle-class life in the U.S.," Su said in exasperation one afternoon.

The couple had begun to argue over just how much they would be willing to risk.

"The way I see it, we have two kids, we must succeed, we can't afford to lose everything," said Su one night in their living room, as their younger son romped around.

Ding disagreed: "I can't think about failure when I make decisions or it will affect those decisions."

Either way, they agreed that they had to shelve their biggest plan of all: to have another baby. Under China's one-child policy, it was a particularly poignant sacrifice in the name of business.

Urban dwellers can only have a second or third child if they can pay the fees, so that means multiple offspring are the most visible trappings of affluence.

Until the couple catches a break, that idea is on hold.

By this time, Liu, the analyst, had agreed to help them find investors. Late one night, when he was over for dinner, they sat and talked about the future.

"They asked me, 'Xiaoxuan, what do you think, are we finished? Should we close the company and move on?' " Liu said.

No, he told them, they were on to something. But he added, "Please, for God's sake, break even."

Marketing Deals

As the new year arrived, Ding and Su settled on a decidedly low-tech tactic: HiU began churning out glossy, direct-mail magazines to 150,000 high-income residents across the city. They could use their list of middle-class members to sell ads in print and online.

They used a similar approach to win more marketing contracts, first from a Dutch maker of baby formula, and later a pair of Chinese dairy companies. Together, the deals would deliver about $2 million in revenue, Ding said, and more marketing deals followed.

By the end of January, they had a reason to celebrate. For the first time, HiU had broken even, with monthly revenue edging over $100,000.

Sure, China's most successful Web company, Tencent, was recording profits of more than $10 million a month, but Ding and Su were proud of where they were.

In May, Ding said they received the news they had been waiting for: A U.S. venture capital firm had agreed to commit $5 million. He declined to name the investor.

A little over two years since they started, Ding and Su's Web site looked nothing like the idea they had first hatched.

Along the way, they had slashed their work force in half, only to begin building it again later.

And they had found their most reliable source of cash from conventional marketing plays that weren't even online.

Yet, they had shown that their gamble just might pay off -- as Ding saw it, that "we can stand up on our own feet."

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