SMARTPHONES: Sinking Smartisan Raises Cash, Xiaomi Defers IPO

Bottom line: Smartisan is likely to close or get sold by the end of this year, possibly to Meizu, while Xiaomi’s valuation is likely to fall by up to half when it returns to private investors for new funding with a year.

No near-term IPO for Xiaomi

A couple of fund-raising stories involving smartphone makers Smartisan and Xiaomi are in the headlines, reflecting in different ways the intense pressure each is feeling due to stiff competition that could soon claim a major victim. One headline has everyone buzzing over a recent share sale to raise cash by the founder of Smartisan, a highbrow niche brand set up by China’s most famous English teacher Luo Yonghao. The other has Xiaomi chief Lei Jun saying that his company may make an IPO in 2025, in what looks like a sarcastic response to a reporter’s question.

We haven’t heard much lately about Smartisan, which was a relative latecomer to China’s crowded smartphone market that is the world’s largest but also intensely competitive with more than a dozen major players. Smartisan was always banking on the uppity reputation of Luo, whose name is synonymous in China with English language instruction.

The brand never really found much of an audience in China, and experienced lukewarm reviews and production problems in its short 2 year history. Now media are reporting that Luo has pledge about 2 million equity shares in his company, Chuzhi Technology, to e-commerce giant Alibaba (NYSE: BABA). (English article; Chinese article) The move halves Luo’s share in Chuzhi to about 28 percent, from a previous 56 percent.

Neither side is commenting on the deal, which was only discovered through records of the sale made to a government agency. Luo is quite a well connected person, and I suspect that he called in a personal favor from Alibaba chief Jack Ma to make this deal. I also suspect that Alibaba didn’t pay too much for this stake, perhaps around $25 million if we assume that Smartisan believes it may be worth up to $100 million.

The sale does appear to show that Smartisan is desperate for cash, since $25 million isn’t a very big amount and probably could only fund this kind of company for 2 or 3 months at most. That hints that Smartisan is probably in a desperate situation, and could either be forced to close or sell itself in the next few months. If it does the latter, one potential buyer could be Meizu, which is backed by Alibaba.

Xiaomi Cagey on IPO

Next there’s Xiaomi, whose story is likely to become a future textbook case study for business school students on the rapid rise and equally rapid fall of a company in the fast-changing smartphone space. The company’s valuation was rapidly rising during its ascent, hitting $45 billion in its last funding round in late 2014.

During those heady days, everyone was asking when the company planned to make an IPO, to which chief Lei Jun would usually reply that such a move wasn’t a priority and wouldn’t come for at least 5 years. Now we are seeing that Lei was really serious, with reports that he has said Xiaomi won’t be making an IPO until 2025. (Chinese article)

Lei made the comments in an interview on the sidelines of a big event in Tianjin, where he also disclosed that Xiaomi is further abandoning its original online-only sales model and moving aggressively into traditional retail stores. I didn’t see the actual interview so can’t comment on Lei’s tone or facial expression when he gave the 2025 IPO date.

But such a date is so far away that it’s almost guaranteed he made the comment as a joke, probably since an IPO is the last thing on his mind right now. Instead, he’s probably more focused on just keeping his company afloat for the next 5 years, and perhaps secondarily on what kind of valuation he may get when he’s finally forced to raise more cash soon. That cash-raising will probably have to come within the next year and will be from private investors, and could see Xiaomi’s last $45 billion valuation drop by up to half.

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