Xiaonei, the Facebook of China, raises $430M — better funded than Facebook

updated three times

Xiaonei, the company that likes to call itself the “Facebook of China” has raised a whopping $430 million from financial backers, VentureBeat has learned from the company’s investors.

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The backing gives it a larger financial warchest than Facebook itself, and sets the scene for a showdown with the American company. Facebook has just started to get serious about entering the huge, fast-growing Chinese market.

The backing of Xiaonei could be a statement that the company intends to fend off China from Facebook’s advances. Xiaonei’s site sports the soothing blue border colors almost identical to Facebook’s; its thus not entirely surprising that Xiaonei would also copy Facebook’s ambitious fundraising strategy.

Recently, Facebook took $100 million (in two tranches) from Hong Kong business mogul Li Ka-Shing, in what is widely considered a strategic move to get help to enter that market. Facebook hasn’t entered China yet. But Ka-Shing’s company, Hutchison Whampoa Ltd, runs everything from major port facilities to mobile, location-based 3G services in China and other countries — all of which could be attractive to Facebook in China’s vibrant mobile market.

Xiaonei is owned by Oak Pacific Interactive (OPI), a holding company with a number of online communities.

The lead investor in this latest round is SOFTBANK Corp.

The huge investment in OPI translates into about 35 percent of the company, according to its investors, meaning the overall company is now worth more than $1 billion on paper. But that’s still far less than Facebook’s value — which is $15 billion, at least based on the value Microsoft gave it when the giant backed Facebook last year.

Facebook has raised $378 million in total over several rounds, including from venture firm Accel Partners, which has also invested in OPI.

While the investment was made into OPI, the money will mainly be used to helping expand Xiaonei.com, the company said. Xiaonei is China’s largest social-networking site. Two other groups, SBI and JOHO Capital, participated in the funding.

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Xiaonei.com’s features include include multiplayer gaming and wireless services for mobile users. In the college market, Xiaonei.com claims a dominant market share, but hasn’t released any specific user data [update: Xiaonei had “22 million registered users and 12.7 million daily users by March,” reports Communication Information, cited via Pacific Epoch. Xiaonei had 280 million page views in March, according to the report. Thanks to Christian, from comments.]

It’s true, though, that in China, there are few Facebook-like sites. Most social sites are like MySpace, where people are freer to use false identities. OPI also owns and operates Mop.com, the largest entertainment portal, and Donews.com, one of the leading IT blogging services in China.

Oak Pacific also announced that Masayoshi Son, chief executive of SOFTBANK Corp. will join the board.

Existing investors of OPI include General Atlantic, DCM, Technology Crossover Ventures, and Legend Capital. OPI had already raised $48 million from those investors two years ago.

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Update: I just talked with David Chao, a partner at venture firm DCM and early investor in OPI, and one of its six board members. When I asked him about the Facebook clone-like blue color, Chao said he thinks the blue “looks like IBM to me.” He added that most sites these days are either blue, green or orange.

Chao was on the board two years ago when it decided to acquire Xiaonei, at the time a small startup. OPI invested heavily into the company, to make it a Facebook-like site. When combined with the traffic of OPI’s other property, Mop (which is more like a MySpace), they make up China’s fourth most visited site in China.

Notably, Chao said the company is cash flow-positive, meaning it didn’t really need to raise money. But Chao said that, after some debate, the company decided to “put the pedal to the metal, and really dominate the market,” he said.

As for Facebook, Chao said he doesn’t see the companies competing closely short-term, because Facebook isn’t even present in China. He noted most strong Chinese companies are home grown, from Alibaba, to 51Job, Baidu, Ctrip and Sina. “There might be an exception, but history tells us there’s not going to be too much to worry about an outside, non-Chinese born company taking a big chunk of the Chinese market.”

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Update II: Reuters and WSJ are reporting the investment was only $96 million, but they seem to have gotten it wrong. There was also a reference to warrants, which is also wrong. Here’s what I think happened: They must have taken an Nikkei article about the investment (which referred to yen) and converted to dollars mistakenly. The Nikkei article refers the company’s draw of $100 million, as the first tranche of the total round. But the $100 million was assumed a 100 yen rate – so it ended up as 100 oku yen in the Nikkei article then it got recalculated at 105 yen to a dollar and ended up with 96 million. In the same article it clearly states total round will be 400 mil (oku) – so it got converted twice wrongly.

ソフトバンク、中国ネット大手を傘下に――最大市場に攻勢

ソフトバンクは中国のインターネット大手、オーク・パシフィック・インタラクティブ（ＯＰＩ、北京市）を傘下に収めることで同社と合意した。約400億円で株式の40％を取得、経営権を握る。急成長する中国ネット市場で携帯電話経由の情報提供など新サービスの拠点とする。中国のネット人口は今年、2億2000万人超と米国を抜き世界最大に浮上する。国内大手のミクシィや米グーグルなど米国勢も事業展開を加速しており、巨大市場を巡る攻防が激化する。

ソフトバンクはＯＰＩ株式の約14％を約100億円で取得。20数％分の新株予約権も得た。最終的に総額400億円を投じて出資比率を約40％に高める。同社創業者のジョー・チェン最高経営責任者（ＣＥＯ）を上回る筆頭株主となり、孫正義ソフトバンク社長は取締役に就任する見通し。

[4月30日/日本経済新聞　朝刊]

Update III. Furthermore, there were no warrants, as discussed by some sources. Next, the amount discussed in Nikkei article was $400 million, but that’s just the Softbank portion. It didn’t count the $30 million contributed by Joho and SBI.

Finally, there are no milestones – the pulling down of the first $100 million (instead of the full amount of $430M) is just cash timing that is best for both sides – nothing to read between the lines.

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