Skip to Content

Stanford Business magazine

 
  • Email
  • Print
  • Share

Stanford Business Magazine Online

 

Joe Chen Beat Facebook to Stock Market

GSB classmates helped launch this engineer's entrepreneurial career.

by Maria Shao

Joe Chen photoThe dot-com frenzy of the late 1990s was in high gear. So it was only natural that Joe Chen, MBA '99, then a student at the Graduate School of Business, teamed up with two other Stanford graduate students from China to organize brown-bag lunches about the fledgling internet in their homeland. At the meetings held on the Stanford Oval amid Frisbee games, a few dozen students would toss around start-up ideas for China.

A dozen years later, Chen returned to Stanford as a keynote speaker at a GSB conference featuring some of China's hottest internet businesses and entrepreneurs. The sold-out "China 2.0: Transforming Media and Commerce" conference featured Chen speaking about the Beijing-based company he founded and leads today — Renren Inc., a social networking firm that many have called the Facebook of China.

Chen's publicly listed company has 124 million activated users, many of them Chinese college students. Building on its loyal following among university students, Renren is hustling to stay at the forefront of China's social networking jungle while facing several other large, deep-pocketed competitors.

"Joe had the foresight and persistence to see that social networks, already growing fast outside China, would also take China by storm," says Thomas Crampton, Asia-Pacific director of social media for Ogilvy & Mather, the advertising and marketing firm. Now, he adds, "the challenge for Renren is that other social networks have made successful inroads into other demographics. There are many dynamic and powerful internet giants in China eager to own significant chunks of the social networking space."

No matter what, Chen, 42, is a prominent member of China's newest generation of internet magnates. These entrepreneurs, who often have education or work experience in the United States, have built large, thriving internet businesses. Typically, the Chinese companies have emulated — some would say copied — U.S. business models and adapted them to China by adding their own twists and localization. The result: China's internet industry is dominated by homegrown giants in sectors ranging from search to e-commerce and social networking to microblogging. While U.S internet pioneers such as eBay, Yahoo, Google, Facebook, and Twitter have either been banned or stumbled in China, the domestic companies are surging as the country's consumer market takes off.

In May, Renren became the first social networking site to go public on the New York Stock Exchange, beating Facebook to the IPO trough. Its well-timed and sizzling IPO raised $855 million, giving it a market value of $5.6 billion. Since then, Renren's market value has slumped to less than $1.5 billion, but it has more than $1 billion in cash to fund growth. What's more, Chen has a track record of being backed by heavyweight investors.

"Joe is a serial entrepreneur. He's a very down-to-earth entrepreneur and a great out-of-the-box thinker. He figures out how to invest and build infrastructure," says Renren board member David Chao, MBA '93, cofounder and general partner of DCM, a Silicon Valley venture capital firm that was Renren's first venture investor.

Chen grew up in Wuhan, an industrial city in central China known for auto manufacturing. He attended Wuhan University for two years before his family moved to the United States thanks to sponsorship from Chen's uncle, a mushroom farming entrepreneur in Delaware. Chen attended the University of Delaware and eventually earned a master's degree in mechanical engineering from the Massachusetts Institute of Technology. He then worked for two years in the United States and China for Altec Industries Inc., an American manufacturer of electric utility trucks.

But it was his late-1990s Stanford experience that set him on his current path. In a GSB investment management class taught by Jack McDonald, the Stanford Investors Professor of Finance, Chen met Yahoo cofounder Jerry Yang and investment guru Warren Buffett. "Warren Buffett introduced me to the idea of value investing, which I have been practicing ever since. Jerry Yang piqued my interest in the internet," Chen recalls. "Without Stanford, I wouldn't be here."

Chen's learning wasn't confined to the classroom. The MBA student traded in dot-com stocks, making enough to pay his GSB tuition. He also met Nick Yang and Yunfan Zhou, both 1999 master's graduates of the Stanford School of Engineering, with whom he organized the brown-bag lunches. While still students, the trio started ChinaRen.com, an online portal for college alumni in their home country.

Their first angel money came from 10 of Chen's GSB classmates. "They went to my Escondido [Village] apartment, saying good-bye, wishing us the best, and giving us $3,000, $5,000, $10,000 checks," Chen says. A year and a half later, back in China, the trio sold their business for $33 million to online portal Sohu.com.

In 2002, Chen started investing in Chinese web firms through his holding company, Oak Pacific Interactive. Four years later, he made a key portfolio addition, buying Xiaonei ("on campus"), a social networking site popular among students at elite Chinese universities. Chen says he paid several million dollars for Xiaonei. Eventually, he raised more than $500 million from venture capital investors, including Japan's Softbank, DCM, and private equity firm General Atlantic.

In 2010, Oak Pacific spun off its other assets to focus on Renren, its social networking site. Today, Renren is run by Chen and James Jian Liu, MBA '00, the chief operating officer, who joined the company as part of an acquisition in 2006. Renren (which means "everyone") is popular among urban youth, college students, and recent graduates — a demographic group attractive to advertisers.

Renren's May IPO was heralded as a way for investors to get a piece of the frothy Chinese internet market. For the first nine months of 2011, the company reported a net loss of $3 million on
revenue of $85 million.

"Joe's sense of timing and marketing flair have paid handsome dividends. The key now is whether he can parlay this advantage … into a greater market dominance," says Duncan Clark, chairman of consulting firm BDA China, who is senior advisor to the China 2.0 project at the Stanford Program on Regions of Innovation and Entrepreneurship, part of the GSB.

Chen's goal is building a broader social media platform. In addition to its social networking and gaming sites, the company recently launched a group-buying site offering daily deals and a social networking site for professionals. Renren recently acquired 56.com, a Chinese site for sharing user-generated videos. Its technology platform is largely open to applications developers, and it has a network of 1,700 partner sites, including Microsoft's MSN China. Although Renren is considered the most Facebook-like among China's major social networking sites, it relies more heavily on gaming than the
U.S. company.

Unlike the U.S. market, where Facebook is dominant, China's many social networking sites serve different demographic groups and purposes. Many Chinese actively use more than one networking site. Renren's chief rivals include Sina Weibo, a fast-rising microblogging site similar to Twitter; Tencent, an instant messaging powerhouse with a huge base of users and a track record in social networking; and Kaixin001.com, an early competitor popular with white-collar workers. And there's always the possibility that Facebook itself, now banned by the Chinese government, will find a way to enter China.

Renren's prospectus says the firm benefits from being a social networking site where users give their real names, while some competitors are virtual-name sites. Real-identity sites are more "sticky" because social connections are long-lasting and strong, potentially deepening user engagement and providing more potent opportunities for targeted advertising and commerce. "There's a tremendous advantage. The social graph is permanent," says Chao, Renren board member.

Certainly, Chen seems well equipped for the competition ahead. He is the quintessential "sea turtle," or hai gui, a Chinese phrase (actually a pun) describing someone who went abroad and "swam" home with global experience. "For a sea turtle, the most important thing is being able to connect with your employees and partners. Being able to understand the cultural aspect of China is a soft skill you absolutely need to have if you lead a company there," says Chen.

The Renren CEO also increasingly sees value in traditional management science for China's young internet industry. For instance, he says Stanford helped teach him the importance of human resources management. "I want to build a systematic, defensible business," he says, growing "steadily but surely" and not through "lucky strikes and serendipity."

In fact, Chen believes that business innovation doesn't necessarily come from new ideas or inventions but strong "execution." He points to Apple's Steve Jobs, who didn't excel purely by inventing new technologies but by combining technologies and artistry in Apple products. "If you look at a small part, there's nothing truly revolutionary, but in aggregate, it's hugely revolutionary," Chen says. Making a similar point about Facebook's Mark Zuckerberg, he says: "It doesn't necessarily take a genius to invent social networking. But you do have to give Mark a lot of credit. He was able to take an accidental success into something much, much bigger." The Renren founder adds: "Everything is in the sauce, not the ingredients."

Joe Chen is hoping he has figured out the special sauce for social networking success in China.