The Internet industry in China no longer boasts massive investment opportunities like it used to do. But this did not stop GSR Ventures, a renowned investment firm that invested in Didi, Eleme and Xiaohongshu, to discover new investment opportunities like Lanhu – an online work collaboration platform that is extremely popular among Internet companies.
Known as China’s first PLG (product-led growth) unicorn, Lanhu was launched in January 2017 by Beijing Jinwei Zhiguang Information Technology Co., Ltd. It has completed its series C+ round financing upon raising one billion yuan in October 2021.
One of Lanhu’s early investors, Zhu Xiaohu, partner at GSR Ventures, attended the press conference on the C+ round financing. Zhu revealed at the press conference that GSR Ventures had shifted its focus to companies that are in the line of the To-B business.
Zhu first saw the product demonstration of Lanhu and the company’s founder Ren Yanghui in June 2020 at Lanhu’s office at Wangjing SOHO’s 42nd floor. It took Zhu less than 20 minutes to make up his mind on investing in Lanhu.
“I decided to make the investment after seeing the product,” Zhu recalled, explaining his rationale behind the investment decision. “Companies that focus on making a good product are rare in China.”
GSR Ventures later led Lanhu’s 300-million-yuan B round financing in April 2021. Zhu also invested in Lanhu’s recent C+ round financing.
How did Zhu discover China’s first unicorn of product-led growth? Zhu shared his insights into digitalization services for businesses in an interview with TMTPost.
Lanhu's C+ round financing press releaase. Photo courtesy of interviewee.
Finding China’s PLG companies
Most Chinese Internet companies that people know are using Lanhu. The platform has already achieved a 98% penetration rate in top players in the Internet industry in China.
Lanhu first amassed a lot of users who did design and development work through a freemium model in its early phase. It later rolled out a paid premium version in June 2020, which has been earning the platform very good revenues. According to statistics released by Lanhu at its C+ round financing press conference, there are already over 500,000 registered teams on Lanhu.
Zhu learned about Lanhu before its commercialization.
“Why do people use Lanhu? It’s because it’s good. People need to use it. That’s why they would pay for it,” Zhu told TMTPost.
Zhu discovered the PLG SaaS sector of China’s cloud software industry.
In short, product-led growth (PLG) is a business methodology in which user acquisition, expansion, conversion, and retention are all driven primarily by the product itself. It is a growth model that is centered around users and promotes the product through word-of-mouth promotion. Before contacting a salesperson, users would have already experienced the product themselves and understand most of the value the product offers.
PLG was originally coined by American venture capital firm OpenView. According to OpenView, companies with a PLG strategy can grow faster and more efficiently by leveraging their products to create a pipeline of active users who are then converted into paying customers. A company with a PLG strategy designs products for the end users, who will tell their boss which SaaS product to buy. It will also deliver value before capturing value through a self-serve free trial, freemium model or open-sourced model so that end users would know what they are getting and become accustomed to using the product. Investing in the product with go-to-market intent is also essential for a company with a PLG strategy.
Companies with a PLG strategy are able to capture quality end users that later become paying users. After users become accustomed to the product, they will naturally pay for it or upgrade to a professional subscription, which is similar to users paying for apps on the App Store.
“There were very software companies in China that really focused on making a quality product in the past,” Zhu told TMTPost. “Or we can say it’s rare for a software company to integrate all of the updates to one product version. That’s why it’s not easy to develop a product like Lanhu in the market.”
However, not everyone can see the true potential of Lanhu.
One of the main reasons for it is the fact the SaaS industry in China still focuses primarily on sales-led growth (SLG) strategy and customized services.
In contrast, the PLG strategy is commonly recognized in the SaaS sector and To-B business. Slack, a team management and collaboration software that was acquired by Salesforce at US$27.7 billion, is one perfect example of PLG company. Slack mentioned in its prospectus that its self-serve service allows end users to realize what Slack can provide, which can help convert them into paying users and boast growth.
Similar to Slack, companies like Zoom, Figma, Twilio and Dropbox also emphasize using the PLG strategy to achieve growth and revenues.
Zhu was amazed to find Lanhu, which adopts the PLG strategy. The cloud software industry is becoming a new investment trend in China and Lanhu has the chance to become a billion-dollar top player in the industry.
Statistics from Bessemer Venture Partners show PLG is becoming the mainstream growth strategy in the American To-B market. Companies of PLG strategy accounted for US$600 billion worth of market value in 2020, according to Bessemer Venture Partners’ data. On the 2021 Forbes Cloud 100 list, over 65%~70% of the companies focus on the PLG strategy. The figure was less than 35% five years ago. The market value contributed by PLG companies has increased from US$21 billion to US$687 billion in only five years.
Zhu believes the PLG strategy has entered a period of fast growth in the Chinese market.
PLG opens the era of cloud software in China
Since the birth of the world’s first computer in 1946, software companies had experienced three main eras - the CIO era, the Exec era and the End-User era.
In the 1980s and 1990s, software was something users installed on their computer from a physical disk. It was expensive to build and buy monolithic on-premise software programs back then. “Sales-led growth” was the key principle for software companies and was driven by field sales reps who schmoozed with the buyer (the CIO) during social events like dinner or a golf course. The key decision-making criteria of this era was simple IT compatibility. Companies like IBM, Intel and Oracle adopted such principles to grow their business.
The early 2000s saw the rise of Windows XP and mobile Internet. Cloud computing became a new demand as Salesforce and others changed how companies operated and drove software out of the data center and into the cloud. Development costs plummeted as users only pay for a small amount of money to use cloud services. Then software companies started to target a new group of buyers: the non-technical executives. Execs looked at criteria like key performance indicators (KPIs) and return on investment (ROI) to evaluate how well a given piece of software would help their team achieve its goals. This era was marked by “marketing-led growth” as a distribution model. Software companies invested lots of money in advertising on the Internet and paid platforms to display their advertisements to their targeted users. Alibaba Cloud, Tencent Cloud and Baidu Cloud used such growth strategies.
Then we entered 2020, a year in which we were hit by a global pandemic and saw new opportunities in the software industry. In 2020, the way we work and collaborate with each other had been completely reshaped. The infrastructure then became more important than ever.
In 2020, the success and fast growth of Zoom brought the PLG strategy to the Chinese market.
Users can now access software services online that follow the principle of PLG very easily. Users can now collaborate with their colleagues online by using online collaboration platforms without having to change tools frequently. The convenient use and useful features eventually lead to word-of-mouth and viral promotion that converts more people into users, and in the long run, paying users. Such growth strategy is associated with viral, freemium and bottom-up distribution.
The PLG strategy’s ability to help emerging software companies capture market share and build up their reputation is also reflected by its reception in the capital market. In July 2020, SaaS company Salesforce’s market valuation surpassed computer technology giant Oracle. Later in September, online conferencing platform Zoom, which went public in 2019, surpassed IBM in market valuation as well.
Over 50% of 300-something American companies with a PLG strategy are ranked high on website traffic analysis platform Alexa.com. This proves their ability to attract more traffic than platforms that focus on SLG.
“The industry believes that China’s SaaS industry is ten years behind its American counterpart. That’s why half of the opportunities here in China are compared to those in America,” Zhu explained. “GSR Ventures has done 100 case studies on American companies with a PLG strategy, ranging from sectors like CRM, online work collaboration, database to cybersecurity. This shows that there are plenty of PLG companies in the United States. The situation in America represents an important direction for the industry in China. We need to find similar companies here. Lanhu has a lot of potentials.”
“Lanhu’s core advantage is it understands users’ pain points.”
Zhu Xiaohu (left) and Lanhu’s founder and CEO Ren Yanghui (right). Photo courtesy of interviewee.
Customized software development was the main business for Chinese software companies in the past. These companies grew by utilizing the SLG strategy. Companies that followed the SLG principle would use sales reps to get orders from big clients, which might bring deals with large scale but low profit rate. The problem with this business model is that the products are not universal and not standardized.
“If the account management team has some changes in the personnel, then the team won’t really have a full understanding of past software versions for the client. This is a very important pain point and a challenge to the SaaS industry,” Zhu told TMTPost.
The PLG model can fundamentally solve such pain points. The criteria to assess whether a firm is following the PLG strategy is very simple – just look at whether the company sends all the updates to one version of software or service.
An industry expert told TMTPost that there are four standards for a PLG product:
1. The product should be ready-to-use.
2. The product has complete features and allows its targeted users to complete a full workflow under certain scenarios.
3. The product’s main functions should be easily accessed by users, especially value-added privileges.
4. The product should have high-end functions that allows flexible product plans or secondary development.
From Zhu’s perspective, the PLG model is very rare in the Chinese market, but it is crucial for innovative startups to become giants in their own sector.
“Chinese software companies are very good at doing case-by-case projects for clients. The good thing about the SLG model is that it brings fast growth in the early phase. However, it doesn’t grant companies the ability to develop their products further, which means growth will become stagnant in the later phase,” Zhu told TMTPost. “Companies that focus on product-led growth might be growing at a slower rate in the beginning. But when they have the product, they can grow by nearly ten times every year.”
End users’ value was crucial to Lanhu’s success
Software products from PLG companies will reach the end users first. During their commercialization phase, the end users will tell their boss which product to purchase. The commercialization process is driven by end users. PLG companies have emerged in an array of industries, including the software industry and architecture design industry.
Kujiale, cloud software that specializes in interior design, is another product born under the PLG model. It can render an interior design in 10 seconds while it will take a few hours to do the job in conventional ways. Kujiale drastically boosts work efficiency for interior designers.
Thousands of creators and designers, as well as other cloud software users, are paying for products created under the PLG model.
This confirms what Lanhu’s CEO Ren Yanghui had said at the financing press release. “Work collaboration software and applications have brought the Chinese software industry into an era in which the value of end users rises.”
Lanhu provides a perfect case study for startup companies.
During the first month after Lanhu was launched, the platform only attracted a couple of hundred users and around 100 registered teams. Lanhu’s team made active communication with the platform’s users and further refine the product. That was when Lanhu was confirmed to be a company that is user and product-driven.
In 2019, Lanhu started working on MasterGo, a one-stop product design tool. MasterGo was later officially launched at Lanhu’s financing press release held in October 2021. MasterGo is positioned as a one-stop design collaboration tool that allows direct use online without having to install anything on the users’ computer. Users can easily access MasterGo’s service on both Windows computers and Macs. The platform also supports importing Sketch files and provides convenient work collaboration and cloud service for its users.
MasterGo’s product introduction. Photo courtesy of interviewees.
MasterGo was not yet launched when Zhu invested in Lanhu. But he agrees with Ren’s strategy to diversify Lanhu’s products nonetheless.
Lanhu’s vision does not stop at design tools. Its team is also making products that center around product making, design and R&D. These products include Lanhu’s work collaboration platform, MasterGo, DDS and Lanhu super file.
“If we can integrate all software on product development together, combining software from design, development and project management to submitting codes and testing, then we will have a company worth 100 billion dollars,” Zhu told TMTPost. “It’s actually not easy to build a product with all these features that work well.”
The cloud software market has a prominent prospect. But Lanhu still faces challenges from the competitive global market. “Building the brand and the user base, innovating the products and improving operation are not the greatest challenges,” Zhu said. “The biggest challenge here is how to go international fast.”
At Lanhu’s financing press release, the company founder Ren introduced that there are 50 million registered companies in China and 20 million in the United States. “China’s cloud software industry boasts lots of opportunities if you look at how many enterprises there are.”
In 2020, China’s digital economy generated 39.2 trillion yuan (around US$5.7 trillion) and accounted for 38.6% of the country’s GDP, statistics from the China Academy of Information and Communications Technology. These numbers show that China is becoming a hotbed for digitalization with over 50 million small and medium-sized companies being potential customers of digital solutions that help them boost work efficiency and lower management cost.
Another trend that is worth noting is that Gen Z users who grew up with the Internet already available to them are becoming core members of enterprises. They as the end users will determine how China’s SaaS market will develop in the future.
Zhu’s investment strategy in the SaaS industry confirms such trends. He believes that software companies should first make a good product before looking at marketing. Software companies need to look at whether they have filled up an important gap on a chain, Zhu said. “Companies of different sectors in China are already using digital solutions to empower their business. They are using digital solutions in all aspects of their business operation and trying to achieve decision-making supported by digitalization. Lanhu is a PLG company with a good software portfolio. It will definitely succeed,” Zhu concluded.
Translator: Garrett Li