Oak Pacific: a mirage?

Dreamers abound in the world of internet business, but few have dreams as grand as that of Joseph Chen, CEO of the Oak Pacific Group.

 

Over the past two years, companies aiming to become the "next big thing" like to define itself as "the next MySpace", "the next YouTube", "the next Facebook" or "the next Craigslist". Through the development and acquisition of a series of websites, Chen's company can perhaps be described as "the next Myspace + YouTube + Facebook + Craigslist". In other words, Chen has combined many of the success stories of Web 2.0 with the view of securing an IPO.

 

As one of the pioneers of the Chinese internet industry and arguably the first to derive commercial value from an online community, Chen should be well equipped to digest this "bowl of spaghetti" of an idea. Even though Chinaren did not successfully complete an IPO, Chen accumulate enough wealth, experience and relationship from this venture to secure two rounds of funding totaling USD$58m. Over the past 10 years, no other internet business was able to secure funding of such size. In addition, venture capitalists estimate that Chen's wireless value-added service provider will achieve income of $15m by end of 2007. Such financial performance, together with the market's generosity in its valuation of web 2.0 companies, means that an IPO should not prove to be overly difficult.

 

However, as the market subsequently witnessed, its IPO plans turned out to be a "variation without a theme".

 

Oak Pacific announced its intention to seek an IPO in August, 2005. The high profile announcement became the foundation of its subsequent hiring spree. 6 months later, Chen's pronouncement that he "has not thought through the reasoning behind an IPO" could hardly conceal his appetite for a major IPO, as illustrated by the introduction of the Facebook-clone 5Q.com, and a Craigslist-inspired redesign of Renren.com.

 

Regardless of whether Chen really did think through the reasoning behind an IPO, he was forced to rethink after China Mobile decided in June 2007 to change its wireless value-added service strategy. Even though Oak Pacific announced that its revenue reached RMB80m, insiders suggest that the change in strategy reduced the company's revenue from wireless value-added services by two-thirds. This also led directly to the sudden retrenchment of staff in September 2006. 

 

If one is to describe March 2006, when Oak Pacific received a second round of funding of $48m, as the company's first turning point, the retrenchment program could be considered as its second turning point. At the time of the retrenchment, Chen sent an open letter to all staff as a show of confidence, and released a statement on his IT online community Donews suggesting that he would create 3 more listed companies in the next 3 years. Few expected that two more rounds of retrenchment would follow in the next 5 months. It was reported that after the second retrenchment round, Chen, over a one week period, lunched with executives across all departments to reassure them that the company's growth and development plans are still progressing positively. After the third round of retrenchments, Chen was no longer talking to his staff. In addition, apart from a few small gathering at the department level, no enterprise-wide activities were organised to mark Chinese New Year 2007.

 

Even in February 2007, Chen was defiant. "We can list right away if we must. However, we would prefer to bide time and wait for the right opportunity as our ultimate aim is to become a highly valuable public company." By this time, few in the industry believe Chen.

 

In an interview conducted at Chen's office on March 23rd, Chen asked Global Entrepreneur, "You tell me, how should I respond to questions on our IPO plans?". In his view, his penchant for speculation is not the issue, but rather media and industry interest in the prospects of Oak Pacific as a listed company. However, this does not mean that this medium built Hubei man with broad, big jaws was about to admit that his company is in trouble.

 

"I'm pretty happy with where we are at, and I am quietly pleased with our outlook." Chen said. "I am not concerned about the speculation surrounding my company. Let those who wish to comment speak their mind. If you are trying to tell me that others cannot understand why I do what I do, then so be it. This makes me happy as it shows that others cannot comprehend my strategy. You do realise, I am sure, that I am not one to seek confrontation". He would only concede that he "should not have shown aggression in such a high profile manner".

 

Whether one takes Chen's pronouncements as show of confidence or bravado, it is well worth putting Oak Pacific's trials and tribulations over the past year under the microscope. Gemag.com contacted more than a dozen staff, investor, competitor and industry analyst for this story and most indicated that they learned much from Oak Pacific's experiences. An entrepreneur, currently in his second start-up, told us that he realised from observing Oak Pacific that corporate strategy should be executed as covertly as possible. A financier involved in Oak Pacific's financing rounds said that this episode prompted him to rethink the relationship between availability of capital and how start-up businesses operate. Some also said that start-up companies should resist the temptation to diversify too early, "Even deities with super-natural powers cannot manage such diverse operations".  Experience internet businessman Xie wen-zong concluded by saying, "Oak Pacific is a microcosm of Chinese internet companies: only interested in value 'on paper', driven by short-term gains and lack the mindset to develop a scalable, sustainable infrastructure.

 

Although it may be premature to draw conclusions on the fate of Oak Pacific, there is little doubt that this uniquely Chinese story will, in time, be considered as one of the tragedies resulting from the Chinese internet start-up bubble circa 2005. Recently, Chen has started signing off emails with the title "Chief Stickiness Officer". Whilst this is meant to demonstrate commitment to his company's cause, it is also a ridiculous, almost self-defecating title that is never used outside the internet industry. Companies with captivating new business concepts, star management teams and significant capital investments are not uncommon occurrences, but few actually meet its initial lofty expectations. The story of Oak Pacific is but one instance in a series of tragedies in the Chinese internet industry.