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January 2008

Can BigCafe become the McDonald's of internet cafés in China?

In BigCafe, Brian Lee, a vice president at venture firm United Capital Investment (UCI), saw an opportunity to create China’s first national chain of standardized internet cafés. As an early backer of outdoor advertising sensation Focus Media, UCI has a good track record backing firms that lie slightly away from the traditional VC hunting grounds. Lee spoke to CHINA ECONOMIC REVIEW about his BigCafe investment. 

Q: What do you think of the BigCafe business model?

A: Essentially it’s just a consolidation of internet cafes. Our initial analysis of the company gave us sufficient interest to look seriously into the industry because the ROI (return on investment) is pretty high. Internet cafes are netting 50% a year on average. When the deal came to us [BigCafe] were operating on their own and they had this great idea and we helped them refine it. That was in the middle to third quarter of last year. We did the seed round.

Q: What problems did they run into?

A: It wasn’t that easy to [consolidate] because individual cafes are making so much money. So the challenge was to convince people that they needed to be in this big chain. That was their challenge

Q: Why did UCI invest then?

A: They weren’t exactly the biggest player, but they had spent a lot of time doing a lot of work that people did not see. They own a national license – you need it to operate – and there are only I think six or seven licenses. This gave them an edge over everyone else. Quite a lot of [the management] are actually haigui (returnees) as well, so they had operated businesses elsewhere and they were managing it in such a way that it wasn’t a mom and pop organization. They had the ability to grow.

Q: Wasn’t there a license freeze earlier this year?

A: Since 2003, only nationally and provincially licensed cafés have been allowed to operate. In March this year the government moved to temporarily restrict entities from opening new cafés, licensed or not. The number of cafes can now only go down.

Q: Doesn’t that impede BigCafe’s plans?

A: A lot of the existing cafes were enjoying good profits without too much interference from government rulings. Although the government said a lot of things, they didn’t do much. The ruling in March shook up the whole industry and made them look at what they can do to secure their own future. Many of these cafes concluded that going under the umbrella of a national branded chain like BigCafe – with its own national license and a good relationship with the government – while still maintaining high margins, is the best route forward.

Q: Will BigCafe customers experience the level of standardization that a McDonald’s offers?

A: I think that’s the ultimate intention and it takes time. They will co-brand first and observe how [the acquired chain] operates and see whether they can improve their operations. The objective is still to help the [acquired chain] grow its business.

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