Due Diligence update: Smartdot

Student project breeds million-dollar business

Tang Tao is the co-founder and vice president of Smartdot Tech Co., Ltd (Smartdot), one of the first high-tech start-ups founded by students from Tsinghua University (China). Smartdot recently won the 2005 IBM PartnerWorld Beacon Awards (finalist for best industry solution) and the IBM Distinguished Achievement Awards (finalist for Asia Pacific). It is the second Asian company to win Beacon awards for last 13 years, with an Indian firm winning the awards only two years ago.

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Here he describes how Smartdot grew from a student project into a million dollar business.

In 1996, when the internet just started gaining ground in China, a group of Tsinghua students came up with the idea of creating management software for office automation, then an almost unexplored field in China.

After some trial development in the school laboratory, Tang Tao and his project mates received positive feedback on their browser-based workflow management solution from companies. They quickly realised that there was a huge market for such software. Smartdot was soon founded by ten Tsinghua students in 1998, and became one of the first companies to be incorporated in Tsinghua Business Incubator.

Chinese advantage in ERP
The concept of workflow management or document management may not sound new, but the standard packages offered by ERP (enterprise resource planning) giants SAP or Oracle cannot be directly adopted by traditional Chinese companies. The administrative structure of state-owned enterprises (SOEs) and government agencies is usually too complicated for popular ERP to be effective. A deep understanding of Chinese culture placed Smartdot at a competitive advantage from the beginning, and early entry to the niche market helped the company secure a strong first group of customers, mainly SOEs in the steel and petroleum industries.

Smartdot was hence a technology leader right from the start. However, Tang and his group – all top students from the prestigious Tsinghua University –understood how fast technology progresses, and how quickly the market changes. Therefore, they kept improving their technologies and products, and launch at least one or two new versions of their core products every year. The continuing heavy investment in R&D ensured that Smartdot remained the technology leader among Chinese players. "We always launch new functions at least 3 to 6 months earlier than our competitors, and that is why we win so many deals," says Tang.

First mover advantage
Both early entry and technology leadership bring Smartdot a steady flow of contracts and therefore, revenue. In 2000, Smartdot was valued at RMB10 million (US$1.2 million) and secured two venture capital investments, including one from an angel investor in Hong Kong. The sufficient capital reserve helped Smartdot survive a difficult time for IT companies in China. "We saw a lot of start-ups disappear in 2002 and 2003, but we managed not only to survive but grow steadily," says Tang. To Tang, proper management of cash flow may be the most important lesson that a Chinese technopreneur must learn.

Having been the leader in China's workflow management software industry for years, Smartdot now experiences pressure from international ERP giants who have accelerated their expansion in the China market. Companies like Oracle and SAP have begun selling customised products for Chinese enterprises. With more engineers hired in China, these companies become more localised, and pose a big threat to local companies.

Therefore, Smartdot has restructured its strategy plan, and will now explore a new market: that of small and medium scale companies. "It was not feasible developing customised products for small companies five years ago, because we would have needed to develop everything from scratch and they could not have afforded the cost. But now, having developed over a hundred modules, we can repackage some and sell to such companies at reasonable prices."

Dare to dream
Smartdot plans to issue an initial public offering (IPO) in the next two or three years. As a flagship start-up by university students, its success has inspired hundreds of student entrepreneurs all over China. Tang believes that the biggest advantage of student entrepreneurs like him is passion. "If you start your own company after working for ten years, you will be very realistic. But we have dreams. We will try our best to develop the best technology and the best business."

This profile is based on an interview given by Tang Tao to Tina Wu, an analyst with The Chilli’s strategic partner, InnovAsia – a wholly owned subsidiary of INSEAD, providing independent intelligence and research on technology innovation across Asia. In addition to engaging INSEAD’s extensive faculty, alumni, and research network across the region, InnovAsia and its partners monitor technology incubators, research labs and entrepreneurs clubs in major Asian cities.

© Chilli Publishing Ltd 2005

02JUN2005