Rebirth 08: Can a mobile game company also build a tech empire?

Chapter 128 Game Theory

Xiong Xiaoge listened to Lu Chen's answer.

They did not immediately express their opinion.

Instead, he picked up his teacup and took another sip.

The meeting room was silent for a few seconds.

"Mr. Lu, your plan is very clear."

Xiong Xiaoge put down her teacup.

"Expanding production, R&D, ecosystem, and overseas markets—you've hit the nail on the head, but I still have one more question."

"Please speak."

"Your ZhengTu Communications currently has a net profit margin of only 5%, which is pitifully low in the hardware industry."

Xiong Xiaoge looked directly into Lu Chen's eyes.

"If we raise funds at a valuation of eight billion, investors are investing in the future growth potential. But how do you plan to increase profit margins in the future?"

We can't keep doing business on a low-profit, high-volume basis forever.

Lu Chen smiled.

"Mr. Xiong, that's a good question."

He said confidently.

"The 5% profit margin is a result of our deliberate choice, because we want to seize market share as quickly as possible and build up our user base. But once users come in, the source of profit will not be just hardware."

"App store revenue sharing? Or in-game purchases?"

Xiong Xiaoge pointed out incisively.

"Yes, we have them all."

Lu Chen nodded.

"The app store's revenue share is 30%. As the user base expands, this revenue will grow rapidly. On the game side, the paid conversion rate of 'Famine' has exceeded 37%, mostly for skins and cosmetic content. It does not affect the balance, and users are willing to pay for it. There are also Z-Dimensional memberships, GG, and in the future, there will be cloud services, fintech, and so on."

He paused, his tone firm.

"Mr. Xiong, we're not in the mobile phone business, we're in the user business. Hardware is just the entry point; the real value lies behind it."

Xiong Xiaoge remained silent for a few seconds.

"Okay, I believe you have the ability."

He nodded, then changed the subject.

"But the valuation of eight billion is too high."

Lu Chen and Lin Bing exchanged a glance.

Now, let's get down to business.

"Mr. Xiong, what do you think is a suitable amount?"

Lin Bing asked.

"Seven billion."

Xiong Xiaoge announced a number.

"A valuation of one billion US dollars corresponds to an investment of one hundred million US dollars, and you are giving up 10% of the shares."

Lu Chen shook his head.

"Mr. Xiong, seven billion is too low. The Journey 1 sold 450,000 units in its first month on the market. This is a hard target for any mobile phone company. Moreover, our sales figures are real and not achieved by burning money."

"I know your grades."

Xiong Xiaoge said slowly and deliberately.

"But Mr. Lu, you have to understand that the valuation in the primary market is not calculated based on the secondary market. Your current profit margin is high, but that is based on the success of Conquer Online 1. No one can guarantee whether the next product can maintain that popularity."

"Therefore, we need to invest the money in research and development."

Lu Chen continued.

"Investing in the next generation of products and in building the ecosystem is not to maintain the status quo, but to achieve sustainable growth."

"Sustained growth takes time."

Xiong Xiaoge retorted.

"Time has a cost. My valuation of seven billion is based on your current achievements. If other investment institutions were to value you, you would be worth at most six billion."

Lin Bing spoke up.

"Mr. Xiong, let's look at it from a different angle. If we compare it with other mobile phone companies, Meizu released China's first Android smartphone, the M8, and its sales in the first month were about 200 million RMB. Its current valuation is about 3 billion RMB. On the other hand, the first-month sales of the ZhengTu 1 were more than four times that of Meizu. If we calculate it this way, ZhengTu Communications' valuation should be around 12 billion RMB!"

Xiong Xiaoge smiled.

"Mr. Lin, your comparison is not fair. If we just use simple multiplication and division, the first month's sales of the iPhone 3G were 2.8 billion RMB, which is three times yours. Apple's market value is about 150 billion USD. According to this calculation, your valuation is 50 billion USD, which is about 350 billion RMB. This is obviously unreasonable."

The negotiations entered a stalemate.

Xiong Xiaoge truly lives up to his reputation as a seasoned veteran.

Every single number can be used as a reason to lower the price.

Lu Chen and Lin Bing worked together seamlessly.

One talks about the product, the other talks about the data.

They withstood the pressure.

"Seventy-five billion."

Xiong Xiaoge finally reported a new number.

"With a valuation of 7.5 billion, you will give up 10% of your shares and raise 750 million RMB, which is approximately 107 million USD."

Lu Chen remained silent for a few seconds.

Seven and a half billion, which is five hundred million less than eight billion.

This gap is within an acceptable range.

But he did not agree immediately.

"Mr. Xiong, we can accept the amount of 7.5 billion, but I have two conditions."

"Speaking."

"IDG needs to help us connect with supply chain resources, especially in overseas markets."

Lu Chen said.

"Zhengtu Technology wants to expand overseas in the future and needs reliable partners. IDG's global resources are something we value."

Xiong Xiaoge smiled.

"That's no problem. IDG has a presence in America, Europe, and Southeast Asia. We can help you make connections."

Lu Chen did not relax.

He then put forward a second condition.

"Secondly, we can give you a seat on the board of directors, but we cannot give you a veto right!"

Xiong Xiaoge raised an eyebrow.

"Mr. Lu, this is not in accordance with usual practice."

"I know."

Lu Chen said calmly.

"But ZhengTu Technology is a company where the founding team has the final say. We can listen to the opinions of investors, but the final decision-making power must be in our hands."

Lin Bing added from the side.

"Mr. Xiong, we have already implemented risk isolation in the architectural design. ZhengTu Communications is an independent subsidiary. You are investing in ZhengTu Communications, not the parent company. This means that your risk is limited to ZhengTu Communications and other businesses will not be affected. In this case, the necessity of a veto right is reduced."

Xiong Xiaoge pondered for a moment.

The two people in front of me.

They are indeed difficult to deal with.

But he became even more interested.

A small team that has just started to achieve some success.

Even when raising funds, they were still thinking about how to maintain control.

This shows that they really take the company seriously.

He's not the kind of person who takes the money and runs away.

"OK."

Xiong Xiaoge finally nodded.

"I can do without the veto power, but I demand an observer seat on the board to attend meetings but not participate in voting."

Lu Chen looked at Lin Bing.

Lin Bing nodded slightly.

"Can."

Lu Chen agreed.

"Alright then."

Xiong Xiaoge stood up and extended her hand.

"Based on a valuation of 7.5 billion, you will give up 10% of the shares and raise 750 million RMB. The specific terms will be negotiated by the legal department."

Lu Chen grasped his hand.

"It's a pleasure doing business with you, Mr. Xiong."

"It's a pleasure working with you."

Their hands were clasped tightly together.

We saw Xiong Xiaoge off.

Lu Chen returned to his office.

He let out a long sigh of relief.