Lessons from an early failure

25 Jun, 2012

When Richard Liu, the founder and chief executive of 360buy, China's second-largest online retailer by transaction volume, first tried his luck as an entrepreneur, he failed miserably.

As a student, he bought a restaurant but it went bankrupt within months. Money had been embezzled by staff and Mr Liu not only lost his own funds, he needed to borrow more than Rmb200,000 ($31,000) from his father. "I was very disappointed and looked at it from the angle of human nature," he recalls. "Is man good or evil? How come I treat my employees so well but they do this to me?" He also felt deeply embarrassed in front of his father, whose respect he had hoped to earn with the venture.

Born in 1974 into a family of businesspeople in the Chinese coastal province of Jiangsu, Mr Liu came to Beijing at age 18 to study social sciences. Realising that this would not get him far in finding a job, he studied computer coding on the side and earned some money with programming jobs in his third year at university. With that, he intended to start his career as a businessman. After the restaurant failed, however, he was forced to find a way to repay his debts.

So, he went to work for Japan Life, a Japanese health products company. "During the two years there, I gradually understood that the restaurant bankruptcy was my fault because I had not established management structures, done oversight or established financial systems and procedures," he says.

Mr Liu is being reminded of those difficult early days more often than he likes. 360buy is preparing to go public in the US in what could be China's largest initial public offering of an internet company. But with investors asking probing questions about its thin profit margins and weak global market sentiment, the company has been forced to delay. And as the business has been expanding rapidly, fierce competition has sparked hostile talk. "For a big company, being private is very problematic," says Mr Liu. "Your financials are not transparent, so the media keep guessing. You face all kinds of rumours like your funding could be running out and you're going bankrupt."

After two years at Japan Life and a few more programming jobs, Mr Liu had repaid his debts and felt ready to try his hand at founding another company. One reason was that having had a taste of being an entrepreneur, he wanted to have another go.

Mr Liu still reveres the feeling of owning his first mobile phone – a Motorola "brick" – as a student. "Not even the dean of Renmin University had a mobile phone back then," he says. "It was too big to put in your pocket so wherever you went you'd put it on the table and people would think you're a Mafioso."

So, in 1998, with just Rmb12,000, he set up a consumer electronics shop in Zhongguancun, Beijing's IT district. The enterprise flourished, and by 2003 he had opened 12 branch stores and earned more than Rmb10m.

But then Sars, the respiratory disease which spread from China to 37 countries, hit. Unable to run his shops as usual because both customers and staff were staying at home for fear of infection, Mr Liu bet on the web.

"I wouldn't have entered ecommerce hadn't it been for Sars," he says.

Since then, he gradually broadened 360buy's scope from electronics to clothing, accessories, cosmetics and other products. Hit by frequent customer complaints about slow and unreliable delivery, the company entered the logistics and delivery market in 2007.

His group's aggressive expansion – it accounted for more than half of the transaction value of all self-trading online retailers in China – and a habit of sometimes brusque comments on social media have earned Mr Liu the reputation of a ruthless entrepreneur who storms ahead without regard for risk or losses. Early companions recall the chubby young man whose pictures line the corridors at 360buy as brash and daring. But an inside look at how he runs 360buy suggests the opposite is true. His early failure has equipped Mr Liu with a healthy sense of paranoia which he imposes on every member of management.

Before this interview, he had just wrapped up the daily morning meeting where he takes reports from about 200 managers about every detail that went wrong the previous day and any plans for the coming day. All logistics centres are dialled in via videoconference.

During this meeting, Mr Liu also speaks often about management. He says, for example, that the failure of the company's chief marketing officer to get into Taiwan as part of a government-led delegation because he had tried to get in without the right visa was a learning experience. "In China many people don't like to play by the rules. There are also many hidden rules," says Mr Liu. "But I told them, we can't do that. Every employee must go by the book. Only like that can we become a truly great enterprise."

Mr Liu uses several other channels to instil his views on his employees. Every year, the company hires about 100 college graduates and trains them from the ground up. "We demand that they have never worked for another company so that they won't be polluted," he says.

The trainees, who are lured with annual starting salaries of Rmb100,000 – high by Chinese standards – undergo a year-long programme during which he builds strong personal relationships with each of them. They attend lectures by him, write weekly email reports to him, and take turns accompanying him at lunch, fishing at weekends and on business trips.

To build up the company's delivery service from scratch, he convinced a handful of employees, all college graduates, to go and deliver parcels with him, luring them with the prospect of promotion to run the fledgling business. While most senior executives have joined 360buy from other companies, 80 per cent of its middle management up to vice-president level are homegrown.

However, while the chief executive builds close ties with them, he also subjects them to a strict regime. Every employee whose delivery draws a complaint loses his entire monthly bonus – half of his pay – and, after three complaints, the employee is fired.

A senior executive at 360buy says of Mr Liu: "He reminds many of chairman Mao – both in the good and in the bad sense." Mao Zedong, the man who led China's Communist revolution, ruled the country with an iron fist until his death in 1976. But Mr Liu, despite heading a company that made Rmb21bn in revenues last year, still feels he has not got much further than when he borrowed the first start-up money from his dad.

The Liu family is in the business of shipping coal from northern China to the more heavily industrialised south. "When I talk to my father, he says, 'Don't you boast about being in the internet business – what you do now is no different from what I've been doing all my life'."

More News From Financial Times