Chinese gaming/communication combo YY.Inc just filed with SEC for an initial public offering to offer up to $100 million ADS (American Deposit Shares) to investors.

Founded in 2005 by Li Xuelin, former editor-at-large of Chinese portal site NetEase, the startup received US$ 1 million angel investment from Lei Jun, one of the best-known figure and angel investor in China’s Internet world, upon its launch, and raised another US$ 4 million in Series A (Morningside Ventures, 2007) and US$ 5 million in Series B round (Steamboat, 2008). GGV and Tiger Fund also invested US$ 23 million and 100 million into the company respectively. See table 1.

Table 1, YY Inc. funding history

The Nasdaq candidate described itself in the prospectus as a “revolutionary rich communication social platform that engages users in real-time online group activities through voice, text and video.” YY Music, one of its offerings based on the communication platform contributed US$ 14.95 million, or nearly 31% of its total revenue in the first half of this year, surpassing its online advertising business (brought in US$7.9 million over the same period), only next to the US$ 23.6 million generated from online gaming business. Out of the monthly active users of over 26.57 million in September, 350 thousand are paid users. ARPU for the service is RMB 254 yuan, even better than some online game companies. For example, ARPU for Perfect World and Changyou used to be around RMB 200.

Table 2, revenue breakdown of YY

As of end of this September, YY client boasted more than 400 million registered users with a monthly active user of over 66 million in that month. And the service is still experiencing fast-paced growth.

 

Underserved Needs in Tier 3 and Tier 4 Cities

For western investors who never heard of YY client or YY Music before, you’re not alone, the initiative somehow is even unbeknownst to Chinese locals, for it targets at a group that usually ignored by both big companies and startup that either try to please white-collar in big cites or aspire to become the Chinese XXX of U.S. companies, like Facebook, like Pinterest, like Twitter.

None of them are interested in serving Chinese blue collars in tier 3, tier 4 or even townships where entertainment is scare and life is tiresome.

YY, on the other hand, becomes a popular platform for live music performance on YY’s music channels, providing a stage for grassroots musicians. People can have their own concert with YY Music, while listeners can buy and give virtual items to performers they love – the secret recipe of how YY Music makes money.

YY also “shares with certain popular performers and channel owners a portion of the revenues they derive from such in-channel virtual item sales on YY Music”. According to a report, the total market size for karaoke and live music performance in ten major cities in China, including Beijing, Shanghai and Shenzhen, was US$8.6 billion. While as such facilities are lacking in small towns, people resort to YY Music.

screenshot of YY Music homepage

 

Robust Technology

Catching consumer needs is the first step into success, but far from enough, what’s behind YY’s thriving scene, is a robust infrastructure that powers up the show ground.

One channel on YY supports more than 100,000 concurrent users with more than 10 million concurrent users online at its peak, and they’re doing audio chatting. Few of Chinese startups could make that happen.

Truth be told, YY isn’t the first of its kind in the market, before its birth, there were already a lot of similar products out there with solid user base. However, as these services kept growing, they experienced setbacks in scaling up their technology infrastructure, user experience were compromised when more and more users poured into their products, driving users to flee away.

The IPO of YY Inc. could be a latest sign to prove that, no matter how bad the market condition across the pacific is, and whether your startup has a U.S-inspired story to appeal investors or not, truly creative startups meeting needs from the crowd are always being favored by investors.