October 27, 2005

Baidu gets “spanked” by the market…what can we learn from this?

Filed under: Start-up First Aid — Administrator @ 8:15 pm

Everyone knows Baidu reported a 29% drop Q0Q in earnings yesterday largely due to a 47% leap in infrastructure related expenses. Everyone knows Baidu didn’t warn investors this might be a problem. And, everyone is now dumping the stock which is down 16% in pre-market trade (as of 8am)…

Sage from Pacificepoch.com talks about this in his blog “Baidu Blunder: Failure to Communicate, Part II” and so I won’t repeat what he says…

..however, I just want to point out that moving forward, investors are going to be pay a premium for well managed Chinese companies. My gut feel is that a lot of investors (including VC/PE funds) are going to get “spanked” because they didn’t do their homework…and/or pulled the trigger too quickly before truly getting to know the capabilities of the management team they’ve just invested in…

…in all fairness this is really hard to do…in fact, I am in the process of dealing with my own “situation” at the moment. So what can we learn from Baidu’s SNAFU:

(1) if you are an investor on the ground in China, make sure you do your homework (e.g. spend time getting to know the mgmt team and employees); if you have to stress test them do it (e.g. call them at 4am and tell them you need a information in one hour see how they respond);
(2) if you are an investor outside of China investing locally be sure to have someone on the ground you trust…and I am not talking about someone inside the company…I’m talking about a third party;
(3) if you are a start-up looking for funding or just received funding, make sure your house is in order (e.g. clear lines of communications, operational procedures in place, etc) so your investors don’t feel obligated to stress test you — be open and forthright (e.g. proactive)

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