The recent Google Inc. (NASDAQ: GOOG) – China spat has made Chinese web news much less interesting to read lately, as there is a flood of officially-toned articles criticizing Google and the US government (after Secretary of State Hillary Clinton’s Internet Freedom Address last week). And honestly, many Chinese netizens are perhaps fearful of tougher crackdowns from the government as a show of strength. It is therefore great news, then, to hear Douban raising close to $10MM in its Series B round of VC funding (via Chinabyte article, link in Chinese).

The Series B round of funding is led byTrustbridge Partners, founded by formerShanda Interactive Entertainment Ltd.((ADR) NASDAQ: SNDA) CFO Li Shujun in 2006, and Ceyuan Ventures, which invested $2MM in the Series A round in 2006.

Founded in 2005, Douban is China’s leading SNS when it comes to books, films and music – organized around such interests, it’s distinctively different from the other Chinese social networks (Renren – the college kids, Kaixin – casual games etc.). The crowd that Douban attracts may be smaller in size, but it is much more skewed towards the highly educated (and perhaps elitist) rising middle class, commonly termed “xiaozi” (literally meaning petty bourgeoisie). And since most topics are centered on the various arts, discussions are generally less sensitive, though Douban had to do some heavy self-censoring in the summer of 2009 to comply with the Chinese government’s regulations.

The site seems to have been picking up significantly over the half year, with over 33MM registered IDs now, versus only 10MM in September 2009. This could partly be due to a partnership withTencent Holdings Ltd.’s (HKG: 0700) popular IM platform QQ, where Douban was listed in the books section. However, like most SNSes, Douban is still on the path to profitability. The site currently generates income from book recommendations (linking to online retailers such as Dangdang and Amazon Joyo), ticket booking services and brand advertising (Ford, Converse, Ray-ban etc., full list of brands here).

Tencent Holdings Limited (HKG: 0700 | (ADR) PINK: TCEHY) announced impressive Q3 results on Nov. 11th (WSJ article, Tencent PR). Quarterly revenues were USD 493.3 MM, 17% QoQ growth and 66% YoY growth; profit growth was even more impressive at USD 209.9 MM (42% net margin), 19% QoQ growth and 92% growth YoY. And as a Bloomberg articlenotes, Tencent has been the best performing stock in the Hang Seng Index this year.

Not all segments were growing though. While Internet VAS (QQ Zone, QQ Games) grew 22% QoQ and represents 78% of total revenue, Mobile VAS dropped 5% QoQ and accounted for 13% of revenue, and the outlook continues to be uncertain despite 3G networks being rolled out. Online advertising grew 20% QoQ and accounted for 9% of revenue, however, outlook for the next quarter seemed poor:

“Sustainability of the recovery in the advertising market is still uncertain… We also expect our search-based advertising revenues to reduce substantially due to amendments to service contract with our partner and the gradual transition into our self-developed search engine.”
– Mr. Ma Huateng, Chairman and CEO of Tencent Holdings Limited.

The ad recession issue aside, Tencent’s fundamentals look great. Active users of QQ increased to 485MM (in comparison, Facebook has >300 MM); peak concurrent users were 75MM (in comparison, Skype has around 20MM peak concurrent users). In terms of monetizing its massive user-base, Internet VAS paying subscribers reached 48MM, a 20% QoQ growth – this is one of the drivers of that impressive top-line growth.

The other driver is of course online games, which generated 58% of Internet VAS revenue (45% of total revenue) and grew 23% QoQ, though Tencent management noted that it was driven by strong summer holiday seasonality. Management also notes that they were facing strong competition from SNS casual games. As an interesting side-story to this, last month rumors surfaced (and then denied) that Tencent had acquired the developers of Happy Farm, the ridiculously addictive casual game that inspired Zynga’s FarmVille. Some people estimate that Tencent was grossing USD 8MM a month on Happy Farm, which would be strong reason to acquire the company while it was still small. (Tencent’s M&A head was actually at Berkeley Haas last week for recruiting, though he was very secretive about their deals, only commenting that they have been very active.)

Children-focused Chinese social networking service (”SNS”) 51mole, which launched last year and received $5MM venture funding from Qiming Ventures this summer, has been under attack in recent months from Chinese media.CCTV, the national state television, first criticized the site in late August in one of its daily news segments; then in late September, Oriental Horizon, one of CCTV’s investigative programs, again called out the site for “making children addicted to the Internet.” And over the past few weeks, there has been quite regular articles popping up in the Chinese web media discussing the controversy.

“Internet addiction” is a sensitive topic in China these days. Literally hundreds of “recovery camps”, similar to those treating drug addiction in the US, have sprouted up all over China over the past few years. It’s a highly profitable private industry, and not surprisingly,horror stories are showing up of teenagers being harmed in those treatment camps. But the widespread popularity of such camps does go to show people’s perception of “Internet addiction.”

Therefore, 51mole’s bad PR, especially those accusations made by the state media, is a very serious issue for the firm. It could well be followed by regulatory crackdowns – and there is a recentcrackdown on Internet games ongoing. Regarding the allegations, I don’t know enough about 51mole to say whether they are true or false (the site is essentially a Club Penguin clone). Since it’s launch last year, the site has enjoyed quite explosive growth and now boasts 30MM users, and is part of a trend of SNS / gaming sites targeting children.

Regardless, I think the incident again highlights the regulatory risks of doing business (and investing in start-ups) in China – just think of all the Chinese Twitter clones getting shut down over the summer. In the long term, even if the government wants to retain such a heavy-handed approach towards the market, there must be due processes and proper justice procedures – otherwise China will never be a nurturing ground for entrepreneurial endeavors.

A week after Yahoo (NASDAQ: YHOO) sold 57.48 million shares of Alibaba.com Limited (HKG: 1688), and a month after Alibaba moved Yahoo China’s local classified listing site Koubei.com to under China’s largest e-commerce site Taobao.com, today Alibaba announced that Yahoo’s Chinese SNS Guanxi will be shut down. The notice on the site states that “due to changes in operational strategy, Guanxi’s services will cease operations on Oct. 30th.” (link in Chinese, my translation.)

Guanxi has barely been in operation for 1 year, having launched in October last year. Earlier this year there were reports of the service being migrated into Alibaba alongside Koubei.com, but apparently Alibaba has decided to adopt a drastic restructuring of its Yahoo China properties. And as a side note on the restructuring, Zdnet China reports today that (link in Chinese) 100 Koubei employees are rumored to be leaving the company as they refuse to be relocated to Alibaba’s Hangzhou headquarters from Beijing.

Going back to Guanxi, the service didn’t seem to have gained much traction within its one year of existence. Being constantly rebranded (first as Yahoo Guanxi, then put under the Koubei umbrella, and more recently Koubei getting integrated into Taobao) probably didn’t help. On the other hand, it would have been interesting to see how Taobao could have leveraged its massive user base to develop Guanxi. Perhaps Taobao has other plans – Guanxi is probably not the right vehicle for Taobao’s own foray into SNS, but clearly Taobao has massive potential. With its user base and the traditional focus it has put on facilitating user interaction (launching its own IM, which currently has 173MM downloads, for instance), it’s not hard to imagine Taobao attempting some SNS play to support its e-commerce community.

Update: I just realized that Taobao has had an integrated SNS Taojianghu.com since the end of March this year. The account is linked with the Taobao and Alipay accounts. So all the more reason to close Guanxi.