In 2001, Henry Winter started Smart Club — one of the first businesses in China to focus on consumer-loyalty programs — in Shanghai. Recently, Winter stepped down as the CEO of Smart Club, but he still thrives on being an entrepreneur and is preparing for his next venture. In an exclusive interview with China Knowledge at Wharton, Winter talks about what he has learned in the past decade in China, and the gap between entrepreneurial ideas and business realities. One thing all entrepreneurs have in common, Winter says, no matter whether they are Chinese or American, is “not accepting the world as it is — trying to change it in your way, to make it better and more comfortable for you and others. That’s international.”


Below is an edited transcript of the conversation.


China Knowledge at Wharton: Henry, can you begin by telling us about the recent developments in your career?


Winter: A month ago, I had a pretty big change in my professional life. For the last seven years, I have worked as a full-time CEO focused on one company which I started in 2001 in Shanghai, called Smart Club. As of a month ago, at my proposal, our board decided to hire a local general manager to run the company. I am still a board director and the Brand Ambassador for Smart Club, but now I am not running the company full time.


So now I am back to thinking of myself as an entrepreneur. When you start a company and you are working in it full time, it’s not really the same as being an entrepreneur. And if you are not actively trying to build a company that can live without you, then you are definitely not an entrepreneur — you just have a job at a company. So I feel like I have returned to my true nature — back to where I belong — which is trying to set things up and build them and make them happen. That’s what an entrepreneur is.


So it’s exciting, and it’s also a little bit scary, as I will be probably launching a new venture which will be completely different.


China Knowledge at Wharton: What made you start Smart Club?


Winter: Smart Club is my second entrepreneurial company, and the child of the first one. The first one is called Groove Street Entertainment Limited, an interactive marketing agency started in Hong Kong in 1998. We set up a branch here in Shanghai in 2000, and in 2004 we sold that company to an international advertisement agency.


An advertising agency doesn’t take too much investment, and it was low risk. But you don’t get rich from starting an advertising agency business. So my partners and I wanted to do something where, even if it was riskier, there was at least a one in a hundred, or one in a thousand, hope that it will grow and we will get rich. That’s why we started Smart Club about seven years ago.


We started the company with the model that we will own our members, who will be our assets. Then we will look like a media owner, we thought, and we will sell our assets every month to advertisers, and month by month our assets will get more valuable. Our hope was that at least there was a chance it could be worth one billion dollars one day.


China Knowledge at Wharton: So, did you reach the target which you set up at the beginning?


Winter: My target at the beginning was for Wharton alumni to stop sitting down with me and telling me, “Henry, you probably don’t realize this, but your business is not scalable. It depends on people.” Obviously, I knew my business wasn’t scalable. But after hearing so many people telling me so, and thinking that they are so smart, I just couldn’t take it anymore. I’ve got to start a business that is completely scalable, I thought. At least no one will tell me my business is not scalable.


So the idea was to have a website that consumers and retailers can join. And when the consumers buy from the retailers, it can all be tracked automatically. And I will collect the commission from the retailer, and give half of it to the consumer, and tell them, “You have so many SmartPoints.” Then they can take their SmartPoints from different retailers and “jifentong” (combine their points) — and later on, exchange them for a big prize. That will all be done technologically, I thought. I will just sit on my yacht, and watch the money rolling in everyday before I go for my massage.


And on the IT part, I did it, and it was very exciting. At the advertising agency, if nobody comes to the office, nothing happens. No work is done, so no money is made. But with Smart Club, over the weekend, when people buy things, it’s automatically tracked. It’s a machine — it makes money without needing any people. Beautiful.


Looking back, I think one of the reasons that Smart Club did not turn into a huge money machine is that I designed it at the beginning to be half way between consumers and retailers. Because my background is with the agency, maybe I even had a bias toward providing service for retailers, for clients. But in the business of consumer shopping, I now know, it doesn’t work that way. You have to be 100% on the side of consumers. If you have a lot of passionate consumers who believe what you do, then they will buy from anyone that you recommended. So if you can really deliver consumer sales to a retailer or a brand, then the client will come to you and say, “I want to work with you, please take my money.”


China Knowledge at Wharton: How you have changed your model to provide more value for consumers?

Winter: It’s really hard to think of doing something for consumers. It’s very easy to say, but difficult to do, especially if you have very limited resources. For every successful case, there are one thousand failures that you don’t know about.


So, we have been trying and we are still trying to make Smart Club more valuable for consumers. So far, the answer has been to try for fewer people — a more focused group of consumers. To make a smaller number very happy is better than making more people a little bit happy. People who are a little bit happy don’t do anything. Only people who are very happy will stand up and go buy something.


For example, if you visit our site today, there is a big banner on a temaihui (special discount sales event) for a shoe company. How many people in Shanghai need that kind of shoes? It must be a small group of people, but we will make them happy this weekend. And we promote it not only online, but also in several local newspapers. So now, Smart Club changes from a jifentong platform to a temaihui platform.


China Knowledge at Wharton: Why didn’t the jifentong model make the amount of money you hoped it would?


Winter: Because it’s a beautiful idea but it’s impossible to realize, especially for a small company. The idea is that you can combine all of your different consumption points in one place, and afterwards you get a big prize. It is a great idea, but the big issuers of consumer points don’t want to do that. Mobile phone companies, department stores, supermarkets, airlines — they aren’t usually interested in having their points combined. They are very happy that our SmartPoints can be changed into their points (for example, air miles), but they are not happy that their travel miles can be changed into our SmartPoints, and then they have to pay us money. Very few companies, at least in China, are willing to pay out money for their consumer points, even though SmartClub then takes the liability to finally deliver the reward to the end consumer.


Another problem is that the normal theory of consumer points doesn’t hold true in China. In theory, the way the points business works is that every time a company sells their product for a hundred yuan, they give back, say, one yuan out of one hundred to the consumer. So, consumers redeem the one point for a prize, and everybody is happy. The company is very happy because, after all, the consumer spent one hundred. And if he redeems that for a prize, maybe he will spend another hundred tomorrow. That is the theory. In reality in China, it is very unusual.


The business reality in China tends to be that the company says, “Our complete budget for prizes this year is 100,000 yuan, no matter how much we sell this year.” The budget for points prizes is totally unrelated to sales. So that is the first problem.


The second problem is, in many cases, people who supply the prize products have their own factories, and the price they can supply at is incredibly low. And they all have under-the-table deals with purchasers. So the final profit margin in that business is very low.


Doing business in China is tough, especially if you don’t know the rules.


China Knowledge at Wharton: So, there a big difference between the idea and the reality in China?


Winter: I should not blame everything on the market. I have to take the primary responsibility, because I decided to go into this business and then I started doing it. And then finally I started to do some market research.


Instead of taking one month to confirm that anyone would actually pay for this, or the key partners will be willing to do it, I just skipped that part.


China Knowledge at Wharton: What other things you have learned while doing business in China over the last decade as a foreigner?


Winter: I have been working with a Western company that has a local Chinese partner. The Western company made a big investment in China. Then my partner said, “Oh, it’s a good opportunity to work with them. Can you ask them for a copy of the contract with this big Chinese company?” Ten days later, they — and we — found out that the contract doesn’t exist. All this time, their local partner has been cheating them and they had no idea. They couldn’t believe their local partner — the boss is a very international guy, a Chinese citizen who speaks perfect English — had just lied. He stole their money.


So point number one is, politely — no matter who you are dealing with, even if they are famous, you have to check. At the time you sign the contract, say politely: “We need to see a copy of your business license” — to make sure the other party has the legal right to do the business, but also to make sure the name of the company on the contract is the same name as in the license, and the same on the invoice. My experience is that there is a problem in one out of four cases.


If something goes wrong, the biggest possibility is the other person doesn’t know it either. Even an honest person can cheat you by accident, as they are also being cheated.


China Knowledge at Wharton: So there is really an issue of credibility in doing business with Chinese people?


Winter: I don’t think it’s Chinese people – it’s people who are doing business in China.


Another story is, in the last year and half, I had three sets of big investors. One of them put in a big portion of their promised investment and then just disappeared — stopped answering the phone. The second one signed the contract to put in a lot of money. After putting in 20%, they admitted they did not have the rest of the money. The third one signed the contract: Part of it is money, part of it is strategic resources. They were not able to deliver the strategic stuff, so they put in more money and came up with some different strategic resources. They really act as our partners.


Of those three, I will take number three. They have good intentions and they understand what the company needs and try to help. The third one is a local Chinese person. The second one is a Westerner and the first one is an overseas Chinese. So out of these three, I would pick the local guys every time, thank you.


China Knowledge at Wharton: I heard that you were among the top ten finalists in “Win in China” (a TV competition program for entrepreneurs) last year?


Winter: Yes, have you seen my TV interviews on LinkedIn? Especially in “Win in China,” I have some funny speeches.


“Win in China” gives me a chance to meet Chinese entrepreneurs. Of course, I have met some before, but it’s not the same as living together for one month, and talking all the time. I started to understand them.


Chinese entrepreneurs and American entrepreneurs are much closer than American entrepreneurs and American farmers. For example, if you go into a restaurant, most people just go and sit down. When entrepreneurs come in, everybody is ordering, trying to control the environment and making things the way they want it. And that is the spirit of entrepreneurship: not accepting the world as it is — trying to change it in your way, to make it better and more comfortable for you and others. That’s international.


I read once that there are two kinds of people in the world. One kind of person accepts things as they are. The other kind of person doesn’t. They try to change things, to make the world more comfortable and better for them. All human progress is thanks to the second kind

<P class=MsoNormal style=”MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left” align=left