Updated
Alibaba, the large Chinese company that owns Yahoo China, is preparing to file another hard-hitting suit against competitor Qihoo and its leader, Zhou Hongyi (pictured above).
Yahoo China has already filed one suit against Qihoo, saying the search engine start-up’s software notifies users that Yahoo’s toolbar is malware and prompts deinstallation, and that it’s hurt Yahoo’s market share.
The coming suit, which VentureBeat learned about early this week, will go much further. It will attempt to take out the man at the center of the stand-off: Zhou Hongyi. He is the founder of Qihoo, and is backed by the aggressive venture capital firm, Sequoia Capital. Zhou embittered Yahoo China since he was forced out of that company last year. Yahoo China will claim that Zhou has embezzled from Yahoo China and defrauded it, according to a source familiar with the lawsuit being prepared.
This isn’t helping Qihoo, which is reportedly trying to raise another round of funding at a high valuation of about $80 million. Its main backer, Sequoia Capital, had a few conflicts in China too. Sequoia was a big backer of Google, which is now a competitor to Qihoo. It was also an original backer of Yahoo. However, it’s not clear how much the U.S. Sequoia team is involved in the Qihoo deal. Sequoia’s Chinese office has been the main liaison with Qihoo.
Meanwhle, a separate source says Yahoo’s co-founder Jerry Yang is actively seeking to dissuade investors from backing Qihoo. A Yahoo spokeswoman declined comment. VentureBeat has contacted Qihoo, but was unable to reach Zhou by the time of this writing (Update: See our story here for Zhou’s response). A spokesman for Yahoo China did not respond to a request for comment.
Qihoo’s Zhou is controversial. He was the founder of 3721, China’s first search engine, which Yahoo bought for $120 million in 2003 to help it gain a significant foothold that had eluded it in China since it entered in 1999.
But 3721’s software had become popular by lodging itself in computers as spyware. It introducing pop-windows, bedeviling its users — and some would say it introduced spyware into China.
Things went down hill after Yahoo’s acquisition. Zhou, who took over Yahoo China’s operations came to loggerheads with Yahoo’s US headquarters. Zhou has subsequently blamed Yahoo China’s arrogance for the fallout. But Alibaba’s suit will claim Zhou initiated illegal behavior long before he was pushed out. Yahoo China says it first became upset with his performance: He refused to hire English speaking employees, and had become distant from his U.S. owner. Meanwhile, he was biding his time until he qualified for the earnout under the Yahoo China acquisition contract.
Then, last year, Yahoo invested $1 billion into Alibaba. Alibaba, under that agreement, took over the operations of Yahoo China. Alibaba’s leader Jack Ma forced out Zhou. Zhou then vowed to some his executives that he’d do anything he could to make sure Yahoo China never succeeded, according to the suit to be filed.
Yahoo China will claim Zhou was already using his position before the Alibaba acquistion to steal partnership and investment opportunities away from Yahoo China, preparing the groundwork for his exodus to Qihoo. He also offered money to key Yahoo China staff if they left the company, the suit will allege. He even launched press releases through front PR firms, saying in one case that a Yahoo China deal with MSN had expired when in fact it hadn’t, the suit will claim.
Qihoo is now reportedly raising another round, asking for a $80 million pre-money valuation. Our source said Sequoia’s Michael Moritz planned to meet Yahoo’s Jerry Yang this week to sort things out, something VentureBeat wasn’t able to confirm. Sequoia did not respond to a request for comment. According to the rumor, Qihoo wants to raise $10 to 20 million and is projecting $3 million in revenue for 2006, and $18 million for 2007.
In Qihoo’s first round, Sequoia joined CDH Investment and IDG Ventures to invest $20 million.
14 Comments
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zorochina said:
It will get really interesting if Yahoo decides to work with the tax authorities in China. Zhou Hongyi apparently paid no taxes on his sale of 3721 to Yahoo, and when he though he was going to be audited he is rumored to have paid off someone in china’s IRS to make the problem go away. It could certainly come back with the right pressure.
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ChinaUser said:
Zhou hongyi’s 3721 was never the “1st search engine” in China, but it is the first and one of the worst spyware in China. Because zhou get a lot of $$ by making spyware, a lot of new comers full filled the market with lots of spywares, these make whole China’s software and Internet indurstry sick.
Zhou is rude, selffish, what he did in Yahoo China are preparing for his next steps, including the qihoo deal.
Zhou misslead many foreign investors to invest in several companies which has nothing but an empty business plan to cheat the investors. These stories are well kown in China.
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Yahoo Hater said:
Google, Yahoo are both PORN Search Engines that makeACTIVELY BILLIONS WITH PORN!!!!
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Yahoo Hater said:
Harvard and Oxford support Google = PORN SEARCH ENGINE = DISGUSTING!!!!!!!
The most prestigous Universities of the World support a company the makes hundreds of MILLIONS of US$ every year and that ACTIVELY indexes BILLIONS OF PORN PAGES!!!!!
DISGUSTING!!!!! The presidents of Oxford and Harvard should step down / get fired!!!!!!
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Jagshemash said:
Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan
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Shut up Yahoo Hater said:
Yahoo Hater - porn is good, and Google is by far the best search engine in the world.
In my opinion, either you are a chick or you are a bloke that needs to have a few good wanks.
Also note, than the Porn industry leads technology innovation because of the amount of money the industry generates. So the fact you USE the internet is probably associated with the porn industry in some way.
So really, get some porn videos and have a wank and stop posting shit.
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Jagshemash said:
Jagshemash, my name Borat Sagdiyev. I would like comment on recent advertisements on television and in media about my nation of Kazakhstan, saying that women are treated equally, and that all religions are tolerated - these are disgusting fabrications. These claims are part of a propoganda campaign against our country by evil nitwits Uzbekistan - who as we all know are a very nosey people, with a bone in the middle of their brain.
There is a man name Roman Vasilenko who is claiming to be Press Secretary of Kazakhstan. Please do not listen this man, he is Uzbek imposter, and is currently being hunted by our agents. I must further say on behalf of my government, that if Uzbekistan do not desist from funding these attacks, then we will not rule out the possibility of military intervention.
If there is one more item of Uzbek Propoganda claiming that we do NOT drink fermented horse urine, give death penalty for baking baigels, or export over 300 tonnes of human pubis per year, then we will be left with no alternative but to commence bombardment of their cities with our catapaults.
Furthermores, all claims that our glorious leader is displeased with my film, ‘Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan’ is lie. Infacts main purpose of Premier Nazharbayev’s visit to Washingtons is to promote this moviefilm. This why together with Ministry of Information he will be hosting a screening tomorrow evening, to which he have invitate Premiere George Walter Bush and other American dignitaries - Donald Rumsfeld, Bill Gates, OJ Simpson and Mel Gibsons.
This screening will be followed by cocktail party and a discussion of closer ties between our countries at Hooters.
Thank you, I must now return to Embassy where my government need me.
Chenquieh
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keanu zhang said:
I am really wondering why sequoia invested in Qihoo. maybe VC focuses too much on startup team not the meaning of the business itself!
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Bo Chen said:
Matt Marshall should have done a better job, in stead of just passing the message from Alibaba/Yahoo! to the Americans - who are not familiar with the China market.
In China, everybody knows that Alibaba and Yahoo! are losing their market share (from top #2 to #5) and they are spending a lot of money on legal and illegal marketing activities to accuse their competitors (such as, Baidu, eBay/EachNet, Qihoo). In China, they are hiring second tier blogers and reporters to spread out negative stories about the competitors.
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Matt Marshall said:
Ok, Bo, this piece was meant to outline the case that Alibaba/Yahoo China is going to make against Qihoo and its founder. These are allegations only, and i\’ve stated them as such. I\’ve seen no \”proof\” yet, either. I\’ve gone out of my way to talk with Qihoo and others on that side, and I\’d suggest you hold on until I can talk with him. It is coming soon. Thanks for interest.
Matt
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Bo Chen said:
Matt, thank you for the explaination. We all look forward to the update. I used to work with eBay China (Alibaba’s direct competitor), so pretty familiar with their marketing strategy.
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ChinaUser said:
Sequoia invested Qihoo.com and 51.com, both this two website are actually backed by cheaters.
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Answer said:
Humans are addictive and curious by nature. It is nothing extraordinary to see that the Internet is filled with all kinds of features lurking around, which includes abusive content.
Pornography also played a part in making the Internet Famous, not Infamous…
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ebdztcglbg said:
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5 Trackbacks
10:14 pm
VentureBeat » China Wars: Zhou fights back, says Alibaba’s Ma is desperate said:
[...] In a phone interview, Zhou (pictured here) responded to VentureBeat’s article on Friday that reported Yahoo China is about to file a lawsuit against him. That article was based on an interview with a source close to Yahoo China familiar with the suit preparations. [...]
4:08 am
China Web2.0 Review » » Qihoo received $25M, a recap of 8 months said:
[...] Zhou Hongyi, Chairman of Qihoo is a controversial entrepreneur and investor in China. Just short before this round funding, Zhou and Jack Ma of Alibaba were in hot fight. See Venturebeat’s report: Yahoo China to file aggressive suit against Qihoo nemesis; China Wars: Zhou fights back, says Alibaba’s Ma is desperate. [...]
3:15 pm
PULSE 2.0 » Blog Archive » The Current State of Yahoo! And Where Yahoo!’s Acquisitions Since 1997 Are Now said:
[...] Yahoo! China/Alibaba.com had taken Zhou Hongyi, the chairman of Qihoo to court, alleging that Zhou may have embezzled and/or defrauded Yahoo! China before leaving Yahoo! China the year before. Once again, I must redirect you to the VentureBeat article that focuses on the Alibaba/Qihoo ordeal. [...]
10:07 pm
» Chinese Video Site, Tudou.com Serves 360 Million Videos Per Week || Pulse 2.0: Web 2.0 Reviews & Profiles || » Blog Archive said:
[...] Yahoo! has already had a tumultuous time in doing business with companies in China, one cannot forget that China is the heaviest populated country in the [...]
10:07 pm
» Chinese Video Site, Tudou.com Serves 360 Million Videos Per Week || Pulse 2.0: Web 2.0 Reviews & Profiles || » Blog Archive said:
[...] Yahoo! has already had a tumultuous time in doing business with companies in China, one cannot forget that China is the heaviest populated country in the [...]