The discussions, at a private dinner when Zuckerberg visited Beijing in October, were never formalised, three of those people said, as the two CEOs weighed the political and commercial implications of Facebook - which has been banned in China since 2009 - buying into the Chinese tech star now valued at $45 billion (roughly Rs. 2,79,588 crores).
One individual with direct knowledge of Xiaomi's fundraising said the mooted Facebook investment was "not huge", but the talks underscore how ties between U.S. and Chinese companies have deepened as China's tech industry matures.
A Facebook investment in Xiaomi would have raised the international profile of the popular handset maker dubbed "China's Apple" by its fans and linked it to a U.S. social networking phenomenon with more than 1.3 billion users.
Facebook, for its part, has long harbored ambitions to expand into the world's most populous country, potentially with partners. One of the individuals said Facebook and Xiaomi began discussing a possible investment in mid-2014.
Xiaomi's Lei was partly put off by the potential for political fallout at home of selling a stake to Facebook while the U.S. social network is still banned in China, two of the people said, adding Xiaomi also feared a tie-up with Facebook could threaten its relationship with Google Inc, a crucial business partner. Xiaomi's phones are built on Google's Android operating system.
Xiaomi ultimately announced last month it raised $1.1 billion (roughly Rs. 6,834 crores) from investors including Hong Kong-based tech fund All Stars Investment; DST Global, a private equity firm that has invested in Facebook and Alibaba Group; Singapore sovereign wealth fund GIC; Chinese fund Hopu Management; and Alibaba founder Jack Ma's Yunfeng Capital.
The fundraising valued Beijing-based Xiaomi at $45 billion just three years after it sold its first smartphone. The company had revenue of close to $12 billion (roughly Rs. 74,556 crores) in 2014.
Zuckerberg has eyed China as a critical piece of his vision to connect the global population. But, like Google and Twitter, the social networking giant has been blocked by China's internet censors, who cite national security concerns.
"Facebook wants to get into China, and Xiaomi is keen to expand outside, so they both recognise the importance of working together," said one of the knowledgeable individuals, none of whom wanted to be named due to the sensitivity of the matter.
Xiaomi and Facebook declined to comment for this article.
The two CEOs knew each other previously and deepened their relationship last year. In October, Zuckerberg was invited for dinner at Lei's Beijing home along with Facebook business development chief John Lagerling and China head Vaughan Smith.
The next day, Zuckerberg, whose wife is Chinese-American, addressed the prestigious Tsinghua University and won plaudits for speaking in Mandarin during a 30-minute Q&A session.
As Xiaomi sought financing last year, ICONIQ Capital, a San Francisco-based fund that manages several individuals' personal wealth, including Zuckerberg's, also considered buying shares, but ultimately did not, several people with knowledge of the matter said. Talks about ICONIQ taking part in Xiaomi's financing were not led by Zuckerberg himself.
ICONIQ declined to comment.
Xiaomi is China's biggest smartphone maker, according to some industry analysts, and trails only Samsung Electronics and Apple in global market share.
A strategic partnership with Xiaomi would give Facebook
another avenue to distribute its apps and potentially provide a powerful ally in its bid to overturn its China ban.
For Xiaomi, access to Facebook's vast banks of user data would be valuable as it seeks to grow into a global internet company providing comprehensive online services.
But Lei thought it would be "too sensitive" to sell an equity stake to Facebook given its uncertain political status in China, said one of the people with knowledge of the matter.
China's top internet censor, Lu Wei, has warned that social media, particularly foreign services, could be a destabilising force for Chinese society. Lu, however, visited Facebook's U.S. headquarters last month, prompting speculation that relations between Facebook and China's government were warming.
© Thomson Reuters 2015