Pinduoduo

0:00 See you next time. Let me retake that. That might be our teeth quote. Oh no, terrible. Welcome to season seven. Episode one of Acquired, the podcast about great technology companies and the stories behind them.

0:29 I'm Ben Gilbert. I'm David Resendal. And we are your hosts. Today we are talking about and I quote from their IPO perspectus. An exemplification of a multidimensional space seamlessly integrating cyberspace and the physical space.

0:45 A combination of Costco and Disneyland driven by distributed network of intelligence agents. Ben, it's like you're reading from my history and facts there. I figured you would have pulled that too. Unbelievable. Like Absolutely unfathomable. At first I thought and Disneyland was gonna be the hook, and then I realized all the stuff around it is actually far more absurd. So listeners, of course we are talking about the Chinese e commerce company, Pin Duo Duo. Now, why is this a fascinating company? Well, first off, it's only five years old. And they went public on the Nasdaq two years ago in twenty eighteen, three years into their existence. They are the fastest company ever to a hundred billion dollar market cap. And they've nearly tripled in value since the coronavirus spiked globally mid March. So almost all of that market cap, or or you know, two thirds of that market cap created in the last few months.

1:38 I think it must be the distributed network of intelligence agents there. It's certainly the intelligence agents, yes. So now you might be saying, well, Chinese e-commerce, I thought that was already sort of a settled frontier. I've heard of Alibaba, or at least even JD. Yeah, and and we haven't covered JD yet on the show, but also at e-commerce powerhouse in China. Well, apparently there was an opportunity remaining. There was a missing segment that was not being addressed by either of those two companies, and it is enormous. This episode felt very timely, not just because of that hundred billion dollar milestone for Pinduo Duo, but also because e commerce in general is uh Having a moment, as they say. So the global pandemic has massively accelerated the shift from offline to online commerce, as I'm sure all of you are

2:26 Experiencing in one way, shape, or form, at least as consumers. Yeah, hopefully you're Amazon shareholders. Yeah, no kidding. Or Seattle residents and benefiting from all the side effects of uh of that. And of course China, once behind the US in their e commerce penetration, I think it was only six percent of retail was done uh online in twenty twelve is now already at twenty four percent of the total retail spend. A lot of that accelerated here in the last few months, much like the US penetration, which is really driving this crazy run up in valuation for um Penduo Duo. So I do want to give a shout out.

3:02 A hundred billion dollar market cap in five years from a standing start. This is just nuts. It took Microsoft twenty-five years. Google and Facebook more than twelve And even for their closest competitor Alibaba, it took fourteen years. And so

3:25 I I it just felt like the stars were aligning to this episode. The more I dug into it, the more I was frankly shook by what this company looks like. really all I knew about this before was their name. It's been fun spending the week kinda doing research and learning. What is this beast? Like every story we tell here on Acquired, like you start thinking it's one thing and then you dig a little deeper and you're like, Oh man, wow, there are so many layers to this onion. Well, a few announcements before we get to it. So a huge thank you to everyone who took our uh our survey at the end of the last season. So entries are now closed.

3:56 As for the winners, we emailed you if you are one of the lucky ten to win the year subscription to the LP program. And the winner of our AirPods is Amy L from the Bay Area. So congratulations, Amy, and we will also be sending you an email to follow up after this. As always, if you love acquired and want more, you should become an acquired limited partner. Our most recent episode was with Benchmark General partner Sarah Taville, part of our VC Fundamentals series, and she joined us to talk about the fundamentals of consumer investing. If you want to join, you can get access to that additional content, plus our book club and our monthly LP calls on Zoom. You can click the link in the show notes or go to glow.fm slash acquired and all subscriptions come with a seven day. Free trial.

4:40 All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do.

5:13 operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time.

5:49 And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win seventy percent of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily they went from one million

6:33 to a hundred million in ARR. In about. Eighteen months. truly insane numbers. And that is the real test.

6:41 Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company. You can learn more at Lagora.com slash acquired and And just tell'em that Ben and David sent you. And now over to you, David, to take us into the story.

7:06 Of Pinto World Who. Yeah. Well, Ben, you stole some of my thunder. I think You know, we've talked about on the show, uh Ben and I don't compare notes before we record so that we keep our, you know, reactions authentic. Church and state and all that. Yeah, exactly. So my lead in was gonna be that quote from the IPO perspectives of uh the Disneyland and Costco and the distributed intelligence agents. What is going on? Well, I mean at least it validates like we're on the same wavelength there and that that actually was the interesting bit to pull out if we both pulled it out. I definitely think there could be a lead in here too that's like, what if you had a gaming company that got smashed together with a company that sold fruit to try to make e commerce fun and then you could shop and buy stuff with your friends? Like what if? What if? It's funny you mention gaming. So the other

7:53 is of course the largest and most important gaming company in the world. and strategic player and it seems about just about every market these days, Tencent. So if you remember back from our old Tencent episode, which I went back and listened to before uh before recording this. It's like navel gazing research. Yeah, seriously. We've now reached the point where our one of our sources for acquired is acquired. Tencent, if you recall from that episode, they are in many ways in such a

8:26 Dominant position. But not just in China, but around the world as the owner and operator of WeChat, which is the dominant social platform in China, but also major shareholders in Epic Games, which makes Fortnite. They're one of the largest shareholders in Tesla. They own League of Legends, major shareholder in Snap and Didi and Ma Dian Ping. But I think you could make an argument that they're now I think it's I think it's about seventeen percent ownership that they have in Pinduo Duo.

8:54 is maybe their most important stake in the whole portfolio.'Cause if you recall from Back our old episode. What were their weaknesses? The flanks that were exposed for tense in were to bite dance. Most specifically in terms of its social dominance. Who of course makes TikTok. course makes TikTok and Totiao, but also Alibaba. And Alibaba's massive Alipay and financial platforms in China. And so if you rewind back to say twenty fifteen, twenty sixteen, twenty seventeen, These are

9:28 major things that are on Tencent's mind. Right as The magical Unicorn, decacorn, centacorn, pinduo duo is being birthed. So keep that in mind as we go. Okay, so let's start. As we always do.

9:42 With The founder. Collin. Huang. He was born in Hangzhou in uh nineteen eighty.

9:50 his Hangzhou, China. His parents were factory workers. Neither of them finished junior high school. So they were You know, not even like maybe sort of on the on the just on the fringes of the establishing China middle class at this point in time. But kinda just barely hanging on. Again, also longtime listeners and China Tech fans might be smiling here because uh of course

10:15 what other very famous China Tech entrepreneur was born in Hangzhou to uh lower middle class parents. A generation earlier. That would be Jack Ma. Course founder of Alibaba. The parallels are gonna be

10:29 quite apt here. You mentioned the generations. For folks that haven't listened to any of our sort of China series before, the way to think about sort of China tech companies is of course there's the big three from the previous generation of Baidu, Alibaba, and Tencent. They they sort of controlled the ecosystem. They were the king makers. They were not only your Google and Facebook, but also your, you know, benchmark and Sequoias. They were both the VC and the sort of fang powerhouse of China. The companies that we've sort of been seeing this generation, the Xiaomi, Pinduo Duo, are the ones that are sort of rising up to become the next generation, and you can see those big three then fighting to participate in the success of this next generation. Yeah, it's such an interesting different ecosystem from US tech. So when Colin was in junior high. He loves math. Like really loves math. And he must have been quite good at it.'Cause he participates in a national math Olympiad. Which you know, they have contests like this in the US. I remember doing this when I was growing up, but like in China this is like a really big deal. And he ends up winning uh a medal in this Olympiad.

11:32 And one of the other prizes for how he placed in the in the competition was he gets an entrance exam ticket. to apply to the Huangzhou Foreign Language School. And now Initially Colin is like, Yeah, I'm not that interested. I mean like English, like fine languages. I really just care about math and physics. And his parents are like, No, no, no, you gotta you gotta go take this exam because it turns out it's not just a foreign language and go school and Punk Joe. Uh

12:02 It is one of the very best schools in all of China and one of the most prestigious prep schools. Uh it's public school, but prep schools uh in the country. He ends up taking the entrance exams. He does well. He he must have done incredibly well because he's still on the fence about going to the school. The president of the school calls him up personally as like a I think he's probably a sixth grader at this point in time. to convince him to come enroll in the school. So he he does go. He does very well. He ends up going to the also very prestigious JG Yang University, where he studies computer science. He interns while he's there at Microsoft in Beijing. This is kinda crazy. He makes more in apparently he he'cause it says in the interview, he makes more in his summer interning at Microsoft in Beijing than uh his parents do in a year uh working in the factory. Then later, I don't know if this was while he was in undergrad or when he was in grad school. He also interns at Microsoft in the US in Redmond and he makes

13:00 Eight times what he made that summer in China in The US. So here's this kid, you know, unlike Jack Ma who, you know, stayed in Hangzhou all his life, was was super fascinated with English in America, worked as a translator and a tour guide, but didn't get good grades, stayed there until his thirties. Um, you know, here's Colin. He couldn't care less about English in America. He just wants to code. But he comes and he makes tons of money. In the years that he was there, those sort of early two thousands, he would have been early enough in the Microsoft internship program where he would get to do the thing at Bill Gates' house and go to the barbecue and meet Bill personally. When I interned it was like fifteen hundred interns per summer or something by the time I got through. So that was no longer uh part of the program. But yeah, that was the major perk of being an intern then. Ah, interesting. Well

13:49 This definitely feeds into a theme with young Colin. Uh When he's in college. The legend has it. Impossible to verify, but also echoes another super famous China Tech founder, Pony Ma. Apparently Colin's hanging out on the internet.

14:06 a famous Net Ease founder, William Ding, posts online in a forum uh looking for help with a with a technical problem that he's, you know, working on. This is how the legend goes. Colin responds to this, starts interacting with Ding, and they kind of become friends. Ding takes a lightning to him and becomes A mentor. Ding. eventually introduces Colin to an even more famous uh China Tech entrepreneur, BBK electronics founder, and also I believe one of the founders of Netties, Duan Yangping, he would go on to found Oppo and OnePlus and like lots of Big, big, big modern Chinese technology companies. So he's got some like heavy hitting mentors. Super heavy hitting mentors, even when he's a college student back in China. After he graduates, probably on the encouragement of uh these mentors, they encourage him to come over to the US and do grad school in computer science at the US. So he goes Ben Ben you're gonna hate this, but he goes to uh

15:03 University of Wisconsin at Madison for grad school. That's fine. As long as it's not Michigan, that's great. Okay. Go big ten. Great. Okay, great. Big time. There we go. While he's there, uh doing his master's in in C S at Madison, he continues to intern to Microsoft. Microsoft desperately wants him to come back. Full time when he graduates. But William tells him. Hey, you know, you've spent a lot of time

15:27 at Microsoft. You've gotten the experience there. You've got a pretty good network. It might be a better idea. I think you should check out this little startup down in Mountain View. They're doing more interesting things. It's called Google. Maybe you should see if you can apply there and get a competing offer. He just keeps hitting the lottery over and over and over again. And I don't say that to imply luck, but like He finds his way to the right place, right time over and over again here. Totally. So he shows up. Of course he gets an offer from Google. He graduates from Madison in two thousand four. Shows up

16:01 That summer, six months before the Google IPO, he's one of the first couple hundred employees. At Google. He starts as an engineer and then pretty quickly switches to being a product manager. the company goes public, he makes a ton of money already. It's like he's just making money without even trying. This is the theme of his life. We'll get there. Yeah, we'll we'll definitely get there. Two years later, after joining in two thousand six, he does so well He gets put on a secret team at Google. He's one of two people leading the team for secret plans to launch Google in China.

16:35 Do you remember this Ben? This was like a huge effort. No. We actually did a case study on this in business school where Google put all this effort into building a Chinese version of of Google. It was all ready to launch. And then they decided not to do it because they would have had to censor the results and it's all like tied up with the you know don't be evil uh

16:58 Yeah, I certainly remember that. I I didn't realize it never launched. I thought it launched and shut down, but it never launched. That's actually a good question. If it did launch then they shut it down, but it was a big Public brew. And to this day there's no Google search in China, right? Yep, only in Hong Kong. Wild. There really are and

17:15 continue to be uh dividing two internets. Yeah. I mean and this is like talk about skipping ahead to what would have happened otherwise. The great firewall was not totally in place yet at this point. Like, if history had turned differently and Google had done this, like So much could be different about China Tech, US Tech, the global internet. But alas it didn't.

17:36 As a result, Colin ended up Leaving Google to go become an entrepreneur on his own rate, which was probably a really good idea. But before we get to that There's this amazing I texted Ben this photo. This is like the most amazing find in the research. And from looking at what you texted me, were you like did you find it in a YouTube video? Because I see like the YouTube bar at the bot Okay. Yes, I found it in a YouTube video. We'll see if we can find whatever website it's on. Uh It's on on the internet and link to it in the show notes. Also in two thousand six. So Well

18:07 Remember we said one of Colin's other mentors. He uh bids on and wins. the auction for the annual lunch with Warren Buffett. Uh in two thousand six. And

18:20 Who does he bring with him as a guest? He brings Colin. Uh this is crazy. And so there's this picture. We'll find some way to link to it. There's this amazing picture of Colin and Warren Buffett. Warren's got his arm around him. They're sitting at a table. In Omaha. having lunch. Uh and it's just incredible. It looks like they both had a glass of red wine. Yeah. There's definitely a wine bottle in front of them. I think Duan paid over six hundred thousand dollars for the lunch. So for that price you should get a pretty good bottle of the wheel. So within that couple of year span, there w we speculate he met Bill Gates

18:55 He definitely met Warren Buffett. We can see the photo with his arm around him. His mentors were Duan Yongping and Pony Ma, or at least he sort of interacted with them, uh certainly interacted with Pony and had Duan as a mentor like and William Ding. Yep. He's just like going down the list of people who have over ten billion in net worth. I know. It's uh it's pretty pretty incredible. Again, like for somebody who you know, his parents never finished junior high school. I mean these are the types of things that were happening in in China during this time is just this hugely rapid

19:28 modernization of the country and opening up of the of capitalism. Okay. So back to Colin's entrepreneurial journey. So it's now 2007. He's just left Google. And like, you know, many talented young folks uh leaving Google and other successful internet companies in in these days, he wants to become an entrepreneur. He wants to start a company. And specifically He wants to start an e commerce company to capitalize on this trend of rising incomes and the emergence of the middle class in China and uh accompanying um rising consumption. Hm. Interesting. Okay, this seems like a theme that's gonna recur. Uh so it's not yet been two thousand seven. This is two thousand seven. And Pinduo Duo twenty fifteen.

20:10 Yep, exactly. He starts a company called Uku.com. O U K U. And it's an online retailer. Uh they sell electronics and other goods on there. It does pretty well. He sells it within three years. And then he says, You know, just like my mentors, I'm gonna become a serial entrepreneur here and start starting and uh funding multiple companies. So the next company he starts is called Lakey. L E Q I

20:37 And that Helped. F the idea was they were gonna help bring foreign brands, non domestic, non China brands, online in China and help them Market and sell.

20:50 on the leading e commerce platforms of the day. Taubao, T Mall, uh, which is obviously part of Alibaba, and JD.com. Okay. Also interesting. So here's uh here's Colin. You know, he's got his e commerce experience, he's got his Google experience. He's now learning about his future competitors. And we should underscore something that's gonna be an important point that we keep revisiting. When you say Taubao and T Mall, those are s products by Alibaba. So Alibaba, you know, started in this B to B e commerce and then got into consumer e commerce where they were selling directly to consumers in China with T Mall, which is think about it like a mall with really high end brands and they wanted to keep that in its own separate ecosystem and Tau Bau. And Tau Bau is more like the eBay. Does that seem like the right comp to you? Yeah, that seems right. I mean I I would say like At this point in time

21:42 Alibaba's various properties are sort of um the equivalent is Amazon plus eBay uh rolled together in in China. We're now in uh you know probably twenty twelve time frame. And people are starting to think people are talking about Alibaba going public it w they which they would in was it twenty fourteen, I think and it was the largest IPO of all the time. Yep. People think uh yeah, like they've won. They are The monopoly and of e you think e commerce, you think China, you think Alibaba. And JD's emerging, they're a number two, but they're the winner, so much so that even Colin is like, Yeah, I'm gonna start a company on their platform to help people sell on on Alibaba.

22:22 But he doesn't stop there. He also at this point in time Mobile and social gaming are a big thing and Tencent has just launched. Uh WeChat. Of course they've had QQ, uh, which was the desktop messenger platform and that was deeply embedded in the gaming ecosystem for a long time. They've just launched WeChat on mobile. Mobile gaming is a thing. He says I'm also Gonna start.

22:47 A mobile gaming studio. Where we're gonna start churning out some Mobile. Uh social games on the back of this new emerging WeChat platform. Okay, okay, interesting. Here we go. So we're maybe maybe we're not quite yet at Costco in Disneyland, but you can see the forces starting to swirl around here. All these things are running.

23:08 In the Parallel. Colin, again, given his background, his mentors, uh Yeah, he's looking for a big Grand Slam home run. None of them it's it becomes clear none of them are really gonna on their own

23:20 Achieve that. mega, mega success. But he knows he's on to some big trends with each of them. And he starts feeling like huh. Maybe

23:30 Maybe there's an some kind of opportunity. To bring all of these things together. An intersection of these trends. And and if we could do that, I actually have the right team, all of these people. It's the same people, even going back to his first company, who same engineering team, same co-founders who are working on all of these different products. We know how to do it. We have all of these skills in house from social gaming to e commerce, deep knowledge of Alibaba and J D. Hm, okay, what could we do?

24:00 Together. Yeah, and he's like your classic serial entrepreneur and he's really You know, he's assembled the band. He he just doesn't exactly know what the company's gonna be in all these different attempts. And I think a few of them are running sort of in parallel. So he has multiple people sort of cut up into different teams to work on stuff that that kinda overlaps. Yeah. It's almost like uh he started a startup studio. Uh before it was cool. So in twenty fifteen He says

24:26 In this studio type environment we have. Let's do this. Let's let's start a company. So they Launch a new company. Called Pin How Hoo, uh I think is how you pronounce it. Again, neither of us are native speakers. We're gonna do our best here, but Pinhao Hua.

24:40 Which roughly translates as uh pin means Doing something together. And Hau Hua means good goods. So like getting good goods together. And the idea this is kind of crazy and super creative. It must have been from the social gaming world, you know, Farm Bill is huge at this point in time. The idea's kinda like real world.

25:02 Farmville. Agriculture. agriculture and produce market isn't anything like the US or Europe or many other countries where there are large co ops of of farmers and agriculture producers. It's much more lots of individual rural farmers. He thinks there's maybe An opportunity to use The internet and in particular mobile.

25:27 Buying and ordering. To have supply meet demand directly for these rural farmers. And the idea is that if they can get this to work, A this is something that Alibaba and J D aren't

25:40 Equipped to go anywhere near. But if they can do it, this is a huge category of groceries, essentially, like produce, and repeat purchase is gonna be super high. They can use all their tricks from the gaming world to drive you know user acquisition, to drive repeat purchases. And they think this could. really work. So as an MVP, remember there's a You know the other good thing about selling groceries or effectively selling sort of fruits is the risk is low relative to you look around at the time JD and um Alibaba's properties, like

26:13 you trust those brands when you're gonna go buy an iPhone or something like that. But there's this new startup, like you kind of need a a cheap thing to sell so that if your site's a little premature and uh doesn't look totally trustworthy, like it has to be a small investment. And fruits and vegetables are a great thing to sell because if it doesn't work out, like that's okay. I have other options. It wasn't that much money anyway. Yeah, I mean this stuff is a couple pounds of fruit for like five R MB, uh, which equates to less than a dollar. So it's funny you say site, then. There's definitely no site for this. There's not even an app. Uh so remember in the mobile gaming side of the house, they realized the power of WeChat. and how important that was as an acquisition vehicle for games. They thought, you know, hey to get going. What if we just don't even do an app? What if we just kinda like

27:03 operate on WeChat with all these rural farmers, you know, they have phones now. They have smartphones, they have WeChat on their phones. We'll just communicate with them. Via WeChat. Send'em some orders and stuff and buy from them and we can pay with WeChat Pay. And then we'll also just kinda chat with The consumers who are buying the fruit on the other end and take payment from them via WeChat Pay

27:25 Okay, like that seems like a good MVP until we can buy some time and buy an app. Well, it starts to work. By mid twenty fifteen They raise some venture capital and fulf the company. And the model's really interesting. So we're definitely still not yet at Pindu Duo and the magic that makes that work. They're also a first party retailer. So unlike if you think about sort of the two models that Amazon has, where there's Amazon retail and then Amazon third party sellers, the model with Pinhao Hua is that they're the Amazon retailer. Buying directly from from them

27:58 you don't really know who the farmer is on the back end. It's your classic retail model of the retailer buys it from the wholesaler, keeps the inventory, has that Tough business model. Especially when the goods are spoiling, uh, and then sells it to the consumer. I have to suspect they learn some lessons in the trickiness of holding inventory that would lead them to later embrace the marketplace. Yeah, totally. I mean you hit the nail on the head. They're they're a retailer in this model. Which is interesting, you know, given Colin comes from the e commerce background, that's probably that was what was natural to him. That's what his first company was was a retailer. And that's why they thought to do it this way. But it turned out there was a better way.

28:34 Yeah. So Pin Howe Hua is doing really well. They've raised venture capital. It's an exciting business. And clearly they've hit on a good

28:45 wedge into the e commerce market with produce and agriculture. But of course their ambitions are mu and Colin's ambitions are much bigger than that. They start thinking about what other categories can we go into next and build on this foothold and you know, eventually maybe we can start to compete with.

29:03 Halley Papa and J D eventually eventually being like six months from now, as we'll see. Um so what did they do? He's like, Oh yeah, well I got this gaming studio, you know, incubator that that I have. Let's just have the team spin up some Some MVP type stuff in some other categories. Okay, great. What's the easiest way to do that? You know, like being a retail. You know, we we did this MVP with Pinhahua. But that was kinda hard, you know, we were built a bunch of infrastructure. Uh and certainly requires cash.

29:33 What if we just, you know, we're really just trying to learn here. Let's just do it as a marketplace. So we won't take inventory. We won't even really take much of a cut on the transaction. We'll make it super, super small. Like less than one percent of the transaction we'll take as a cut for our marketplace fee. You know, which is different. Like I think Amazon takes what does Amazon take? Thirty plus percent on their marketplace and and even Alibaba and J D are taking, you know J D's very close. J D's twenty eight percent of GMV is recognized as net revenue, so revenue to the marketplace. And I think T Mall and Taubau are like five percent.

30:09 Still meaningfully, yeah, five times higher. Okay, great. So they settle here on like 0.6 percent? Yeah, zero point six percent. Tiny, tiny little take rate again, because they just want to learn what sells. So they launched this thing and they're like, Oh, what are we gonna call? It's also mostly running on WeChat. We we like the pe and you know, the doing things together. Um, let's call it pe and duo duo. Together, more savings and more fun. Seems seems fine. We'll go with that. And interestingly, this is a different company. They started as a separate entity also registered to Colin. It sets the table for who's this Colin guy and how does he have these two companies and I'm sorry, is it

30:47 Is it fruit, is it gaming, or is it marketplace for goods? Yes. Is the answer to that. So shocker, they launch this thing and it works even better than Pinhaal Hua. It works so well, they end up raising some money for it independently at this separate entity from some of the same investors. This is in twenty Fifteen.

31:12 And then in twenty sixteen it's growing so fast. literally by the end of twenty sixteen, they would do seventy million dollars in revenue. Not GMV, revenue with their tiny take rate with this marketplace that in September of twenty sixteen they merged the companies into It's now one company. It's all the same team that have been working on these things called Pin Duo Duo. And then in the beginning of twenty seventeen they fulfill the old retailer model of PH H and fully to the marketplace model of PDD.

31:43 Two things to say here. One is uh Meta point about this episode. Since most of our audience is Western, we've converted everything to US dollars to sort of make it easier to understand. The other thing is, David, we should not gloss over and it just did really well, and boom, they got to seventy million in revenue in the first year. Like How did that happen? Happen. Yes. That is a very good question, Ben. Well Let's dive into that.

32:12 It's not just that Pintoo Duo is a marketplace with a low take rate. For good. So like that in and of itself sure is an advantage versus the incumbents, but like they can slash their take rates too. Also, who's gonna trust Pin Dodge You know, like you were saying earlier, Ben, like there's some upstart, you know, when you can buy an iPhone on this thing and be doing. Also, like I'm not gonna attract any retailers just by having a low take rate. Like Amazon is is currently Amazon. So if I start Amazon two with a point six percent take rate, I'm not gonna get

32:45 I don't know, Adidas to come and retail shoes on my little thing with a low take rate just'cause it has a low take rate. Like I have no audience, I have no distribution, I have no ability to actually pull it off. Yeah. could talk to Tamilton Helmer here. It turns out there's a thing called two sided network effects where like You have a bunch of buyers, it attracts a bunch of sellers, which attracts some more buyers and Boom, that's actually defensible. So are you telling me then that they needed to find a novel way to attract a bunch of buyers?

33:11 Might be a way uh to enter the market. So remember They have all this gaming DNA. So they come up with this concept for Pinto a duo that they call team buying. Now this isn't new. I mean

33:27 This was in many ways at least, um marketed as the core concept of Groupon, like oh lots of people buy this thing together and then you'll get a lower price. Yeah. But that's kinda not really what Groupon was. It was

33:43 It is it was a deal site. Yeah, we have all this crap that wasn't already selling. And so uh well, you come take it off our hands if we lower the price enough. And actually over time we're just gonna phase out that uh group mechanic anyway. I remember buying things at Group On and and still if you go I assume if you go buy on the site stay, you're just buying the thing. Like you're an individual consumer. Group on put something in front of you. You're buying it. Fall stop. That's it. Pinduo Duo is pretty different from that, and team buying is pretty different than that. So in the Pindu Duo experience

34:12 And this is the core mechanic that has gotten them to a hundred billion dollar market cap today. You see two prices for every item. One price is the individual price. So you can just buy something straight up for that price. Get it, you know, tomorrow. They have uh

34:29 Just like all good internet companies and gaming companies. That button is like super faded, washed out colors. Red is the color scheme for Pinto Doo. It's like great anti pattern for UI designers. Yeah. Exactly. It's like very soft pink. The text is not bolded. You really have to fight against every fiber of your being to click that button. Are you sure you want to cancel your subscription? No. Right next to it though is a Big.

35:00 Which also happens to be at a price that is typically about forty percent lower. Then the individual buying button. Which is interesting'cause that's set by the retailer. So the retailer As a I don't know if it's a contractual obligation, but like as a w term of listing on Pindu Duo, you

35:18 set two prices. So it's the individual price and then the team buying price. And interestingly, I think it was something like The team size had to be like twenty people originally. If you could go get twenty people to come together, then you would have access. And I think the retailer would control this too and say, if you bring twenty people and then it became ten people Now it's all the way down to two people, but this idea that If you can self organize, if you can do some demand aggregation for us, then yeah, you get a break. Yeah, totally. And now I don't know if if this is how it was in the beginning, but now the retailer sets the team size the minimum team size. I say retailer I I mean

35:54 Seller. We'll get into that in a minute. So what happens when you click that button, this is just genius. Because it all runs on We chat's payment system. You are instantly charged that price, the team price, the minute you hit that button and that dollar value gets transferred to Pindu Duo immediately. They get the money.

36:16 the second you hit that button. The transaction doesn't go through though. You have twenty four hours to hit the minimum. Team size. Now there are two ways that you could Hit the minimum team size to buy this item.

36:29 You could One, join an existing team that's out there and Pinto Duo right in the UI surfaces a bunch of other people that are also trying to buy this app have also formed teams. You can join up on their teams. Seems pretty simple. Get the discount that way. Or if you want.

36:45 Extra discounts. you can form your own team and you can recruit your own people. Yeah. And it's all natively baked right into WeChat. So you can just super easy Post this item that you're buying.

37:01 into your family, friends, whatever WeChat group or post a publicly on WeChat stories, whatever, and recruit people to come join you. And what is this kind of stuff? It's like Well, it's fruit. Obviously. But it's also um shoes, it's jeans, it's uh I think Still the number one product issue is yeah, tissue, like literally Kleenex. This is where, you know, the Costco part of the Costco and Disneyland analogy comes in. It's essentials. Like who wouldn't want to be recruited into a group to buy something that you kinda have to buy anyway and now you get to do it cheaper? Like super cheap. It comes with the social proof of somebody you already know saying, Hey, I'm doing this, I trust this system, so do it with me. And didn't they later launch features that if you get enough people it's actually free for you? It's like price cut or something.

37:50 I think initially the platform showed you a selection of products that you could try and attempt to get for free. with the price chap, so literally pay zero dollars. It was getting people to sign up for Like literally register accounts. And the brilliance of it, again, this all comes from the gaming world was say you had like a hundred RMB product was sticker individual price. The first person you brought in for the price chop lower it like fifty percent. Then the next person lowered it to

38:18 You know, thirty R and B. Then the next person it was like an asthmatope that kept getting harder and harder to hit zero. If you didn't hit zero Nothing went through. Like you didn't get it for free. It's not that you got it for like the price. So you got it down to five. You didn't get it for five. You gotta get it to zero or nothing. It's like shooting the moon. But all those people you just onboarded onto So these are like effectively the greatest growth hacks of all time. And the exact correct incentives with the exact minimal amount of friction doing it on WeChat to just get a crap ton of users super fast to come and and uh and join the platform.

38:59 And not just join the platform, but actually transact. Actually transact. to making this all work that really Could not I mean. n not being nearly a expert China Tech watcher, I I'm I was actually really surprised doing the research that this was possible in twenty fifteen, twenty sixteen.

39:19 'Cause it's not even possible in the US today. The Third party logistics networks in China. Are so mature and incredible and built out. To an extent they're not going to be able to do

39:29 P D could do this without setting up any of their own logistics. So the way this worked yeah, was you know, these transactions were happening and this gamified mechanic that PDD was facilitating. And then they would have the merch it would be on the merchants, even these like rural farmers. to take care of delivery and logistics. You know, there's tons and tons of delivery, both last mile and

39:54 Up above the last mile delivery networks and competition in China, that that was actually doable, like from your phone. Oh yeah. I read something about this and they're they're all sort of API driven. So they would basically bid out who could come and take the the shipment the cheapest and it would all be done sort of programmatically. Well so now I think this is what Pinto Oduo does. They've invested a lot of tech in building this out. Kind of like um you could almost think of it like uh Shopify's fulfillment solutions now, where Shopify is not doing the fulfillment themselves, but they've built out all these APIs to manage it. Pinto Aduo's built that out now. But in the early days, like they weren't even doing that. It was literally just like hey farmers, hey manufacturers, hey whatever. Yeah, it's on you. Get this to consumers. And by the way, yeah, you should probably do that within seven days or you're gonna have points in the algorithm. That's really interesting. I hadn't realized this as much. I guess this makes I was thinking there were sort of two pillars, but I guess there's three pillars of areas where China is just way ahead here. So the first one there being distribution, the second one being something we've talked about in group buying and sort of social commerce. Social e commerce doesn't exist in the US. There's like some Shopify plugins that will show you like so and so just bought this on this website to make you feel like

41:05 Hey, people are actually buying stuff so I should buy stuff too. But th there's not a you know, multi billion dollar company that sort of made it work and made it an effective mechanism. And you have to imagine it will, and you have to imagine that coronavirus will accelerate that because, you know, shopping used to be a thing that we did for fun and now it's not because we can't go shopping with our friends. And it's a let's return to that in a minute. I think there's a structural reason why this is gonna be tough in the US in a way that it wasn't in China. Hold that then,'cause I want to talk about that. But the third being the

41:37 Advancement of WeChat Pay and Ali Pay are so far superior to the Payment mechanisms and money transfer mechanisms that we have here in the US because of the entrenched interests of the big banks, where we are stuck on. not just old technology, but like And costs associated with incredible fees associated with transferring money that like the speed and uh lack of friction and lack of fees that money can sort of move around these ecosystems in China is just far superior to the debit rails here, the ACH rails here, the wires. It's just it's

42:16 It's almost crookery, the way that you look at how far stuck in the past we are in in that industry here. Yeah. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done.

42:39 But in an AI first world, that doesn't hold up anymore. Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT. And your posture is different than it was last week, let alone at your last audit. Banta's own research found that around seventy percent of companies have this quote unquote shadow AI running with no security review at all.

43:03 Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's governance, risk, and compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

43:25 In half. Which is exactly why more than sixteen thousand companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake. All stay audit ready and catch the risks that crop up between audits across every vendor. Every AI tool. The whole environment.

43:43 And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get$1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A.com slash acquired for a thousand dollars off. And just tell them. That Ben and David sent you.

44:11 Talk to me about why the social thing won't work. So we've alluded to this a bunch of times so far in the episode. Let's finally bring in Tencent and what's going on here. So like you said, Ben, the pillars to making this work are well, A there's some cultural stuff, the group buying uh actually was kind of a phenomenon in offline in China already, so people are familiar with this. The logistics networks were mature enough to be able to do it. The financial networks uh were were mature enough to be able to do this. But then there's social. Okay.

44:41 Let's go back to Tencent and WeChat. We alluded to this and and if you go listen to our episode on Tencent. They made a major strategic decision with We chat around this time that was very different than Facebook. 'Cause I was thinking, doing research, I was like, I remember there were a bunch of

45:01 social commerce companies that got started. right around the time of the Facebook IPO. I remember looking at a bunch of Madrona. We almost invested in one. Thank goodness we didn't. We lost the deal, I remember'cause the company went bell up because what happened was These companies were doing the same thing that Pindu Duo did with WeChat, which is they were just leveraging the Facebook social graph to blast out there was tons of creativity about What you were buying, broadcasting it to your friends, people were trying stuff like buying Blippy. Yeah. Yep. Even stuff like um remember Fab.com. Yeah. Uh which raised a ton of money and flamed out. You know, they were more of an email newsletter buy, but they were also leveraging, you know, the Facebook graph, the open Facebook graph.

45:53 What happened was Facebook saw all this going on right around the IPO. They wanted to goose commerce happening on the platform leading up to the IPO, but then they yanked the cord and they shut off. All of this stuff. And they killed, you know, you could still, you know, Facebook uh connect into anything these days, but they took all the juice out of the algorithm. in the feed for any kind of stuff like this. In the same way that they did for for music, but Spotify had sort of already uh gotten enough distribution using, hey, well here's what your friends are listening to, but of course they then stopped showing here's what your friends are listening to in the Facebook news feed, and so no one could sort of catch

46:34 Spotify. But what you're saying is no one had sort of leveraged the Facebook graph to get enough scale to become sort of a I don't care if you shut it off, I'm already a winner. It was sort of like before they were over the hump. Yeah. Well and you need ongoing unlike Spotify, which is a subscription service. You n you need ongoing access to a social graph to do this. Like I do think a certainly a huge dependency and they have this in their IPO prospectus and ongoing filings for Pinto A Duo is is Tencent and WeChat. Like if Tencent did the same thing to them, like they'd be kneecapped Unless they built their own social network graph, which they sort of have within the app, but not totally yet. So why did why did Tent

47:14 And Facebook diverge here. What Facebook decided is they were like, Oh, we're gonna monetize this thing via advertising, right? We effectively want to control the commerce and business flowing through our platform. We don't wanna let anybody else do anything here. We wanna make everybody pay a tax if you're gonna do this. Now we ta took a really different approach. One I think because the advertising ecosystem in China in general wasn't as mature at this point in time. Like it was harder to monetize. There weren't as many advertisers. But also two, it was a messaging based

47:45 ecosystem where advertising you know, they do have advertising, but it's not as doesn't make as much sense. They came up with Just a brilliant different business model, which was Uh okay, we'll actually let all these startups use our platform and build businesses on our platform. And then what we'll do

48:05 We have all the data. We can see what's working. We'll just pick the winners and we'll invest in them. We'll invest in them. We'll get equity in these companies. And then we can, you know, put our hand on the scale and tip like the give them strategic access to APIs new features like mini programs one might say that some of their competitors won't have. And then this is what ends up making Pindu. And this is really the point to sort of draw that bright line of the difference between a platform and an aggregator. And for folks who read Stratekery, I'm sure Ben has a much more eloquent definition than this, but you know, Facebook is your classic aggregator. They're aggregating the audience attention, and then they're aggregating all of the advertisers and they're the choke point in the middle, and they

48:48 Charge the advertiser every time the advertiser wants to leech you off for a few minutes to do something on your site or app. Whereas with Tencent, they actually said, Hey, WeChat is going to be a platform. People are going to be developing rich applications on top of this. And Facebook made a few different runs at being a platform, but ultimately being a platform and an aggregator were in conflict. They picked the aggregator advertising based business. You know, they they've basically thrown in the towel on on really being a a platform. Whereas Ten cent has succeeded wildly. Not just because being a platform is a good business, but probably more importantly, exactly what you're saying, David, is then they're gonna observe what's taking off pick winners. And invest.

49:27 Yeah, one thing I didn't even realize uh this is almost a a sidebar, but came up while doing the research. You know Tencent is one of the largest shareholders in Tesla. They bought a five percent stake in two thousand seven, I think. Two thousand seventeen, sorry. Um, man, has that been a good investment in and of itself. But um you might think like, Well, that's just unrelated. That's just being a good investor deploying capital. Well, guess who has an official account and a mini program on WeChat? Tesla. And guess what you can do on it? You can find superchargers, you can uh Browse and order a Tesla. So they were watching the demand in China.

50:05 Well I don't know if they're watching the demand, but they've allowed Tesla to go the other way around. So Tesla can get better penetration in China. Yep. Because they have proprietary access to different APIs and Yep. Yep. So now for something like this. For something like Tesla, like Great. This is kinda icing on the cake. For something like this, this is literally the core of what makes it work. So there were competitors to Pintual duo. There's still competitors to Pinto Audo. Once

50:32 In February of twenty seventeen, Tencent decides to essentially king make Pinduadu here. in this category and and this is such a strategically important category to them, as we've discussed. They lead a hundred and ten million dollar series B in Pinto Audio. This company remember is like a year this is

50:52 five, six months from the merger between PHH and PDD that they lead Sequoia comes in as well as Sequoia China. Uh so they give them a ton of capital, but they also give them wide open access to the platform, including This new critical feature that they've just launched on WeChat called mini programs. And this is like for folks who have never sort of paid attention to the China ecosystem before It's not like in the US where the app store is the place that you go to get access to software.

51:24 In China. WeChat has really created an abstraction layer on top of the operating system where you open WeChat and then you decide what to do from inside WeChat. And these days that's by going to a mini program. It's totally brilliant from like a technical and computer science standpoint, this completely oblivates the need to

51:44 develop and maintain rich apps across iOS and Android and all the various other operating ecosystems within China and various flavors of China only Android or Xiaomi and and the like. I don't think it totally obviates it. I think you do need to build special versions for each operating system, even if you're building a mini program, or at least hook into the native stuff on its own. But what it did do is make the operating system less important. And so the it the switching costs kind of go away or you can switch between iPhone and Android more easily because hey, you've got WeChat and all your mini programs, no matter what. your you know hardware is. Yep, totally. And most of these companies, once they reach any scale, they do have native apps and we chat many programs, but in terms of customer acquisition, in terms of loyalty across platforms, it's huge. And so we'll try and link to this in the show notes as well.

52:34 There's this amazing graph of looking at PDD and its competitors of how many users they have in their own app ecosystem versus in the WeChat mini program app ecosystem. PDD's the only one they have two hundred and thirty three million Users. that interacts primarily

52:56 through the WeChat mini program, which is a fully featured Pinduo app. All the same features are in there as in the native app. That's like the equivalent of two thirds of America, including children, are Pinduo Duo users. Only through the mini program through WeChat. Yeah. They have another hundred and forty four million users that primarily uh interact with their own native apps. Which is like four Twitters worth of users. Right. You compare that to Alibaba, you compare that to JD, you compare that to VIP shop. All of those other

53:29 uh competitors Most of the users are on their own apps, A. And B PDD has exponentially more users total in the WeChat ecosystem than any of their competitors. And for something like this that is so natively social, that is such a huge advantage, because remember

53:48 all of the buying traffic on the buyer side of the marketplace is coming via these team purchases. It's funny in their filings, uh year after year, you know, they talk about how you can buy things individually and then they say Substantially all of our purchases happen via the team buying platform. Like nobody buys the individual price. Well, especially now that you can It's almost silly to call it team buying, the fact that you only need a party of two and you can join a party of two with a stranger. It's like uh you must have just clicked the wrong button or something if you didn't uh just join someone's existing party and like if you didn't feel like inviting your friends and making a big party of ten or twenty or whatever, and you just need a party of two and somebody's already posted it, like

54:30 Come on, is that really a team purchase? You you're basically like Trying to pay more money. Yes. Yeah. So on the back of this

54:40 This is February twenty Seventeen when all this happens, the investment and the mini program launch from twenty sixteen to twenty seventeen. Pin de O do Over

54:51 three X's their revenue to two hundred and seventy eight million dollars. They fully transition to the marketplace model. They get out of the retailing business. And on the back of that, they file To go. Public. And then they do go public in June of twenty eighteen. less than three years after the initial launch of the company and less than two years after the merger.

55:15 Just Incredible. Yeah, and an important point that they make in this this IPO prospectus is you know, not only did they grow like wildfire, but they hooked into a consumer category that all these other ones overlooked. So you think about the way China has different cities, there's Tier One, Two, Three, and Four. And so your Tier One Cities are the ones closest to the big commerce centers, Tier Four cities are the ones sort of furthest out toward the

55:43 most rural areas, and you know, wealth kind of goes down from one to four. Well what Pendo Duo did was they were able to effectively reach people in Tier three and tier four cities. And they were able to also reach a dramatically female audience. I think it's something like

55:59 mostly twenty five to thirty five year old females in these tier three and four cities. So Not a super high dollar amount per purchase, but for many of them, this is the first experience with e commerce. And so Pin Duo Duo is their gateway for these customers into the e commerce world and their sort of bet is look how fast we grew with these people. We're going to continue to grow quickly. And as they start to accumulate more buying power, they're going to be purchasing from us. That brings up a couple of great points that we haven't touched on yet. And this has kind of been one of the narratives around Pinduo Duo for the last couple of years is

56:37 Bringing on these more rural users. onto e commerce and that is definitely true. But there are a couple of interesting things about it, and I think we're So Remember where they started with produce and groceries and most of what Yeah.

56:53 Items that are being bought on this app are their everyday household essentials. doing that. It's whoever's kind of managing the household. And in many cases that's uh that's women. And in many cases that's women with children at home. So if you look at the demographics of the app, at least in the earlier days, um it's now Broadening and penetrating the whole economy. But I think about seventy percent of the users were women. The biggest age demographic was between twenty five and thirty-five. Yeah, it was all young mothers at home who were using this to like save a lot of money on all their household purchases. Yep. The other important thing that we haven't touched on yet is that it was browse centric.

57:35 Not search centric. So if you think about e commerce you know, for most of you who are buying stuff and listening to this show, you go to Amazon.com. If sorry, you go to smile.amazon.com to donate to your favorite charity. You type in the box exactly the product that you're thinking of, and absent there being a coronavirus going on, it's almost a hundred percent chance it's there and ships to you. If not in one day, then in two. And like the world is magical. Well, Pindu Duo's insight is

58:02 You know We're gonna feature stuff that people need. But We're not gonna make it a intent based system. We're just gonna show people

58:11 you know, at first in a brute force way over time algorithmically things that we think they'd be interested in, things we think they might be out of, things we think their friends are are buying and thus might influence them to buy. And it's basically a newsfeed. of stuff that you can purchase, which is a totally different paradigm and allows them to get away with something that is a in my mind a total narrative violation, which is long uh to use the phrase, long shipping times. So when you buy something on Pin Duo Duo, you didn't search for it. So it wasn't something you like immediately needed in that moment. It was something that sort of caught your eye and you're like, Oh yeah, I'll take that.

58:48 So they can get away with much cheaper shipping that takes much longer and have a totally different cost structure. This is sort of like very interesting to me as a startup investor. If you had pitched me in twenty sixteen and said, hey, I'm gonna create this e commerce site, um, and uh it's gonna take forever to ship. I'd be like, Well, that's immediately out because the future is overnight shipping. Amazon has changed the world. In fact, Azulili in the US had the same insight. They at one point were a six billion dollar independent retailer, but then by uh Q V C Q V C. Yep, Seattle based. They had the same insight that if they just send out a browsable list of deals every morning then they can get away with long shipping because nobody is intent based and nobody needs that thing that they were searching for immediately tomorrow. And I I think the parallels to Zuly are actually interesting because it's a primarily female audience. Um it's mostly about the deals, but this linkage, and I think it was a very interesting insight that both companies had, Zulily and Pindu Duo, is when it's a browse based experience and it's not intent driven, you can get away with much cheaper, much longer shipping times.

59:50 This brings up two related nuanced points on that. One you know in that Colin and Pindu talk about a lot is the entertainment value of this. Think again, especially about this demographic, you know, this is the demographic that uh in a different age and place and time would have, you know, been watching Oprah, right? This is a lot of the same demographic that played and plays these mobile social games. And so this is essentially a mobile social game, except you're buying your household groceries with it. Super interesting. The other aspect, you know, you bring up the feed This has a really important

1:00:22 impact for the supply side of the marketplace. A because they don't need as fantastic uh shipping and logistics times as you mentioned, Ben. But also just like TikTok, it means that there's much less entrenched success on the platform. And so new Entrance on the cellar side. especially via the team buying mechanic, can start breaking through and getting good volumes because it's all driven algorithmically by the feed that Pin Doo isn't putting in front of users as opposed to, you know, the equivalent in social being the follow model on or subscribe model on YouTube or Twitter or whatnot. And then how TikTok really ended around that with

1:01:04 the the four U feed where anybody any good content could break through. It's the same deal here. Right. So the platform can be much more opinionated on where it drives its traffic. And that can be really, really good if you're a supplier on the platform. I mean, it's bad in the sense that you don't get to build that direct connection with audience, so it's less reliable. But when the uh the eye of I don't know, what's the positive eye of Sauron when when it looks favorably upon you, it can buy a whole bunch of stuff all at once. Think about Amazon. You're selling something uh a a commodity type good on Amazon. You've been on it for a long time, you have a certain scale, you have 10 thousand reviews for your product. a new entrant wants to come in and compete with you in that same category and they have two reviews, who's gonna get most of the purchases. That's not a problem on Pinto Audo. So

1:01:52 On the supply side, who do they start attracting with all of this demand that they can channel? It's actually manufacturers themselves. We alluded to this earlier in the episode. Wait. They end up doing and I think part of what makes the economics of this whole thing work Is It's not distributors, it's not retailers, it's not the traditional people who are gonna sell on

1:02:15 Alibaba and JD, who are successful on Pin Duo Duo, it's the actual factories and manufacturers themselves They now don't need any branding, distribution, anything like that. They can just go direct onto PDD, even though they have no brand. And know that it's gonna Work.

1:02:36 And so that I think is a big collapsing of the value chain that they've been able to accomplish. Yeah, a hundred percent. I have to pull forward a tech theme now because we're talking so directly about it. I think like one of the big takeaways from this whole thing is that they successfully disintermediated. Both traditional retailers and brands.

1:02:54 So by not only being entirely internet based, but also social network based, they were able to bring that scale of of buyers of demand directly to the brand, which is normally the job to be done by that retailer. So the brand can sort of sell in big chunks to the, you know, their wholesalers and then it can get chunked down smaller and smaller from there. So the the social buying model takes that sort of aggregation of demand and totally eliminates the job to be done by a retailer. It allows for much cheaper prices because they cut out that middleman, but then Pendoduo takes it even one step further. Because on top of that, they created a marketplace that at least so far hasn't cared that much about brands and is starting to this year, but uh because they sell basically household commodity things, that means an individual manufacturer can just list a huge quantity of one thing that they make, not a brand that you know, that has to have a suite of products and builds that relationship with the customer retine and invests in all this marketing. So like they can drive the price down so far because they get rid of the retailer because all the demand can be aggregated on its own through the group buying. And then they also get rid of the brand and just say, hey, buy this unbranded thing from this retailer and boom, it sells out.

1:04:05 And I think In the early days especially, a lot of the supply on the platform was actually coming directly from Manufacturing lines. of manufacturers that just had excess capacity for stuff. Like they weren't booked up enough by whoever they're these contract manufacturers, by whoever was using them. So they had some excess capacity. So Pinto O2 has started going to them and they've they've now Labeled this whole

1:04:29 Practice uh C2M, consumer to manufacturer. They start going to these contract manufacturers and saying, Hey, we think we can generate a lot of demand for Tissues for Jeans for raincoats for umbrellas, whatever don't they pre sell stuff sometimes too? Like they even do generate the demand, take the payments, and then I think they go to the manufacturers after that and say, We know you can make this, just make it. Just make it. Uh that's funny. They may start doing this. And so they go to the manufacturers and they're like, Yep, we're pretty sure like you just use your excess capacity on the line, make this stuff. We can pretty much guarantee you're gonna move it.

1:05:03 Yeah. Okay, so this is the positive scenario of that. The negative scenario is and the rip on this company for a long time now, a long time. It's been five years. The rip for the last two years, and I know they're taking lots of w steps to address this, has been massive amounts of counterfeiting and people buying goods that are knock offs of big brands or you know, the factories that manufacture stuff for brands are making a few others that are, you know, not putting the nameplate on it and then selling it on Pindu Duo for way cheaper. It comes with these downsides that now Pindow Duo is having to really invest in sort of anti fraud, uh mechanisms in order to not damage their own brand as a And and also, you know, they've also uh been a lot of fraud on the consumer side, too. In that

1:05:47 one of the ways, you know, this company has huge sales and marketing expenses that is certainly advertising that they do, but a big part of it is coupons and promos and deals and they're very sophisticated coupon hacking rings, essentially, uh in China and everywhere. Where people are doing affiliate and coupon fraud. Uh pay essentially nothing for items. So yeah, like there's massive challenges associated with this. But Because of these dynamics they've been able to break into this market, e commerce in China, that everybody thought was

1:06:20 Done. Yep. You know, we've talked to the IPO a little bit. We're talking a little bit about Their efforts today to sort of combat this fraud. There's another big effort today that has been going on, which is breaking into these sort of tier one and tier two cities. Because the price per item

1:06:37 on Pindu Duo is like six bucks or something, the average transaction size. And you look at that compared to any other Not only Chinese but American Comparable and it's super low. So not only is the price per item super low As we talked about

1:06:51 P D's take rate is incredibly low. And so they have a revenue. Yeah. What is the business model of this company? Uh that's a good question. Hard to build a big business even with lots of GMV if you're only making money on the zero point six percent. Take rate. But what if David I could tell you

1:07:10 that only ten percent of your revenue needs to be from that take rate and you can make ninety percent of your revenue doing something else. That Sounds like it could be interesting. No. So what we're talking about is

1:07:23 advertising and promotions, PDD has built out a whole Very sophisticated. advertising and ad bidding system similar to Google, similar to Facebook, and and actually really similar to Amazon and Alibaba too, where merchants on the platform Can pay. and importantly prepay for preferenti in customers' feeds of their product for sponsored placement, just like sponsored posts on Instagram or Twitter, or you know, whatever. And that

1:07:53 as you said, is makes up most of the revenue of this company. Now what's interesting is like people think this is a big innovation. Alibama and Amazon have been doing the same thing for a long time. There are a lot of sponsored products on Amazon. The originator of this business model is is uh in some ways the classified ad, but in other ways it's Google and of course Yahoo before that and Overture before that. And so The thing that you mentioned about Amazon is interestingly not true. Oh I was wrong. It took Amazon basically twenty three years to layer on an advertising business of any meaningful size to their e commerce business. So the way that Amazon makes money is they charge a thirty ish percent take rate if you're a third party seller. And of course they have their own margin that they make if they're the retailer and they make

1:08:40 most of their money, let's forget AW AWS for a minute, they make most of their money that way. Well, only about three, four years ago did they really start to meaningfully develop an advertising ecosystem that's been growing and is now about a 10 billion dollar a year run rate business for them. So they're very quickly becoming a major player in the advertising ecosystem. And these are of course all the Sponsored search results that you see on Amazon. Exactly. Exactly. This was not Amazon's play for a long time, and they were sort of leaving this money on the table. fascinated me that Pindu Duo was like well Uh

1:09:13 We aren't making money on uh sales on these transactions. So uh we gotta make it somehow. And and very early in their business, they sort of developed leg number two of the stool to make money on promoting products. It's also more common in China, so you know. Yeah. Yep, yep. Which is interesting. I I had thought that Amazon started this

1:09:34 Much earlier than maybe they did. I know they had pilot projects running around this for a long time, but the decision to really invest in it. I wonder if it was driven by observing What's been happening in China. It had to be'cause they've really put their foot on the gas. It went from something like four billion dollars in twenty eighteen to ten billion dollars in twenty nineteen. So it's like it's a really fast growing business. Oh. That's crazy.

1:09:58 So we mentioned the IPO uh a minute ago. It was actually pretty huge. They raised one point six billion dollars in the IPO. The stock popped forty percent on day one, so Bill Gurley would be unhappy about that. Uh fortunately or unfortunately he wasn't an investor here. Money for bankers and money for people who bought the IPO allocation and money on the table for all the private shareholders. Yeah, exactly. Colin uh wasn't hurting too much though. This is crazy. He still owned forty six point eight percent of this company when it went public. Yeah. So you know, one of the knocks we're gonna get to this in narratives in a minute on this company is times what Tencent owned. Yeah. So um One of the knocks.

1:10:38 on this company is uh They're not profitable, their losses are huge. We're gonna get to that in a minute. Just think about hmm, if this company had huge losses, how was Colin able to retain so much of the equity, even though they fundraised a lot. Uh Yes and no. So he owned almost half the company. At IPO, that stake was worth thirteen point eight billion US dollars, making him the twelfth richest person in China. Again, for a company that was essentially founded generously three years before and like really two years before that, Tencent and Sequoia both bought into the IPO rather than selling. They each put about 150 million USD

1:11:22 uh to work buying shares in the I think that's brilliant now. Yeah.'Cause things go Pretty well, um, over the last two years. The stock is up five X they did cross a hundred billion dollar market cap, Ben, as you mentioned in the intro Their share of the e commerce market in China went from they were already at four percent of the e commerce market by transaction volume. at IPO in twenty eighteen, it is now fourteen percent. That has come almost a hundred percent at the expense of Alibaba, which went down from seventy three percent to sixty two percent. So almost all of that share

1:11:58 Now of course they're both growing, so it's a massive growing pie, but yes, they they from share percentage, yes. Yeah. crazy. And with that stock run up, and this is why Pinto Adu has been in the headlines recently, they passed a hundred billion dollar market cap. Colin became he's now as of today the fifth richest person in China. He briefly passed Jack Ma of Alibaba, becoming The third richest person in China is now down to number five. He's the thirtieth richest person in the world. And so as all this was happening.

1:12:32 Yeah. Uh he's he's gunning for them. On july first In a surprise announcement, he announced that he was gonna step down as CEO, remain as chairman, of Pindu Duo. Hand the CEO role over to his co founder and CTO.

1:12:48 Li Chen. Who had been with him I think since the first company. They were actually grad students at Wisconsin together. I don't know if Leah worked full time at Google, but I know he interned at Google. So they worked at Google together. Then they worked on the first company and all the companies all along. So very interesting what's going on now. Yeah, it's fascinating. Wait, but David, you gotta you gotta answer that question. So how if they were losing all this money did they manage to preserve so much ownership in the company? All right. This is a good transition to narratives. The bare narrative around this company, I think, has been, well, A, this is just a kind of a crazy model, hard to understand.

1:13:25 I I didn't understand it at all until doing a lot of research over the last week. This is an interesting reminder that Gap accounting doesn't always tell the whole story. So if you look at the net losses of those companies, this is this is quite an exciting podcast, listeners that you're tuning into. We are talking about gap accounting. Okay, so if you look at the if you look at the net losses of this company, they're huge and growing. But then I found something really interesting. Go look at the cash flow statement. This company has had Huge.

1:13:58 Positive Operating cash flow. for the last like three plus years. Over a billion dollars USD. positive operating cash flow each of the last three years. What is that? Up front payments on on advertising?

1:14:11 So It's a couple of things that are just Totally brilliant pieces of the model. Let me put something into layman's terms, frankly, for myself, and then you can tell me if I'm interpreting this right. So there's something that's not being recognized as revenue, but they are receiving cash for something that gets to be in their bank account and they get to be in this really nice cash position, even though on their income statement it wouldn't show up as revenue because they're deferring it to some for some future purpose. That is part of the story. So

1:14:40 There's an interesting almost kind of equivalent to Berkshire Hathaway and and their Geico insurance business equivalent to the float dollars that Berkshire gets. Of When New merchants. Sign up to come on to

1:14:55 The PDD platform. They have to pay in a pretty meaningful cash deposit to be on the platform. And that's to guard against uh fraud. So if There are customer complaints like kind of the equivalent of

1:15:11 chargebacks or counterfeit merchandise or whatever, there's actually some real teeth and and Uh there's been a lot of controversy about this in an attempt to eliminate fraud. PDD has what they call the 10X Rule. That the ten X the value of the goods gets charged to

1:15:30 The merchant. As a penalty. for committing fraud, uh for counterf putting counterfeit merchandise on the platform, and they have to pay that in up front as essentially this deposit. Well, that cash just sits there, right? And it's so if you look at the restricted cash line item on this company's balance sheet, it's enormous. Um so that's one aspect of it. But that's not the only source of restricted cash. Remember we talked about how the team buying deals work. When customers hit that team buying buy button. The cash immediately goes from their account over to PDD, even though the transaction isn't gonna complete for up to twenty four hours.

1:16:05 And if the transaction doesn't complete at all, then it gets refunded back to the customer, but the cash still goes over to PDD. So they're holding a bunch of cash that they're not allowed to touch because it didn't ever get recognized as revenue. Yep. And then the third source of this is a source of flow for the company is what you mentioned, Ben, which is that merchants for advertising for sponsored placement in the feed, they prepay for that advertising, and then it gets doled out algorithmically over a set period of time and kind of charged off against the accounts. So all all of that, you know, at the scale that PDD is operating. nets out to this massively positive or I guess negative cash cycle in accountants speak, but positive in terms of cash flow, where it's essentially an interest free loan on their growth. So now they have raised a bunch of money that they've

1:16:57 Wait, but can they spend that on growth? Like if you have all this restricted cash. It's restricted, but Like what if the music stops? Well, certainly right. If they stop growing, then it'll go down to it'll uh that restricted cash will Go down. But

1:17:12 Because you know, money is fungible, even though money's coming in and out of that restricted cash pool it's large and growing. And so I think think kind of just like the insurance flow business, where like it's not like Warren can go spend the cash on the insurance flow, but it can be invested. And so investment in fixed income or something to get one percent. Exactly. So if you look at the short term investments on the company's balance sheet. It's gone way, way, way up in recent years. And that doesn't even account for the restricted cash. That's their actual unrestricted cash they've been investing, but I assume that's because they've

1:17:49 built out like a massive treasury department, uh to be investing all these pools of cash that they have. You just painted a bear and bull side of that narrative. the bare case on it is like that they're just burning cash you could compare this to the litany of Uber era companies in the US that were like growth at all costs, very unprofitable. Accurately group on Yeah. Burning a bunch of cash on customer acquisition while selling deals and subsidizing those deals.

1:18:17 Yeah. And what you're saying is that that They're not burning cash. They just They have negative operating income, but They are a actually

1:18:26 doing great on cash. Yeah. It's very um there hasn't been a bunch of coverage about this, but I just found it as I was looking at the company's financial statements and I was like, whoa, this does not add up. Like on you look at the income statement and it paints one picture of the company and then you look at the cash flow statement and it looks like a totally different company. I will paint The other side of that narrative which is

1:18:50 they are incredibly richly valued because of how fast they grew. So like Uh this is a company that Cells. inexpensive items, doesn't get to participate in that much of the transaction for those inexpensive items. And when you look at this, you know, hundred billion dollar valuation that they have.

1:19:08 It's a twenty three X. revenue. Now keep in mind that revenue is just the Point six percent of the transaction plus the money that they get from advertising. So twenty three times revenue they're they're trading at. Meanwhile J D is literally one tenth of that at two point three times revenue. Alibaba

1:19:27 close to a third of that at nine X and Amazon at five X. And so compared to like other companies with similar business models, you better believe that they're gonna do a whole lot more growing the way that they have done, which frankly feels a little silly because they're already closing in on Alibaba, which is sort of the upper limit of how many users you could have in China buying things. Or they've got to get much better at monetizing each user. And so what they've been doing is trying to move into tier one and tier two cities in addition to this three and four. And they've done that successfully. Toward the end of last year, they announced that forty five percent of users are now in tier one and tier two cities. So they sort of match the breakdown of what the sort of demography in China looks like. And the question is sort of how? Why are people in Tier One and Tier Two cities

1:20:15 Getting interested in this. Well enter the subsidy scheme. So they're listing things like iPhones on the platform now. And so this is something that people in tier one and tier two cities are interested in. But P D D is going to the manufacturers and saying, Hey Can you list it for like fifteen percent off? Because that's kinda that's what people really expect on our platform. And the manufacturers kind of look at'em like they're insane. And then PDD says, Well

1:20:41 We'll cover the difference. And that is where all their cash is going. Yeah. And so that's why I know we were in a little bit of arcane accounting details there, but that's why I think this is so Interesting looking at their cash flow statement. Yes, they are subsidizing all this. They're effectively spending all of that money on customer acquisition.

1:21:01 But their cash flow is positive while they're doing it. Even with all those subsidies, last year they generated over two billion dollars in operating cash flow. So if you think about the valuation in cash flow terms. This company's trading at, you know, roughly fifty X. past twelve months operating cash flow. That's not a crazy valuation. And this is why uh you need to look at all three financial statements in order to really understand a company.

1:21:28 Yeah, what's the phrase? uh revenue as a fact and profit as an opinion. I think that sort of uh extrapolates a lot further where you can sort of have a different philosophical viewpoint on a business based on the way that you choose to value it. Yep. Totally. I know we're in narratives, but I wanna give

1:21:48 a little saying here. I want to give some comparisons between where the company is today so you understand the scale that they're at, JD, Taubao, and and Amazon, just to sort of understand the relationship between the two. the mega giant in China is Alibaba and their consumer e commerce in China is uh is T Mall and Tao Bao. The GMV on those platforms are close to a trillion dollars. That's three X's Amazon's GMV.

1:22:18 That is a a trillion dollars of goods or or gross merchandise value move through T Mall Taubau. Now they're able to capture five percent of that as revenue. And so last year on those two platforms, T Mall and Taubau, Alibaba actually did fifty billion dollars of revenue. So Alibaba generating fifty billion dollars of revenue, they're very profitable. They have an operating margin, so not gross margin, but operating margin of eighteen percent. This is a little bit mixed up in the AliCloud and all that,'cause it's not just the retail business, but The way I'm trying to paint this is they're a revenue juggernaut.

1:22:54 And They're very profitable. Now If you compare that to where we are with Pendo Duo.

1:23:01 You know, they have a hundred and forty five billion in GMV. So like They've made a dent. I mean that's what, one sixth, one seventh, something like that of Alibaba just, you know, in the last five years they've they've come up to be able to do that. but they only do a little over four billion in revenue. And you know, the th that effectively means they're capturing about three percent of all the GMV flowing through the platform as revenue, either in the form of these advertising services or in the actual, you know, point six percent commission that they get to take. So I just think it's interesting to sort of compare those two businesses.

1:23:36 The other interesting way to compare uh Pindu Duo is that this four point three billion in revenue that they do is only five percent of J D's revenue. But with one point seven times the users. Well.

1:23:53 Yeah, it's back to that dynamic that you were talking about earlier of the average purchase price of goods on the platform and velocity, yeah. Pinto Duo has 490 million monthly active users, so one and a half Americas worth of users. Uh they actually have six hundred and thirty million active buyers when you look at the number of people that are on the mini program. 630 million, so close to two Americas. You compare that to like a J D JD has uh an estimated two hundred ninety million uh monthly active users, so that's you know, call it half. Pindu duo's users. But

1:24:32 you know, they're able to generate eighty three billion in in revenue because twenty eight percent of GMV gets captured as revenue. So it's like Would you rather be J D and have like half the users? Or would you rather be Pindu. and have, you know, way more users, but like

1:24:49 What what are we looking at here? Five percent of the revenue that generates Yeah. The most interesting question is like all uh Valuations of companies, it's about the future, not the past. And what do we think is gonna happen to all of those users and transactions, especially as Pinduo starts

1:25:09 Trying to compete more directly. for the same types of users that J D and Alibaba and particularly T Mall. Are homework. Yep.

1:25:18 All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks

1:25:46 Are real. Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why Service Now built the AI control tower. Yep. AI control tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with Any AI, not just theirs. Every device on your network, every permission across every system.

1:26:11 Every AI agent visible and secure in one place. And ServiceNow can do this because they've spent more than twenty years building the operational backbone of the enterprise, the workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. ServiceNow already runs more than a hundred billion workflows annually and trillions of transactions for more than eighty-five percent of the Fortune five hundred. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future, that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out serviceNow.com slash acquired and tell them that Ben and David sent you.

1:27:07 All right, David, we opened up some questions there of who would you rather be, you know, Pindo Duo, JD, uh team all taubao, um, we gave some comps to Amazon. Let's move into like this what would have happened otherwise and then try and answer those. The most interesting thing to me going through the history and facts of what could have been different is what if Facebook had made a different decision here in the US about how open they were gonna let their platform be to Big businesses being built on it, and particularly commerce businesses. Now, I think it's extremely unlikely that would have happened. Like I think They made the strategically correct decision given the operating environment in the US at the time of

1:27:49 Going with advertising. And we should say Facebook generates seventy billion dollars a year in revenue, but they get to keep most of it. So like pretty good decision, pretty good business. Yep, yep. Definitely pretty good. I'm very fascinated by this ten cent decision because then they Really have gotten to see And invest in all of these companies that are getting built. I mean let's just take P D.

1:28:13 And Maiton. And D D, those are the big three. Ten is I believe the largest shareholder in all of them. largest or one of the largest. Compare that, you know, w a few years ago when They started down this strategy. You know, they were kinda neck and neck with

1:28:32 Ali Baba and Baidu and Very unclear what the strategic future of the company was gonna be. And now fast forward to, you know, uh nobody cry for certainly Alibaba, Baidu, I I think has followed on somewhat harder times. But Tentin just seems to me to be so much better strategically positioned to capture all of the internet economy happening in China via this strategy.

1:28:55 There's some work to be done here to compare Tencent as an investor to SoftBank as an investor, because my guess here is that they actually did a better job at Softbank strategy than Softbank did. to go and basically back all the unicorns and be in the most successful unicorns as they grow from billion dollar companies to hundred billion dollar companies. I think they're in like fifteen to twenty percent of the unicorns and they got in early. I would guess they made

1:29:22 twelve, fifteen billion dollars of course in in illiquid value, but just from This investment in PDD, like I think they've done that four, five, six times. Yeah. It reminds me of uh of Sequoia and uh our part one episode uh about Don Valentine and his quote that When he started Sequoia, he had a strategic advantage. He knew the future. Right. And that was from knowing all the roadmaps from Fairchild and what all the applications to semiconductors are gonna be. Th there was the same thing for Tencent here. Like they

1:29:52 knew the future in that they controlled the distribution platform that all these businesses were being built on. And now with many programs, not just the distribution platform, but literally the operating system, so they can see what's taking off. And then after they invest, they can start to put their hand on the scale a little bit and strategically help Their chosen companies. Yeah. Whereas Facebook thought they were kinda making the same decision where they'll benefit from the whole ecosystem when apps were booming and Facebook just made

1:30:23 a sinful amount of money on app install ads where They are like we don't even have to have an opinion or make an investment. We just make money every time somebody goes and installs an app. And the question is, w is that going to be as enduring As

1:30:37 ten cents method of doing it'cause Facebook's is more efficient. They don't have to invest. And they also don't have to have an opinion. Yeah. I like that you took what would have happened otherwise there. I was thinking since this episode's gonna be about the IPO and grading the IPO, like what would have happened if they didn't IPO. I mean Until your comment there, I was gonna say they were screwed because I thought they desperately needed access to cash. And I think they've over the course of uh the IPO and three subsequent uh debt and equity offerings, they've now raised another five billion dollars or something since the IPO or including the IPO. And so

1:31:12 This is a company that does need cash to grow. It didn't need cash to grow originally because it was just growing like wildfire on WeChat, but now they have to invest dollars to make this thing grow and big dollars. Like I think they have one point five or something billion dollars reserved for subsidies this year. To me, there was this real danger of grow big fast, but not be able to effectively monetize their user base if they weren't able to sort of uh keep growing into the more valuable user base. So I do st still think that's true, even with your comment about them having really great cash flow dynamics. But

1:31:49 I would say this company needed to IPO or go raise like a soft bank round, or more likely a ten cent round. That sort of uh simulated an IPO around the time that they did. Yeah. It's interesting. At least one of the equity follow on rounds that they did, equity raises after the IPO. I believe Tencent bought most of, or at least a significant portion. So they continue

1:32:13 to invest dollars into the company, even though they're already the largest shareholder. It's awesome. Alright, should we get into playbook? Yeah, let's do it. Okay. So

1:32:23 There's a thing that's like a splinter in my mind on team purchase that I'm trying to apply to like h how do you use this lesson in starting a startup? Where uh it was both a novel product feature that had Like perfect product market fit. And it was an unbelievable mechanism for growth.

1:32:40 It was like a native growth feature that was intrinsic to the value. from the product itself. But also provided this intr incredible sort of extrinsic growth strategy. And

1:32:53 I think that the way to misunderstand growth hacking is to assume that you can, you know, stick it on afterwards. And I think this is like the best example of growth hacking where the product itself was virality. It's so rare to be able to find Examples like this. You know, maybe

1:33:12 Instagram or WeChat or WhatsApp, like the the messengers and and social type platforms. Could fit this bill. Maybe one of the other To go back to narratives a little bit, one of the other bear cases against this company is just the argument that

1:33:29 People have said this before the with social commerce companies that there was this inherent viral nature to their products. And the steam always runs out of the engine or has in the past. And And I wonder if that's, you know, it could legitimately be still an open question with PDD, especially in these categories they're getting into now. Like is it really about team buying when you're buying an iPhone or is it about them subsidizing the price? Right. It's about them subsidizing the price. I'll I'll offer an opinion on that. Yeah. It seems pretty clear. Yeah, I I mean it's try it's a classic, I think a classic w what got you here won't get you there. Like now that they're a scale player, a team purchase is sort of less of a drive of the business.

1:34:10 Though I do think that like mini games and stuff in there are a driver. Even if you don't want to buy something today, there's something for you to do in the app and there's rewards that come and discounts that come with doing it. So you may as well open the app and play with it today. Yeah. Oh we didn't have time to talk about this, but this is I think one of my favorite features about it, that like there's essentially a Farmville. clone in the app where when you f finish growing your tree they actually ship you a box of fruit. Another big

1:34:35 Playbook thing that We have to call out here is you know, thanks to Hamilton Helmer for sort of providing us a framework to think about this, but recognizing uh a counter positioning opportunity. to build an amazing moat around your business. And and with P D D

1:34:50 Colin realized that with the newly launched WeChat mini programs, there was an opportunity to leverage the WeChat social graph for e commerce. And not only that, but he realized that it would be defensible from the largest competitor out there in e-commerce, Alibaba. And since Alibaba competed with Tencent and basically wouldn't use WeChat platform. And in fact, I think Alibaba actually banned their sellers from encouraging the use of WeChat and made them use their own chat platform. Of course there are others who could compete with Pendo Duo on WeChat, but Uh Colin at least had that sort of like

1:35:24 wide open lane versus the biggest incumbent. And this is that classic example of counterpositioning, since in order for Alibaba to see that Pindoduo's strategy was working and then copy them, they would have needed to do serious damage to their own existing business to convince Tencent to sort of allow them the amazing native functionality that they were providing to Pinto Duo. Alibaba can't take advantage of the viral effects on WeChat. Well I think there might be another structural reason too to why they couldn't respond, which is the the payments layer. Uh WeChat Pay and Alipay are mortal enemies, right? And was was Alibaba really gonna let people Buy stuff on Tabau and T Mall using WeChat Pay when they're, you know, fighting tooth and nail against Alley Pay.

1:36:10 Yeah, that's a great point. I hadn't I hadn't thought about that either. It's a deep mode, at least against Alibaba, not against other startups, but definitely against them. I could be wrong here. I I don't know enough about the supply side of these platforms, these e commerce platforms in China to say, but I think they might have been able to Also Build a

1:36:30 network on the other side to a unique network that's defensible of of suppliers. In that I I do think that a good portion of the supply side for PDD is different than the supply side on J D and Alibaba in that it's these, you know, kind of contract manufacturers and uh remnant capacity on their lines. And and I think a lot of these contract manufacturers are even just converting to now being fully dedicated PDD manufacturers. And that's a defensible moat in that like if you get a whole bunch of

1:37:06 manufacturers on the supply side to go give you a meaningful part of their business and you're deeply integrated via the C two M initiatives that they have where they're giving them data, they're telling them, you know, what types of SKUs to produce and what quantities. It's gonna be really hard to switch off of that. Right. That creates yeah some lock in. Cool. Alright, I've got one more for for playbook. Go for it. Um and this is a negative one. Like I think the ones we've talked about so far are like Go do this if you want to be like Pinduo. But

1:37:38 The thing that they're experiencing now is diminishing marginal returns. So they they obviously grew like incredibly quickly to tier three and tier four cities, then spread like wildfire through WeChat groups, and they had uh basically a product the with perfect product market fit for those users. So there's cheap goods, you buy it with friends, there's no real brands, it can take a while to ship But it's so cheap. And

1:37:59 It's great and it's fun. But once they acquired all those users, every user after that costs more money to acquire the product isn't perfect for them. They don't naturally hear about it. And this is something that I hadn't fulfilled my head around until recently, because I always thought, well, over time as you build brand, customers would get cheaper to acquire. But especially with like a great example is any of these sort of like D to C products now that have amazing organic growth at first because they find their niche, they find that community, they find the obsessed people, then you run out of them and you have to switch to a traditional customer acquisition strategy that costs money. It really makes you understand and get religious about What is your obsessed

1:38:39 segment addressable market, the people for which you're gonna have to pay incredibly little money. 'Cause y you can spend tons and tons of money and acquire a lot of people for your thing, but Your company will be the most valuable if

1:38:56 the people who are crazy about your thing that you don't have to spend lots of money to reach are themselves responsible for a lot of buying power. Yeah. Yeah. A hundred percent. And yeah, this is reflected perfectly in in this massive subsidies that PDD is having to spend on now.

1:39:13 To attract those marginal. Buyers. Yeah. And I guess the point I want to make here is the core offering that they had that spread like wildfire and they didn't have to spend a lot of money to acquire those customers, it was huge. And they do make tons of money off them. So like very successful business in terms of finding that virality before they hit the sort of gnarly fall off where diminishing marginal returns start to happen. But that is the place where they are now. One real quick playback theme. I want to talk about here is um

1:39:40 we've alluded to it a little bit with agriculture and produce with PDD. They're also a good example of just like with every successive generation of internet companies, you can penetrate further and further into areas of the economy that you wouldn't have thought the internet could penetrate into before. Literally rural farmers Uh growing fruit are selling at massive scale on PD D. Yeah. It's pretty crazy.

1:40:06 Yeah. Okay, so grading. I guess what we should do here, even though it's early, is grade the IPO. Like how good of a use of proceeds, was the IPO a good idea, did they make good use of it? Um and then answer a secondary question that we teased earlier, which is Where do you want to put your chips right now? J D, Tau Bau Team All, or Pindow Duo? Oh, I love it. I love it. Putting our money where our mouth is. On the grave for the IPO.

1:40:31 For sure and A. Again, early grading, you know, things could change. Markets are volatile and all that. And uh certainly this is a Incredibly intensively. Competitive space e commerce in China. It's up almost five X since the IPO. They've

1:40:47 certainly put that capital to good work, I think building value even with their massively beneficial cash cycle uh that they're generating operating cash from. And I think it's also really interesting That you know, Tencent and Sequoia were buyers in the IPO.

1:41:04 Tencent, at least I don't know about Sequoia, but at least Tencent has continued to be a buyer in secondary offerings along the way. Just goes to show the incredible potential that An informed insider investor like that, who also controls the main platform on which the company operates, think there is still an upside to be had in in the company. You're in a herd bet here because uh you think the insiders have good information and if they're putting money in do you have a good lead? Okay, I'm in. Yeah. Exactly, exactly But you know people do tend to put their money where their mouth is and uh and I think those are like literally the Insiders uh I don't

1:41:40 think have sold a share here are the major insiders and I think that speaks volumes. Yeah. I I guess A is the right thing. The way I wanna get analytical on this would be For the shareholders who decided to put their dollars to work in the IPO versus other things that they could have put their dollars to work into, how good of a decision was that? And that's fairly cut and dry. I mean, it's basically like you said, a five X over two years. any day of the week, uh I'll take that. You know, it's it's much different than the sort of crazy upside that you see in these acquisitions where a dollar of Facebook's

1:42:16 cash put into Instagram was a much, much healthier return over the years, but maybe we should come with a separate grading scale for IPOs, basically, like if you invest in the IPO, how good was the ensuing sort of decade after that. 'Cause I think that's really the way the way that you should think about it is for the new shareholder. I think in the past we've often thought about how good of a use of the cash raised was it for the company like this. Yeah, which in this case, looking at that perspective, uh I think that's the point you were arguing earlier. They've they've made very good use of it. I don't have a

1:42:51 I have no idea how they could have made a better use of it, but the thing that does sort of Yeah, that's not really the interesting analysis though. The interesting analysis is like if you bought into this IPO And you are still holding the shares today. Obviously you're feeling good, but like uh actually even more interesting is like let's let's think about Say you bought into the IPO planning to hold for a decade at least.

1:43:14 D how good do we think a decision that was. Right. I mean that gets into this question of which of the three horses do you want? Do you want J D Pindo or or Taobao? Of those who have benefited from coronavirus, Pindo Duo has benefited much more than the users that JD or uh or Taubau T Mall have added.

1:43:33 They have taken meaningful share away from Tau Bau T Mall Alibaba. The bet that you have to make is that they're going to over time do a good job of monetizing this So far valuable, but not that valuable user base.

1:43:49 I guess the the structural question is like is the things that they're really good at, this gamification, retention, Virality team buying. Are those things gonna help them? acquire the future users that they need to acquire and extract more dollars from their existing base.

1:44:09 And I don't know if the answer to that is yes. Yeah. I th I think there's definitely A big aspect.

1:44:17 of what you said a minute ago Ben of like what got you here isn't gonna get you there going on in the company. So I think the question is Do they know that I think they probably do know that Are they capable of Building the next act. And this is actually a case where

1:44:34 The most recent news is a little Yeah, I know. That's meaningfully concerning. Yep. Like if Tencent has really been buying up, can they put their

1:44:47 Finger on the scale again. Is there some more nuclear move that they can pull? Like I don't I think they sort of religiously don't acquire the companies that they that launch on their platform because they don't want to make that seem like what's gonna happen to you and make you potentially scared of them or not scared of them. Yeah, don't really need to.

1:45:06 Right. If they threw all their weight behind PDD How could that m meaningfully change the trajectory. Well, and here's another interesting thing. I didn't dig too much into this, but there are articles. I believe Tencent has been testing

1:45:24 competing in this space on their own. Um natively like spinning up a Social comments platform. Within ten cents. Yeah, you know, there are all sorts of reasons why they could be doing that. You know, to learn more, experiment, all sorts of stuff. Facebook to talk about them is another example there.

1:45:40 building new stuff all the time that they don't really intend to Invest behind. But if they were to decide to make this a big Initiative. Um, well, that would really suck for Pinduo. Yeah.

1:45:55 Alright, to g to give an answer,'cause we could waffle on the fence forever, I am going to say I'd rather be Alibaba. Like I'd rather be Tao Bao. Especially at these prices. That's a big part of my analysis is P D's so freaking expensive. Curious where you fall down on that.

1:46:11 Oh, it's interesting. I'm hesitant to say. O one reason I'm hesitant to say is I don't know enough about JD. about what their strategy is and what a bull And bare case for J D would be. Certainly it seems like they have the most attractive kinda unit economics in the space.

1:46:28 I mean they look like Amazon and they have a very affluent base. Yeah. Yep. I wonder, okay, so th this is a little bit of a cop out. I will pick a horse in a minute, but I actually wonder, thinking about this a little bit, if this might be a case where the right move is just to buy shares in all three. This is such a rising tide. I mean I think e commerce in China is growing at something insane, like a thirty percent Kager. Yeah, I mean if it if it went from uh six percent to twenty four percent over the last eight years, they went from behind the US to I think ahead of the US in terms of penetration.

1:47:00 Right. What's the opposite of rearranging deck chairs on the Titanic? Like maybe rearranging deck chairs on uh on a on a Falcon Heavy. Like it doesn't matter. I like that. But I do think in terms of It's pretty crazy that P D D essentially took ten points a share from Alibaba in the last two years.

1:47:24 I think I would bet on P D D. I mean I'm biased'cause I just did all the research on it, but uh I think I would bet on them. Like that's pretty damn impressive. A team that can do that, I think is a team that can figure out a second act with the big caveat of like what is going on with Colin. Is him becoming chairman more like him becoming like Bezos is essentially chairman of Amazon? You know, like there's a CEO of AWS and there's a CEO of Amazon retail and Bezos is sort of group level CEO. Is that what's happening? Or is it like Colin was like, Oh man I made a bunch of money and I'm gonna write off it to the side. Yeah.

1:48:01 Good question. I suppose that what matters how if he sells a lot of his shares or not. Yeah. Which he did. transfer a bunch of them out. What I don't know is how much of that was sold versus he had said from the get go, even in the IPO perspectus, that he intended to create um multiple charitable foundations. Kind of like Bezos. Um so I think that was part of the book. Dude he he has such a thing for Bezos. He even does the thing where he republishes

1:48:28 the original shareholder letter after each PDD shareholder letter, which of course there have been two since they IPO, but he attaches the twenty eighteen uh after that. Yeah. There we have it.

1:48:43 Let's bring it home, David. I guess we've got a bet going, um and we'll have to revisit this at some point. This feels like a bet where the odds are in your favor to just be On one of those horses. Yeah. Agree.

1:48:56 All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah. In the

1:49:15 crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where StatSIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed. to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started.

1:49:57 Alright, carve outs. So uh listeners, I have two. David has zero right now'cause he's been steeped in in research and reading uh more in the series of previous carve out, which was the Dark Tower. Yeah. By Stephen King. So I'll give my first one first and then for the second one, I think David may claim it. So for the first one It's team buying on the cars. That's right.

1:50:19 That's right. I'm only halfway through this book right now, but it's excellent. And if you liked our SpaceX episode, I think you will love this book. It is called How to make a spaceship. It is the story of the X Prize. and how that came to be and how the sort of amazing uh idealist behind the X Prize sort of uh grew up during the space race and

1:50:40 started all these incredible organizations and uh and and sort of was just a force of will to make it happen. And I think I'm like exactly halfway through, but it's been thrilling so far. It's just a really good if you kind of like the like Uh shoe dog. It's almost these like Thriller. bio book. Uh it's just like it's exciting and you never quite know what's gonna happen next and it's well written and well story told. So I highly recommend it.

1:51:05 The second one is amazingly, I had not read this before, but I finally read Creativity Inc. Oh man, how had you not read that? I know shocked. Sinful that we did a Pixar episode and I uh I never read it. So good. It's so great. And especially in the context of startups with Pioneer Square Labs. starting startups over and over again is a creative process that also requires structure and repeatability and efficiency.

1:51:31 And I think a lot of us are in jobs that require both creativity and repeatability and efficiency. And so First of all, it's cool as a Pixar nerd because they give these behind the scenes glimpses into rewrites of movies so you can find out what was gonna happen in Up and then they rewrote it or what was gonna happen in the original Toy Story and they rewrote it. And some of them are famous, but some of them are like less famous, just cool Easter eggs. But uh also there's just great principles in there of like how to run a creative organization in a repeatable way. It's just Great freaking read.

1:52:02 I would love to go back and reread it, having read Seven Powers now. And particularly the um cornered resource power and the example of the Pixar Brain Trust, the the idea of that as a cornered resource, that group of people in their collective experience. I wonder how d is any of that coming through in the reader. There's also definitely process power. Where

1:52:25 A lot of people have tried to copy Pixar and it hasn't worked and it took Disney actually acquiring Pixar and having their leadership come in and turn Disney animation studios in large part into A different Pixar. There's important ways that they left it on on its own and let them sort of have their legacy, but like a lot of the processes they brought over from Pixar. So there's definitely some process power there too. Yep. And it does feel like even with that and and sort of that reinvention of Disney animation, that there is kind of a ghost in the machine in Pixar and now in Disney animation of like

1:52:59 This is I think what you know what Hamilton talks about in the process power of like you can't Totally. Quantify you know. with the magic of the Toyota Toyota production system. Like you can have lots of people come in and try and learn it. You can read Creativity Inc. But there's just something special in that.

1:53:18 Group. Great point. All right, ready to bring it home? Let's do it. All right. Well if you are listening and you are not subscribed. And you like what you hear.

1:53:28 You should subscribe. And uh if you want to become a limited partner, subscribing gets you access to our bonus show where we dive deeper into the nitty-gritty of company building topics in real time. Uh, of course also our newly added book club and our monthly LP calls on Zoom. To join, you can click the link in the show notes or go to glow.fm slash acquired and all new listeners get a seven day Free trial. If you want to discuss this episode, you should join us in Slack at acquire.fm slash slack. And we will see you next time.

1:53:58 We'll see you next time.

What you see above is a preview of the first minutes. One unlock costs 10 credits and covers this episode forever: full segment and word-level timestamps on this page, plus .txt, .srt, .vtt and word-level JSON downloads, as many times as you like.