TikTok

Transcript from https://podmenti.com/t/c5c668f446e09d5e

Cool.
Yeah, we're jamming a lot in here. I know.
Welcome to season five, episode eight of Acquired.
The podcast about great technology companies and the stories behind them.
I'm Ben Gilbert and I'm the co founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle.
And I'm David Rosenthal, and I'm a general partner at Wave Capital, an early stage venture fund focused on marketplaces based in San Francisco.
And we are your hosts.
Today, we'll tell the story of the most valuable tech startup in the world.
Bite dance.
You may not have heard of it.
But you have almost certainly heard of their most popular product.
Doyin.
Uh wait.
If you're in our Western audience, I mean TikTok.

Valued at close to eighty billion dollars, this privately held venture backed Chinese company has completely changed how a generation of teens and twenty something
globally use their phones.
Or another fun way to introduce TikTok.
What is this machine learning based social media app that skyrocketed the then unknown Lil Nas X to number one on the Billboard Hot One Hundred for 17 weeks, the longest of any song in history, with his breakout track
Old Town.
Do after doing this research, I finally
Know what the uh challenge was.
Well, David, I mean, how on earth can this app create such a universal sensation for so many people at once to skyrocket it to number one like this? I mean, this is something that no other social media app has been able to accomplish.
Well, not in quite a long time.
The other thing.
Fun thing.
That we're not gonna talk as much about on the episode, but to stay up front.
to also just build the acquired, you know, um theme and
Uh suspense here.
You of course know who assigned the I think it's seventy it's either seventy eight or seventy nine billion dollar valuation to
To buy dance, right?
Is it Sequoia China?
No.
They were an earlier investor.
Was an earlier investor.
Oh boy. Alright, I can't wait for this.
The hits keep on coming.
Although this one actually is a hit.
Indeed.
Well, listeners, the way we'll be telling this story is through Bite Dance's twenty seventeen acquisition of another China based company.
musically. So join us on this journey of Bite Dance acquiring musically to create the TikTok that we know today.
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 chatbot 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.
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. 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 70% 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
to a hundred million in ARR.
In about
Eighteen months.
Mm.
truly insane numbers. And that is the real test.
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 just tell'em that Ben and David sent you.
And now
On the TikTok.
On to Tic Tac. So
To start history and facts, we're gonna go all the way back.
to the nineteen twenties and Charlie Chaplin.
The origins of pre No.
I'm kidding. Although if we really, really wanted to give it the full acquired treatment, we would we would do that. But um no, of course I was referring to the great performer and the performing arts and the origins of showbiz, Charlie Chaplin. But no, we pick up the story relatively recently, this time, by acquired standards.
In
Two thousand twelve.
Not in China.
But in the
San Francisco Bay Area.
With a man
And not a young man.
But a man named Alex.
Two.
Who is in his mid thirties.
Uh he's from China originally. And he is I love that that's like not a young man to you.
Well, hey, I mean I I just turned thirty five, so uh I I definitely don't feel like a young man anymore. But in comparison to what we're about to talk about, you might think that TikTok or musically, if you knew its initial incarnation would have been started by a teenager or an Evan Spiegel like character.
But no, not
at all, as we will see. Uh in many ways, Alex is kind of the anti Evan Spiegel. So he's in his mid thirties.
And he's working as a UI designer.
At the enterprise software giant, the European Enterprise Software Giant, SAP.
hotbed of consumer mobile social app innovation. Oh yeah. The totally uh the SAP mafia of uh of social network startups. Indeed. Indeed. After
Working this is this is actually his second stint with SAP, Alex at this point has a long career in
In
Enterprise software.
Um and uh after his second stand at SAP that this is for uh working there for about a year, he's just been appointed as an in house futurist at SAP, focused specifically on
on the future of education.
You can just see musically jumping right off the page here. I saw some tweet years ago that said, uh if you have the word digital in your title, then you have the right job at the wrong company.
Uh I think that might be the same thing for futurists.
Yeah, yeah. Why is it all that like
Enterprise companies have futurists. I think Google does. Isn't Ray Kurzweil the Google's uh
Chief futurist or something? Oh, I don't know. Maybe.
We'll have to we'll have to look that up. So
His new role as futurist, Alex's new role is
is to and he he says this is on his LinkedIn profile, which we'll link to in the show notes. It's quite amazing. Um he says uh his job was to research the future trends of education and learning, specifically identify opportunities for breakthrough innovation and social impact, and convert ideas into prototypes and applications.
And what did this mean at the time in 2012? I remember this super clearly. I was about to start business school um at Stanford, and what was
all the rage, both in the tech world and in the education world, were MOOCs. Coursera and Uacity had just launched, both of them out of Stanford, uh raised tons of money, and they were going to digitize uh universities and learning and education and bring it all
Online.
Neither of them, but you know, both of them are still around, of course, but neither of them would go on uh to realize the potential that everyone thought they had at the moment, or at least not in a near term time frame. Interestingly, though, um it was actually an enterprise software company to you that would go public and become quite a large company that would help existing
existing schools uh manage their online degree programs. And actually my uh old undergrad classmate Jeremy Johnson, who's now the CEO of Andela, was one of the co-founders of that. So it was enterprise software. It did, you know, you could be in a story why it sort of made sense for Alex to be working on this within SAP.
But as he gets
Deeper and deeper into it.
becomes really convinced that there are
A couple problems with the way
MOOCs and online education is being approached at the time.
And he's totally right. The biggest one, as he digs in, is that
Nobody finishes.
The courses. And not only nobody finishes the courses, nobody even finishes like a single video of a single lecture. They're just
too long for most people, unless you're in an actual degree program where you have to, you know. I mean she's
students at colleges barely, you know, stay awake through lectures. Like who's gonna
Uh of their own free will and volition and watch a whole course. Yeah, reflecting back on it, I think like I would w if I'm gonna watch even like the Khan Academy type stuff, it's gonna be like one video at a time and maybe not even the whole video. You kinda get that thing that you need and pop back out.
Get in exactly. You're gonna spend five minutes or or less on there. Um and so as he comes to this
Realization, he thinks, so maybe the way to attack this is to make
the videos short form instead of long form, these educational videos. And he realizes, you know, look, this is not something that
an enterprise software company like SAP is gonna uh really be equipped to tackle here. So he
is passionate about the space though, and he does decide to start a company on the side outside of SAP while he's still working there. He's gonna take his uh his futurism talents elsewhere. Yeah, exactly. At least according to his LinkedIn, he um does stop being a futurist at SAP. He goes back to working on other normal projects as a UI designer and actually stays at the company
according to his LinkedIn for quite a few years to come. But on the side, he's working on
uh realizing this opportunity and he calls up an old friend from back in China
Uh, Louis Yang, who he had worked with at another company back in China, and they start a company called Cicada Education.
A real auspicious name. Cicada. Like the bug? I believe so. Um at least that is how it's spelled. I don't know if where you grew up there were cicadas, but like I in in Ohio every I don't know, those thirteen years or something, you eat these gnarly
bugs like for two weeks of summer.
Yeah, I mean uh same where I grew up in in Pennsylvania and then
Especially in New Jersey, going to college, like uh
Did not make you want to study.
Or name a company after them.
So so so far, you know, there's this is a interesting, compelling story, you know, there are a few a few twists here, but but it kinda sounds like your typical, you know, Bay Area.
Startup story on the surface. But when you peel back the onion a little bit.
There's
A couple
really unique things going on for the time. So one
The
Dual
China and US uh headquarters of the company, Alex stays in the Bay Area, um, is still working at SAP there. Lewis is back in China. This is like
not done at the time. I mean, A, I remember, you know, starting to invest in companies at when I joined Madrona at this time. Remote teams, period, are like a no no for venture capitalists and startups, let alone
uh cross continent, cross border, cross cultural remote teams is just crazy. But
these guys have a little bit of experience with that, um, or at least Alex does, after
undergrad, he first worked at China Pages in China as a designer, and then he spent three years at Webex, where I believe I can't verify for sure, but I believe he reported up to Eric Wan.
Wow.
Founder and CEO, of course, of Zoom.
of Zoom and um Zoom would leverage this model, of course, as we covered on the Zoom episode.
to amazing success. Uh and and Eric also did within WebEx of having engineering
uh back in China and all over the world really, while having go to market uh based in the Bay Area.
Crazy. Um
So
Alex after Webex uh joined SAP, then left SAP and went to an insurance software company called EBAW, and that's where he met Lewis, who was the best PM there. Uh and they worked together briefly there before Alex went and rejoined SAP and moved to the Bay Area.
So he calls up Lewis, this really talented PM who he's worked with before, and they go out and they raise
Two hundred fifty thousand dollars. And uh Ben, you actually know uh the uh the folks that they raise this angel money from, right?
Yeah, yeah. One of the firms in there is uh China Rock Capital Management. So
a great cross border China US firm that had uh important to this story has a uh a Palo Alto office.
Yeah, so they're kinda at the forefront of this crazy idea of
Building cross border companies.
And the idea is that they're gonna take Alex's insight and make these and get experts across a wide variety of domains from you know peer education to professionals to create these short kind of three to five minute videos explaining a subject that they know really well.
And
They raise the money, they start working on this.
As you can imagine.
It's not
Super compelling.
Alex actually uh says later, uh after the pivot to Music League, he says, The day we released this application to the market, we realized it was never going to take off. It was doomed to failure. To have one thing so right in short form video and one thing so wrong in
you know, delivering education in sort of a
entertainment type format in that short form video. It's kind of remarkable
how they really, really deeply keyed into a trend, but
didn't exactly nail it the first time. Yeah. I mean, Alex Alex Lane says, he says, it's hard for a new startup this is so true. It's hard for a new startup to fight against human nature. It's better to follow human nature. And uh especially in short form video, education is not, you know, just gonna really compel somebody to open up an app on of many on their phone. The other thing that
They so that's the big thing that they get wrong, West Cicada. But the other thing that they get wrong, and this really goes on to inform musically and Tic Tac, is the videos took
way too long to create and they were way too hard. A just like cognitively, if you're an expert trying to convey like
the essence of a subject in three to five minutes. Like you can't you could do that if you spend a lot of time organizing and figuring out how to convey information, but also just like the tools. And remember this is back in
twenty twelve, twenty thirteen.
the tools within the product to create these compelling videos are
way, way, way too immature for this to go mainstream.
Yeah, if you think back twenty fourteen was probably the iPhone six S.
That that that era.
Uh no, I think that was the iPhone six.
Yeah, so I mean the or or let's put an O S number on it. That would have been
IOS seven had just come out. Twenty fourteen was iPhone.
Six.
An IOS like seven eight.
This means like
back in the Sicada days, you're working with
At best an iPhone five S
Which is the small screen, as much as I love and miss that thing. Like creating video content on that is gonna be super hard.
Yeah.
And it was only what the second third generation of uh of retina phones, so there's still lots of phones out there that are the
You know, I three twenty by four eighty or whatever it was.
Yeah, totally. So okay. We're now
In spring of twenty fourteen,
They've burned through most of the two hundred fifty thousand dollars that they raise, but Alex at least is
Part time on this. And I think he's hanging out a lot at uh the China Rock office.
in Palo Alto and uh importantly leads to him taking Caltrain rides.
Yeah. Well, I believe he was also probably working for SAP's campus down in Palo Alto, uh out the t at the time too. I mean spending some portion of his time there. So they decide to take another swing at this.
And yes, as you said, Ben, he is famously commuting down from San Francisco to the peninsula, as so many people do.
And uh and often he takes Caltrain to avoid the traffic. And one day
He's thinking about, you know, the failure of Cicada, thinking about what they wanna pivot into and take a swing at next based on what they learn, and he sees a group of teenagers on the train.
And he they're playing with their phones and they're they're doing it together and he starts like observing them, like, Huh, what are what are these kids doing? Maybe I can learn something. You know, the stereotype at the time, you know, I remember the
like adults, uh older partners that were drawn to talk about this. Like oh kids like they just sit on their phones and they don't talk to each other and they're not social and like everything's you know
Digital. But that's not what's happening at all. These kids are like collaborating together. They're talking, they're chatting, they're being loud, they're not parallel playing. They're using their phones, but they're
Doing things together and
physically on them. And so what are they doing? They're taking videos, uh selfie videos
But they have like one person who's making the video, another person is finding music on their phone.
to play in the background to put a score to the video. And then other people are creating
graphics and digital overlays that they're gonna put on top of the video and narrate all together, you know, a story about their
time on the train together and then they're posting it out to other social media, to Instagram, to Twitter, to Facebook. And Alex realizes like
Oh wow.
This is actually
A perfect use case for all this tech that we've built and for
Short form video. Look at these links that these kids
Are going to to create this.

What if we made one app that made it really easy for all this?
To happen.
And that would be
Kinda cool.
Yeah, and important here to know about Alex is uh there's lots of different sort of founder archetypes. He's really the product person slash designer archetype, where part of the reason that he was able to to raise that initial little seed money, he's able to
not only design beautiful products, but observe problems in the world that can be solved with technology. And so the thing that we're sort of seeing here when you're thinking to yourself, wow, how did they, you know, how how was it a good idea to pivot
when deciding should we pivot, should we not? Well, uh Alex was uniquely good at observing problems and and with sort of like little resources figuring out how to solve that problem with technology.
Yeah, so Lewis actually talks about this later. He says, So we change the product quickly from the
education uh video app.
to do an experiment. What if we just provide some music in the product to allow people to quickly shoot a video with music? Will they feel very confident about what they create?
And if they feel excited about it, will they share it? And this is interesting. He says, We created the prototype very quickly and we tried to launch in China, in Japan, in Europe, and in the US.
We just wanted to see. We were not sure which country was going to pick it up really quickly, but we had a gut feeling that it should be the US. The US is a music country and
Everyone there is so into music and the US is the center of pop culture worldwide. We got that gut feeling.
But we still decided to try it worldwide.
We just released it in the app store, created some keywords for people to search for it, and the result is yeah. In the US people automatically started picking it up.
Fascinating. I did not know that the uh
That that was a hunch of why they
Why they did it uh in the US.
Yeah. So
That's the official story of the watch and musically. And as far as we know, we have no contradictory evidence that
Anything else was different.
Two other apps that were blowing up at the same time that probably had a pretty big influence in that direction.
Uh no, Dub Smash actually launched right around the same time as Music Lee. They were they were pretty concurrent. But they had a big influence on the direction that Musically decided to go. Snapchat.
Nope, not Snapchat.
One is in the US and one is in China. One is Vine.
Oh yeah.
Twitter's uh Twitter's biggest mistake.
Oh man. Such a tragedy. Like
And it doing this research reminded me of it. So mine
Was acquired by Twitter pre launch.
back when the team was still working on the product and Jack Dorsey saw the potential for this and just loved it. And so they acquired the company in January twenty thirteen before they launched the product.
And Vine, I'm sure.
Lots of our US listeners will remember this. It was six second looping videos and music and lip syncing was like a key
It was like lip syncing and NBA replays.
Yeah, oh man. Such a good platform for sports replays. Users loved it. And of course it had priority distribution on Twitter, but especially teenagers. And and man, this story like this
Presages TikTok so exactly. So there was this Canadian teenager who goes by Ruth B, who goes viral
After posting a short clip of herself singing a few lines that she just made up about a song about Peter Pan on Vine
ends up turning it into a full song, gets a record deal, makes the Billboard Top One hundred charts. And this is like this should have been such a sign to Twitter that like there's something really interesting happening on this platform, but
Uh Twitter was going through its IPO at this time. They had crazy management drama. They didn't have enough resources to invest in it and
The
platform just kinda
Peter's out and yeah, and they ultimately shut it down. But of course, lots of people saw.
what was going on here, and I have to imagine that Alex and Lewis did, and this had a big influence on
The direction of musically.
So the second one
Back in China.
is an app that's still a super large company today called Qui Show.
Uh, I believe that's how you pronounce it. And that was actually started in twenty eleven as a gift maker tool in China. Um, they'd raise money from Morning Side Ventures.
originally. It didn't go
Super well. They were just a utility. And so they brought in one of the advisors and angel investors to take over as CEO.
This guy named Su Hua.
And so had or did both Google and Baidu.
And he pretty quickly.
Que show into a short video platform. And this is the first
big short video platform in China and it starts taking off like
Wildfire.
Wasn't Morningside also the first money into bite dance?
That's a good question.
They might been.
I'm pretty sure.
They might have been they're they're really good early stage venture folks in China.
And quite sure.
also really interestingly, starts taking off not among
What you think of as the normal audience for
tech products in China, which is
Yeah, sort of.
wealthy middle and upper class, uh tier one city urban elites.
Que show takes off.
in the rural areas with sort of the eighty percent of the country that is still living in the provinces
and are getting their first smartphones around this time. And Queto is just for like
People to make videos and talk about their kind of daily lives.
There's a great twenty seventeen Technote article um that talks about their strategy and it says it's like a
really authentic place where people can be themselves and show their lives.
And
The way that
it it all works is the content that people see is not driven by who you are or who you follow. It's driven by an algorithm that is recommending it gets to know what you like and it recommends videos that other people make to you that just find their way to you. So you don't have to go out and find
influencers find topics.
it just starts to get to know you and it surfaces all this interesting stuff.
Much like
other companies that we're gonna see in a minute here.
Huh.
There's one other interesting thing to note on um why it blew up in America.
In uh America this notion of sort of lip syncing.
um has always been like a thing people knew about. I mean it's not like a there was a dedicated video platform for it, but it was sort of like a popular thing to, you know, sing along with music and, you know, famously there have been some
big debacles where even pop artists were lip syncing their own songs um and sort of got called out for that. This is a bit later, but just to drive the point home on lip syncing as a cultural phenomenon in the US, but not China at the time, there was actually a TV show called lip sync.
battle. Oh yeah. This is gonna come up in a second here. All right. Well I won't I won't spoil it too much, but like you gotta like understand at this time that
This is really unique for a Chinese
technology company to be building a product that is
m you know, most popular in the US market. Like this was pretty unheard of and makes total sense when you think about the sort of cultural differences of where it could be appreciated.
The super cool thing is the team learned their way into this. So we're still in twenty fourteen when they make this pivot and they launch the MVP of Musicly. Now they're already thinking about music, clearly by the name of the app as being a key feature, but it was it was more
Vine and Qui show than it was what we think of musically in TikTok today. It was a broad short form video platform.
And so they launch it and they do
A couple of really interesting things. So
One.
You know, Lewis talked in that quote about
the name of the app and doing app store optimization.
This was
A point in time when the app store and particularly the IOS app store started really prioritizing
Search terms.
And so I don't know if you remember, Ben, like a bunch of apps and musically does this.
Keyword stuffing.
stuff a ton of keywords into their title. So the title of the app is like musically
Dash make videos for Instagram, Twitter, and Facebook with music with your friends.
Have fun, like blah, blah, blah, blah, blah. And it just goes on and on and on. They stuff all these keywords in there. And that's what starts getting
The initial download
Traffic.
That the app is getting in the US.
So
This is where
Based on that, they start to learn a couple of things, and this eventually leads to the big breakthrough of lip sync battle. So they operate for a few months, the app's growing, they're getting really good retention and usage. People that are downloading it and trying it are sticking with it. But
They're not like hitting rocket ship growth yet. And so they start digging into their data and they realize that on Thursda nights
In the US
Every Thursday night, there's a big spike in downloads. And so they start like going on the app trying to figure out why. Uh, and they've always been really good about staying close to their users. They have lots of user research groups that they do to this day. Alex talks about how he creates fake accounts and just goes into
First musically and now and now TikTok and interacts with users just to try to get a sense of
what's going on and why they're using it.
And they realize that it's because of the lip sync battle TV show, which airs
Thursday nights in the US on the Paramount Network.
I had totally forgotten about this.
But
Lip sync battle is actually a spin off from the Jimmy Fallon show.
So Jimmy started doing this as a skit.
On the show on the Jimmy Fallon show.
And then he went and he pitched it.
with a couple other producers to NBC as its own show.
NBC turned it down, but Paramount picked it up and it became a huge hit. People love it.
That's awesome. I had no idea the history of that.
Yeah. Did they mention musically at all on that? Or was it just sort of like people getting inspired from the show that they want to be doing?
The app store app to optimization. They had put lip sync in the title of, you know, a bunch of versions of the app. And so after the show ends, people just go on and search the app store for lip sync and musically is what pops up.
Makes total sense.
Yeah.
Super cool. So
It's now in spring of twenty fifteen when they realize
This is happening.
And
Because growth has been slow they decide.
A couple things. One
We need to make a decision and go
all in on a particular use case, like classic enterprise software crossing the chasm type problem of you have a broad platform.
That ultimately will be useful for lots of different things. But in the beginning you have to have one very specific
use case to knock down that first bowling pin of why people are gonna use the product. And they're like
Alex and Louis realize
Okay, lip syncing.
This is it. We're gonna go all in. So they redesigned the app and they in particular the onboarding flow.
for
really making it clear that like this is a great product for
And then importantly.
The videos that they surface to you once you're
In the app.
They start surfacing the very best.
Lip syncing videos.
And this is when
the flywheel really starts to kick off.
So they change the onboarding flow.
Two
Make it clear that
musically is really great.
uh helping you create lip sync videos
Two.
They then start
Sending users
regular notifications, like daily notifications with challenges of lip sync videos that they can create.
using the app and this starts driving people to keep
coming back. People were coming back and consuming content, but this starts driving people to come back and create content.
On
a more than weekly basis.
And this is the origin of challenges that ultimately the Yeehaw challenge would be one of the biggest of that would help drive uh help drive uh old town road, of course. But that's still to come.
And then
The product model
is super cool. So if you think about
Instagram, Facebook, Twitter, even Snapchat, all the successful Western social networks up to this point.
The content that you see is based on who you follow. And so when people
Log onto the app.
and create accounts for the first time, who are they gonna follow? They're gonna do Ben and I were chatting before the show, you know, we've been playing with TikTok over the past couple of days and Ben, you're like, Oh, I went in, I followed a bunch of my friends and none of them have any videos.
On Tic Tac.
And on musically before that it didn't matter, and this is what they take from Qui Sho back in China.
Because
The content
The the app.
Uh surfaces for you.
is based on an algorithm of what it thinks you're gonna like completely regardless of who you follow. So when you're a new user onboarded for the first time, it prioritizes content that you have no connection to, and that makes it
Super different from other apps, A, but also this incredible opportunity.
Yeah, it's about finding the content to fit with your interests.
Not the
person fit, so like a person that you know and not your own perceived content fit. It's not like I I would tell you that I like sci fi and I like what's actually become quite clear to me from TikTok is what TikTok has learned is I like prank videos and I like extreme sports things.
And it is crazy how I I've been using TikTok for a year f and didn't follow anyone, and I followed people this week and it didn't improve my experience at all. It's like it's it's still the same
stuff from people who I've never met that is just like very well tailored to me at this point.
Totally. So
Once they make these changes in the spring of twenty fifteen
The app just takes off like a rocket ship. So two months later on July sixth, it's number one in the US iOS app store. Since then
musically and then its successor to TikTok has never fallen out of the top forty apps, which is pretty incredible. This is the beginning of the rise that puts it not just on Snapchat trajectory.
But
Now, you know, well beyond to
Instagram and even potentially
And the interesting thing about this, two points I want to make.
In apps where the expectation was set originally that
I'm gonna
express interest in who I care about and then I get to follow them.
I get really annoyed later when that promise is broken and
Twitter starts doing the algorithmic timeline, Facebook starts to limit organic distribution and makes you sort of pay for exposure if you're a brand there's all these things where you start to feel like gosh, they're really messing with what the brand promise was here. TikTok from the very beginning is
We are going to show you what we think is the most engaging for you. And we make no promises about uh I mean yeah, sure there's that following tab, but like that's not where you live. You live on the tab where it's hey, this is this is what we think you'll most like. Yeah. Which is like the explore tab on Instagram that nobody goes to.
Right.
Right, right, right. And so their algorithm, of course, is not public.
But there's been some really nice speculation by and I might mess up his name, but it's a great medium post by Matt Schlicht, where he sort of talks about his experience dribbling stuff out and trying to to reverse engineer the algorithm a little bit on TikTok. And this is, of course, flashing forward a little bit, but I think it's important to
really understand what it's doing.
It's
kind of like it's always A B testing. So the vast majority of what you're being shown is things that
TikTok thinks you will like based on
Your
previous uh viewing and liking history.
But it mixed in there is every video gets the waters tested so they can kind of see, hey, how how engaging is this? And so it looks for you know, what is the conversion ratio from view to like? What's the conversion ratio from view to finish viewing? And that sort of determines how it uh how it spreads wider and wider and wider.
It's important to have a basic understanding of how the algorithm works. So when we say things like
the platform truly rewards and spreads the most objectively liked, uh or objectively good, talented videos, that's actually what it's doing.
Well it's even more than this. And this is
As I as I was doing research and thinking about
Again, what made musically successful more than its peers at the time and what's made TikTok such an incredible
global phenomenon, it really is to bring it back to the American Idol analogy, it's like
A personalized American.
for every single consumer on the app. Because in American Idol, it's just a flat TV show, right? It's like what can the producers go out and find from talent all across the country that's going to have the broadest mass market appeal.
On Tic Tac though.
they can have all of this content in all of these niches and have the personalized algorithmic feed for each consumer.
And so they're able to take
of so much more content and talent and creators
and make them successful because they only need to find their niche audience. And they don't even need to go find it anymore. TikTok is finding it for them.
Fascinating.
But important in knowing that you don't need to find your own audience and you're relying on TikTok finding it for you, it means you don't get to form that direct relationship with that audience. So it's not necessarily going to lead to a follow or something where they're going to see your next piece of content. You may be a a flash in the pan if you're
if that's your best and and only great video. And so it truly uh rewards the uh the venture investing philosophy espoused by by Sequoia early on, you're only as good as your last investment.
Yeah, or your last TikTok video.
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So
Let's talk about
What
success for creators on TikTok means.
And this is
Another area where the platform is really different from the existing social networks that's come before them.
Alex.
gives a great talk uh on YouTube uh at a Greylock event. Greylock and our friends at GTV were the main venture investors behind Musically before it was acquired and became TikTok. But Alex in this talk, he has this amazing analogy
of building
The
social network of musically to being like
building like founding and building a country, a nation. He says at first it's like, you know, you find a new world, a new land,
And you have nothing, you just have land, you just have real estate. You need to attract people
Yeah.
And to attract.
the people, you need to show them a path to success. You need to create this uh
Image of your new land of being a land of opportunity.
And the way that you do that is
Is
Some version of a path to wealth creation, because ultimately it's an economy that a country runs on, a political economy, and it's the same thing.
With a social media platform. So he says, Alex says, when users first come to a new social media platform, the first thing they're looking for is fame. That's like
A stand in for
an economy. It's like a proxy. People believe once they have fame, then they can get money. And he says, but uh but that's not enough. Once they have the fame, they have to monetize. And so the platform that can generate the biggest revenue streams for
its biggest users, that's the one that will stick around. And he says the way that they did this
Musically.
Is first.
You centralize your economy. So you make sure you put your hand on the scale.
You make sure that some of those initial people
that are on the platform, those initial creators, the ones with the most talent that you
are subjectively judging as the arbiters of the platform, you make sure that they get rich.
And so
Um Alex doesn't talk a lot about how musically does this, but
bite dance with TikTok in China, they just start paying.
Content creators.
And people who are
uh creating the best content, they pay them more money and they invite them to exclusive events and they get all sorts of perks and they broker introductive and
Marketers and advertisers.
who are gonna wanna sponsor their content either directly
Or through the platform.
That's like
The first step.
But then Alex talks about and this is I think is a really amazing insight.
He says then though
You have to take a second step, which is
decentralizing. So you start with a centralized economy where you're making sure that some people succeed. But then though you have to pull back and decentralize
Because if you want to keep attracting new creators, and this is where
know Facebook and Instagram have really failed to make this step, you have to ensure that there really is opportunity for everyone, that there's the equivalent of the American dream. If you're someone who is new to the platform, you have to believe that there's a chance.
that you will a real chance that you'd get discovered and that you can find success even though
You're starting from a cold start. And this actually is kind of back to the American Idol analogy. Like
This is why the algorithm
And the algorithmic feed within musically and then TikTok is so important. It makes it so different from Instagram.
God, there's a lot there, but uh it's a pretty interesting
analogy to the the criticism of America right now that the American dream has failed and actually the
you know, once you're at one end of the pole or the other, you kinda tend to stay there. Like maybe you could see people arguing that uh our country needs a a equivalent TikTokification.
Also uh quite ironic that this um vision and rhetoric is coming from a
a cross border US and Chinese startup that then gets acquired by and becomes part of the largest startup in China. The two sub points that he makes about
This need to decentralize is one.
Exactly what you said, Ben. You need to have true
social and economic mobility within the platform. But also just as important too, and to your point about making money,
You need a viable middle class. So of course you're gonna have the elite, the upper class.
the little Nasaks, the people who become just so much bigger than anything they could have ever imagined. But you
Also need
viability for
the middle. Uh there's there's gonna be people who just don't have talent and then they won't make it, but there are gonna be the people
Who have
you know, a few uh successes or have like a very, you know, a relatively small niche.
How do you help them succeed? And this is something that
The platform hasn't
fully fully figured out in the West, but we're gonna talk about this a bunch more as we go through the rest of the episode.
Yeah, it's really interesting. There's another point that's important to hit on that's part of Musicly's success here, and that's they really do something pretty innovative in overhauling the app to be all in on lip syncing because they're able to allow people to be
a little bit creative and get a lot of output.
which was kind of the magic of Instagram when it started. You could

a crappy photographer and put a cool filter on it and then no matter what it was gonna look cool. And it very much rings true of the uh the way to bootstrap a a a network, which is come for the tool, stay for the network.

creating in musically because it
could create a good product with little effort and sharing it everywhere else. And MusicLe watermarked every single one of those videos and made it very easy to share it everywhere else. If there's one th big difference to know between Musicly then and TikTok now, Musicly really grew organically because people were
sharing their creations that were far easier to make than you would think.
Um
Everywhere they possibly could.
This aspect of music leads growth.
Is
a page straight out of the playbook of Instagram, which
Did this exact same thing and Twitter.
Yeah, exactly. Was make a really, really great utility that made the content you were creating as a creator
look much better in a very easy manner.
Hipstomatic, was that the the straight utility competitor to Instagram? Yep. Yeah. And then
provide that really easy sharing functionality and and really it was Twitter that that Instagram grew off the back of.
And then Twitter shut them off the platform, but it was already too late.
Yep, smash and grab job accomplished.
So musically does the same thing on that front.
So now by twenty sixteen
Musically is.
on fire. So they have 10 million DAU and over 90 million users, up from 10 million the year before in 2015. So they're grown 10 X, uh close to nine X in 2016.
There's also something else very interesting going on.
In the year twenty sixteen in social network land. Well, there's a bunch of things that we've covered on this show, but twenty sixteen is the year
that Facebook and Mark Zuckerberg are trying to crack into China. So remember um
Zuck me I think this was the year that he made it his annual challenge was twofold. One, he was gonna learn Mandarin.
And two, he was gonna go jogging all around the world.
And uh and there was this famous moment I had totally forgotten about till doing research for this episode where he goes jogging through Tiananmen Square.
With a bunch of
Chinese Communist Party officials and he's working super, super hard. I mean, he views, you know, Facebook at this point
is still on its exponential growth curve.
They've acquired Instagram.
And Zuck is looking at China and seeing the billion people there.
And seeing the lack of a real, you know, Renren is around, but nobody's really become the Facebook equivalent of China at this point. WeChat is still in its infancy and he thinks this is gonna be the next big market for Facebook.
Yeah, pretty wild.
And as we would as we would see, that did not quite turn out.
Well it did not quite turn out. In fact, quite the opposite. But um
You know, twenty sixteen, this is uh, you know, the WhatsApp acquisition has happened. Uh Mark has tried to buy Snapchat several times. He's of course acquired
Instagram. It's cardoculus.
What's the Facebook playbook for entering these adjacent large markets?
It's acquisition.
I did not know this until yesterday, but it's been reported that in August of twenty sixteen, Zuck invites
Alex. Alex had moved back to Shanghai at this point.
To be full time with the product and engineering team in uh in China. Zuck invites Alex to come meet with him in Menlo Park.
And expresses interest in acquiring musically.
And apparently the next month in um October of twenty sixteen
a whole team from Facebook goes out and visits musically headquarters in Shanghai. Uh so there's serious acquisition talks going on between the companies. Man, just imagine what would have been if this had happened.
It's crazy they go to China'cause a very large part of the business was being run out of LA at this point. I mean that musically like a
had a Santa Monica office. There was a North America GM, another Alex, Alex Hoffman, who was running um
I'd say running that so well that the perception
by most Americans using this was this is this is not a Chinese app. I'm not using something, you know, sort of not built here. I'm I'm using a a social media app like any other. And I think that the product team in Santa Monica had a lot to do with that.
But of course.
Uh Alex and and Lewis are the co CEOs of the company.
So yeah, this uh apparently acquisition talks were quite serious, but the deal
Falls apart and hasn't been reported why. I don't know if it was
Regulatory concerns or
I don't think it was price.
Yeah. It seems unlikely it was priced. Looking at a twenty billion dollar pickup of WhatsApp, uh
I don't think it was price.
So we now enter twenty seventeen.
Musically
It's still
On fire from a growth perspective.
They've just come out of these discussions with
Facebook
With
Renewed.
resolve to be an independent company and continue growing.
Not as part of Facebook.
The big priority.
for that year that the team that Alex and Lewis decide on
Is to launch and grow.
back in their homeland in China. So now remember, they had launched the initial experiment in a bunch of countries, including China, but then they'd totally deprioritized and focused on the West.
First in the US and then had grown throughout North America and Europe.
But in China it was a different story.
And it was a different story for a couple reasons. One, because
Everything is different in China. But of course they should be if anyone, if any kind of Western social network or Western adopted social network is positioned to succeed in China, you would think it would be musically because
The founders are Chinese and
at least half of the company, more than half of the company is based there.
But
There are a couple things that are different. One
The business model for content.
Is
very successful in China, but very different from how it is in the West. In the West, of course, almost all media companies from traditional media companies through all the social media companies monetize through advertising.
In China, the advertising market
At this point.
was not yet anywhere near the level of maturity that it is in the West. Instead
direct monetization is the most powerful business model for social apps in China. Which wasn't something that I realized until we did that Tencent episode and real and realized really that like Tencent invented the sort of modern video game business model and a lot of where content in the West is shifting. Virtual goods, gifting
Tipping, you know, payments, of course, being a huge part of that and a revenue generator for the platforms, but the gifting and tipping is really
Really interesting. So now back to
what we were talking about a minute ago with the management of the economy.
of the network effect between creators and consumers
on a platform like musically and TikTok.
The China business model is actually a really elegant way to do that. If you allow for virtual goods and
gifting and tipping that
the consumers can show their appreciation to the creators for any given piece of content or a series of pieces of content.
And then those creators are able to exchange those gifts, convert it
in stu in part or whole into actual cash, now you can start to make a living
And
And build a middle class on a platform.
So this is happening in China and Qui Show is the pioneer of this. Remember Qui Sho's user base is primarily rural. Um so advertising, you know, e commerce companies and the like don't really have all that much interest.
Uh, this is prepin Duo Duo days, uh, which we should definitely cover on another episode. But don't have all that much interest in reaching
These audiences
Instead they're able to monetize through this direct monetization.
So that's one big thing. Musically has to figure out
how to navigate this new business model or different business model in China.
Two though, and this is gonna become
Much more important as we get towards the end of the story.
Um anytime you're talking about a media business
In
China, uh, whether social or otherwise.
You are operating in a very, very different political environment than you are.
In the West.
And we touched on this a little bit in the ten cent episode, but
You know, ten cent.
By dance who's gonna come in here in a minute, and basically any content company platform or non-platform in China.
employs thousands and thousands of sensors that are going through all the content.
working with the Chinese Communist Party
Making sure that
Yeah, of course you're
the content on the platform is upholding the laws of the party, but even
You know.
The wishes of the party. That is super different from a Western social network.
be it Facebook or Instagram or musically at the time where anything goes.
In late twenty seventeen, after working on this for
most of the year having this be the major priority in the company
Lewis gives a talk at a GGV event where he um uh I'm imagining he must be a pretty funny guy. He says, quote, I regret not having entered into China's market earlier. Now I can hear vibrating sounds everywhere, making me uncomfortable.
So most listeners, or at least most Western listeners, aren't gonna get what he means there. But by vibrating sounds everywhere making me uncomfortable, he's of course
Referring to Do Yin.
Which is
At this point has been launched by

Content company.
In China.
Most valuable startup in the world.
By dance and doin.
Uh
means literally vibrating sound or shaking music. And it's it's important to know too, like
Bite dance before Doin was
doing very well with Tao Teo. I mean, hundreds of millions of users. This is th the best news and information technology company in China. And so when they see hey this music lead thing is taking off in the US
Wow, they're not effective at entering China and oh yeah, the world is starting to shift where this short form video thing that
maybe didn't make sense a couple of years ago in China, does make sense now, it's effectively a fast follow where Byte Dance is like, cool, we'll leverage out all we have from Tao Tiao to go and build Do Yin, which is gonna look a lot like Musically does in the US. We're gonna launch that here in China and beat them to their own country.
Yeah. I mean this is
Basically Bite Dance's version of Instagram stories here. Yeah, a word about Byte Dance, which we've of course referred to a bunch in this episode. So Totio, which Ben just alluded to.
up until this point was the core app of the company and the biggest and most important product. So
What is To Tiao?
And why does this make Bite Dance such a formidable competitor to musically? So
Total is basically, you could think of it as like Apple News on steroids. It's Tot literally means headlines.
It is a
News and content aggregation app. Maybe more like Flipboard back in the day.
But unlike
Apple News or Flipboard or whatever.
Well, A, people spend an insane amount of time on it. And Ben, like you mentioned
An incredible portion of China, something like half of the internet users in China are daily active users of Totiao. But two, more importantly,
Really early on.
Bite dance realized with Totiao that
they couldn't be limited by formats. So of course they have text and news on there.
But they also have photos, they also have long form video, and of course they also have short form video. And short form video
within Total is a big driver of engagement and content with the app.
And the other
really key thing about bite dance and the reason why
They've succeeded.
above so many other competitors in China.
is that their algorithmic recommendations, just like we were talking about with Musically, that made it made Musicly so interesting and different.
are the best in the world. They have
The best AI technology
to quickly for any given user about what they're gonna like and then go scout this immense vast corpus of content that they're bringing in to Totiao every single day to find the very best stuff that you're gonna love across.
All different types of formats.
Yep. And all of course vetted. Thousands and thousands of sensors employed by the company to to make sure that that aggregated content going to users is vetted.
So talk about
A moat here and a super
Easily
accessible adjacent market for Totiao and Bite dance to get into the
Is
Pure short form video. So they're seeing
The super success of musically.
In the West.
Now, Bite Downs has always talked about having aspirations of expanding beyond the Chinese market and being one of the first
of the new generation of Chinese internet companies that is going to be a global company, they see what's going on with Musically and they say, Okay, this is
the perfect, you know, Instagram stories.
be a copier and fast follow model for us here. There just real quick, the other reason why this is so appealing to them.
is we talked a minute ago about
monetization models in China and advertising versus direct monetization. Now by dance
has direct monetization and is capable of that within their products as well. But they're also the first company that's really starting to crack the advertising market in China. And again, it gets back to this super sophisticated algorithm, which gets to know users preference. So just like
Facebook advertising.
Where
They know you so well.
They can
recommend content to you. They can also recommend ads to you. I mean, arguably, I would say with Facebook, like it's better at recommending ad content than it is at
organic content because so much of the weight in the algorithm is who you know and who you follow, as opposed to Totiao and Bite Dance.
Bite dance.
over the past couple of years has been turning this algorithm into advertising too. And they're really starting to build for the first time a digital advertising market in China.
Yeah. And what's important to know here is they they launched O Yin that's going
uh swimmingly in in China, musically, frankly, is scared at this point because they're like, Okay, we we sat around in Missed China for too long and like now we're probably gonna get beat there. But similarly
Do Yin is launched as TikTok in the US.
It does not go well in the US. Musically is still, you know, it's got this passionate, large, organically built user base.
I think it's easy to gloss over the sort of um importance of feeling like it's a native app for your country. You know, there's not a lot of people using WeChat in the US because it doesn't certainly the Chinese version doesn't feel like it's for people in the US because it's not, and the American version is so stripped down that, you know, it's it doesn't it doesn't feel right either. But
Musically.
really did. And that's a a huge piece of that sort of Santa Monica office. And so TikTok versus musically in the US, to the extent that you want to win this market
Oh it's
At least so far gonna be musically.
Yeah. Well so it's interesting. It really like the parallels to
Facebook's behavior with competitors are so apt here. So first
By dance copied musically.
Domestically in China, with Do Yin. That launched at the end of two thousand sixteen.
Nine months later.
in sort of fall of twenty seventeen, Doin already has a hundred million users and they're serving over a billion video views a day. So they've got this amazing technology that they lifted right out of Totter than anything musically has. Two, they've got this incredible scale, but they've got the distribution relationship with
consumers from Totiao. So they're plugging Do Yin within To Tiao to all their users. You know, it's kind of like at this point, you know, all the platforms and especially the Chinese platforms are super smart to the
distribution hack of like sharing out your content onto other platforms and then exfultrating those users. There's no way that Bight Dance is gonna let musically come in and do the same thing on Too. They're gonna do it.
We're now in the fall of twenty seventeen, and that's when
ByteDance launches TikTok and takes dough internationally. So
No, it doesn't get anywhere near.
the amount of traction that musically has. But it's not
Really a full test. It's more like a toe in the water. Because shot across the bow too.
Yeah, it's a shot across the bow'cause
So we're now towards the end of twenty seventeen. Musically is
been struggling mightily in this big effort for the year to enter China.
Uh, and so they're ready to re entertain acquisition talks. I don't know, I don't believe Facebook was involved in this round, but Qui Show, the original
uh short form video platform in China.
And of course Ten.
are really interested in acquiring the company at this point in time. So now remember
Ten.
is of course a big investor and an acquirer of
Content all around the world, not just in China. You know, owner of Riot Games and League of Legends, investor in Epic Games and Fortnite and so many other things. And actually, amazingly, when you look over at
Bite dance.
Somehow that company has never taken investment from Tencent or Alibaba.
Like that every sort of big story. No, yeah.
Startup out there. Yeah, that like like that was the f big first generation was of of the Chinese tech giants was those three, and every other one that we've sort of covered that's been a recent um Xiaomi, Maituan, you know, Pindodo, uh I believe Pindodoo.
uh all took money from one of those three, the B A T, the big three in China. But Byte Dance is much more a sort of traditional venture funded mega unicorn.
And
Think about Tencent.
Which of the B A T is byte dance the biggest threat to, at least right now? Ten cents. For sure. And WeChat, you know.
TikTok is ten cents miss.
When when you sort of think about what each of those three companies were in their sort of loose US allegory, you have Alibaba being the Amazon, you have Baidu being the Google, and you have Tencent being the the Facebook, the Facebook Twitter, sort of the social and and four
both uh bite dance and musically to come up developed in China under their nose and end up being today an eighty billion dollar valuation company is the first big credible threat to Tencent.
Tencent, of course.
is really motivated and interest and interested in potentially acquiring musically.
And that's where the shot across the bow from TikTok, uh, from Byteance launching TikTok internationally right around this time is super important. So
Once the dust settles.
It's announced on November tenth, twenty seventeen.
That bite dance.
Not quite sure. Ten cent.
is acquiring musically.
for between eight hundred million and a billion dollars, the exact number wasn't announced.
It's really interesting and you gotta think about like w yeah, what drove that decision?
to sell to bite dance.
You have to think it's you know.
A sort of like the power of thinking about wow, what could these two platforms do together? And Alex actually takes some time off, um, but then comes back in and he is now running TikTok, all of TikTok within Byte Dance.
And Lewis, I believe, stays on fully all the way through at Bite Dance. But also
Man, if we were to sell
and presumably sell for equity definitely to Qui Sho, uh potentially to Tencent too, to one of these other companies.
You know, and we know now that we're gonna have this direct competitor from Byte Dance and TikTok all around the world. Man, what kind of slog is that gonna be?
Yeah, that's a great point.
It's interesting to know too the scale of both of these platforms at the time of the acquisition. So it's like well, what did they get for eight hundred to a billion?
Th there musically had a hundred million monthly active users at this point. And of course TikTok, because of the scale of China
TikTok slash Doein uh had five hundred million monthly active users. They're buying a
big company at this point. And not necessarily in terms of people or revenue, but like
That is a thing that tons of people around the world and really the Western world use all the time.
Well we'll get into this maybe maybe to pull forward what would have happened otherwise a little bit. Like
I have to imagine that.
Musically didn't have a ton of leverage, uh, at this point in time.
Because Facebook's already out, right? And we don't know what happened, but unlikely that they're gonna be an acquirer.
You know, you've got Tencent and Qui Show interested. Tencent's probably the biggest point of leverage.
But Byte Dance is doing executing a builder by right in front of them. Like there's
Very little imaginable path that
Uh musically either on its own or as part of Tencent.
is going to win as a big standalone.
Uh network here.
Yeah, billion sounds like a big number. Uh and it was only up a little bit from the post money in the last round. Um, but when you think about it, it's only ten dollars per monthly active user. And when you think about like what does Facebook make off of a monthly active user per year in the US, it's like
twenty five, thirty bucks. And so to be able to go and and pick up, you know, what might be the next generation of of social networks and get
those users in perpetuity for ten bucks a head, you know, it's it's actually kind of a steal.
Yeah, totally. So they do the acquisition.
Initially.
Musically and TikTok.
Stay separate.
But then
Clearly, and this makes so much sense. Part way through twenty eighteen, they merge the platforms.
They rename musically as TikTok.
So they don't. Th this is the craziest thing. So I I could not believe that this is how this worked, but'cause the here's what I thought. I'm like, cool, you buy this, you already have the apps installed on everyone's phone. You you just you deprecate the old TikTok in in the Western world and you
you just rename musically TikTok and then boom you're off to the race interface. I assume that that is what they did. Me too. And I can't quite figure out why they did it the other way, but here's what they did. They
duped the backend database. So they basically said if you have a musically account, then when you log into the next generation of TikTok that we'll be putting in the app store soon, your entire account will be maintained. So your same credentials, everything.
But they actually created a new and combined app
put it in the app store as TikTok and then told everyone to go download it and say download it and log in.
You had to go download a new app, music or autoconvert into TechSoup. I'm like ninety percent sure. This is like uh I'd love anyone to sort of check my uh my research on this and um um acquire it if I'm at gmail.com or let us know. If that is the case, then everybody did migrate.
spent like a billion and a half dollars, I think
over the next several months doing a massive ad campaign in the Western world for TikTok. And basically this is a a
They spent more than the actual acquisition in advertising dollars to make sure that
they made a huge splash, not only with new users and saying, Hey, you know, you should uh you know, you you should go check out th this new TikTok app, it's great, but ensuring that all the existing users moved over from musically.
I think we've seen this.
On a couple episodes now, uh certainly on Disney Plus, our most recent episode.
But
I think it's tempting
As a technology company.
And especially as a social media company, but really any tech company, any consumer facing tech company, to think that
Product and growth hacky distribution is always the key to success. That's wrong. It's the key to success in the early days when you're figuring out product market fit and getting early growth.
But then once you're past that point and you're trying to go mainstream, you need to be spending and spending smartly marketing dollars and you need to be doing it at a scale that is going to get you to break through.
This is what you know, Disney has done with all their content forever, but that they're doing with Disney Plus. You know, this is what Netflix does, this is what Amazon does, this is what Facebook does, and this is importantly what
Bight dance.
did in China and had raised enough money to be able to do and learn the playbook there, and then now they're running around the world.
Yep.
Absolutely.
They merged the platforms in twenty eighteen. Man, that's crazy. I didn't know that that's how they did that. By the end of twenty eighteen
The combined platforms Do Yin and TikTok have
Five hundred MAU worldwide.
uh which is more than two X Snap and already fifty percent of Instagram.
It's the most downloaded app in the app store, in the iOS app store for all of twenty eighteen, which of course downloads don't always translate to retained users, but still pretty impressive. Users spend an average of fifty-two minutes a day
in the app, which I believe is significantly higher than any other
social network out there.
And then this year in twenty nineteen
Tic tac adds another estimated three hundred million MAU to get to
eight hundred million MAU.
Total worldwide.
They are approaching Facebook and Instagram scale here.
But of course twenty nineteen, before we wrap up history and facts,
We can't not talk about the coda here with
Facebook and
U S
China and everything going on.
between the countries and indeed between these companies right now.
You know, as we all know, twenty nineteen hasn't exactly been uh
A banner year for US and China political.
relations.
We talked about this a lot in the first episode of this season on our on our Huawei episode.
But in January twenty nineteen.
The think tank uh Peterson Institute for International Economics comes out and says that TikTok is a quote Huawei-sized problem.
I was thinking about this during our H Huawe episode. It could be a potentially larger than Huawei size problem in terms of a national security threat.
to the US.
And particularly like uh for many, many reasons, but one specific use case is um
That lots of military personnel
Use Tic Tac.
There are many videos of
People in
Western militaries.
You know, they're using it and TikTok is getting their location data, their facial data.
um you know biometric data through that.
which, you know, the company is owned by Byte Dance, which is a Chinese company.
If the
you know, Chinese government were to request that data from ByteDance, they would even if they didn't want to give it to them, they would legally be forced to
Comply and give that data to the Chinese government.
This news changes every day, so this may even change by the time we release this episode. But TikTok executives, uh Byte Dance executives are regularly asked this question and and also sort of regularly say, Oh no, we won't we won't do that. But like
As you say, David, like you would be legally competing.
You know, and and they do talk about you know, according to Alex has talked about this
For the version of TikTok in Western countries, uh not Doin.
the data is actually stored in the US, I believe on AWS on Amazon servers uh in the US.
There's that. But again, like legally, it's owned by Byte Dance. Would they have to give that data to the government to the Chinese government if they asked for it?
And then this becomes
Even more acute.
in spring of twenty nineteen and through the summer and through today when the protests in Hong Kong start.
And
Interestingly, you know, they're of course blowing up on social media.
all around the Western world, particularly on Twitter and you know
So much discussion of it everywhere, but interestingly, not so much.
On TikTok.
And then people start asking the question, Well
Why aren't people talking about the Hong Kong protests on TikTok? Is it because
You know, what TikTok says, which is like, hey, this is a platform for goofing off.
This is for like making fun entertaining content.
Or is it because
TikTok is censoring posts about the uh
About the protests.
And so listeners, as you can imagine, it makes some you know US politicians uneasy and and saying, Wait a minute, this is a thing that's like taking off in our country
Well, surely this this must be subject to Cypheus review. This is the committee I'm gonna I'm gonna butcher it, but something about it. Committee on foreign investment in the United States.
Which we've talked about.
several times on this show. Yeah. If a if a foreign entity wants to come in and and buy a massive AI company or a massive uh defense company, then like
It makes sense that the government would say, Well, let us look at this first. We have this really interesting scenario here where these are both Chinese companies, granted with a pre one with a presence in the US, um, but tons of users in the US. And now close to two years after this acquisition got done.
There's now politicians calling to to institute a side review.
A Cyphis review has been opened on the Musically acquisition, which of course was two years ago. It's already closed in the past. But when it was done, there was no Cypheus review. I mean, A, because I think people weren't
really thinking about this at the time. It's also a Chinese company buying another.
Yeah. Yeah. Super interesting. So
I mentioned.
Facebook. I think you know
All all of what we just said is true. And like
These are really serious questions and potential problems and things for
Tic tack.
And the US government.
And the Chinese government, you know, and by dance and all of the ecosystem to grapple with.
At the same time, conveniently
Who is out there fanning the flames of this fire and the controversy?
Mark Zuckerberg and Facebook. So you know, remember twenty sixteen
Facebook almost bought musically and
W their number one priority, Zach's number one priority for that year was figure out how to enter China. Well, here we are in twenty nineteen and Facebook is
Completely out of China.
and proud of it because they're under
Tons of political pressure, to put it mildly, here in the US.
And
They also now have this emerging
threat to their, you know, social netweg in the West.
with eight hundred million monthly active users in TikTok. So November twenty eighteen, a year ago.
Facebook launched Lasso, which was there.
TikTok competitor. Latest attempt to make a really jank independent app that's a copy of a yeah.
Superjank fails miserably.
And so so then in twenty nineteen, as this controversy really starts to grow, just a couple months ago in October.
Zuckerberg gives a speech at Georgetown University where he calls you know, he calls out
All Chinese.
owned social media.
In general.
About these issues.
around national security.
and around privacy and around censorship, but he specifically calls out TikTok
And bite dance.
as a national security threat and a threat to, you know, Western values.
And ways of life.
Now, again, he may not be wrong. Like these are super, super important questions, but it's also a really convenient misdirect from like
The equally valid and important questions about
Facebook's role in influencing elections, Facebook's own role in free speech, you know, et cetera, et cetera.
So it's against the backdrop of all this.
That
The Siphius.
Review.
Does get
Instantiated this month.
going back and re looking at this musically acquisition. Um so it'll be really interesting to see what happens
Here in the next this is probably gonna take
more than a couple of months, but heading into twenty twenty
You know, if
Cyphyus were to
rule to try and reverse retroactively this acquisition. What would happen. Yeah.
How can the US force to
Chinese companies to
Uncombine.
I mean, I guess they there's US shareholders of musically and lots of them, maybe even more than fifty percent. I have to assume it was more than majority owned by venture investors given the four rounds that they did.
Well, actually it's really interesting, you know, going back to
Ben, if it's true what you said about how they integrated musically and TikTok, and if they actually used the
Tic tack.
Up.
and core infrastructure and migrated musically onto it.
I wonder if you know.
It seems crazy from like a
product decision, but I wonder if they were thinking about this. If this is now gonna be an argument of a potential US governmental review. Yeah. Like hey, this is this is TikTok. This is n this was never musically.
Huh. Yeah.
The last piece of the puzzle here.
Uh that we are
Definitely gonna watch play out.
Of course, a year ago when Facebook launched Lasso, which
You've never heard of uh it failed miserably.
But just a couple weeks ago, at the beginning of November in twenty nineteen,
Facebook and Instagram launched a test of a new feature.
In Brazil.
in the Brazilian market that they're calling reels.
And uh R E E L S
And just like when they launched stories and copied Snapchat.
This is a much more fully featured
Uh Tic Tac.
Competitor.
In a new tab.
Natively within Instagram.
So we'll see how.
That performs.
Oh man, well this th this may need a a follow up at some point. The plot thickens.
We spent one of the reasons we spent a lot of time talking about
the core of how the product operates it musically and TikTok and the algorithmic
Recommendation.
is one because that's how
Uh that was the secret to the company's success. But two, it may end up being the moat that protects them.
here from Instagram copying them. Because if you think about Snapchat, when Instagram copied stories, it was the same
Network model.
on Snapchat as it is on Instagram of like I'm following, I'm interacting with people I know or people I care about or people influencers or whatever.
Here it's not. So like is Instagram gonna be able
to recreate the algorithmic feed.
Within Instagram.
We'll see.
Great question.
Yeah, it may be a fundamentally different in in in the way that
stories fit in nicely. This may not fit in so nicely.
All right listeners.
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All right.
Acquisition category.
For listeners who are new to the show, um, we like to categorize an acquisition, uh, whether it's a people acquisition, technology, product, business line, asset.
Or other.
And I actually called this one an asset acquisition, where the asset they were acquiring was the audience.
They sort of were buying distribution instead of pay to build their own distribution.
I don't have enough context to know if they actually needed to buy the product.
Or not.
Um, I looked at this more like buying
uh buying distribution.
Yeah, it's interesting. We added um
At some point, I can't remember which episode. Maybe it was Zillow Trulia. We added consolidation as a uh
Category. I think that's what I'd go with here.
Um
There's more network effects when you add more nodes to the network.
Yeah, like
Okay.
Even with all the differences we talked about, you know, at the end of the day
This was
The same th
Product.
You know, different versions of it, but the same filling the same
Need and use case.
And so just like Zillow and Trulia or Rover and Dog Vake.
by being able to consolidate these two companies and these two user bases, both on the creator and the consumer side, they were able
I think to drive a lot more scale in their network effects sooner.
I definitely buy that.
Which I'm gonna hold my comments on until grading.
All right.
The suspense builds.
Um, I think we pretty much have covered what would have happened otherwise. Do you wanna go into playbook?
Yeah. I mean the biggest thing for me is just like
I had no idea.
about all of these dynamics underlying
How
musically and TikTok and by dance work.
And this
really orthogonal view to how all other Western social networks operate.
And
having content be driven by the actual content and algorithms recommending it as opposed to the people making it. I think this is a huge, huge trend that is super important for entrepreneurs to be thinking about um across
All types of content companies.
Yeah, I okay, I wanna dive into that, but I wanna
Uh take one step back first.
And say
the way to emerge as a new social network. So there's a a narrative violation here, and whether or not you like the term narrative violation, um which is I love how acquired finally made the New York Times last year. Narrative violations. Amazing. Thanks, Aaron.
A narrative violation for sure happening right now is that you can't create a consumer a new consumer social network. Like, sorry, we live in the post Facebook world and like that's not happening. And yet
TikTok did. So what happened?
And the way that I was sort of thinking about this is
Initially to emerge as a social network in sort of V one, it was simple. You could just enable people to communicate with each other with messages or whatever, wallposts, and show information about themselves. So things sort of like basic friendster or early Facebook
And this was like very primitive creative expression. It was basically just a communication channel. But the way to disrupt that world
is to create a new canvas for people to
easily be creative within.
And this comes uh a little bit from Eugene Way's theory from his amazing post status as a service, but you basically need a canvas that enables people to be creative without doing a lot of work and to have a large amount of uh a large amount of variance in what can be created.
'Cause this'll facilitate a new generation of creating, sharing, following
And thus TikTok was able to be
uh sort of explosive in growth by nailing the format of this new method for creative ex
expression. So you can consider that basically like an amplifier for the work that one has to put in on what they can get out the other side.
And so
by enabling sort of this new format, this new canvas that you have
uh the ability to paint on and and be more creative than you thought you could be
it sort of naturally attracts people to it. And then you can sort of bootstrap a new network on top of that.
So TikTok
is about sharing with anyone where Facebook and Instagram were about sharing with friends.
So David, this is where I want to bring in your point.
there's a much higher K factor or w the viral coefficient when the content can get distributed to that much larger group. Th this really gets to your point of winner take all. It's it's really like diving into Metcalf's law, which is that that
aphorism that the value of a network is proportional to the square of the number of connected users in a system, like or or you know, equals n squared. And the flaw in this in applying it to the Facebooks of the world is that
You know, with something like Facebook it's not actually n squared,'cause when a new person I don't know joins Facebook, it's extremely unlikely that it actually increases the value for me. But with TikTok, that's not true. It's actually
It actually is.
N squared.
Yeah. Yeah, this is like a totally new type of network effect that we're looking at that actually
acts as a global system instead of a whole bunch of stitch together, bifurcated, uh personalized systems.
Yeah, it's really as you were saying that I actually think
This mega trend, you know well, this this trend
and theme is even bigger than we've been talking about.
Uh because
For the last fiftin years.
The
Whrase social network.
has meant
A
Technology driven platform.
With
personal connections on it. You know, it is it's just been like the friend model of Facebook, the follow model of Twitter, or Snap or Instagram, or whatever. Like there's it's just this implicit assumption that
All social networks are based on relationships between people.
But that's not at
Oh.
TikTok is. In many ways, you know, YouTube is much more similar to this too.
It's
The relationships are about the content and it's about relationships. It's one to many relationships between creators and consumers.
And
Unlike YouTube though, on TikTok.
A much higher percentage of consumers also become creators. Now nowhere near a hundred percent, not as high as say Instagram.
But much, much higher than YouTube because the barriers
to creation are much lower because of the short form.
format versus the long form format on YouTube.
I think you could make one of two arguments. Either that this represents a wholesale rethinking of what

Or it's a different category altogether. Like it's not social media. This is
Pure media. Like UGC driven.
media.
And so like to this narrative violation of like you can't create a new social network. Well, maybe that's sort of you know sort of true. Like if you think about how Snap
Uh came on the scene and competed with
Facebook.
It was a competing social network. It was just they found
a separate network of users and younger users that weren't attracted to Facebook, but it was a substitute product, right? And same with Instagram. This is is not that it really isn't. Even though most of the users are young right now, that is not gonna be the case forever. This is a network that's gonna have broad universal appeal just like YouTube.
Because it's not about the people, it's about the content. And they can find the best content for you, whether you're, you know, nine or ninety.
Yeah, what you're really seeing is the purest distillation of social network versus social media. In a way that we had sort of blurred them together before. This is
very much social media really not a social network.
Whereas you look at something like Facebook, it's it's much more a social media, not really social media.
And totally.
And the why TikTok has been so explosive is it's all the benefits of YouTube, like true social media where someone creates content and and it could benefit literally anyone around the world, not just their their little community of people that they're actually friends with, but it's also the the best of
Facebook or Twitter where it satisfies that instant gratification, short form, in the moment, bite size content.
Yeah, in a way that YouTube you know, I love YouTube and we gotta redo that episode'cause we were so wrong. But I'm never gonna whip out YouTube while I'm standing in line, you know, waiting to check out at the register. But I might whip out TikTok because all the videos are fifteen seconds or less.
Which actually this is a double edged sword. So this leads to what my sort of bear case is on um on TikTok long term. And and there's a bear case that is soft bank invested, which is its own bear case. Um and you could also say eighty billion dollar valuation really by dance. Um Yes. Yes.
But the one that's more based on fundamentals is look, Facebook
has been entrenched in my life since two thousand five or six because
It carries all the people I've ever met with me.
And like m a lot of them fall off the network and maybe some move over to the Instagram and don't post post on Facebook or whatever, but like that's based on a really solid bedrock of
important things in my life.
And with TikTok being so much about instant gratification and me not really knowing any of the people I follow. Again, this could be different for lots of other people, but I think for most people you don't know the vast majority of the people that end up in your feed.
Will it actually have that sort of staying power uh that Facebook has had by having that social network that's important to you? And to really bring it back to our
Previous
conversation like maybe social media
has higher
Short term value.
because of the incredible propagation, but maybe social networks
Have you got to be able to do it?
More long term stand power.
Yeah. I think what it probably
Thinking about this, I think to me
What this means is
It is
even more important for TikTok and other
potential social media networks like it.
Well, certainly like To Tiao.
To
Constantly refresh with
new, fresh, relevant content.
Because that's the lifeblood. Like
If
If the
fire hose of new content creation that is coming into TikTok every day.
If that dips or dries up, then the algorithms aren't gonna have amazing new content to recommend to people. And the value of the library of old content probably gets stale much, much more quickly than the value of
Digitizing your relationships with all your friends.
Which means the better comp here is actually YouTube than Facebook.
Yeah.
Totally.
Hm. All right.
Well
There we have it. Do we want to do um
Greening.
Greating.
All right, so I have a take.
I was thinking about this before
Jumping on. So the the task of grading if we think bite dance.
will make back the billion dollars they spent on musically with their current business model is actually like it's kind of tricky to to back into that based on CPMs or, you know, average revenue they're making today per user stuff like that. So to take a different angle at it, I I want to talk about an episode that we haven't done, which is Facebook buying WhatsApp.
Uh and without doing any research, I preliminarily think uh that's gonna be an A. And the major reason being Facebook seems to have a monopoly on being the dominant social network, and that allows them to be the best marketing channel in the world to reach consumers targeted by demographic or interest.
And if you think about it, before
TikTok, there were six social networks with over a billion users. And I looked this up a few minutes ago. It's in order. Facebook, YouTube, WhatsApp, Facebook Messenger, WeChat, and Instagram. And this is globally. So Facebook owns four of the six billion plus
person social network or social media properties.
Oh.
So like if you if you take that lens on it, to like Facebook, which is a two hundred billion dollar market cap company, only having to drop ten percent of their entire, you know, enterprise value to protect against the greatest threat to them out there.
was actually still a fantastic move at that time, even if they're not monetizing WhatsApp now. It was basically like a twenty billion dollar insurance policy to allow them to keep printing that twenty billion dollars in net income that they generate every year.
Mm-hmm.
So now bringing it back to Music Lee, which was only a billion dollar acquisition.
And if you believe that that was essential to enable TikTok to become the insane platform that it is today, with somewhere between half a billion and a billion MAUs, David, I think you estimated it at like eight hundred million. Eight hundred million. But th they'll
Assuming nothing major changes. It'll be a billion soon. Yeah. Yeah. Like it seems like a no brainer that it'll be sort of this like first legitimate challenger to to Instagram, which really is what Snap was supposed to be, but fell short of with only three hundred million monthly. I think the difference is, yeah, Snap
Had
Snap's network effect was relegated to
a specific demographic of people.
Um I think there's a chance that that that that's different for uh for TikTok.
I think you're right. And I mean I think I think that's why if you take this sort of top down market view, um and analyze it based on, you know, buying a ticket to attend that billion dollar social network dance.
I absolutely think it was a fantastic purchase and probably one that will go down in history of one of the best ever, if
One
TikTok can hold on.
Like can actually to the point that we were talking about earlier, create lasting value, like to have staying power to be able to make sure that even though they don't really own those personal relationships, that they're an important part of your life on an ongoing basis, and two, really start to turn on the the gas and and monetize like Facebook has been able to.
Yeah, yeah.
Okay.
So you're a I'm an A?
I'll say A.
A

Alright, so I have one
One overarching caveat to all of my great I'm I'm also gonna be an A.
Um, but one overarching caveat, which is this is all appending what happens with the Cypheist review. Absolutely. Like that could throw
A huge wrench in everything here. It could be like multiple billions of dollars of just lighting money on fire.
Yeah.
Totally.
So
I'm gonna
I am we are gonna grade this.
Just from a pure like business perspective.
Assuming that
this is the Sipheus review, you know.
There was no view of it happening when the acquisition was done over the last couple of years and let's assume
that the acquisition doesn't get reversed. So that said, I'm also an A
for I'm not an A plus though. So I'm an A because for two reasons. One
This was the way like Bite Dance.
This is what
makes Bite Dance so exciting. All of these dynamics. That's the reason why
It w was and is the
Highest valued startup.
Privately held company in the world.
So they would have been completely fine without Musically.
But
I think they would have had a very hard time.
penetrating into the West. They would have been able to expand outside of China.
into
Other Asian countries.
uh but getting into the West and specifically into the US in such a big and quick way would have been really, really hard. So this is their path to do that one.
Two.
uh as we talked about in acquisition category for consolidation, just generally for like these two products in the space, combining them.
is gonna allow them to grow much faster and with far fewer roadblocks. Because again, it all gets back to
content this flywheel effect between content
And uh that creators are creating and then consumers consuming that content and needing the fire hose of new compelling content.
By getting
All of it all around the world onto the same platform.
That's really gonna drive things.
Much faster.
I think it's not an A plus though because
To me an A plus is like
this one company and this one acquisition like created a new category, saved something like an Instagram. Like Facebook was not gonna succeed at doing Instagram on its own.
I even forget what their clone was called. Um, they needed to buy the company, you know, or Apple and Next. Um
So I think that's why I'm not an A plus, but
With the caveat of Cepheus.
Totally agree. I'm an A.
Cool.

Well, do you want to do our first carve out in a while?
Yeah, let's do it. I've got two saved up. Um
One'cause we haven't done it in a while and
to uh for the holidays. So my first carve out is the Nintendo Switch Lite.
I bought it when it came out and it's awesome. I haven't owned a
video game console in years. But I'm traveling for Thanksgiving.
So listeners, if my audio quality's a bit off on this one, I apologize. It's just been so great. Like I haven't even played I have played no
New games on it. I just bought Breath of the Wild on Black Friday. Um you shared this with me like a couple weeks ago that that you have a uh Switch and you've only played the classic Nintendo games. I've only been playing Nintendo N E S Super Nintendo games.
And then um
I bought a few. There are a bunch of
you know, both indie titles and uh
reissue games from previous consoles in the Nintendo eShop that are all like
So good. I'm not even like that excited to play Breath of the Wild. I'm just so enjoying going back and playing like Super Metroid and like Castlevania and all this stuff. So
That's one.
My second carve out is
Jenny and I are with my family for Thanksgiving.
And uh we went out last night and saw the movie Knives Out.
uh with Daniel Craig and
I knew very little about it, wasn't expecting it to be awesome, but it was like really, really fun. Super great holiday movie.
Really well done.
Alright I gotta see it.
Mine.
Actually has
to do with this episode, uh, but I won't tell you how until the end. So I'm gonna recommend a nine inch nails album from
I know where you're going with this. I remember discovering this in college and being like I well, first of all, I'm like a big um Trent Resner fan and like a lot of the m sort of harder, more classic nine inch nail stuff as like
When you're like
really gonna like have some good speakers around and and rock out.
And um like unbelievable live shows, uh the all the soundtracks that he's done with Atticus Ross, including Social Network and Gone Girl and most recently Watchmen have been awesome.
he released this album called Ghosts One to Four and it's a uh four disc album
It's my favorite music to work to. Like it's sort of like deconstructed tracks. They're very minimalist tracks. It's a great put it on and like think music.
So my two favorite tracks on it are uh track twenty six on ghost three, track twenty nine on ghost four. You should go play the both of those right now on Spotify because they're great. But the one that I'm recommending today is track thirty-four from Ghost Four.
Which is the sample that is the base of the beat in Old Town.
Mm
And so great. The New York Times did an awesome uh both
text piece and also a video recording that's on YouTube where they go and interview the producer in the Netherlands who used this sample and made the bee. It's so good.
It's awesome. And it's one of these things where I always knew like listening to Old Town Road. I'm like, I kinda I th I know something like what this beat is, but I never put two and two together. And then watching that New York Times video, I was like, no way, it's actually Trent Reznor under this whole thing.
So I just thought that was the coolest thing.
Amazing.
Trent Reznor.
And Billy Ray Cyrus.
Well Nas X.
And Tic Tac.
And uh oh and I for I'm blanking on the name of the producer from the Netherlands. Um but anyway.
That is a true
Twenty nineteen.
Moment, if there ever was one.
Absolutely.
All right listeners.
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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.
Alright, listeners, that is all for today. So if you like this episode or really anything that we've done, please don't be shy about sharing it on social media or uh leaving us a review on Apple Podcasts. We haven't mentioned that for a while, but it's an awesome way to help the show grow. And I think I I learned recently that the um
the iTunes charts are actually dictated by the number of subscribes per unit of time in the Apple Podcast app. So if you listen in a different app and you want to help us bump up the charts, you should go and and click subscribe in uh in Apple Podcasts.
we are starting to get into that territory where we're getting a bunch of nice organic traffic from people looking for uh new technology shows to listen to and seeing us in the charts. So thank you so much for for doing that or leaving a review or sharing us. Uh we really, really deeply um appreciate you helping to to grow the show.

And by the way, if you're uh
An entrepreneur or aspiring entrepreneur.
And you're thinking about making the TikTok for podcasts.
Get in touch with us. David, I have someone to email you after this.
Awesome.
Yeah.
Um, if you want to go deeper on any company building topics you should consider becoming an acquired limited partner, 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. And with that.
We will see you next time.
See you next time.