In this episode of Acquired, hosts Ben Gilbert and David Rosenthal delve into the remarkable rise of Chinese e-commerce giant Pinduoduo. Founded by ex-Google engineer Colin Huang, Pinduoduo leveraged WeChat's social graph and mini-programs to fuel its viral team buying model, allowing it to amass a staggering user base and achieve a $100 billion market cap in record time. Despite its unorthodox approach and low take rates, Pinduoduo's innovative use of social commerce and direct manufacturer relationships has disrupted the industry, challenging established players like Alibaba and JD.com. With Huang stepping down as CEO but remaining as chairman, the company's future hinges on its ability to monetize its growing yet lower-income user base and expand into higher-tier cities.
"Today we are talking about, and I quote from their IPO prospectus, an exemplification of a multidimensional space seamlessly integrating cyberspace and the physical space. A combination of Costco and Disneyland, driven by distributed network of intelligence agents."
This quote explains Pinduoduo's business model as presented in their IPO filing, emphasizing their innovative approach to e-commerce by blending online and physical experiences.
"Now, why is this a fascinating company? Well, first off, it's only five years old, and they went public on the Nasdaq two years ago. In 2018, three years into their existence, they are the fastest company ever to 100 billion dollar market cap, and they've nearly tripled in value since the coronavirus spiked globally mid March."
The quote highlights Pinduoduo's unprecedented growth trajectory, reaching a $100 billion market cap faster than any other company, and their success during the global pandemic.
"So the global pandemic has massively accelerated the shift from offline to online commerce, as I'm sure all of you are experiencing in one way, shape or form, at least as consumers."
This quote reflects on the impact of the pandemic on consumer behavior, with a notable shift to online shopping, which has benefited companies like Pinduoduo.
"So I do want to give a shout out to Honam in the slack who inspired us to do the episode with this comment. 100 billion dollar market cap in five years from a standing start. This is just nuts."
The quote acknowledges a listener's comment that sparked the idea for the Pinduoduo episode, emphasizing the company's remarkable market cap achievement.
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"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."
The quote introduces Pilot as a leading accounting firm in the US, emphasizing its focus on startups and the trust placed in it by prominent investors.
"So my lead in was going to be that quote from the IPO perspectives of the Disneyland and Costco and the distributed intelligence agents. What is going on?"
David Rosenthal discusses his initial focus on Pinduoduo's unique business description from their IPO prospectus, emphasizing the curiosity it sparked.
"So if you remember back from our old Tencent episode, which I went back and listened to before recording this, it's like navel gazing research."
Ben Gilbert reflects on previous discussions about Tencent, highlighting the relevance of past insights to the current topic of Pinduoduo.
"They start thinking about what other categories can we go into next and build on this foothold? And eventually maybe we can start to compete with Alibaba and JD. Eventually. Eventually being like six months from now, as we'll see."
This quote explains that Colin's ambitions for expansion were not just hypothetical but had a clear and aggressive timeline, indicating a strategic move to scale quickly and challenge established e-commerce giants.
"Let's just do it as a marketplace. So we won't take inventory. We won't even really take much of a cut on the transaction. We'll make it super small. Like less than 1% of the transaction will take as a cut for our marketplace fee."
The quote reveals the strategic choice to prioritize learning and market entry over immediate profits by setting a low take rate, differentiating their marketplace from competitors.
"It's growing so fast, literally by the end of 2016, they would do $70 million in revenue, not GMV, revenue, with their tiny take rate with this marketplace."
The quote emphasizes the remarkable growth of Pinduoduo, highlighting its revenue achievement, which validates the marketplace model and the decision to merge with the original company.
"They come up with this concept for Pinduoduo that they call team buying. Now, this isn't new...but Pinduoduo is pretty different from that and team buying is pretty different than that."
The quote introduces the innovative "team buying" feature, which is a cornerstone of Pinduoduo's user engagement strategy, setting it apart from other e-commerce platforms.
"It all runs on WeChat's payment system...recruit people to come join you. And it's all natively baked right into WeChat."
This quote illustrates the seamless integration of Pinduoduo with WeChat, which is crucial for its user acquisition strategy and the implementation of its growth hacks.
"In February of 2017, Tencent decides to essentially king make Pinduoduo here in this category...They lead a $110,000,000 series B in Pinduoduo."
The quote highlights Tencent's strategic investment in Pinduoduo, effectively endorsing and empowering the platform within the WeChat ecosystem, which is instrumental to its success.
"This is the first experience with e-commerce...Pinduoduo is their gateway for these customers into the e-commerce world."
The quote explains Pinduoduo's strategic focus on new e-commerce users in lower-tier cities, positioning itself as the entry point into the e-commerce ecosystem for this demographic.
"If you had pitched me in 2016 and said, hey, I'm going to create this ecommerce site and it's going to take forever to ship, I'd be like, well, that's immediately out, because the future is overnight shipping. Amazon has changed the world."
This quote highlights the initial skepticism towards the viability of e-commerce models with long shipping times, given the dominance of Amazon's quick shipping model.
"This is the demographic that in a different age and place and time would have been watching Oprah, right?"
The quote connects Pinduoduo's user demographic to a traditional TV audience, suggesting that the platform's entertainment value appeals to similar demographics.
"The other aspect you bring up, the feed, this has a really important impact for the supply side of the marketplace."
This quote emphasizes the significant impact Pinduoduo's feed system has on the supply side, enabling new sellers to gain visibility and sales.
"It's the actual factories and manufacturers themselves. They now don't need any branding, distribution, anything like that."
This quote explains how Pinduoduo's model enables factories and manufacturers to sell directly on the platform, bypassing the need for branding and distribution.
"They successfully disintermediated both traditional retailers and brands."
The quote summarizes Pinduoduo's impact on the traditional retail and branding landscape, highlighting the platform's ability to bypass these entities and connect directly with consumers.
"They started going to these contract manufacturers and saying, hey, we think we can generate a lot of demand for tissues, for jeans, for raincoats, for umbrellas, whatever."
This quote describes Pinduoduo's strategy of leveraging manufacturers' excess capacity to meet consumer demand, which is central to their C2M approach.
"A long time. It's been five years, the rip for the last two years. And I know they're taking lots of steps to address this, has been massive amounts of counterfeiting."
The quote acknowledges the ongoing issue of counterfeiting on Pinduoduo and the steps being taken to combat it, highlighting a significant challenge for the platform.
"That sounds like it could be interesting. Now. So what we're talking about is advertising and promotions."
This quote introduces the discussion on Pinduoduo's primary revenue source, emphasizing the importance of advertising and promotions in the platform's business model.
"So one of the knocks on this company is they're not profitable, their losses are huge."
The quote points out a common criticism of Pinduoduo related to its profitability, setting the stage for a deeper examination of its financials and market strategy.
"This company has had huge positive operating cash flow for the last like three plus years."
This quote highlights the discrepancy between Pinduoduo's reported net losses and its positive cash flow, revealing a more complex financial situation.
"They're listing things like iPhones on the platform now."
The quote illustrates Pinduoduo's strategy to attract users from higher-tier cities by offering subsidized high-value products, indicating a shift in its growth approach.
"If you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPIs, Statsig is awesome for that."
This quote highlights the utility of Statsig in helping companies determine the effectiveness of new AI features on their performance indicators.
"We're pumped to be working with them."
This quote reflects the positive sentiment from David Rosenthal towards the collaboration with Statsig.
"The most interesting thing to me, going through the history and facts of what could have been different, is what if Facebook had made a different decision here in the US about how open they were going to let their platform be to big businesses being built on it and particularly commerce businesses."
This quote by David Rosenthal discusses the hypothetical scenario of Facebook taking a different strategic path and its potential impact on commerce businesses.
"There's some work to be done here to compare Tencent as an investor to Softbank as an investor."
Ben Gilbert suggests analyzing the effectiveness of Tencent's investment approach compared to Softbank's strategy.
"They knew the future in that they controlled the distribution platform that all these businesses were being built on."
David Rosenthal explains how Tencent's control over WeChat provides it with a strategic advantage in identifying and investing in successful ventures.
"Facebook just made a sinful amount of money on app install ads."
Ben Gilbert comments on the financial success Facebook experienced from its advertising model during the app boom.
"I was going to say they were screwed because I thought they desperately needed access to cash."
Ben Gilbert discusses the importance of Pindoduo's IPO in securing the capital needed for the company's growth.
"At least one of the equity follow on rounds that they did equity raises after the IPO. I believe Tencent bought most of, or at least a significant portion."
David Rosenthal points out Tencent's continued financial support for Pindoduo after the IPO.
"There's a thing that's, like, a splinter in my mind on team purchase that I'm trying to apply to."
Ben Gilbert reflects on the effectiveness of Pindoduo's team purchase feature as a growth mechanism.
"Is it really about team buying when you're buying an iPhone, or is it about them subsidizing the price?"
David Rosenthal questions whether the team buying concept will remain appealing to consumers purchasing high-value items like iPhones, or if price subsidies are the main attraction.
"Recognizing a counter positioning opportunity to build an amazing moat around your."
Ben Gilbert discusses how Pindoduo's strategic use of WeChat mini programs created a competitive advantage over Alibaba.
"I do think that a good portion of the supply side for PDD is different than the supply side on JD and Alibaba."
David Rosenthal speculates on Pindoduo's distinct supply chain and its potential as a competitive moat.
"Every user after that costs more money to acquire."
Ben Gilbert discusses the concept of diminishing marginal returns as it applies to Pindoduo's user acquisition strategy.
"You can penetrate further and further into areas of the economy that you wouldn't have thought the Internet could penetrate into before."
David Rosenthal highlights the expanding reach of internet companies into various sectors of the economy, such as agriculture.
"So Crusoe, as listeners know by now, is a clean compute cloud provider specifically built for AI workloads."
David Rosenthal introduces Crusoe as a company providing AI compute services with an environmentally friendly approach.
"For the shareholders who decided to put their dollars to work in the IPO versus other things that they could have put their dollars to work into. How good of a decision was that?"
Ben Gilbert analyzes the success of Pindoduo's IPO from an investor's perspective.
"This is actually a case where the most recent news is a little concerning the CEO transition."
David Rosenthal expresses concern over the implications of Pindoduo's CEO transition for the company's future.