we'll see you next time you take that. Uh, that sounded terrible.

Welcome to Season seven. Episode one of Acquired the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, Um, David Rosenthal and we are your hosts today we're talking about and I quote from their AIPO prospectus and exemplify cation of a multi dimensional space seamlessly integrating cyberspace and the physical space A combination of Costco and Disneyland driven by distributed network of intelligence agents.

Then it's like you're reading from my history and facts There. You would have

to Unbelievable. Like, absolutely unfathomable. At first I thought Costco and Disneyland was gonna be the hook. And then I realized all the stuff around it is actually far more absurd. So listeners, of course. We're talking about the Chinese e commerce company PIN Duo duo. Now, why is this a fascinating company? Well, first off, it's only five years old and they went public on the NASDAQ two years ago in 2018 3 years into their existence. They're the fastest company ever to $100 billion market cap and they've nearly tripled in value since the Corona virus spiked globally mid March so almost all of that market cap or or, you know, to there's that market cap created in the last few months.

I think it must be the distributed network of intelligence

agents that it's certainly the intelligence. Yes, so now you might be saying, Well, Chinese e commerce. I thought that was already sort of a settled frontier. I've heard of Alibaba,

or even

J. D. Yeah, and we haven't covered JD it on the show, but also on e commerce powerhouse in China. Well, apparently there was an opportunity remaining. There was a missing segment that was not being addressed by either of those two companies, and it is enormous. This episode felt very timely not just because of that $100 billion milestone for a pin dodo, but also because e commerce in general is, ah, having a moment, as they say. So the global pandemic has massively accelerated the shift from offline to online commerce, as I'm sure all of you are experiencing in one way, shape or form, at least as consumers.

Hopefully, your Amazon

shareholders, he had no kidding or Seattle residents and benefiting from other side effects of of that and of course, China wants behind the US in their e commerce Penetration, I think, was only 6% of retail was done. Ah, online in 2012 is now already a 24% of the total retail. Spend a lot of that accelerated here in the last few months, much like the U. S. Penetration, which is really driving this crazy run up in valuation for, um pen dodo. So I do want to give a shout out to ah ho Nam in the slack. Who inspired us to do the episode with this comment? Ah, $100 billion market cap in five years from a standing start,

this is just nuts. It took Microsoft 25 years, Google and Facebook more than 12 years. And even for their closest competitor, Alibaba, it took 14 years. And so it just felt like the stars were aligned into this episode. The more I dug into it, the more I was frankly shook by what this company looks like. Really. All I knew about this before was their name. It's been fun spending that we kind of doing research and learning. What is this beast

like? Every story we tell here on acquired like you started thinking. It's one thing and then you dig a little deeper and you're like, Oh, man, wow, there are so many layers to this onion.

Well, a few announcements before we get to it. So a huge thank you to everyone who took our our survey at the end of last season, so entries are now closed. As for the winners, we emailed you if you are one of the lucky 10 to win the year subscription to the LP program. And the winner of our airpods is Amy L. From the Bay Area. So congratulations, Amy, and we will also be sending you an email to follow up after this. As always, if you love acquired and want more, you should become an acquired, limited partner. Our most recent episode was with benchmark general partner Sarah Tavel, part of our VC fundamental Siri's,

and she joined us to talk about the fundamentals of consumer investing. If you want to join, you can get access to that additional content, plus our book club and our monthly LP calls on Zoom. You can click the link in the show notes or go to glow dot FM slash acquired and all subscriptions come with a seven day free trial. Now, before we dive in, I'd like to welcome our presenting sponsor for all of Season seven Tiny Now over to my conversation with Tiny founder Andrew Wilkinson. Well, Andrew, we are excited to have you as our presenting sponsor for this season. Can you start us off on this first episode and just tell folks what is tiny? Oh, of course, I'm a huge fan and longtime listener, so it's cool to be here.

So Tiny was born out of my original business, which was Metal AB, which is a design agency. So as you guys have talked about in the past, we help companies like Slack Coin Base, Tumbler Shopify. All sorts of great startups build the first version of their product or expand their platform. And we've been doing that for 15 years, and it turned out the business was profitable. And so originally I used the profits to start new businesses. So I started some South software companies, partnered with Shopify and built the largest partner and that ecosystem on. Then I At a certain point we hit a point where you know, we're making quite a bit of money and we couldn't just keep expanding and incubating businesses. We had to do something bigger. And we had also been frustrated because we've been through the ringer with private equity firms looking to sell businesses,

and they just always made it so difficult. It was like a six month miserable process, and so two things happened. One, we decided, Hey, we should go by businesses. There's must be all these founders out there like us that are frustrated and wants one great to sell two and two. Let's rethink the process and make it super simple. And so we looked at Warren Buffett. Women Warren Buffett rates $10 billion checks in two weeks. Why can't we do the same thing wide? All these private equity firms take six months and re negotiate. And so we've for the last seven years been acquiring wonderful Internet businesses, usually bootstrapped unprofitable businesses. But we've also bought venture backed businesses as well,

and we just hold them for the long term. We focus on profits. We leave the team's alone to do their thing, and now we're up to almost 30 businesses and it's a lot of fun. I get to do it from Victoria, Canada, in the middle of nowhere and have a nice life. It's pretty cool. That's awesome, Andrew. Well, we're excited to Ah, here more as the season evolves and have ah, ongoing discussion about tiny and its many levers. So thanks so much for joining us. If you own a wonderful Internet business that you want to sell or you know someone who does,

you should get in touch. You can learn more about tiny at tiny capital dot com or by clicking the link in the show notes And now over to you, David, to take us into the story of pin diode. Whoa.

Yeah. Well, Ben, you still someone my way? We've talked about on the show, Ben and I don't compare notes before we record so that we keep our your reactions authentic church

in ST Know that?

Yeah, exactly. So my leading was gonna be that quote from the i. P. O. Prospectus of the Disneyland and Costco and the Distributed Intelligence Agency. What is going on?

Well, I mean, at least it validates like we're on the same wavelength. Yeah, that that actually was the interesting bit to pull out of it was sold out. I definitely think there could be a leading here, too. That's like, What if you had a gaming company that got smashed together with a company that sold fruit to try to make e commerce fund, and then you could shop and buy stuff with your friends?

Like what if? What if it's funny you mention gaming. So the other thought I want to put in everybody's minds before we dive into the story is, of course, the largest and most important gaming company in the world and strategic player. And it seems about just about every market these days. 10 cent. So if you remember back from our old tense an episode which I went back and listened to before before recording this,

it's like navel gazing research

seriously. We've now reached the point where one of our sources for acquired is acquired tense, and if you recall from that episode, they are in many ways in Suchy dominant position, but not just in China but around the world as the owner and operator of We Chat, which is the dominant social platform in China but also major shareholders in Epic games, which makes four night. They're one of the largest shareholders in Tesla's, the only of legends major shareholder in Snap Indeedy and Meat went down Ping. But I think you could make an argument that there now I think it's I think it's about 17% ownership that they have in Pin Duo Duo is maybe their most important steak in the whole portfolio. Because if you recall from back our old episode, what were their weaknesses? The flanks that were exposed for 10 Cent, where to bite dance most specifically in terms of its social dominance?

Who, of course, makes Tic Tac

course makes Tic Tac in Tokyo, but also Alibaba and Alibaba's massive Ali pay and had financial platforms in China. And so, if you rewind back to say, 2015 2016 2017 thes air major things that are on 10 cents mind right, as the magical unicorn Decca Corn Center Corn Pin duo duo is being birthed to keep that in mind as we go. OK, so let's start as we always dio with the founder, Colin Hong. He was born in Hong Zhou in Ah 1980 his 100 China. His parents were factory workers neither of them finished junior high school. So they were, you know, not even, like, maybe sort of on the on the just on the fringes of the establishing China middle class at this point in time, but kind of just barely hanging on again.

Also, longtime listeners and China Tech fans might be smiling here because, uh, of course, what other very famous China Tech entrepreneur was born in one Joe Teoh, lower middle class parents a generation earlier. That would be Jack Ma course, founder of Alibaba. The parallels are gonna be quite

apt. Here you mentioned the generations for folks that haven't listened to any of our sort of China Siri's before. The way to think about sort of China tech companies is of course, there's the Big Three from the previous generation of Baidu, Alibaba and Tencent. They sort of controlled the ecosystem. They were the kingmakers. They were not only your Google and Facebook's, but also your you know, benchmark and Sequoia is they were both the V C and the sort of fang powerhouse of China. The companies that we've sort of been seeing this generation a Xiaomei Pin Duo duo are the ones that are sort of rising up to become the next generation. And you can see those Big Three then fighting to participate in the success of this next

generation. It's such an interesting, different ecosystem from us tech. So when Colin was in junior high, he loves math, like really loves math, and he must have been quite good attics. He participates in a national math Olympiad, which, you know they have contests like this in the US I remember doing this when I was growing up, but like in China, this is like a really big deal. And he ends up winning a medal in this Olympia and one of the other prizes for how he placed in the in the competition was he gets an entrance exam ticket to apply to the Hong Zhou Foreign language School. And now, initially, Colin is like, I'm not that interested.

I mean, like English, like fine languages. I really just care about math and physics. His parents like No, no, no, you gotta You gotta go take this exam because it turns out it's not just a friend language in school. And Hondo, uh, it is one of the very best schools in all of China and one of the most prestigious prep schools. It's public school, but prep schools in the country. He ends up taking the entrance exams. He does well. He must have done incredibly well because he's still on the fence about going to the school.

The president of the school calls him up personally as like, I think he's probably 1/6 grader at this point in time to convince him to come enroll in the school. So he does go. He does very well. He ends up going to the also very prestigious Jade Young University, where he studies computer science. He interns while he's there at Microsoft in Beijing. This is kind of crazy. He makes more in. Apparently, he gives it, says an interview. He makes more in his summer interning at Microsoft in Beijing than his parents do in a year working in the factory. Then later, I don't know if this was while he was in undergrad or when he was in grad school. He also interns at Microsoft in the US and Redmond,

and he makes eight times what he made that summer in China in the U. S. So did. Oh, here's this kid, unlike Jack Ma, who you have stated among Joel's life, was super fascinated with English in America. Worked as a translator in a tour guide but didn't get good grades. Stayed there until it's thirties. Um, here, here's Colin. He couldn't care less of that English in America. He just wants to code, but he comes 18 weeks, tons of money.

In the years that he was there, the sort of early two thousands he would have been early enough in the Microsoft internship program, where he would get toe, do the thing that Bill Gates his house and go to the barbecue and meet Bill personally when I interned, it was like 1500 interns for summer something by the time I got through. So that was no longer a part of the program. But, yeah, that was the major perk of being an intern then.

Interesting. Well, this definitely feeds into a theme with young Colin of when he's in college. The legend has it, this is impossible to verify but also echoes another super famous China Tech founder, Pony Ma, apparently Collins hanging out on the Internet. Famous Netease founder William Ding posts online in a forum looking for help with A with a technical problem that he's working on. This is how the legend goes. Colin responds to this. Starts interacting with saying it had they kind of become friends. Things takes a liking to him and becomes a mentor. Ding eventually introduces Colin Teoh, an even more famous China Tech entrepreneur, BBK Electron ICS found there. And also, I believe, one of the founders and Eddie's Dewan Young Ping. He would go on to found a Po and one plus and like lots of big, big, big modern Chinese technology companies.

So he's got some, like heavy

heading mentors, super having hitting mentors even when he's a college student back in China after he graduates, probably on the encouragement of thes mentors. They encourage him to come over to the U. S and do grad school in computer science at the U. S. So he goes been, then you're gonna hate this, but he goes to, ah, the university, Wisconsin in Madison for

grads. That's fine. As long as it's not Michigan. That's great. Go 10.

Okay, big down there, huh? While he's there doing his masters in CS at Madison. He continues to Internet Microsoft. Microsoft desperately wants him to come back full time when he graduates, but William tells him, Hey, you know, you've spent a lot of time at Microsoft. You've gotten the experience there. You've got a pretty good network. It might be a better idea. I think you should check out this little start up down in Mountain View. They're doing more interesting things. It's called Google. Maybe you should see if you can apply there and get a competing offer.

He just keeps hitting the lottery over and over and over again. I don't say that to imply look, but like he finds his way to the right place right time over and over again here.

Totally. So he shows up. Of course, he gets an offer from Google. He graduates from Madison in 2004 shows up that summer six months before the Google AIPO. He's one of the first couple 100 employees at Google. He starts as an engineer and then pretty quickly switches to being a product manager. The company goes public. He makes a ton of money already. It's like he's just making money without even trying. This is the theme of his life. We'll get there. Yeah, well, we'll definitely get there. Two years later. After joining in 2006 he does so well.

He gets put on a secret team at Google. He's one of two people leading the team for secret plans to launch Google in China. Do you remember this ban? This was like a huge effort. No, we actually did a case study on this in business school where Google put all this effort into building a Chinese version of Google. It was already the launch, and then they decided not to do it because they would have had to censor the results. And this was all, like, tied up when the don't be evil.

Ah, yeah, I certainly remember that. I didn't realize it never launched. I thought it launched and shut down, but it never Ah, that's actually good question.

If it did launch, then they set it down. But it was a big public brouhaha.

And to this day, there's no Google search in China,

right? Yep.

Only in Hong Kong. Wild. There really are And continue to be, ah, dividing two Internets.

Yeah. I mean, and this is like talk about skipping ahead to what it happened. Otherwise, the great firewall was not totally in place yet at this point. Like if history had turned differently and Google had done this lake so much could be different about China. Attack us, Tech, the global Internet. But, alas, it didn't. As a result, Colin ended up leaving Google to go become an entrepreneur on his own right, which was probably a really good idea. But before we get to that, there's this amazing. I texted Ben this photo. This is like the most amazing find in the research

and from looking what you texted me. Were you like, did you find it in a YouTube video? Because I see the you tube are of

the baht. Okay, Yes, I found it in a YouTube video. We'll see if we can find whatever website it's on. It's on on the Internet and link to it on the show. That's also in 2006. So, Dwan, remember, we said one of Colin's other mentors he bids on and wins the auction for the annual lunch with Warren Buffett in 2006. And who does he bring with him as a guest. He brings Colin, This is crazy. And so there's this picture will find some way to link to it. There's amazing picture of Colin and Warren Buffett. Warren's got his arm around him there, sitting at a table in Omaha, having lunch, and it's just incredible.

It looks like they both had a glass of red wine.

Yeah, there's definitely a wine bottle in front of them, I think, to unpaid over $600,000 for the one. So for that price, you should get a pretty good.

But within that couple of year span, we speculate he met Bill Gates. Definitely met Warren Buffett. We can see the photo with his arm around him. His mentors were Dwan, Young Ping and Pony Ma. Or at least he sort of interacted with them, certainly interacted with pony and had Dwan is a mentor, like

I'm William dating Kim.

He's just like going down the list of people who have over 10 billion

and net worth. I know it's Ah, it's pretty, pretty incredible again, like for somebody who you know, his parents never finished junior high school. That's crazy. When these the types of things that were happening in China during this time is just this hugely rapid modernization of the country and opening up of the of capitalism. Okay, so back to Collins entrepreneurial journey. So it's now 2007. He's just left Google and, like, you know, many talented young folks leaving Google and other successful Internet companies in these days, he wants to become an entrepreneur. He wants to start a company,

and specifically, he wants to start an e commerce company to capitalize on this trend of rising incomes and the emergence of middle class in China and accompanying rising consumption. Interesting. Okay, this seems like a theme that's going to recur. Eso it's not yet,

but in 2007

this is 2007

and Pin Dodo 2015.

Exactly. He starts a company called puku dot com. O u K u. And it's an online retailer. They sell electron, ICS and other goods on there. It does pretty well. He sells it within three years, and then he says, you know, just like my mentors, I'm gonna become a serial entrepreneur here and start starting and funding multiple companies. So the next company he starts is called Lakey L E que i and that helped. The idea was they were gonna help bring foreign brands, non domestic, non China brands online in China and help them market and sell on the leading e commerce platforms of the day. How about a team?

All of which is obviously part of Alabama and JD dot com? Okay, Also interesting. So here's Here's Colin. It's got his e commerce experience. He's got his Google experience. He's now learning about his future competitors,

and we should underscore something That's gonna be an important point that we keep revisiting when you say Tao, Bao and team all those are products by Alibaba. So Alibaba, you know, started in this B to B e commerce and then got into consumer e commerce where they were selling directly to consumers in China with team all which is think about it like a mall with really high end brands. And they wanted to keep that in its own separate ecosystem. And Tao Bao and Taub, I was more like the eBay is that seemed like the right

come to you. Yeah, that seems right. I mean, I would say like at this point in time, Alibaba's various properties are sort of the equivalent is Amazon. Plus eBay rolled together in China, were now in, uh, probably 2012 timeframe. And people are starting to think people are talking about Alibaba going public with the which they would in 2014 I think, and it was the largest I

popolare just I p O. Yeah,

people think Yeah, like they've won. They are the monopoly and you think e commerce you think China, You think Alibaba and JD is emerging their number two, But they're the winner. So much so that even Colin is like, I'm gonna start a company on their platform to help people sell on on Alibaba. But he doesn't stop there. He also, at this point in time, mobile and social gaming are a big thing, and Tencent has just launched we chat. Of course, they've had Q Q, which was the desktop messenger platform, and that was deeply embedded in the gaming ecosystem. For a long time.

They just lunch. We chat on mobile mobile gaming is a thing, he says. I'm also gonna start a mobile gaming studio where we're going to start churning out some mobile social games on the back of this new emerging we chat platform. OK, ok, interesting. Here we go somewhere. Maybe we were not quite yet at Costco in Disneyland, but you can see the forces starting to swirl around here. All these things were running in parallel. Colin again, given his background, his mentors, you know, he's looking for a big Grand Slam home run.

None of them is. It becomes clear none of them are really gonna on their own achieve that mega mega success. But he knows he's onto some big trends with each of them. And he starts feeling like, maybe maybe there's some kind of opportunity to bring all of these things together on intersection of these trends. And if we could do that, I actually have the right team. All of these people, it's the same people even going back to his first company. Who? Same engineering team, same co founders who are working on all of these different products. We know how to do it. We have all of these skills in house from social gaming, T e commerce, deep knowledge of Alibaba and JD. Okay, what could we dio together?

Yeah, and he's like your classic serial entrepreneur and he's really you know, he's assembled the band. He just doesn't exactly know what the company is gonna be in all these different attempts. And I think a few of them are running sort of in parallel. So he has multiple people sort of cut up into different teams to work on

stuff that that kind of overlaps. Yeah, it's almost like he started to start up studio Ah, before it was cool. So in 2015 he says, are in this studio type environment we have. What's do this? Let's let's start a company. So they launch a new company called Pin. How who I think is how you pronounce it

again. Neither of us are native speakers. We're gonna do our best here. But Pinho,

which roughly translates as pin, means doing something together and how who means good, good. So like getting good goods together. And the idea this has got a crazy and super creative. It must have been from the social gaming world, you know, Farm Bill's huge. At this point in time, the idea is kind of like real world Farmville. He thinks that rural agriculture, you know, the Chinese agriculture and produce market isn't anything like the US or Europe or many other countries where there are large co ops of of farmers and agriculture producers. It's much more lots of individual rural farmers. He thinks there's maybe an opportunity to use the Internet and in particularly mobile buying and ordering to have supply, meet demand directly for these rural farmers. The idea is that if they can get this toe work A.

This is something that Ali Baba and J D aren't equipped to go anywhere near. But if they can do it, this is a huge category of groceries, essentially like produce and repeat purchases gonna be super high. They can use all their tricks from the gaming world to drive user acquisition to drive repeat purchases. And they think this could really work. So as an M. V. P. Remember

there, you know the other good thing about selling groceries air effectively selling sort of fruits is the risk is low relative to you. Look around at the time, JD and Ali Baba's properties like you trust those brands when you're going to go buy an iPhone or something like that. But there's this new startup like you kind of need, Ah, cheap thing to sell so that if your sights a little premature and ah doesn't look totally trustworthy like it has to be a small investment and fruits and vegetables are great thing to sell because if it doesn't work out like that's okay, I have other options. It wasn't that much money anyway.

Yeah. I mean, this stuff is a couple pounds of fruit for, like, five RMB, which equates to less than a dollar. So it's funny, you say site then there's definitely no site for this. There's not even an app. Eso remember in the mobile gaming side of the house, they realized the power of we chat and how important that was as an acquisition vehicle for games. They thought, you know, hey, to get going. What if we just don't even doing half? What if we just kind of like operate on?

We chat with all these rural farmers, you know, they have phones now. They've smartphones. They have we checked on their phones. We'll just communicate with them via wechat, send him some orders and stuff and buy from them, and we can pay with wechat pay. And then we'll also just kind of chat with the consumers who are buying the fruit on the other end and take payment from them via wechat. Pay. Okay, like that seems like a good M V p until we can buy some time and by an app. Well, it starts toe work. By mid 2015. They raise some venture capital and fully launched the company and the models Really interesting. So we're definitely still not yet at Pingeot do on the magic that makes that work

there. Also a first party retailer. So, unlike if you think about sort of the two models that Amazon has, where there's Amazon retail and then Amazon third party sellers, the model with Pinho A is that they're the Amazon retailer eggs eyeing directly from from them. You don't really know who the farmer is on the back end. It's your classic retail model of the retailer. Buys it from the wholesaler. Keeps the inventory, has that tough business model, especially when the goods air spoiling ah and then sells it to the consumer. I have to suspect they learn some lessons in the trickiness of holding inventory that would lead them toe later. Embrace the marketplace

Yeah, totally. When you hit the nail on the head there there, Retailer. In this model, which is interesting in a given, Cullen comes from the commerce background. That's probably that was what was natural to him. That's what his first company was was retailer. And that's why they thought to do it this way. But it turned out there was a better way so peen how who, uh, is doing really well. They've raised venture capital. It's an exciting business, and clearly they've hit on a good wedge into the e commerce market with produce and agriculture. But of course,

their ambitions are Collins and biggest sins are much bigger than them. At least I think about what other categories can we go into next and build on this foothold? And, you know, eventually maybe we can start to compete with Alibaba and JD eventually eventually being like, six months from now, we'll see. Um So what did they dio? He's like, Oh, yeah, Well, I got this gaming studio, you know, incubator that that I have Let's just have the team spin up some some M v p type stuff in some other categories. Okay,

Great. What's the easiest way to do that. You know, like being a retailer. You know, we did this M v p with Pena who? Ah, but that was kind of hard, you know, Were built a bunch infrastructure and certainly requires cash. What if we just, you know, we're really just trying to learn here. Let's just do it is a marketplace so we won't take inventory. We won't even really take much of a cut on. The transaction will make it super super small,

like less than 1% of the transaction will take a cut for our marketplace fee. You know, which is different. Like I think Amazon takes Wednesday was on take their clothes percent on their marketplace. And even Alibaba and JD you're taking you know,

tension is very close. JD's 28% of G m V is recognized as net revenues a revenue to the marketplace. And I think team on tab, our like 5%. Still, like

meaningfully. Higher. Still meaningful. You have five times higher. Okay, great. Like 0.6%. Tiny, tiny little take great again cause they just want to learn what sells. So they want to this thing, and then we got what we call it. You know, it's also mostly running on. We chat. We like the P in, you know, the doing things together must call it PM Dodo together more savings and more fun seems, seems fine. We'll go with that.

And interestingly, this is a different company. They started as a separate entity, also registered to Colin. It sets the table for who's this Colin guy and housing of these two companies. And I'm sorry. Is it Is it fruit? Is it gaming or is it marketplace for goods?

Yes. Thea, say to that um so shocker. They launch this thing and it works even better than Pena. Who? Uh, it works so well. They end up raising some money for it independently. At this separate entity from some of the same investors. This is in 2015 and then in 2016 it's growing so fast. Literally. By the end of 2016 they would do $70 million in revenue. Not G M V revenue, with their tiny take great with this marketplace that in September of 2016 they emerged. The company's in tow. It's now one company. It's all the same team that have been working on these things called Pin Duo Duo. And then in the beginning of 2017 they fully transitioned out of the old retailer model of pH and fully into the marketplace model of PDD.

Two things toe say, here one is Ah, met a point about this episode since most of our audiences Western we've converted everything to us dollars toe sort of make it easier to understand. The other thing is David, we should not gloss over and it just did really well. And boom, they got to 70 million in revenue in the first year. Like how? How did

that happen happen? Yes, That is a very good question, Ben. Well, let's dive into that. It's not just that Pinto Duo is a marketplace with a low take great forgets like den in of itself. Sure is an advantage versus the incompetence, but like they could slash there take rates to also who's going to trust pin diode Yoda. It was like you were saying earlier. Been like there's some upstart. You know what? You can buy an iPhone on this thing and

beautiful also like I'm not gonna attract any retailers just by having a low take rate like Amazon is currently Amazon. So if I start Amazon to with a 0.6% take rate, I'm not gonna get I don't know, Adidas to come and retail shoes on my little thing with a low take rate just cause it is a low take rate. Like I have no audience. I have no distribution. I have no ability to actually pull it off.

Yeah, I could talk to Tamil Tin Elmer here. It turns out there's a thing called tea set of network effects where, like you have a bunch of buyers, it attracts a bunch of sellers, which attracts some more buyers. And boom, that's actually defensible.

So are you telling me then that they needed to find a novel way

to attract a bunch of buyers? That might be a way to enter the market. So remember they have all this gaming DNA, So they come up with this concept for Pinto duo that they call team buying. Now this isn't new. I mean, this was in many ways at least marketed as the core concept of group on, like so, lots of people buy this thing together, and then you'll get a lower price. Yeah, but that's kind of not really What group on was it was is a deal site.

Yeah, we have all this crap that wasn't already selling. And so will you come take it off our hands if we lowered the price enough. And actually, over time, we're just gonna phase out that group mechanic.

Anyway, I remember buying things like Groupon and still, if you go ask him if you go by on the sites day, you're just buying the thing that you're an individual consumer group on. Put something in front of you. You're buying it. Full stop. That's it. Pingeot do is pretty different from that. And team buying is pretty different than that. So in the pin dodo experience. And this is the core mechanic that has gotten them to, ah, $100 billion market cap today, you see two prices for every item. One price is the individual price. So you can just buy something straight up for that price.

Get it? You know, tomorrow they have Ah, just like all good Internet companies and gaming companies. That button is like super faded, washed out colors. Red is the color scheme for Pinto

do it looks like great anti pattern for

yeah, I designers exactly. It's like very soft pink. The text is not bold ID. You really have to fight against every fiber of your being to click that button.

Are you sure you want to cancel your subscription?

Ah, right next to it, though, is a big, bright, saturated, bold red color of the team buying but which also happens to be at a price that is typically about 40% lower than the individual buying. But

which is interesting because that's set by the retailer. So the retailer as a if it's a contractual obligation. But like as a term of listing on pin dodo, you set to prices that the individual price and then the team buying price. And interestingly, I think it was something like the team size had to be like 20 people originally, if you could go get 20 people to come together, then you would have access. And I think the retailer would control this too and say if you bring 20 people and then it became 10 people. Now it's all the way down to two people. But this idea that if you can self organize. If you could do some demand aggregation for us, then,

Yeah, you get a break? Yeah, totally. And now I don't know if this is how it was in the beginning, but now the retailer sets the team. That's the minimum team size, I say retailer. I mean cellar. We'll get into that in a minute. So what happens when you click that button? This is just genius because it all runs on retail payment system. You were instantly charged that price the team praise the minute you hit that button and that dollar value gets transferred to pin do rodeo immediately. They get the money the second you hit that button, the transaction doesn't go through, though. You have 24 hours to hit the minimum team size.

Now there two ways that you could hit the minimum team size to buy this item. You could one join an existing team that's out there and pin dodo right in the US I surfaces. A bunch of other people that are also trying to buy this app have also formed teams you can join up on their teams. Seems pretty simple. Get the discount that way or if you want extra discounts, you conform your own team, and you can recruit your own people to come in and join you. And it's all natively baked right into. We chat so you can just super easy post this item that you're buying into your family, friends, whatever we tech group over post Republican and we chat stories, whatever and recruit people to come join you. And what is this kind of stuff? It's like, Well, it's fruit,

obviously, but it's also, um, choose its genes. It's, I think. Still, the number one product is yeah, tissues, like literally Kleenex. This is where you know, the Costco part of the costume in Disneyland. Analogy comes

in its essentials. Like Who wouldn't want toe be recruited into a group toe by something that you kind of have to buy anyway? And now you get to do it cheaper like super cheap when it comes with the social proof of somebody you already know saying Hey, I'm doing this. I trust this system. So do it with me. And didn't they later launch features that if you get enough people, it's actually free for

you? It's like a price cut or some price chop shop. So I think initially the platform showed you a selection of products that you could try and attempt to get for free with the price. Chap said. Little pay $0. It was getting people to sign up for Pinto Do it like literally register accounts and the brilliance of it again. This all comes from the gaming world was say, you had like, 100 RMB product with sticker individual price. The first person you brought in for the price chap lowered it like 50%. Then the next person lowered it, you know, 30 RMB, then the next person. So it was like an asthma tote that kept getting harder and harder to hit. Zero. If you didn't hit zero,

nothing went through like you didn't get it for free. It's not that you got it for, like the price. Say you got it down to five. You don't get it for five. You got to get it to zero, like shooting the man. It's like shooting the moon. But all those people, you just onboard it onto todo

thes air like effectively the greatest growth hacks of all time. I totally want to grow a platform as fast as they did and the exact correct incentives with the exact minimal amount of friction doing it on. We chat to just get a crap ton of users superfast to come and and join the platform and not just join the platform, but actually transact

actually transact. And there's one more piece to making this all work that really could not. I mean not being nearly a expert China Tech watcher. I was actually really surprised doing the research that this was possible in 2015 2016 because it's not even possible in the US today. The third Party logistics networks in China are so mature and incredible and built out to an extent that PDD could do this without setting up any of their own logistics. So the way this worked yeah, was you know, these transactions were happening in this game ified mechanic that PDD was facilitating, and then they would have the merchant would be on the merchants. Even these, like rural farmers, to take care of delivery and logistics. You know, there's tons and tons of delivery both last mile and up above the last mile. Delivery networks and competition in China that that was actually doable. Like from your phone. Oh,

yeah, I read something about this and they're all sort of a p I driven. So they would basically bid out who could come and take the the shipment. The cheapest. And it would all be done. Sort of programmatically

Well, so now I think this is what pin Dodo does. They've invested a lot of tech and building this out kind of lake. You could almost think of it like Shopify eyes Fulfillment Solutions. Now, where Shopify is not doing the fulfillment themselves But they've built out all these AP eyes to manage it. Pingeot do is built that out now, But in the early days, like they weren't even do it, that it was literally just like K farmers. Hey, manufacturers. Hey, whatever. Yeah, it's on. You get this toe consumers. And by the way, yeah, you should probably do that within seven days or you're gonna fascinating points in the algorithm.

That's really interesting. I hadn't realized this as much. I guess this makes I was thinking there were sort of two pillars, but I guess there's three pillars of areas where China is just way ahead here. So the 1st 1 there being distribution, the 2nd 1 being something we've talked about in group buying and sort of social commerce, Social e commerce doesn't exist in the U. S. There's like some Shopify plug ins that will show you like so and so just bought this on this website to make you feel like, Hey, people are actually buying stuff. So I stood by stuff, too, but there's not, ah, you know, multi $1,000,000,000 company.

That sort of made it work and made in an effective mechanism. And you have to imagine it well. And you have to imagine that Corona virus will accelerate that. Because, you know, shopping used to be a thing that we did for fun. And now it's not because we can't go shopping with our

friends and it's a let's return to that in a minute. I think there's a stay direction, oral reason why this is gonna be tough in the US in a way that it wasn't in China.

Hold that then, cause I want to talk about that. But the third being the advancement of we chat Pay and Ali pay are so far superior to the payment mechanisms and money transfer mechanisms that we have here in the U. S. Because of the entrenched interests of the big banks, where we are stuck on not just old technology but like just old thinking about how long money takes to clear and costs associated with. He's associated with transferring money that, like the speed and ah, lack of friction and lack of fees. That money can sort of move around these ecosystems. And China is just far superior. Toe the debit rails here, the A C H rails here. The wire is so it's just it's it's almost crockery the way that you look at how far stuck in the past we are in in that industry here. Yeah, talk to me about why the

social thing won't work. OK, so we've alluded this a bunch of times so far in the upset. Let's finally bring in 10 Cent and what's going on here. So links have been the pillars to making this work our way. There's some cultural stuff. That group buying actually was kind of ah phenomenon in Offline and China. Already, some people are familiar with this. The logistics networks were mature enough to be able to do it. The financial networks were mature enough to be able to do this. But then there's Social. Okay, let's go back to 10 Cent and we tab. We alluded to this. And if you go listen to our episode intense and they made a major strategic decision with we chat around this time, that was very different than Facebook because I was thinking to in research,

just like I remember, there were a bunch of social commerce companies that got started right around the time of the Facebook I p o. I remember looking at a bunch of Madonna. We almost invested in one. Thank goodness we didn't We lost the deal. I remember because the company went belly up because what happened? Waas thes companies were doing the same thing that pin duo duo did with Wechat, which is they were just leveraging the Facebook social graph toe blast out. There was tons of creativity about what you were buying broadcasting it to your friends. People were trying stuff like

buying like Blip E. Yes. Ah, there's like a social network around logging things that you bought so like broadcasting things that you had already purchased that Hit your credit card?

Yeah, even stuff like, um, remember fab dot com. Yeah, which raised a ton of money and flamed out. You know, they were more oven email newsletter buying, but they were also leveraging. You know, the Facebook graph, the open Facebook graph. What happened was Facebook solve that's going on right around the AIPO. They wanted deduce commerce happening on the platform leading up to the I p O. But then they yanked the cord and they shut off all of this stuff and they killed. You know, you could still, you know, Facebook connect in tow anything these days. But they took all the juice out of the algorithm in the feed for any kinda stuff

like this in the same way that they did for music. But Spotify had sort of already Ah, gotten enough distribution using Hey, Well, here's what your friends are listening, Teoh. But of course, they then stopped showing. Here's what your friends are listening to in the Facebook news feed. And so no one could sort of catch Spotify. But what you're saying is no one had sort of leverage the Facebook graph to get enough scale to become sort of Ah, I don't care if you shut it off. I'm already a winner. It was sort of like before

they were over the hump. Yeah, well, you need ongoing. Unlike Spotify, which was a subscription service, you need ongoing access to a social graph to do this. Like I do think it certainly a huge dependency. And they have this in their I p O prospectus and ongoing filings for Pingeot Duo is is tense and we chat like if 10 cent did the same thing to them like they beat kneecapped unless they built their own social network graph, which they sort of have within the app, but not total yet. So why did why did tension and Facebook diverge here? What Facebook decided is they were like, Oh, we're gonna monetize this thing via advertising. Great. We effectively want to control the commerce and business falling through a platform.

We don't want to let anybody else do anything here. We want to make everybody pay a tax if you're going to do this now. We Ted took a really different approach one, I think, because the advertising ecosystem in China in general, Wasn't this mature at this point in time, like it was harder to monetize. There weren't as many advertisers, but also to it was a messaging based ecosystem where advertising, you know, they do have advertising, but it's not. It doesn't make much sense. They came up with just a brilliant, different business model, which was,

uh okay, well, actually let all these startups use our platform and build businesses on our platform. And then what will dio we have all the data? We can see what's working. Well, just pick the winners and will invest in them, Will invest in them, will get equity in these companies. And then we can, you know, put our hand on the scale and tip like the give them strategic access state. Yeah, is new features. Like many programs, one might say that some of their competitors won't have. And then this is what ends up making Pingeot dio.

And this is really the point to sort of draw that bright line of the difference between a platform and an aggregator. And for folks who reads trajectory, I'm sure then has a much more eloquent definition than this. But your Facebook is your classic aggregator there, aggregating the audience attention and then there aggregating all of the advertisers. And they're the choke point in the middle. And they charge the advertiser every time the advertiser wants toe leach you off for a few minutes to do something on your site or APP, whereas with 10 cent, they actually said, Hey, we chat is going to be a platform. People are gonna be developing rich applications on top of this, and Facebook made a few different runs at being a platform, but ultimately being a platform in an aggregator were in conflict. They picked the aggregator advertising based business. They've basically thrown in the towel on really being, ah platform. Whereas Tencent has succeeded wildly not just because being a platform is a good business, but probably more importantly exactly what you're saying David is. Then they're gonna observe what's taking off pick winners and invest.

Yeah, One thing I didn't even realize is almost ah, sidebar, but came up while doing the research. You know, Tencent is one of the letter to shareholders and Tesla's. They bought a 5% stake in 2007 I think 2017. Sorry. Um man has that been a good investment in and of itself? But you might think like, well, that's just unrelated. That's just being a good investor. Deploying capital. Well, guess who has an official account and a mini program on we, Chad Tesla's and guess what you can do on it. You confined superchargers. You can browse and order a Tesla's

eso. They were watching the demand in China.

Well, I don't know if they were watching the demand, but they've allowed Tesla's

to start their way around. Tesla can get better penetration in China because they have proprietary access toe different AP eyes and

job. Yep, So now for something like this for something like Tesla's, like great, this is kind of icing on the cake for something like this. This is literally the core of what makes work. So they were competitors to pin todo There still are competitors. Todo once, in February of 2017 10 sen decides to essentially King make Pin duo duo here in this category, and this is such a strategically important category to them. As we've discussed, they lead 100 $10 million Siri's be in pin todo this company. Remember is like a year. This is 56 months from the merger between PHH and PDD that they lied. Sequoia comes in as well Sequoia China s. They give them a ton of capital, but they also give them wide open access to the platform, including this new critical feature that they've just launched on. We Chad called many programs,

and this is like for folks who have never sort of paid attention to the China ecosystem before. It's not like in the US, where the APP store is the place that you go to get access to software in China, we chat has really created an abstraction layer on top of the operating system where you open, we chat and then you decide what to do from inside we chat, and these days that's my going to a mini program.

It's totally brilliant from like a technical in computer science standpoint, this completely oblivious the need to develop and maintain rich APs across IOS and Android and all of the various other operating ecosystems within China and various flavors of China Only android or shall me and the

lake. I don't think it totally obviates it. I think you do need to build special versions for each operating system, even if you're building a many program or at least hook into the native stuff on its own. But what it did do is make the operating system less important, and so the the switching costs kind of go away. Or you can switch between iPhone and Android more easily because, hey, you've got we chatted all your many programs. No matter what you're you know, hardware

is yeah, totally. Most of these companies, once they regeni scale, they do have native APS and we chat many programs. But in terms of customer acquisition, in terms of loyalty across platforms, it's huge. And so will traveling to this in the show notes as well. There's this amazing graph of looking at PDD and its competitors of how many users they have in their own app. Ecosystem versus In the wee chap. Many program app ecosystem PDS, the only one. They have 233 million users that interacts primarily through the we chat many program, which is a fully featured Pingeot doapp. All the same features are in there, as in the native app.

That's like the equivalent of 2/3 of America, including Children, are pin dodo users only through the many program through each. At

Yeah, they have another 144 million users that primarily at interact with their own native

apse, which is like four Twitter's worth of

user. Yeah, right. You compare that to Alibaba. You compare that to J. D. You compare that to V. I. P shop all of those other competitors. Most of the users are on their own. APS A and B P. Diddy has exponentially more users total and that we chat ecosystem than any of their competitors. And for something like this that is so natively social, that is such a huge advantage. Because remember, all of the buying traffic on the buyer side of the marketplace is coming via these team purchases. It's funny in their filings,

year after year, you know, they talk about how you can buy things individually, and then they say substantially. All of our purchases happen via the team buying platform like nobody buys the individual

price Well, especially now that you can. It's almost silly to call it team buying the fact that you only need a party of two and you can join a party of two with a stranger. It's like you must have just clicked the wrong button or something if you didn't. Ah, just join someone's existing party. And like, if you didn't feel like inviting your friends and making a big party of 10 or 20 or whatever and you just need a party of two and somebody already posted it like Come on, is that really a team

purchase? You're basically like trying to pay more money. Yes. Um, so on the back of this, this is February 2017. When all this happens, the investment and the many program launch from 2016 to 2017 Pin dio dio over three exes. Her revenue to $270 million. The fully transitioned to the marketplace model, they get out of the retailing business. And on the back of that, they file to go public. And then they do go public in June of 2018 less than three years after the initial launch of the company. In less than two years after the merger. Just incredible.

Yeah, and an important point that they make in this This AIPO prospectus is you know, not only did they grow like wildfire, but they hooked into a consumer category that all these other ones overlooked. So you think about the way China has different cities. There's tier 123 and four. And so your tier One cities are the ones closest to the big commerce centerist your four cities or the one sort of furthest out toward the most rural areas. And, you know, wealth kind of goes down from 1 to 4. Well, what Pinto duo did was they were able to effectively reach people in Tier three and Tier four cities and the horrible the also reach a dramatically female audience. I think something like mostly 25 to 35 year old females in these tier three and four cities. So not a super high dollar amount per purchase. But for many of them, this is the first experience with e commerce. And so Pin Duo Duo is their gateway for these customers into the e commerce world. And they're sort of bet is look how fast we grew with these people. We're going to continue to grow quickly, and as they start to accumulate more buying power, they're gonna be purchasing from us.

That breaks up a couple of great points that we haven't test on yet. And this has kind of been one of the narratives around. Pin Dodo for the last couple years is bringing on these more rural users onto e commerce, and that is definitely true. But they're a couple interesting things about it, and I think we're brilliant parts of the strategy. So remember where they started with producing groceries and most of what the items that are being bought on this app are there everyday household essentials. You know who's doing that? It's whoever's kind of managing the household in In many cases, that's that's women. And in many cases, that's women with Children at home. So if you look at the demographics of the at least in the earlier days, um, it's now broadening and penetrating the whole economy. But I think about 70% of the users were women. The biggest age demographic was between 25 35. Yeah, it was all young mothers at home who were using this till, like, save a lot of money on all of their household purchases.

Yep, the other important thing that we haven't touched on yet is that it was browse centric, not search centric. So if you think about e commerce, you know, for most of you who are buying stuff listening to the show, go to amazon dot com. It's Are you gonna smiled at amazon dot com to donate to your favorite charity? You type in the box exactly the product that you're thinking of and absent there being a Corona virus going on. It's almost 100% chances there and ships to you if not in one day than in two. And like the world, is magical. Well, Pinto duos Insight is, you know we're gonna feature stuff that people need, but we're not gonna make it on intent based system. We're just gonna show people,

you know, at first in a brute force way over time, Algorithmic lee things. We think they'd be interested in things we think they might be out of things we think they're friends are, are buying and thus might influence them to buy. And it's basically a news feed of stuff that you can purchase, which is a totally different paradigm and allows them to get away with something that is in my mind a total narrative violation, which is how long to use the phrase long shipping times. So when you buy something on pin Dodo, you didn't search for it. So it wasn't something you like immediately needed. In that moment, it was something that sort of caught your eye. You're like, Oh, yeah,

I'll take that. They can get away with much cheaper shipping that takes much longer and have a totally different cost structure. This is sort of like, very interesting to me as a start up investor. If you had pitched me in 2016 and said, Hey, I'm gonna create this e commerce site, um and ah, it's gonna take forever to ship. I'd be like, Well, that's immediately out. Because the future is overnight shipping, Amazon has changed the world. In fact, Zulily in the US had the same insight.

They at one point where a $6 billion independent retailer but Q B c Q V c Yep, Seattle based. They have the same insight that if they just send out a browse herbal list of deals every morning, then they could get away with long shipping because nobody is intent Base and nobody needs that thing that they were searching for immediately tomorrow. And I think the parallels to Zulily actually interesting cause it's a primarily female audience. It's mostly about the deals, but this linkage. And I think it's a very interesting insight that both companies had Zulily and Pando is when it's a browse based experience and it's not intent driven, you can get away with much cheaper, much longer shipping times.

This brings up to related nuanced points on that one, you know, and that Colin and Pin Dodo talk about a lot is the entertainment value of this. Think again, especially about this demographic. You know, this is the demographic that, in a different age in place in time would have you know, been watching Oprah, right? This is a lot of the same demographic that played and plays thes mobile social games, and so this is essentially a mobile social game, except you're buying your household groceries with it. Super interesting. The other aspect, you know, you bring up the feed.

This has a really important impact for thesis. Apply side of the marketplace A because they don't need as fantastic shipping and logistics times as you mentioned Ben, but also just like tic tac. It means that there's much less entrenched success on the platform. And so new entrance on the seller side, especially via the team buying mechanic Ken start breaking through in getting good volumes. Because it's all driven algorithmic Lee by the feed that pin Dodo isn't putting in front of users as opposed to, you know, the equivalent in social being. The follow model on our subscribe model on YouTube or Twitter wouldn't and then how Tic tac really ended around that with the four you feed where anybody, any good content could break through. It's the same deal here,

right? So the platform could be much more opinionated on where it drives its traffic. And that could be really, really good if you're a supplier on the platform. I mean, it's bad in the sense that you don't get to build that direct connection with audience, so it's less reliable. But when the ah, the eye of you know, what's the positive I of Celeron When when it looks favourably upon you, it could buy a whole bunch of stuff all I want

Think about Amazon. You're selling something. Ah, commodity type. Get on Amazon. You've been on it for a long time. You have a certain scale. You have 10,000 reviews for your product. A new entrant wants to come in and compete with you in that same category, and they have two reviews. Who's gonna get most of the purchases? That's not a problem on Pinto Audio. So on the supply side, who do they start attracting? With all of this demand that they can channel, it's actually manufacturers themselves. We alluded to this earlier in the episode.

What the end of doing? And I think part of what makes the economics of this whole thing work is it's not distributors. It's not retailers. It's not the traditional people who are going to sell on Alibaba and JD, who are successful in Pinto duo. It's the actual factories and manufacturers themselves. They now don't need any branding, distribution, anything like that. They can just go direct onto PDD, even though they have no brand and know that it's gonna work and so that, I think, is a big collapsing of the value chain that they've been able to accomplish

yeah, 100%. I have to pull forward a tech theme now because we're talking so directly about it. I think like one of the big takeaways from this whole thing is that they successfully disinter mediated both traditional retailers and brands. So by not only being entirely Internet based but also social network based, they were able to bring that scale of buyers of demand directly to the brand, which is normally the job to be done by that retailer. So the brand can sort of sell in big chunks to the you know they're wholesalers, and then it can get chunk down smaller and smaller from there, so that the social buying model takes that sort of aggregation of demand and totally eliminates the job to be done by a retailer and allows for much cheaper prices because they cut out that middleman. But then pin Dodo takes it even one step further because on top of that, they created a marketplace that, at least so far, hasn't cared that much about brands and is starting to this year. But because they sell basically household commodity things, that means an individual manufacturer can just list a huge quantity of one thing that they make, not a brand that you know that has to have a suite of products and builds that relationship with the customer,

retired and invested all this marketing. So like they can drive the price down so far because they get rid of the retailer because all the demand can be aggregated on its own through the group buying. And then they also get rid of the brand and just say, Hey, buy this unbranded thing from this retailer and boom, it sells out.

And I think in the early days, especially a lot of the supply on the platform was actually coming directly from manufacturing lines of manufacturers that just had excess capacity for stuff like they weren't booked up enough by whoever. Their these contract manufacturers, by whoever was using them as they had some excess capacity soap into a do it started going to them. And they have now labelled this whole practice see to em consumer to manufacturer. They started going to these contract manufacturers and saying, Hey, we think we can generate a lot of demand for tissues, for genes, for raincoats,

for umbrellas. What don't they preach? Sell stuff sometimes, too, like they even do generate the demand. Take the payments and then they think they go to the manufacturers after that and say, we know you can make

this just like it does make it. That's funny. They may start doing this and the gun manufacturers and like you were pretty Surely you just use your excess capacity on the line. Make this stuff we can pretty much guarantee you're gonna move it.

Yeah. Okay, So this is the positive scenario of that. The negative scenario is, and the rip on this company for a long time now, Long time. It's been five years the last two years, and I know they're taking lots of steps to address. This has been massive amounts of counterfeiting and people buying goods that are knockoffs of big brands. Or, you know, the factories that manufacture stuff for brands are making a few others that air, you know, not putting the name plate on it and then selling it on Pinto Duo for way cheaper. It comes with these downsides that now Pinto duo is having to really invest in sort of anti fraud Ah mechanisms in orderto not damage their own brand as on

and also you know, they've also been a lot of fraud on the consumer side, too. In that one of the ways you know, this company has huge sales marketing expenses. That is certainly advertising that they do. But a big part of it is coupons and promo those deals, and they're very sophisticated. Coupon hacking rings essentially in China on everywhere where people are doing affiliate and keep on fraud pay essentially nothing for items. So, yeah, like there's massive challenges associated with this. But because of these dynamics, they've been able to break into this market e commerce in China that everybody thought was done.

Yeah, you know, we've talked to the i p o a little bit. We're talking a little bit about their efforts today to sort of combat this fraud. There's another big effort today that has been going on, which is breaking into these sort of tier one and tier two cities because the price per item on Pingeot is like six bucks or something. The average transaction size and you look at that compared to any other not only Chinese but American comparable, and it's super low. So not only is the price per item super low as we talked about PDS. Take rate is incredibly low, and so they have

a revenue. What? What is the business model of this company? Uh, that's a good question. Hard to build a big business, even with lots of G M V if you're only making money on the 0.6% take rate.

But what if David, I could tell you that only 10% of your revenue needs to be from that take rate, and you could make 90% of your revenue doing something else.

That sounds like it could be interesting. Now this is what we're talking about is advertising and promotions. PDD has built out a whole, very sophisticated advertising, an ad bidding system similar to Google similar to Facebook and actually really similar to Amazon and Alibaba. To where merchants on the platform can pay and importantly, pre pay for preferential placement in customers feeds of their product response replacement, just like sponsored posts on Instagram or Twitter. You know, whatever. And that, as he said, it makes up most of the revenue of this company. Now what's interesting is like people think this is a big innovation. Alabama and Amazon. I've been doing the same thing for a long time. There, a lot of sponsored products

on Amazon. The originator of this business model is, is ah, in some ways, that classified ad. But in other ways it's Google and, of course, Yahoo before that and overture before that. And so the thing that you mentioned on Amazon is, interestingly, not true. I was running. It took Amazon basically 23 years to layer on an advertising business of any meaningful size to their e commerce business. So the way that Amazon makes money is they charge a 30 ish percent take rate if you're 1/3 party seller. And, of course, they have their own margin that they make.

If they're the retailer and they make most of their money, let's forget it up. Eight of us for a minute. They make most their money that way. Well, only what 34 years ago, did they really start to meaningfully develop an advertising ecosystem that's been growing? It is now about a $10 billion a year run rate business for them, so they're very quickly becoming a major player in the advertising ecosystem

and the like. Of course, all the sponsored search results that you see on

Amazon. Exactly. Exactly. This was not Amazon's play for a long time, and they were sort of leaving this money on the table. Fascinating Me That pin diode whoa! Was like, Well, ah, we aren't making money, huh? Say on these transactions. So we've got to make it somehow and very early in their business, they sort of developed leg number two of the stool toe make money on promoting products. It's also more common in China. So,

um Ali Baba stuff for a long time?

Yep. Yep,

Yep. Which is interesting. I had thought that Amazon started this much earlier than maybe they did. I knew they had pilot projects running around this for a long time, but for sure the decision. Teoh really invest in it. I wonder if it was driven by observing what's been happening in China.

It had to because they've really put their foot on the gas. It went from something like $4 billion in 2018 to $10 billion in 2019. So it's like it's a really fast growing business.

That's crazy. So we mentioned the AIPO a minute ago. It was actually pretty huge. They raised $1.6 billion in the I P o the stock pop 40% on day one. So Bill Gurley would be unhappy about that. Fortunately, or unfortunately, he wasn't an investor

here. Money for bankers and money for people who bought the I P O. Allocation and money left on the table for all the private shareholders.

Yeah, exactly. Colin wasn't hurting too much, though. This is crazy. He still owned 46.8% of this company. Why went public? Yeah. So, you know, one of the knocks we're gonna get to this and narratives and admitted on was what, 10 cent owned? Yeah. So one of the knocks on this company, his Ah, they're not profitable. Their losses,

they're huge. We can get to that in a minute. Just think about whom. If this company had huge losses, how was Colin able to retain so much of the goody? Even though they fundraise a lot, keep that Probably competitive Fundraise is Ah, yes and no. So he owned almost half the company at I p o. That stake was worth $13.8 billion making him the 12th richest person in China again for a company that was essentially founded generously three years before in like, really two years before that, 10 Cent and Sequoia both bought into the AIPO rather than selling. They each put about $150 million toe work buying shares in the analysis. Brilliant. Yeah, because things go pretty well.

Um, over the last two years, the stock is a five X. They did cross $100 billion market cap. Ben is he mentioned in the intro. Their share of the e commerce market in China went from. They were already a 4% of the e commerce market by transaction. Volume had AIPO in 2018. It is now 14%. That has come almost 100% of the expense of Alibaba, which went down from 73% to 62%. So almost all of that share

now growing so the rest of growing pie. But yes, that from share percentage yes,

yeah, crazy. And with that stock run up and this is why Pinto do has been in the headlines recently, the past $100 billion market cap Colin became he's now as of today, the fifth richest person in China. He briefly past Jack Ma of Alibaba, becoming the third richest person in China is now down to number five. He's the 30th richest person in the world. And so, as all

this was his after Bill and and Warren

yeah, he's gunning for them. On July 1st, in a surprise announcement, he announced that he was going to step down as CEO, remain as chairman of Pingeot Duo, hand the CEO role over to his co founder and CTO Li Chen, who had been with him. I think since the first company they were actually grad students at Wisconsin together. I don't know if we, ah, work full time at Google, but I know he interned at Google. So they worked at Google together. They worked on the first company and all the companies all along. So very interesting. What's going on now?

Yeah, it's fascinating weight, but, David, you gotta You gotta answer that question. So how if they were losing all this money, did they manage to preserve so much ownership in

the company? All right, this is a good transition to narratives. The bear narrative around this company, I think, has been Well, hey, this is just a kind of a crazy model. Hard to understand. I didn't understand it at all until doing a lot of research over the last week. This is an interesting reminder that Gap accounting doesn't always tell the whole story. So if you look at the net losses of

thistles quite exciting podcast listeners that you're tuning into, we are talking about Gap.

Okay, so if you look at the net losses of this company, they're huge and growing. But then I found something really interesting. Go look at the cash flow statement. This company has had a huge positive operating cash flow for the last, like three plus years over a $1,000,000,000 USD positive operating cash flow each of the last three

years. What is that? Upfront payments on advertising.

So it's a couple of things that are just totally brilliant pieces

of the model. Let me put something into layman's terms, frankly, for myself. And then you can tell me if I'm interpreting this right? So there is something that's not being recognized as revenue. But they are receiving cash for something that gets to be in their bank account, and they get to be in this really nice cash position, even though on their income statement it wouldn't show up as revenue because they're deferring it to some for some future

purpose. That is part of the story. So there's an interesting, almost kind of equivalent to Berkshire Hathaway and their Geico insurance business, equivalent to the float dollars that Berkshire gets of when new merchants sign up to come on two. The PDD platform. They have to pay in a pretty meaningful cash deposit to be on the platform, and that's to guard against fraud. So if there are customer complaints like kind of the equivalent of charge backs or kind of merchandise or whatever, there's actually some real teeth. And there's been a lot of controversy about this. In an attempt to eliminate fraud, PDD has what they call the 10 X rule that the 10 x the value of the goods gets charged to the merchant as a penalty for committing fraud for counter putting kind of rumor today from the platform. And they have to pay that in a front as essentially this deposit. Well, that cash just sits there, and it's so if you look at the restricted cash line item on this company's balance sheet.

It's enormous, so that's one aspect of it. But that's not the only source of restrict cash. Remember, we talked about how the team buying deals work when customers hit that team buying by button. The cash immediately goes from their account over to PDD, even though the transaction isn't gonna complete for up to 24 hours. And if the transaction doesn't complete it all, then it gets refunded back to the customer. But the cast still goes over to PDD,

so they're holding a bunch of cash that they're not allowed to touch cause it didn't ever get recognized as revenue.

Yeah, and then the third source of this is a source of flow for the company. Is what you mentioned Ben, which is that merchants for advertising for sponsored placement in the feed, the pre pay for that advertising and then it gets doled out algorithmic lee over a set period of time and kind of charged off against the accounts. So all of that, you know, at the scale that PDD is operating nets out to this massively positive or against negative cash cycle in accountant speak but positive in terms of cash flow, where it's essentially an interest free loan on their growth. So now they have raised a bunch of money that they've used.

Can they spend that on growth like give all this restricted cash? It's restricted. But what if the music stops?

Well, certainly right. If they stop growing, then it will go down. The it'll that restricted cash will go down. But because you know money is fungible, even though money is coming in and out of that restricted cash pool, it's large and growing. And so I think, kind of just like the insurance flow business where, like, it's not like Warren can go spend the cash on the insurance flow, but it can be invested. And

so the investment in fixed income or something to get 1%.

Exactly. So if you look at the short term investments on the company's balance, see, it's gone way, way, way up in recent years, and that doesn't even account for the restricted cash. That's their actual unrestricted cash. They've been investing, but I assume that's because they've built out like a massive Treasury Department to be investing all these pools of cash that they have.

You just painted a bear and bull side of that Basically, like the bear case on it is like that. They're just burning cash. You could compare this to the litany of uber era companies in the US that we're like growth at all costs very in profit of more accurately group on, Yeah, burning

a bunch of cash on customer acquisition while selling deals and subsidizing those deals.

Yeah, And what you're saying is that they're not burning cash. They just they have negative operating income, but they're actually doing great on cash.

Cash? Yeah, it's very hasn't been a bunch of coverage about this, but I just found it as I was looking at the company's financial statements. Now it's like, Whoa, this does not add up. Like you look at the income statement and it paints one picture of the company, and then you look at the cash flow statement and it looks like a totally different company.

I will paint the other side of that narrative, which is they're incredibly richly valued because of how fast they grew. So, like, this is a company that sells inexpensive items, doesn't get to participate in that much of the transaction for those inexpensive items. And when you look at this, you know, $100 billion valuation that they have, it's a 23 X revenue. Now, keep in mind that revenue is just the 230.6% of the transaction, plus the money that they get from advertising. So 23 times revenue there they're trading at. Meanwhile, JD is literally 1/10 of that at 2.3 times revenue. Alibaba the close to 1/3 of that at nine x and Amazon at five x.

And so, compared to like other companies with similar business models, you better believe that they're going to do a whole lot more growing the way that they have done, which frankly, feels a little silly because they're already closing in on Alibaba, which is sort of the upper limit of how many users you could have in China buying things. Or they've got to get much better at monetizing each user. And so what they've been doing is trying to move into Tier One and Tier two cities in addition to this three and four, and they've done that successfully toward the end of last year, they announced that 45% of users air now in Tier one and Tier two cities, so they sort of match the breakdown of what sort of demography and China looks like. And the question is sort of how Why're people in Tier One and Tier two cities getting interested in this? Well, enter the subsidy scheme so they're listing things like iPhones on the platform now. And so this is something that people in Tier one and Tier two cities are interested in. But PDD is going to manufacturers and saying,

Hey, can you list it for, like, 15% off? Because that's kind of that's what people really expect on our platform, And the manufacturers kind of look at him like they're insane. And then PDD says, Well, we'll cover the difference. And that is where all their cash

is going. Yeah, and so that's why I know we were in a little bit of arcane accounting details. They ever. That's why I think this is so interesting looking at their cash flow statement. Yes, they are subsidizing all this. They're effectively spending all of that money on customer acquisition, but their cash flow is positive. While they're doing it. Even with all those subsidies last year, they generated over $2 billion in operating cash flow. So if you think about the valuation in cash flow terms, this companies trading at, you know, roughly 50 x past 12 months operating cash flow. That's not a crazy valuation.

And this is why, Ah, you need to look at all three financial statements in order to really understand a company that what's the phrase revenue is effect and profit is an opinion. I think that that sort of extrapolates a lot further, where you can sort of have a different philosophical viewpoint on a business based on the way that you choose. Value it. Yeah, totally. I know we're in narratives, but I want to give just for listeners to keep a little saying here. I want to give some comparisons between where the company is today. So you understand the scale that their at J. D. Tao Bao and Amazon just to sort of understand the relationship between the two. The mega giant in China is Alibaba, and their consumer e commerce in China is ah is team all in Tao Bao, the G M V on those platforms are close to a trillion dollars.

That's three X's Amazon's G M V. That is a trillion dollars of goods or gross merchandise value move through team. All of how about now they're able Teoh capture 5% of that as revenue. And so last year on those two platforms, team on Taobao. Alibaba actually did $50 billion of revenue. So Ali Baba generating $50 billion of revenue. They're very profitable. They have an operating margin. So not gross margin, but operating margin of 18%. This is a little bit mixed up in the only cloud and all that cause. It's not just the retail business, but the way I'm trying to paint this. Is there a revenue juggernaut? And they're very profitable.

Now if you compare that where we are with Pando duo, you know they have 145 billion in G M. V. So, like they've made a dent. I mean, that's what 1/6 17 something like that of Alibaba. Just you know, in the last five years they've they've come up to be able to do that, but they only do a little over four billion in revenue. And you know that that effectively means they're capturing about 3% of all the G M V flowing through the platform as revenue, either in the form of these advertising services or an actual 30.6% commission that they get to take. So I think it's interesting to sort of compare those two businesses. The other interesting way to compare Pin Dodo is that this 4.3 billion in revenue that they dio is only 5% of JD's revenue, but with 1.7 times the users.

Wow, that's back to that dynamic that you're talking about earlier of the average purchase price of kids on the Platform and Velocity,

Pingeot has 490 million monthly active users. So 1.5 America's worth of users they actually 630 million active buyers. When you look at the number of people that are on the mini program, it's sort of the sum total of anybody who buys through Pinto Duo through any platform 630 million so close to two Americas. You compare that to like a J D. J. D. Has a nest emitted 290 million monthly active users. So that's, you know, call it half of Pinto does users, but you know, they're able to generate 83 billion in revenue because 28% of G. M V gets captured as revenue. So it's like, would you rather be JD and have, like,

half the users? Or would you rather be pin diode? Whoa and have, you know, way more users? But like what it would be looking at here, 5% of the revenue that generates.

Yeah, the most interesting question is like all ah, valuations of companies. It's about the future, not the past. And what do we think is gonna happen? Teoh. All of those users and transactions, especially as PIN Duo duo starts trying to compete more directly for the same types of users that JD and Alibaba and particularly Team Oh, are their homework's?

Yep. Well, before we try and move into the analysis here and answer some of those questions, we'd like to think Bamboo, the official sponsor of the analysis of Season seven. Bamboo is one of the top growth marketing firms in tech. They have supported world class growth programs for startups like all trails Saletan, friends of the shore over dot com and many more so whether it's paid search paid Social creative production attribution or Product analytics. Basically, all of bamboos growth offerings have the same objective. Helping tech companies improve their payback periods and the health of their long term cohorts, which sounds jargon e. But if you just listen to the LP show with Sarah Tavel like, that's kind of the whole ballgame is figuring out how to do that. If you are a start up with multi $1,000,000 growth targets ahead, or an already big and successful company looking to just invest smarter, the next quarter were year or whatever.

Our friends at bamboo will make a great extension to your growth team so you can click the link in the show notes or goto grow with bamboo dot com to learn more. All right, David, we opened up some questions there of who would you rather be? You know, pinned O J D team all Tao Bao we gave some comes to Amazon. Let's movinto like this what would have happened otherwise and then try

and answer those the most interesting. Think 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 U S. About how open they were gonna let their platform be too big business is being built on it and particularly commerce businesses. Now I think it's extremely unlikely that would have happened. Like I think they made the strategically correct decision given the operating environment in the U. S. At the time of going with advertising.

And we should say Facebook generates $70 billion a year in revenue, but they get to keep most of it. So like pretty good decision. Pretty good

business. Yep, yep, definitely pretty good. I'm very fascinated by this 10 cent decision because then they really have gotten to see an invest in all of these companies that are getting built. I mean, let's just take PDD and mate Juan and Dede. There's the big 3 10 10 is, I believe, the largest shareholder in all of them, the largest or one of the largest. Compare that a few years ago, when they started down this strategy, you know, they were Ken and economic with Alibaba and Baidu and very unclear what the street IQ future the company was gonna be. And now fast forward to you know, nobody cry for certainly Alibaba, by do it, I think has fallen on somewhat harder times. But tension just seems to me to be so much better strategically positioned to capture all of the Internet economy happening in China via this strategy.

There's some work to be done here to compare tense and as an investor to Softbank as an investor, because my guess here is that they actually did a better job at Softbank strategy than Softbank did to go and basically back all the unicorns and being the most successful unicorns as they grow from $1,000,000,000 companies toe $100 billion companies, I think they're in, like, 15 to 20% of the unicorns. And they got in early. I would guess they made 12 $15 billion of course, in a liquid value. But just from this investment in PDD, like I think they've done that 456

times. Yeah, it reminds me of ah, of Sequoia and ah are part one episode about down Valentine and his quote that when he started Sequoia he had a strategic advantage. He knew the future right. And that was from knowing all the road maps from Fairchild and what all the applications assembling conductors were gonna be. There was the same thing for attention here, like they knew the future in that they controlled the distribution form that all these businesses were being built on. And now, with many programs, not just the distribution platform, but literally the operating system so they can see what's taking off. And then after they invest, they can start to put their hand on the scale a little bit and strategically help their chosen companies.

Yeah, whereas Facebook thought they were kind of making the same decision where they'll benefit from the whole ecosystem when APs were booming and Facebook just made, ah, sinful amount of money on app install ads where they're like, we don't even have to have an opinion or making investment. We just make money every time somebody goes and installs an app. And the question is, is that going to be as enduring as 10 cents method of doing it? Because Facebook's is more efficient, they don't have to invest. And they also don't have to have an opinion. Yep. I like that. You took what would have happened otherwise. There I was thinking, since this episode's gonna be about the AIPO and grading the I p o like what would have happened if they didn't aipo? I mean,

until your comment there I was going to say they were screwed because I thought they desperately needed access to cash. And I think they've over the course of, ah, the AIPO and three subsequent debt and equity offerings they've now raised in their $5 billion or something since the i p o. R, including the AIPO. And so this is a company that does need cash to grow. It didn't need cash to grow originally because it was just growing like wildfire on we chat. But now they have to invest dollars to make this thing grow and big dollars like I think they have 1.5 or something $1,000,000,000 reserved for subsidies this year. To me, there was this really danger of grow big fast, but not be able to effectively monetize their user base if they weren't able to sort of keep growing into the more valuable use it race. So I do still think that's true. Even with your comment about them having really great cash flow dynamics. But I would say this company needed typo or go raise like a Softbank round were more likely a 10 cent round that sort of simulated on AIPO around the time that they did.

Yeah, it's interesting. At least one of the equity follow on rounds that they did equity races after the AIPO. I believe 10 Cent bought most of, or at least a significant portion. So they continue. Teoh invest salaries into the company even though they're already the largest shareholder.

It's awesome, all right, so we get into play book.

Yeah, let's do it.

Okay, so there's a thing that's like a splinter in my mind on team purchase that I'm trying to apply to, Like, how do you use this lesson in starting a startup where it was both a novel product feature that had, like, perfect product market fit and it was an unbelievable mechanism for growth? It was like a native growth feature that was intrinsic to the value from the product itself but also provided this incredible sort of extrinsic growth strategy. And I think that the way to misunderstand growth hacking is to assume that you can, you know, stick it on afterwards. And I think this is like the best example of growth hacking where the product itself was vier ality.

It's so rare to be able to find examples like this, you know, maybe instagram or we chatter whats app like the messengers and social type platforms could fit this bill, you know, and I think the maybe one of the other to go back to narratives a little bit. One of the other bear cases against this company is just argument that people have said this before the with social commerce companies, that there was this inherent viral nature to their products. And the steam always runs out of the engine or has in the past, and and I wonder if that's, you know, it could legitimately be still an open question with PDD, especially in these categories they're getting into now is a really about team buying when you're buying an iPhone or is it about them serviced, rising the price

right? It's about them subsidising the price. I'll offer an opinion on that.

Yeah, it seems pretty clear.

Yeah, I mean it straight into classic. I think a classic. What got you here? We'll get you there like now. If they're a scale player, team purchases sort of less of a driver. The business, though I do think that like many games and stuff and there are a driver, even if you don't want to buy something today, there's something for you to do in the app, and there's rewards that come and discounts that come with doing it. So you may as well open the app and play with it today.

Yeah, we don't have time to talk about this, but this is, I think, one of my favorite features about it that, like there's essentially a Farmville clone in the where when you've finished growing your tree, they actually ship your box of fruit.

Another big playbook thing that we have to call out here is, you know, thanks Toa Hamilton Helmer, for sort of providing us a framework to think about this. But recognizing a counter positioning opportunity to build an amazing moat around your business and and with PDD, Colin realized that with the newly launch we chat many programs, there was an opportunity to leverage the we chat social graph free commerce And not only that, but he realized that it would be defensible from the largest competitor out there. Any commerce Alibaba. And since Alibaba competed with 10 Cent and basically wouldn't use we chat platform. And in fact, I think Ali Baba actually banned their sellers from encouraging the use of we chat and made them use their own chat platform. Of course, there are others who could compete with Pando on we chat. But Colin at least had that sort of like wide open lane versus the biggest incumbent. And this is that classic example of counter positioning since in order for Alibaba to see that pin dodo strategy was working and then copy them, they would have needed to do serious damage to their own existing business to convince 10 sent to sort of allow them the amazing native functionality that they were providing. Teoh, Pingeot and Alibaba can't take advantage of the viral effects

on we chat. I think there might be another structural reason to toe why they couldn't respond, Which is the payments layer. We check pay and alipay or mortal enemies, right? And was it was alley popover really gonna let people buy stuff on Taboo and team all using wee Chap A. When they're fighting tooth and nail against Attlee

pay. Yeah, that's a great point. I hadn't I hadn't thought about that, either. It's a deep mode, at least against Ali Baba, not against other startups, but definitely

against them could be wrong here. I don't know enough about the supply side of thes platforms thes e commerce platforms in China to say, but I think they might have been able Teoh also build a network on the other side to a unique network that's defensible of suppliers. In that I do think that a good portion of the supply side for PDD is different than the supply side on JD and Alibaba in that it's these kind of contract manufacturers and remnant capacity on their lines. And I think a lot of these contract manufacturers, or even just converting to now being fully dedicated PDD manufacturers. And that's a defensible mode in that, like if you get a whole bunch of manufacturers on the supply side, todo give you a meaningful part of their business and you're deeply integrated via the sea to M initiatives that they have, where they're giving them data there telling them, you know what types of excuse to produce in what quantities. It's gonna be really hard to switch off of that.

All right, that creates. Yes. Um, walk in. Cool, right. I've got one more for playbook. Go for, um, and this is a negative one, like, I think the ones we've talked about so far, like go do this if you want to be like window. But the thing that they're experiencing now is diminishing marginal returns. So they obviously grew like, incredibly quickly to Tier three and Tier four cities,

then spread like wildfire through we chat groups. And they had basically a product that with perfect product market fit for those users. So there was cheap goods. You buy it with friends, there's no real brands. It could take, well, the ship. But it's so cheap and it's great and it's fun. But once they acquired all those users, every user after that costs more money to acquire. The product isn't perfect for them. They don't naturally hear about it. And this is something that I hadn't fully wrap my head around until recently. X. I always thought well over time as you build brand customers would get cheaper to acquire,

but especially with like, ah, great example is any of these sort of like D to see products now that have amazing organic growth at first? Because they find their niche, they find that community, they find the obsessed people, then you've run out of them and you have to switch to a traditional customer acquisition strategy that costs money. It really makes you understand and give religious about what is your obsessed segment addressable market, the people for which you're gonna have to pay incredibly little money to for them toe like your thing cause you can spend tons and tons of money and acquire a lot of people for your thing. But your company will be the most valuable if the people who are crazy about your thing that you have to spend lots of money to reach our themselves responsible for a lot of buying

power. Yeah, yep, ah, 100%. And this is reflected perfectly in in this massive subsidies. The PDD is having the spent don't now to attract those marginal buyers.

Yeah, and I guess the point I want to make here is the core offering that they had that spread like wildfire and they didn't have to spend a lot of money to acquire those customers. It was huge, and they do make tons of money off them. So, like very successful business in terms of finding that vier ality before they hit the sort of nearly fall off where diminishing marginal returns start to happen. But that is the place where they are now.

One real quick playbook theme I want to talk about here is, um, we've alluded to a little bit with agriculture and produce with PDD. There also a good example of dislike. With every successive generation of Internet companies, you can penetrate further and further into areas of the economy that you wouldn't have thought the Internet could penetrate into before literally rural farmers growing fruit are selling at massive scale on PDD.

Yeah, it's pretty crazy. Yeah, all right, David, I want to move on to grading. Yeah, well, let's do it. So before we dive in and issue our grades here, we want to think Perkins Kui, the official legal sponsor of Season seven of acquired now longtime listeners. The show No Perkins Kui is a premier technology focused international law firm known for providing high value strategic solutions. An extraordinary client service to businesses ranging in size from startups. Toe Fortune 50 Companies clients rely on Perkins Kui for Council on Company Formations, I P. Protection and Enforcement financings,

including I Pose and Mergers and Acquisitions, among other areas. They also advised veces in fund formations and investments and represent their portfolio companies throughout the arc of their growth. To learn more, visit Perkins co dot com or click the link in the show notes. Okay, so greeting. I guess what we should do here, even though it's early, is grade the AIPO like how good of a use of proceeds was the I. P. O. A good idea. Do they make good use of it? Um and then answer a secondary question that we teased earlier. Which is where do you want to put your chips right now? J d Taboo team all, or Pingeot?

Oh, I love it. I love it putting our money where our mouth is on the great for the i p o. For sure, in a again early, grating Pete of things could change. Markets are volatile, and all that and certainly this is a incredibly intensively competitive space e commerce in China. But it's up almost five accents. The AIPO. They've certainly put that capital to good work, I think building value even with their massively beneficial cash cycle that they're generating operating cash from. And I think it's also really interesting that you know, Tencent Sequoia, where buyers in the AIPO a tense and at least I don't know about Sequoia. But least Henson has continued to be a buyer in secondary offerings along the way. Just goes to show the incredible potential that uninformed insider investor like that who also controls the main platform on which the company operates, think there is still an upside to be had in the company.

You're gonna hurt bad here because you think a good information. And if they're putting money in, do you have a good lead?

Okay, I'm in. Yeah, exactly exactly. But you know, people do tend to put their money where their mouth is, And I think those air, like, literally the insiders I don't think have sold a share here. The major insiders and I think that speaks volumes.

Yeah, I guess a is the right thing. The way I want to get analytical on this would be for the shareholders who decided to put their dollars to work in the I. P. O versus other things that they could have put their dollars to work into. How good of a decision was that? And that's fairly cut and dry. I mean, it's basically like you said a five x over two years, any day of the week. I will take that. You know, it's it's much different than the sort of crazy upside that you see in these acquisitions, where a dollar of Facebook's cash put into instagram was a much, much healthier return over the years. But maybe we should go with a separate greeting scale. Four.

IPO's basically like if you invest in the i p o. How good was the ensuing sort of decade after that? Because I think that's really the way the way that you should think about it is for the new shareholder. I think in the past, we've often thought about how good of a use of the cash raised Was it like this? Yeah, which in this case, looking at that perspective, e think that's the point you were arguing earlier. They've They've made very good use of it. I don't have Ah, I have no idea how they could have made a better use of it. But the thing that does sort of

yeah, that's not really the interesting analysis there. The interesting analysis is like if he bought into this I p o and you are still holding the shares today, Obviously, you're feeling good, but like actually even more interesting is like, let's let's think about say, you bought into the I p o planning to hold for a decade at least. How good do we think? A decision that was

right. I mean, that gets into this question of which of the three horses do you want? You want JD pinned o r tell bow of those who have benefited from Corona virus pin diode. Whoa has benefited much more than the users that JD or ah or Taboo team all have added they have taken meaningful share away from Taba team all Ali Baba. The bet that you have to make is that they're going to overtime do a good job of monetizing this so far valuable but not that valuable user base. I guess the structural question is like is the things that they're really good at this Gamification retention vier ality team buying Are those things gonna help them acquire the future users that they need to acquire and extract more dollars from their existing base? And I don't know if the answer to that is yes.

Yeah, I think I think there's definitely a big aspect of what you said a minute ago. Ban of, like, what got you here isn't gonna get you there going on in the company. So I think the question is, do they know that? I think they probably do know that are they keep a ble of building the next act. And this is actually a case where the most recent news is a little consumer CEO transition. Yeah, that's that's meaningfully concerning.

Yep. Like if Tencent has really been buying up, can they put their finger on the scale again? Is there some more nuclear move that they can pull like I don't? I think they sort of religiously don't acquire the companies that they that launch on their platform because they don't want to make that seem like what's gonna happen to you and make you potentially scared of them are not scared of them. I don't really need to, Right. If they threw all their weight behind PDD cow, could that meaningful e change the trajectory?

Well, and here's another interesting thing. I didn't dig too much into this, but there are articles. I believe you. Tencent has been testing competing in this space on their own natively like spinning up a social comments platform within 10 cent. You know, they're all sorts of reasons why they could be doing that toe. Learn more experiment, all sorts of stuff. Facebook. To talk about them is another example. They're building new stuff all the time that they don't really intend toe invest behind. But if they were to decide Teoh make this a big initiative. Well, that would really suck for doing so.

Yep. All right, to get to give an answer cause we could waffle on the fence forever. I am going to say I'd rather be Alibaba like I'd rather be Tao Bao, especially at these prices. That's a big part of my analysis. Is PDD so freaking expensive? Curious

where you fall down on that? That's interesting. I'm hesitant to say 11 reason I'm hesitant to say is I don't know enough about JD about what their strategy is and what a bowl and bear case for JD would be. Certainly it seems like they have the most attractive kind of unit economics and

the space. I mean, they look like Amazon, and they have a very affluent

base. Yep. Yeah, I wonder. OK, so this is a little bit of a cop out. I will pick a horse in a minute, but I actually wonder thinking about this a little bit. If this might be a case where the right move is just to buy shares in all three figure like this is such a rising tide. How many think? Yeah, e commerce in China is growing at something in seeing, like a 30%

caykur. I mean, if it if it went from ah 6% to 24% over the last eight years, they went from behind the U. S. So I think ahead of the U. S. In terms of penetration,

right? So it's kind of like what's the opposite of rearranging deck chairs on the Titanic? Like maybe rearranging deck chairs on on on a Falcon heavy like it doesn't matter. You should just buy shares in all of them.

I like that.

But I do think in terms of it's pretty crazy that PDD essentially took 10 points a share from Alibaba in the last two years. I think I would bet on PDD. I mean, I'm bias because I just did all the research on it, but I think I would bet on them like that's pretty damn impressive. A team that can do that, I think, is a team that can figure out a second act with the big caveat of like, what is going on with Colin? Is him becoming chairman? More like him? Becoming like Bezos is essentially chairman of Amazon. You know there's a CEO of a WS, and there's a CEO of Amazon retail and Base. Us is sort of group level CEO. Is that what's happening? Or is it like Colin was? Account man, I made a bunch of money and having

right now with a lock in these gains and yeah, let's get a question. I suppose that what matters is how if he sells a lot of the shares

or not, Yeah, which he did transfer a bunch of the mountain. What I don't know is how much of that was sold versus he had said from the gecko, even in the i p O prospectus that he intended to create multiple charitable foundations. Kind of like Jesus. So I think that was part

of the Communist. He has such a thing for basis. He even does the thing where he re publishes the original shareholder letter after each PDD shareholder letter. Which, of course, they have been to since they idea all to attach. Is the 2018

after that? Yeah. All right,

there we have it. Let's bring it home, David. I guess we've got a bet going. Um, and we'll have to revisit this at some point.

This feels like a bet where the odds are in your favor to just be on one of those horses.

I agree. All right. Carve outs. So ah, listeners, I have to. David has zero right now because he's been steeped in in research and reading. Ah, Maurin, the Siris of previous carve out which was the dart a doctor for Stephen King. So I'll give my 1st 1 first and then for the 2nd 1 I think they would make claim it. So for the 1st

1 it's team buying on the carve outs.

That's right. That's right. I'm only halfway through this book right now, but it's excellent. And if you liked our space X episode, I think you will love This book is called How to Make a Spaceship. It is the story of the X Prize and how that came to be and how the sort of amazing ah idealist behind the X Prize sort of ah grew up during the space race and started all these incredible organizations and and and sort of was just a force of will to make it happen. And I think I'm like, exactly halfway through. But it's been thrilling so far. It's just a really good if you kind of like the like, ah, shoe dog. It's almost leads like thriller bio book. It's just like it's exciting and you never quite know what's gonna happen next. And it's well written and well, Story told,

so I highly recommend it. The 2nd 1 is amazingly, I had not read this before, but I finally read Creativity, Inc

Oh, Red, How would you about red that

I know fact sinful that we didn't fix our episode, and I never read it so good. It's so great. And especially in the context of startups with Pioneer Square labs, starting startups over and over again is a creative process that also requires structure and repeatability and efficiency. And I think a lot of us are in jobs that require both creativity and repeatability and efficiency. And so, first of all, it's cool is a Pixar nerd because they give these behind the scenes glimpses into rewrites of movies so you can find out what was gonna happen in up and then they rewrote at or what was gonna happen in the original toy story. And they rewrote it, and some of them are famous. But some of them are like less famous, just cool Easter eggs. But also there's just great principles in their of like how to run a creative organization in a repeatable way. It's just a great freakin read.

I would love to go back and re read it. Having read seven powers now and particularly the corner resource power and the example of the Pixar brain trust that the idea of that as a cornered resource, that group of people in their collective experience, I wonder, how is any of that coming through

in? Yes, there is also definitely processed power where a lot of people have tried to copy Pixar and hasn't worked. And it took Disney actually acquiring Pixar and having their leadership come in and turn Disney animation studios in large part into a different Pixar. There's important ways that they left it on its own and let them sort of have their legacy, but like a lot of the processes they brought over from Pixar. So there's definitely some process power there, too.

Yeah, and it does feel like even with that and sort of that reinvention of Disney innovation, that there is kind of a ghost in the machine in Pixar and Now and Disney Animation of Lake. This is, I think, what you would Hamilton talked about in the process power of like You can't totally quantify, you know, with the magic of the Teoh Toyota production system like you can have lots of people come in and try and learn that you can read Creativity Inc. But there's just something special in that group

a great point. All right, ready to bring home? Let's do it. All right. Well, if you are listening and you are not subscribed and you like what you hear, you should subscribe. And if you want to become a limited partner, subscribing gets you access to our bonus show, where we dive deeper into the nitty gritty of company building. Topics in real time, of course, also are newly added Book club, and our monthly LP calls on Zoom to join. You can click the link in the show notes or go to glow dot FM slash acquired and all new listeners get a seven day free trial. If you want to discuss this episode,

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