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Thu, 16 Jul 2020 19:51

We kick off Season 7 with a bang: Pinduoduo, the incredible five year-old Chinese mashup of "Costco and Disneyland" (as self-described in their IPO prospectus) which recently became the fastest company ever to pass $100B market capitalization. What makes PDD so special, and how were they able to enter a market that everyone considered "already won" and disrupt massive entrenched competitors Alibaba and This story is chock-full of lessons that apply not only to China tech, but to high-growth company building and investing everywhere.

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We'll see you next time. Ooh, let me retake that. Oh! That might be our teaser code. Oh, that sounded terrible. Welcome to season 7, episode 1 of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we are talking about, and I quote, from their IPO prospectus, an exemplification 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. Ben, it's like you're reading from my history and facts there. I think you would have pulled that too. Unbelievable. Like, absolutely unfathomable. At first, I thought Costco and Disneyland was going to be the hook and then I realized all the stuff around it is actually far more absurd. So listeners, of course, we are talking about the Chinese e-commerce company, Pin 2, 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, three years into their existence. They are the fastest company ever to a hundred billion dollar market cap and they've nearly tripled in value since the coronavirus spiked globally mid-March. So almost all of that market cap, or two thirds of that market cap, created in the last few months. I think it must be the distributed network of intelligence agents there. It's certainly the intelligence agents, yes. So now, you might be saying, well, Chinese e-commerce, I thought that was already sort of a subtle frontier. I've heard of Alibaba. Or at least. Maybe even JD. And we haven't covered JD yet on the show, but also at e-commerce, powerhouse in China. Well, apparently there was an opportunity remaining. There was a missing segment that was not being addressed by either of those two companies and it is enormous. This episode felt very timely, not just because of that hundred billion dollar milestone for Pin 2, Duo. But also because e-commerce in general is 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. Yeah, hopefully your Amazon shareholders. Yeah, no kidding. Or Seattle residents and benefiting from all the side effects of that. And of course, China, once behind the US in their e-commerce penetration, I think it was only 6% of retail was done online in 2012 is now already at 24% of the total retail spend. A lot of that accelerated here in the last few months, much like the US penetration, which is really driving this crazy run-up evaluation for Pin 2, Duo. So I do want to give a shout out to Ho Nam in the Slack, who inspired us to do the episode with this comment. A hundred billion dollar 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 aligning to this episode, the more I dug into it, the more I was frankly shook by what this company looks like. Really all I knew about this before was their name. It's been fun spending the week doing research and learning what is this beast. Like every story we tell here on acquired, you start thinking it's one thing and then you take 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 survey at the end of the last season. So entries are now closed. As for the winners, we emailed you if you are one of the lucky ten to win the year subscription to the LP program and the winner of our AirPods is Amy L from the Bay Area. So congratulations, Amy and we will also be sending you an email to follow up after this. As always, if you love acquired and want more, you should become an acquired limited partner. Our most recent episode was with benchmark general partner Sarah Tavill, part of our VC fundamental series. And she joined us to talk about the fundamentals of consumer investing. If you want to join, you can get access to that additional content plus our book club and our monthly LP calls on Zoom. You can click the link in the show notes or go to slash acquired and all subscriptions come with a seven day free trial. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder. So we knew there's a natural fit. We know the host of founders well, David Senra, hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akio Maria before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders and to acquired because all of history's greatest entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest such a printer to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's My Hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas and now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player, lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. And now over to you David, to take us into the story of Pinduodwo. Yeah. Well, Ben, you stole some of my fun. I think we've talked about on the show Ben and I don't compare notes before we record so that we keep our, you know, reactions authentic. Church and state and all that. Yeah, exactly. So my lead in was going to be that quote from the IPO perspective of the Disneyland and Costco and the distributed intelligence agents. What is going on? Well, I mean, at least it validates like we're on the same wavelength. Yeah. And that actually was the interesting bit to pull out. People pulled it out. I definitely think there could be a lead in here too that's like, what if you had a gaming company that got smashed together with a company that sold fruit to try to make e-commerce fun and then you could shop and buy stuff with your friends? Like what if? It's funny you mentioned 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, Tencent. So if you remember back from our old Tencent episode, which I went back and listened to before, before recording this, it's like naval gazing research. Yeah. Seriously. At the point where one of our sources for acquired is acquired. Tencent if you recall from that episode, they are in many ways in such a dominant position, not just in China, but around the world as the owner and operator of WeChat, which is the dominant social platform in China, but also major shareholders in Epic Games, which makes Fortnite. They're one of the largest shareholders in Tesla. They own League of Legends, major shareholder in Snap, in D.D. and Made to Want Dianne but I think you can make an argument that there now I think it's about 17% ownership that they have in Pindu Oduo is maybe their most important stake in the whole portfolio because if you recall from back our old episode, what were their weaknesses? The flanks that were exposed for Tencent were to bite dance most specifically in terms of its social dominance, who of course makes TikTok, of course makes TikTok and TOTAL, but also Alibaba and Alibaba's massive Alipay and financial platforms in China. If you rewind back to 2015, 2016, 2017, these are major things that are on Tencent's mind right as the magical unicorn, deca corn, centric corn, Pindu Oduo is being birthed. So keep that in mind as we go. Okay, so let's start as we always do with the founder, Colin Huang. He was born in Hangzhou in 1980, his in Hangzhou, China. His parents were factory workers, neither of them finished junior high school. So they were not even like maybe sort of 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 in China tech fans might be smiling here because of course what other very famous China tech entrepreneur was born in Huangzhou to lower middle class parents a generation earlier, that would be Jack Ma, of course founder of Alibaba. The parallels are going to be quite apt here. You mentioned the generations for folks that haven't listened to any of our sort of China series before the way to think about sort of China tech companies is of course there's the big three from the previous generation of Baidu Alibaba and Tencent. They sort of controlled the ecosystem. They were the king makers. They were not only your Google and Facebook's, but also your benchmark in Sequoias. They were both the VC and the sort of Fang powerhouse of China. The companies that we've sort of been seeing this generation, the Xiaomi Pindu Oduo are the ones that are sort of rising up to become the next generation. And you can see those big three then fighting to participate in the success of this next generation. Yeah, it's such an interesting different ecosystem from US tech. So when Colin was in junior high, he loves math, like really loves math and he must have been quite good at it because 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. He ends up winning a medal in this Olympiad and one of the other prizes for how he placed in the competition was he gets an entrance exam ticket to apply to the Huangzhou 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. And his parents are like, no, no, you got to go take this exam because it turns out it's not just a foreign language to go school in Huangzhou. 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 was probably a sixth grader at this point in time to convince him to come and roll in the school. So he does go. He does very well. He ends up going to the also very prestigious JGN University where he studies computer science. He interns while he's there at Microsoft in Beijing. This is kind of crazy. He makes more and 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 interns at Microsoft in the US in Redmond and he makes eight times what he made that summer in China in the US. So here's this kid, unlike Jack Ma who stayed in Wangzhou. I was super fascinated with English and America. Worked as a translator and a tour guide but didn't get good grades stayed there until his 30s. Here's Colin. He couldn't care less about English and America. He just wants to code. But he comes and he makes tons of money. In the years that he was there, those early 2000s, he would have been early enough in the Microsoft internship program where he would get to do the thing. He built Gates's house and go to the barbecue and meet Bill personally. When I interned, it was like 1500 interns per summer or something by the time I got through. So that was no longer 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 Chinatek founder, Ponimah. Apparently Colin's hanging out on the internet. Famous net ease founder, William Ding, posts online in a forum looking for help with a technical problem that he's working on. This is how the legend goes. Colin responds to this, starts interacting with Ding and they kind of become friends. Ding takes a liking to him and becomes a mentor. And eventually introduces Colin to an even more famous Chinatek entrepreneur, BBK electronics founder. And also I believe one of the founders and net ease to one young paying. He would go on to found Oppo and OnePlus and like lots of big, big, big modern Chinese technology companies. So he's got some like heavy hitting mentors, super heavy hitting mentors, even when he's a college student back in China. He graduates probably on the encouragement of these mentors. They encourage him to come over to the US and do grad school and computer science at the US. So he goes, Ben, Ben, you're going to hate this. But he goes to the University of Wisconsin and Madison for grad school. That's fine. As long as it's not Michigan, that's great. Go big 10. Great. Great. Big 10. There we go. While he's there doing his masters in CS and Madison, he continues to intern in 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 startup down in Mountain View. They're doing more interesting things. It's called Google. Maybe you should see if you can apply there and get a competing offer. He just keeps hitting the lottery over and over and over again. I don't say that to imply luck, but like he finds his way to the right place, right time over and over again here. Totally. So he shows up. Of course, he gets an offer from Google. He graduates from Madison in 2004. Shows up that summer, six months before the Google IPO. He's one of the first couple hundred employees at Google. He starts as an engineer and then pretty quickly switches to being a product manager. The company goes public. He makes a ton of money already. It's like he's just making money without even trying. This is the theme of his life. We'll get there. Yeah, we'll 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 band? 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 to launch and then they decided not to do it because they would have had to censor the results. It was all tied up when the don't be evil. Yeah, I certainly remember that. I didn't realize it never launched. I thought it launched and shut down, but it never launched. That's actually a good question. If it did launch, then they shut it down. It was a big public brew. And to this day, there's no Google search in China, right? Yep. Only in Hong Kong. There really are and continue to be dividing two internet. Yeah. And this is like, talk about skipping ahead to what would have happened. Otherwise, the great firewall was not totally in place yet at this point. Like if history had turned differently and Google had done this, like so much could be different about a Chinatake, 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 at what you texted me, were you like, did you find it in a YouTube video? Because I see like the YouTube bar or the bot. 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 linked to it in the show notes. Also in 2006. So Duan, 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. We'll find some way to link to it. There's an amazing picture of Colin and Warren Buffett. Warren's got his armor around him. They're 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 Duan paid it over $600,000 for the lunch. So for that price, he should get a pretty good bottle wine. So within that couple of years span, we speculate he met Bill Gates. Definitely met Warren Buffett. We can see the photo with his armor around him. His mentors were Duan Young Ping and Pony Ma. Or at least he sort of interacted with them. Certainly interacted with Pony and had Duan as a mentor. I'm William Dink. He's just going down the list of people who have over $10 billion in net worth. It's pretty incredible. Again, for somebody who his parents never finished junior high school, that's crazy. I mean, these are the types of things that were happening in China during this time. It's just this hugely rapid modernization of the country and opening up of capitalism. Okay. So back to Colin's entrepreneurial journey. So it's now 2007. He's just left Google and like many talented young folks leaving Google, another 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 fido rising incomes in the emergence of the middle class in China and accompanying rising consumption. Interesting. Okay. This seems like a theme that's going to recur. So it's not yet been due to- 2007. 2007. And pin 2o 2o 2015. Yep. Exactly. He starts a company called OUKU. And it's an online retailer. They sell electronics and other goods on there. It does pretty well. He sells it within three years. And then he says, you know, just like my mentors, I'm going to become a serial entrepreneur here and start starting and funding multiple companies. So the next company he starts is called lekey leqi. And that helped the idea was they were going to 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. Taobao, T-Mall, which is obviously part of the helibaba and Okay. Also interesting. Here's Colin, he's got his e-commerce experience. He's got his Google experience. He's now learning about his future competitors. We should underscore something that's going to be an important point that we keep revisiting. When you say Taobao and T-Mall, those are products by alibaba. So alibaba started in this B2B e-commerce and then got into consumer e-commerce where they were selling directly to consumers in China with T-Mall, which is think about it like a mall with really high end brands and they wanted to keep that in its own separate ecosystem and Taobao. And Taobao is more like the eBay. Does that seem like the right comp 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. We're now in probably 2012 timeframe. Some people are starting to think people are talking about alibaba going public, which they would in 2014, I think, and it was the largest IPO of all time. Even the largest IPO, yeah. People think, yeah, like they've won. They are the monopoly. You think e-commerce, you think China, you think alibaba and JD's emerging. They're a number two, but they're the winner so much so that even Colin is like, yeah, I'm going to start a company on their platform to help people sell 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 a wheat chat. Of course, they've had QQ, which was the desktop messenger platform that was deeply embedded in the gaming ecosystem for a long time. They just launched wheat chat on mobile, mobile gaming is a thing. He says, I'm also going to start a mobile gaming studio where we're going to start churning out some mobile social games on the back of this new emerging wheat chat platform. Okay, okay. Interesting. Here we go. Maybe we're not quite yet at Costco in Disneyland, but you can see the forces starting to swirl around here. All these things are running in parallel. Colin, again, given his background, his mentors, he's looking for a big grand slam home run. None of them, it becomes clear. None of them are really going to, on their own, achieve that mega mega success. But he knows he's on to some big trends with each of them. And he starts feeling like, maybe there's some kind of opportunity to bring all of these things together, an 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, co-founders who are working on all of these different products. We know how to do it. We have all of these skills in-house from social gaming to e-commerce, deep knowledge of Alibaba and JD. Okay, what could we do 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 going to 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 kind of overlaps. Yeah, it's almost like he started a startup studio before it was cool. So in 2015, he says, all right, in this studio type environment we have, let's do this. Let's start a company. So they launched a new company called Pin How Who. I think is how you pronounce it. Again, neither of us are native speakers. We're going to do our best here, but Pin How Who. Which roughly translates as pin means doing something together and how who means good goods. So like getting good goods together and the idea, this is kind of crazy and super creative. It must have been from the social gaming world, you know, farm bills huge at this point in time. The idea is kind of like real world farm bill. 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 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 particularly mobile buying and ordering to have supply, meet demand directly for these rural farmers. And the idea is that if they can get this to work, A, this is something that Alibaba and JD 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 purchase is going to be super high. They can use all their tricks from the gaming world to drive, you know, user acquisition to drive repeat purchases. And they think this could really work. So as an MVP, remember there, you know, the other good thing about selling groceries are effectively selling sort of fruits is the risk is low relative to you look around at the time JD and Alibaba'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 a cheap thing to sell so that if your site's a little premature and doesn't look totally trustworthy, like it has to be a small investment. And fruits and vegetables are a great thing to sell because if it doesn't work out, like that's okay, I have other options, it wasn't that much money anyway. Yeah, I mean, this stuff is a couple of 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. So remember in the mobile gaming side of the house, they'd realized the power of wechat and how important that was as an acquisition vehicle for games. They thought, you know, hey, to get going, what if we just don't even do an app? What if we just kind of like operate on wechat, which all these rural farmers, you know, they have phones now, they have smartphones, they have wechat on their phones, we'll just communicate with them via wechat, send them 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 this seems like a good MVP until we can buy some time and buy an app. Well, it starts to work by mid 2015. They raise some venture capital and fully launch the company and the model is really interesting. So we're definitely still not yet at Pindu Odu on the magic that makes that work. There are 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 pin howhua is that they're the Amazon retailer. Yeah, exactly. Starting directly 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 are spoiling and then sells it to the consumer. I have to suspect they learn some lessons in the trickiness of holding inventory that would lead them to later embrace the marketplace. Yeah, totally. I mean, you hit the nail on the head there. They're a retailer in this model, which is interesting. You're given Colin comes from the e-commerce background. That's probably what was natural to him. That's what his first company was, was retailer. That's why they thought to do it this way, but it turned out there was a better way. So Pindu Odu 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 and columns and ambitions are much bigger than that. They start thinking about what other categories can we go into next and build on this foothold. Eventually, maybe we can start to compete with Alipaba and JD eventually, eventually being like six months from now as we'll see. So what do they do? He's like, oh, yeah, well, I got this gaming studio incubator that I have. Let's just have the team spin up some MVP type stuff in some other categories. Okay, great. What's the easiest way to do that? Being a retailer, we did this MVP with Pindu Odu, but that was kind of hard. We built a bunch of infrastructure and certainly requires cash. What if we just, we're really just trying to learn here. Let's just do it as a marketplace. So we won't take inventory. We won't even really take much of a cut on the transaction. We'll make it super, super small, like less than 1% of the transaction will take as a cut for our marketplace fee, which is different. I think Amazon takes, what is the Amazon take? 30% on their marketplace and even Alipaba and JD are taking 10, 30%. JD is very close. JD's 28% of GMV is recognized as net revenue, so revenue to the marketplace. And I think T-Mall and Taube are like 5%, and still meaningfully higher. 5 times higher. So like, okay, great. They settle here and they're like 0.6%. Tiny, little take rate. Tiny, tiny, little take rate again, because they just want to learn what sells. So they launch this thing and they're like, what are we going to call it? It's also mostly running on WeChat. We like the PIN, the doing things together. What's called Pindu Odu, together more savings and more fun. Seems fine. We'll go with that. Interestingly, this is a different company. They started as a separate entity, also registered to Colin. It sets the table for who's this Colin guy and how does he have these two companies? And I'm sorry, is it fruit? Is it gaming or is it marketplace for goods? Yes. He's the answer to that. So shocker, they launched this thing and it works even better than PIN, how who? It works so well. They end up raising some money for it independently of 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 GMV, revenue with their tiny take rate with this marketplace. That in September of 2016, they merged the companies into, it's now one company. It's all the same team that I've been working on these things called Pindu Oduo. And then in the beginning of 2017, they fully transitioned out of the old retailer model of PHH and fully into the marketplace model of PDD. Two things to say here. One is a meta point about this episode. Since most of our audience is Western, we've converted everything to US dollars to sort of make it easier to understand. The other thing is David, we should not gloss over. It just did really well and boom, they got to $70 million in revenue in the first year. How did that happen? How would that happen? Yes, that is a very good question, Van. Well, let's dive into that. It's not just that Pindu Oduo is a marketplace with a low take rate for good. So, like, that in and of itself, sure is an advantage versus the incumbents, but like, they can slash their take rates too. Also, who's going to trust Pindu Oduo to, you know, like you were saying earlier, Ben? Like, there's some upstart. You know, what are you going to buy? I phone on this thing and be doing... Also, like, I'm not going to attract any retailers just by having a low take rate. Like, Amazon is currently Amazon. So, if I start Amazon 2 with a 0.6% take rate, I'm not going to get, I don't know, adidas to come and retail shoes on my little thing with a low take rate just because it is a low take rate. Like, I have no audience, I have no distribution, I have no ability to actually pull it off. We could talk to Hamilton Helmer here. It turns out there's a thing called two-sided network effects where like, you have a bunch of buyers, it attracts a bunch of sellers, which attracts some more buyers, and boom, that's actually defensible. So, are you telling me then that they need 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 Pindu Oduo 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 Groupon. Like, oh, lots of people buy this thing together and then you'll get a lower price. Yeah. But that's kind of not really what Groupon was. It was a deal site. Yeah, we have all this crap that wasn't already selling, and so, well, you come take it off our hands if we lower the price enough. And actually, over time, we're just going to phase out that Group Mechanic anyway. I remember buying things like Groupon and still, if you go as soon as you go by on the site's day, you're just buying the thing. You're an individual consumer. Groupon puts something in front of you. You're buying a full stop. That's it. Pindu Oduo is pretty different from that. And team buying is pretty different than that. So in the Pindu Oduo experience, and this is the core mechanic that has gotten them to $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 tomorrow. They have just all good internet companies and gaming companies. That button is super faded, washed out colors. Red is the color scheme for Pindu Oduo. It's like great anti-pattern for you, my designers. Exactly. It's like very soft pink. The text is not bolded. You really have to fight against every fiber of your being to click that button. Are you sure you want to cancel your subscription? No. Yes. Right next to it, though, is a big, bright saturated, bold red color of the team buying button, which also happens to be at a price that is typically about 40% lower than the individual buying button. Which is interesting because that's set by the retailer. So the retailer, as a, I don't know if it's a contractual obligation, but like as a term of listing on Pindu Oduo, you set two prices. So it's the individual price and then the team buying price. And interestingly, I think it was something like the team size had to be like 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 can 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 size, the minimum team size. I say retailer, I mean seller will get into that in a minute. So what happens when you click that button, this is just genius because it all runs on wheatats payment system, you are instantly charged that price, the team price, the minute you hit that button and that dollar value gets transferred to Pindu Oduo 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 are 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 Pindu Oduo right in the UI surfaces, a bunch of other people that are also trying to buy this app, have also formed teams. You can join up on their teams. Seems pretty simple. Get the discount that way. Or if you want extra discounts, you can form your own team and you can recruit your own people to come in and join you. And it's all natively baked right into wheatats. So you can just super easy post this item that you're buying into your family, friends, whatever wheat tech group or post public them wheat 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 chews, it's jeans, it's I think still the number one product category is, yeah, tissues like literally Kleenex. This is where the Costco part of the Costco and Disneyland analogy comes in. It's essentials. Who wouldn't want to be recruited into a group to buy something that you kind of have to buy anyway and now you get to do it cheaper? Like super cheap. And 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. Didn't they later launch features that if you get enough people, it's actually free for you. It's like price cut or something. Price chop. Price chop. 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 chop. So literally pays you $0. It was getting people to sign up for Pindu Odua, 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 chop lowered it like 50%. Then the next person lowered it to 30 RMB. Then the next person said it was like an asymptote that kept getting harder and harder to hit zero. If you didn't hit zero, nothing went through. Like you didn't get it for free. It's not that you got it for like the price. So you got it down to five. You didn't get it for five. You got to get it to zero or nothing. It's like shooting the moon. It's like shooting the moon. But all those people you just onboarded on to. Pindu Odua. So these are like effectively the greatest growth hacks of all time. To be able to grow a platform as fast as they did. And the exact correct incentives with the exact minimal amount of friction doing it on WeChat to just get a crap ton of users super fast to come and 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'm not being nearly an 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. Wow. Yeah. You know, these transactions were happening in this gamified mechanic that PDD was facilitating. And then they would have the merge. It would be on the merchants, even these like rural farmers to take care of delivery and logistics. You know, there's tons and tons of delivery, both last mile and up above 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 API driven. So they would basically bid out who could come and take the shipment, the cheapest and it would all be done sort of programmatically. Well, so now I think this is what Pindu Oduo does. They've invested a lot of tech in building this out. You could almost think of it like Shopify's fulfillment solutions now where Shopify is not doing the fulfillment themselves, but they built out all these APIs to manage it. Pindu Oduo is built that out now. But in the early days, like they weren't even doing that. It was literally just like, hey, farmers, hey, manufacturers, hey, whatever. Yeah, it's on you get this to consumers. And by the way, you should probably do that within seven days or you're going to face points in the algorithm. That's really interesting. I hadn't realized this as much. I guess this makes I was thinking there were sort of two pillars, but I guess there's three pillars of areas where China is just way ahead here. So the first one there being distribution, the second one being something we've talked about in group buying and sort of social commerce. Social e-commerce doesn't exist in the US. Just like some Shopify plugins 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 said buy stuff too. But there's not a multi-billion dollar company that sort of made it work and made it an effective mechanism. And you have to imagine it will. And you have to imagine that coronavirus will accelerate that because 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. It's, let's return to that in a minute. I think there's a structural reason why this is going to be tough in the US in a way that it wasn't in China. Hold that then because I want to talk about that. But the third being the advancement of WeChat pay and Oli pay are so far superior to the payment mechanisms and money transfer mechanisms that we have here in the US because of the entrenched interests of the big banks where we are stuck on not just old technology but like just old thinking about how long money takes to clear and cost associated with credible fees associated with transferring money that like the speed and the lack of friction and lack of fees that money can sort of move around these ecosystems in China is just far superior to the debit rails here or the ACH rails here or the wires. It's almost crookery the way that you look at how far stuck in the past we are in that industry here. Talk to me about why the social thing won't work in the US. Okay, great. So we've alluded to this a bunch of times so far in the episode. Let's finally bring in Tencent and what's going on here. So, Linky's had been the pillars to making this work are well, either some cultural stuff that group buying actually was kind of a phenomenon and offline in China already. So people are familiar with this. The logistics networks were mature enough to be able to do it. The financial networks were mature enough to be able to do this. But then there's social. Okay, let's go back to Tencent and we chat. We alluded to this and if you go listen to our episode on Tencent, they made a major strategic decision with WeChat around this time that was very different than Facebook because I was thinking to Henry said to us like, I remember there were a bunch of social commerce companies that got started right around the time of the Facebook IPO. I remember looking at a bunch of Madridana, we almost invested in one. Thank goodness we didn't. We lost the dealer. I remember because the company went belly up because what happened was these companies were doing the same thing that Pandu Oduo did with WeChat, which is they were just leveraging the Facebook social graph to blast out. There was tons of creativity about what you were buying broadcasting to your friends. People were trying stuff like group buying. Oh yeah. It was like blippy. There was a social network around logging things that you bought, so broadcasting things that you had already purchased that hit your credit card. Even stuff like, which raised a ton of money and flamed out, they were more of an email newsletter buying but they were also leveraging the Facebook graph, the open Facebook graph. What happened was Facebook saw this going on right around the IPO. They wanted to do commerce happening on the platform, leaving up to the IPO, but then they anchored the cord and they shut off all of this stuff. You could still Facebook connect into anything these days, but they took all the juice out of the algorithm in the feed for any kind of stuff like this. In the same way that they did for music, but Spotify had already gotten enough distribution using, hey, here's what your friends are listening to. Of course, they then stopped showing, here's what your friends are listening to in the Facebook news feed and so no one could catch Spotify. What you're saying is no one had leveraged the Facebook graph to get enough scale to become sort of a, I don't care if you shut it off. I'm already a winner. It was before they were over the hump. Yeah. You need ongoing, unlike Spotify, which is a subscription service. You need ongoing access to a social graph to do this. I do think it's certainly a huge dependency and they have this in their IPO perspectives and ongoing filings for Pandu Oduo is Tencent and we chat. If Tencent did the same thing to them, they'd be kneecapped unless they built their own social network graph, which they sort of have within the app, but not totally yet. Why did Tencent and Facebook diverge here? What Facebook decided is they were like, oh, we're going to monetize this thing via advertising, right? We effectively want to control the commerce and business flowing through our platform. We don't want to let anybody else do anything here. We want to make everybody pay attacks if you're going to do this. Now we did took a really different approach. One, I think because the advertising ecosystem in China in general wasn't as mature at this point in time. It was harder to monetize. There weren't as many advertisers. But also too, it was a messaging-based ecosystem. We're advertising. You know, they do have advertising, but it doesn't make as much sense. They came up with just a brilliant different business model, which was, okay, we'll actually let all these startups use our platform and build businesses on our platform. Then what we'll do, we have all the data. We can see what's working. We'll just pick the winners and we'll invest in them. We'll invest in them. We'll get equity in these companies. Then we can put our hand on the scale and tip the Give Them Strategic Access API. These new features, like many programs one might say, that some of their competitors won't have. Then this is what ends up making Pinduoduo. This is really the point to sort of draw that bright line of the difference between a platform and an aggregator. For folks who reads Dirtekery, I'm sure, then has a much more eloquent definition than this. Facebook is your classic aggregator. They're aggregating the audience attention. Then they're aggregating all of the advertisers and they're the choke point in the middle. They charge the advertiser every time the advertiser wants to leach you off for a few minutes to do something on your site or app. Whereas with Tencent, they actually said, hey, WeChat is going to be a platform. People are going to be developing rich applications on top of this. Facebook made a few different runs at being a platform, but ultimately being a platform and an aggregator were in conflict, they picked the aggregator advertising based business. They've basically thrown in the towel on really being a platform. This 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 going to observe what's taking off, pick winners, and invest. Yeah, one thing I didn't even realize is almost a sidebar, but came up while doing the research. You know Tencent is one of the largest shareholders in Tesla. They bought a 5% stake in 2007, I think, 2017. Sorry. Man, has that been a good investment in and of itself? You might think, well, that's just unrelated. That's just being a good investor to play in capital. Well guess who has an official account and a mini program on WeChat? Tesla. Guess what you can do on it? You can find superchargers. You can browse and order a Tesla. They were watching the demand in China. Well, I don't know if they were watching the demand, but they've allowed Tesla to start to. Yeah, Tesla can get better penetration in China because they have proprietary access to different APIs and. Yep. Yep. So now for something like this, for something like Tesla, like great, this is kind of icing on the cake for something like this. This is literally the core of what makes it work. So there were competitors to Pindu Oduo. There's still our competitors to Pindu Oduo. Once in February of 2017, Tencent decides to essentially king make Pindu Oduo here in this category. This is such a strategically important category to them as we've discussed. They lead a $110 million series B in Pindu Oduo. This company, remember, is like a year. This is five, six months from the merger between PH and PDD that they lead Sequoia comes in as well as Sequoia China. So they give them a ton of capital, but they also give them wide open access to the platform including this new critical feature that they've just launched on WeChat called mini programs. And this is like for folks who have never sort of paid attention to the China ecosystem before, it's not like in the US where the app store is the place that you go to get access to software. In China, WeChat has really created an abstraction layer on top of the operating system where you open WeChat and then you decide what to do from inside WeChat. And these days, that's by going to a mini program. It's totally brilliant from like a technical and computer science standpoint. This completely oblivates the need to develop and maintain rich apps across iOS and Android and all of the various other operating ecosystems within China and various flavors of China only Android or Xiaomi and the like. I don't think it totally obvious it. I think you do need to build special versions for each operating system even if you're building a mini program or at least hook into the native stuff on its own. But what it did do is make the operating system less important. And so the switching costs kind of go away or you can switch between iPhone and Android more easily because hey, you've got WeChat and all your mini programs no matter what your hardware is. Yep. Totally. And most of these companies once they reach any scale, they do have native apps and WeChat mini programs, but in terms of customer acquisition, in terms of loyalty across platforms, it's huge. And so we'll try and link to this in the show notes as well. There's this amazing graph of looking at PDD and its competitors of how many users they have in their own app ecosystem versus in the WeChat mini program app ecosystem. PDD is the only one they have 233 million users that interact primarily through the WeChat mini program, which is a fully featured Pinduo Duo app. All the same features are in there as in the native app. That's like the equivalent of 2 thirds of America, including children, are Pinduo Duo users only through the mini program through WeChat. Yep. They have another 144 million users that primarily interact with their own native apps, which is like four twitters worth of users. Yeah, right. You compare that to Alibaba, you compare that to JD, you compare that to VIP shop, all of those other competitors, most of the users are on their own apps, A, and B, PDD has exponentially more users total in the WeChat ecosystem than any of their competitors. And for something like this that is so natively social, that is such a huge advantage, because remember, 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, 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 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's already posted it, like, come on. Is that really a team purchase? You're basically like trying to pay more money. Yes. Yes. So on the back of this, this is February 2017, when all this happens, the investment and the mini program launch from 2016 to 2017, Pinduoduo over three X's their revenue to $278 million, they fully transition to the marketplace model. They get out of the retailing business and on the back of that, they file to go public and then they do go public in June of 2018, less than three years after the initial launch of the company, and less than two years after the merger, just incredible. Yeah. And an important point that they make in this, this IPO prospectus is, you know, not only did they grow like wildfire, but they hooked into a consumer category that all these other ones overlooked. So you think about the way China has different cities. There's tier one, two, three and four. And so your tier one cities are the ones closest to the big commerce centers, tier four cities are the ones sort of furthest out toward the most rural areas. And you know, wealth kind of goes down from one to four. Well, what Pinduoduo did was they were able to effectively reach people in tier three and tier four cities and they were able to also reach a dramatically female audience. I think it's something like 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 Pinduoduo is their gateway for these customers into the e-commerce world. And their sort of bet is, look how fast we grew with these people. We're going to continue to grow quickly. And as they start to accumulate more buying power, they're going to be purchasing from us. That brings up a couple of great points that we haven't touched on yet. And this has kind of been one of the narratives around Pinduoduo for the last couple of years is bringing on these more rural users onto e-commerce. And that is definitely true. But there are 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 every day household essentials. You know, who's doing that? It's whoever's managing the household. And in many cases, that's women. And in many cases, that's women with children at home. So if you look at the demographics of the app, at least in the earlier days, 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 and 35. Yeah, it was all young mothers at home who were using this to save a lot of money on all their household purchases. Yep. The other important thing that we haven't touched on yet is that it was Browse-centric, not search-centric. So if you think about e-commerce, for most of you who are buying stuff and listening to this show, go to If sorry, you go to to donate to your favorite charity. You type in the box exactly the product that you're thinking of and absent there being a coronavirus going on. It's almost 100% chance is there and ships to you if not in one day then in two. And like the world is magical. Well, Pindo Duo's insight is, you know, we're going to feature stuff that people need, but we're not going to make it an intent-based system. We're just going to show people, you know, at first in a brute force way, over time, algorithmically, things that we think they'd be interested in, things we think they might be out of, things we think their friends are buying and thus might influence them to buy. And it's basically a newsfeed of stuff that you can purchase, which is a totally different paradigm and allows them to get away with something that is in my mind, a total narrative violation, which is long to use the phrase long shipping times. So when you buy something on Pindo Duo, you didn't search for it. So it wasn't something you like immediately needed in that moment. It was something that sort of caught your eye. And you're like, oh, yeah, I'll take that. So they can get away with much cheaper shipping that takes much longer and have a totally different cost structure. This is sort of like very interesting to me as a startup investor. If you had pitched me in 2016 and said, hey, I'm going to create this e-commerce site and it's going to take forever to ship. I'd be like, well, that's immediately out because the future is overnight shipping. Amazon has changed the world. In fact, Zoolily in the US had the same insight. They at one point were a $6 billion independent retailer, but they're powered by QVC. QVC, yep, Seattle based. They had the same insight that if they just send out a browsable list of deals every morning, then they can get away with long shipping because nobody is intent-based and nobody needs that thing that they were searching for immediately tomorrow. And I think the parallels to Zoolily are actually interesting because it's a primarily female audience. It's mostly about the deals. But this linkage, and I think it was a very interesting insight that both companies had Zoolily and Pindoduo is when it's a brows-based experience and it's not intent-driven, you can get away with much cheaper, much longer shipping times. This brings up two related nuance points on that. One in that Colin and Pindoduo talk about a lot is the entertainment value of this. I think, again, especially about this demographic, this is the demographic that in a different age and place and time would have been watching over. This is a lot of the same demographic that played and plays these mobile social games. And so this is essentially a mobile social game except you're buying your household groceries with it. Super interesting. The other aspect you know, you bring up the feed, this has a really important impact for the supply side of the marketplace, A, because they don't need as fantastic shipping and logistics times as you mentioned Ben. But also just like TikTok, it means that there's much less entrenched success on the platform and so new entrants on the seller side, especially via the team-bying mechanic, can start breaking through and getting good volumes because it's all driven algorithmically by the feed that Pindoduo is putting in front of users as opposed to the equivalent in social being the follow model on our subscribe model on YouTube or Twitter or whatnot. And then how TikTok really ended around that with the for you feed where anybody, any good content could break through, it's the same deal here. Right. So the platform can be much more opinionated on where it drives its traffic and that can be really, really good if you're a supplier on the platform. I mean, it's bad in the sense that you don't get to build that direct connection with audience. So it's less reliable. But when the, the eye of, I don't know, what's the positive eye of Sauron when it's like, when it looks favorably upon you, it can buy a whole bunch of stuff all at once. Think about Amazon. You're selling something, a commodity type good 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 enterant wants to come in and compete with you in that same category and they have two reviews who's going to get most of the purchases. That's not a problem on Pindoduo. 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 they end up doing and I think part of what makes the economics of this whole thing work is it's not distributors. It's not retailers. It's not the traditional people who are going to sell on Alibaba and JD who are successful on Pindoduo. It's the actual factories and manufacturers themselves. They now don't need any branding, distribution, anything like that. They can just go direct on to PDD even though they have no brand and know that it's going to work. That is a big collapsing and a value chain that they've been able to accomplish. 100%. I have to pull forward a tech theme now because we're talking so directly about it. I think one of the big takeaways from this whole thing is that they successfully disintermediated both traditional retailers and brands. 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. The brand can sell in big chunks to their wholesalers and then it can get chunked down smaller and smaller from there. The social buying model takes that aggregation of demand and totally eliminates the job to be done by a retailer. It allows for much cheaper prices because they cut out that middleman. But then Pendo Duo 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. 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 has to have a suite of products and builds that relationship with the customer time and invest in all this marketing. 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. They also get rid of the brand and just say, hey, buy this unbranded thing from this retailer and boom, it sells out. 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. They weren't booked up enough by whoever they're, these contract manufacturers, by whoever was using them. So they had some excess capacity. So Pendo Duo started going to them. They've now labeled this whole practice C2M 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 jeans, for rain coats, for umbrellas, whatever. Yeah, don't they pre-sell stuff sometimes too? They even do generate the demand, take the payments, and then I think they go to the manufacturers after that and say, we know you can make this, just make it. Yeah, it does make it. That's funny. They may start doing this. So they go to the manufacturers and they're like, yep, we're pretty sure like you just use your excess capacity on the line, make this stuff. We're pretty much guaranteed you're going to 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, a long time, it's been five years. The rip on the last two years, and I know they're taking lots of steps to address this, has been massive amounts of counter-fitting. People buying goods that are knockoffs of big brands or the factories that manufacture stuff for brands are making a few others that are 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 anti-fraud mechanisms in order to not damage their own brand. Yeah. And also, they've also been a lot of fraud on the consumer side too, in that one of the ways this company has huge sales and marketing expenses, that is certainly advertising that they do, but a big part of it is coupons and promos and deals. And they're very sophisticated. Coupon hacking rings essentially in China, everywhere, where people are doing affiliate and coupon fraud pay essentially nothing for items. So yeah, 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. Yep. We've talked to the IPO a little bit. We're talking a little bit about their efforts today to combat this fraud. There's another big effort today that has been going on, which is breaking into these tier 1 and tier 2 cities, because the price per item on Pinoduo 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, PDD's take rate is incredibly low. And so they have a revenue problem. Yeah, what is the business model of this company? That's a good question, hard to build a big business even with lots of GMV 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, so what we're talking about is advertising and promotions. PDD has built out a whole very sophisticated advertising and ad bidding system similar to Google, similar to Facebook and actually really similar to Amazon and Alibaba 2, where merchants on the platform can pay and importantly, pre-pay for preferential placement in customers feeds of their product for sponsored placement, just like sponsored posts on Instagram or Twitter, whatever, and that, as you said, makes up most of the revenue of this company. Now, what's interesting is people think this is a big innovation. Alibaba and Amazon have been doing the same thing for a long time. There are a lot of sponsored products on Amazon. The originator of this business model is in some ways the classified ad, but in other ways, it's Google. And of course, Yahoo before that and Overture before that. And so the thing that you mentioned about Amazon is interestingly not true. Oh, I was wrong. It took Amazon basically 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 a third-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 AWS for a minute. They make most of their money that way. Well, only what three, four 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 these are of course all the sponsored search results that you see on Amazon. Exactly. Exactly. This was not Amazon's play for a long time and they were sort of leaving this money on the table. Fascinating me that Pindodwo was like, well, we aren't making money on these transactions. So we got to make it somehow and very early in their business, they sort of developed leg number two of the stool to make money on promoting products. It's also more common in China. So you know, you've been doing it. Yeah. Alibaba's done this for a long time. Yep. Yep. Which is interesting. I had thought that Amazon started this much earlier than maybe they did. I know they had pilot projects running around this for a long time, but for sure. The decision to really invest in it. I wonder if it was driven by observing what's been happening in China. It had to be 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. Oh, that's crazy. So we mentioned the IPO a minute ago. It was actually pretty huge. They raised $1.6 billion in the IPO. The stock popped 40% on day one. So Bill Gurley would be unhappy about that. Unfortunately, or unfortunately, he wasn't an investor here. Many for bankers and money for people who bought the IPO 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. What? When it went public. Yeah. So one of the knocks we're going to get to this in narratives in a minute on this company is what Tencent owned. Yeah. So one of the knocks on this company is they're not profitable. Their losses are huge when you get to that in a minute. Just think about, hmm, if this company had huge losses, how was Colin able to retain so much of the goody, even though they fundraised a lot? Keep that thought in your mind. Kind of like competitive fundraises. Yes and no. So he owned almost half the company. At IPO, that stake was worth $13.8 billion, making him the 12th richest person in China. Even for a company that was essentially founded generously three years before and like really two years before that, Tencent and Sequoia both bought into the IPO rather than selling. They each put about 150 million USD to work buying shares in the IPO. Now that's brilliant now. Yeah. Because things go pretty well over the last two years. The stock is up five X. They did cross a hundred billion dollar market cap. Ben, as you mentioned, in the intro. Their share of the e-commerce market in China went from, they were already at 4% of the e-commerce market by transaction volume at IPO in 2018. It is now 14%. That has come almost 100% at the expense of Alibaba, which went down from 73% to 62%. So almost all of that share. Now, of course, they're both growing. So it's a massive growing pie. But yes, they, and from share percentage, yes. Yeah. Crazy. That stock run up, and this is why Pinduoduo has been in the headlines recently. They passed a hundred billion dollar market cap. Colin became, he's now as of today, the fifth richest person in China. He briefly passed Jack Ma of Alibaba becoming the third richest person in China. He's now down to number five. He's the third richest person in the world. And so as all this, as he's after Bill and Warren. Yeah. He's 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 Pinduoduo, hand the CEO roll over to his co-founder and CTO Lee 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 Lee worked full time at Google, but I know he interned at Google. So they worked at Google together. Then they worked on the first company and all the companies all along. So very interesting. What's going on now? Yeah, it's fascinating. Wait, but David, you got to answer that question. So how, if they were losing all this money, did they manage to preserve so much ownership in the company? Ha ha. All right. This is a good transition to narratives. The bear narrative around this company, I think, has been, well, A, 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 this company, this is quite an exciting podcast, listen to your tuning into. We are talking about gap accounting. We're 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 huge positive operating cash flow for the last like three plus years. Over a billion dollars USD, positive operating cash flow, each of the last three years. What is that up front payments on 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's something that's not being recognized as revenue, but they are receiving cash for something that gets to be in their bank account. And they get to be in this really nice cash position. Even though on their income statement, it wouldn't show up as revenue because they're deferring it to some for some future purpose. That is part of the story. So 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 to 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 chargebacks or kind of emergent dice 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 10X rule that the 10X, the value of the goods gets charged to the merchant as a penalty for committing fraud, for kind of putting counterfeit emergent dice on the platform. And they have to pay that in front as essentially this deposit. Well, that cash just sits there, right? And 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 restricted cash. Remember we talked about how the team buying deals work when customers hit that team buying buy button. The cash immediately goes from their account over to PDD, even though the transaction isn't going to complete for up to 24 hours. And if the transaction doesn't complete at all, then it gets refunded back to the customer. But the cash still goes over to PDD. So they're holding a bunch of cash that they're not allowed to touch because it didn't ever get recognized as revenue. Yep. And then the third source of this is a source of flow for the company is what you mentioned Ben, which is that merchants for advertising for sponsored placement in the feed, they prepay for that advertising. And then it gets doled out algorithmically over a set period of time and kind of charged off against the accounts. So all of that, you know, at the scale that PDD is operating, nets out to this massively positive or I guess negative cash cycle in account and 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 to go. Wait, but can they spend that on growth? Like if you have all this restricted cash, it's restricted, but like what if the music stops? Certainly, right, if they stop growing, then it'll go down to it all that restricted cash will go down. But because money is fungible, even though money's coming in and out of that restricted cash pool, it's large and growing. And so I think 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 invested in fixed income or something to get 1%. Exactly. So if you look at the short term investments on the company's balance sheet, it's gone way, way, way up in recent years, then 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 of these pools of cash that they have. You just painted a bear and bull side of that. Yeah, right. 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 were like growth at all costs, very unprofitable. 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 are actually doing great on cash. Yeah. It's very, there hasn't been a bunch of coverage about this, but I just found it as I was looking at the company's financial statements. And I was like, whoa, this does not add up. Like you look at the income statement and it paints one picture at 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 are 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 23X revenue. Now keep in mind that revenue is just the.6% of the transaction plus the money that they get from advertising. So 23 times revenue they're trading at. Meanwhile, JD is literally one tenth of that at 2.3 times revenue. Alibaba, close to a third of that at 9x and Amazon at 5x. 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 are now in tier one and tier two cities. So they sort of match the breakdown of what the sort of demography in China looks like. And the question is sort of how, why are people in tier one and tier two cities 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 the 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 them like they're insane. And then PDD says, well, we'll cover the difference. And that is where all their cash is going. Yeah. So that's why I know we were in a little bit of arcane accounting details there, but that's why I think this is so interesting looking at their cash flow statement. Yes, they are subsidizing all this. They're effectively spending all of that money on customer acquisition. 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 company's trading at, you know, roughly 50X past 12 months operating cash flow, that's not a crazy valuation. And this is why you need to look at all three financial statements in order to really understand a company. What's the phrase revenue is a fact and profit is an opinion. I think 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 to value it. Yep, totally. I know we're in narratives, but I want to give just for listeners to keep a little sane here. I want to give some comparisons between where the company is today. So you understand the scale that they're at JD, Tau 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 T-Mall in Tau Bao. The GMV on those platforms are close to a trillion dollars. That's 3X's Amazon's GMV. That is a trillion dollars of goods or gross merchandise value moved through T-Mall Tau Bao. Now, they're able to capture 5% of that as revenue. And so last year on those two platforms, T-Mall and Tau Bao, Alibaba actually did $50 billion of revenue. So Alibaba generating $50 billion of revenue, they're very profitable. They have an operating margin, so not gross margin, but operating margin of 18%. There's a little bit mixed up in the Alikloud and all that because it's not just the retail business, but the way I'm trying to paint this is they're a revenue juggernaut and they're very profitable. Now if you compare that to where we are with Pendo Duo, they have 145 billion in GMV. So they've made a dent. That's what 1.6th 1.7th something like that of Alibaba just in the last five years, they've come up to be able to do that. But they only do a little over 4 billion in revenue. And that effectively means they're capturing about 3% of all the GMV flowing through the platform as revenue, either in the form of these advertising services or in the actual 0.6% commission that they get to take. So I just think it's interesting to compare those two businesses. The other interesting way to compare Pendo Duo is that this 4.3 billion in revenue that they do is only 5% of JD's revenue, but with 1.7 times the users. Wow. Yeah, it's back to that dynamic that you were talking about earlier of the average purchase price of kids on the platform and velocity. Pendo Duo has 490 million monthly active users. So 1.5 America's worth of users. They actually have 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 Pendo Duo through any platform. 630 million, so close to two Americas. You compare that to like a JD. JD has an estimated 290 million monthly active users. So that's call it half of Pendo Duo's users, but they're able to generate 83 billion in revenue because 28% of GMV gets captured as revenue. So it's like, would you rather be JD and have half the users or would you rather be Pendo Duo and have way more users, but what are we looking at here? 5% of the revenue that generates. Yeah, the most interesting question is like all valuations of companies that's about the future and not the past. And what do we think is going to happen to all of those users and transactions, especially as Pendo Duo starts trying to compete more directly for the same types of users that JD and Holly Bob are in particular T-Mall. Are there hallmarks? Yep. All right, David. We opened up some questions there of who would you rather be Pendo Duo, JD, T-Mall Tau Bao. We gave some Comps to Amazon. Let's move into like this. What would have happened otherwise and then try and answer those. The most interesting thing to me going through the history and facts of what could have been different is what if Facebook had made a different decision here in the US about how open they were going to let their platform be to big businesses being built on it and particularly commerce businesses. Now I think it's extremely unlikely that would have happened. Like I think they made the strategically correct decision given the operating environment in the US at the time of going with advertising. 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. Definitely pretty good. I'm very fascinated by this Tencent decision because then they really have gotten to see and invest in all of these companies that are getting built. I mean, let's just take PDD and Maituan and DD, those are the big three. Tencent is I believe the largest shareholder in all of them, largest or one of the largest compare that a few years ago when they started down this strategy. They were kind of neck and neck with Alibaba and Baidu and very unclear what the strategic future of the company was going to be. And now fast forward to nobody cry for certainly Alibaba Baidu, I think has fallen on somewhat harder times. But Tencent 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 is some work to be done here to compare Tencent as an investor to Softbank as an investor, because my guess here is that they actually did a better job at Softbank strategy than Softbank did to go and basically back all the unicorns and be in the most successful unicorns as they grow from billion dollar companies to 100 billion dollar 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 illiquid value, but just from this investment in PDD, I think they've done that four or five six times. Yeah, it reminds me of Sequoia and our part one episode about Don Valentine and his quote that when he started Sequoia, he had a strategic advantage. He knew the future, right? Now it was from knowing all the roadmaps from Fairchild and what all the applications assembly and conductors are going to be. That was the same thing for Tencent here. They knew the future in that they controlled the distribution platform that all these businesses were being built on. Now with many programs, not just the distribution platform, but literally the operating system. They can see what's taking off. 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 making the same decision where they'll benefit from the whole ecosystem when apps were booming and Facebook just made a sinful amount of money on app install ads where we don't even have to have an opinion or make an investment. We just make money every time somebody goes and installs an app. The question is, is that going to be as enduring as Tencent's method of doing it? Facebook's is more efficient. They don't have to invest. They also don't have to have an opinion. I like that you took what would have happened otherwise there. I was thinking since this episode is going to be about the IPO and grading the IPO, what would have happened if they didn't IPO? Until your comment there, I was going to say they were screwed because I thought they desperately needed access to cash. I think they've over the course of the IPO and three subsequent debt and equity offerings, they've now raised in their $5 billion or something since the IPO or including the IPO. This is a company that does need cash to grow. It didn't need cash to grow originally because it was just growing wildfire on WeChat, but now they have to invest dollars to make this thing grow and big dollars. I think they have $1.5 billion reserved for subsidies this year. To me, there was this real danger of growing big fast but not being able to effectively monetize their user base if they weren't able to keep growing into the more valuable user race. I do still think that's true even with your comment about them having really great cash flow dynamics. I would say this company needed IPO or go raise a soft bank round or more likely a 10 cent round that simulated an IPO around the time that they did. Yeah. It's interesting that at least one of the equity follow-on rounds that they did equity races after the IPO, I believe 10 cent bought most of or at least a significant portion. They continue to invest dollars into the company even though they're already the largest shareholder. Should we get into playbook? Yeah, let's do it. There's a thing that's a splinter in my mind on team purchase that I'm trying to apply to how do you use this lesson in starting a startup where it was both a novel product feature that had perfect product market fit and it was an unbelievable mechanism for growth. It was a native growth feature that was intrinsic to the value from the product itself but also provided this incredible extrinsic growth strategy. I think that the way to misunderstand growth hacking is to assume that you can stick it on afterwards. I think this is the best example of growth hacking where the product itself was virality. It's so rare to be able to find examples like this. Maybe Instagram or WeChat or WhatsApp, the messengers and social type platforms could fit this bill. I think maybe one of the other to go back to narratives a little bit, one of the other bear cases against this company is just the argument that people have said this before that 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. I wonder if that could legitimately be still an open question with PDD, especially in these categories they're getting into now. Is it really about team buying when you're buying an iPhone or is it about them subsidizing the price? Right. It's about them subsidizing the price. I'll offer an opinion on that. It seems pretty clear. Yeah. It's a classic, I think, a classic got you here, we'll get you there. Now that they're a scale player, a team purchase is less of a driver of the business. So 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 I think one of my favorite features about it that like there's essentially a Farmville clone in the app where when you finish going your tree they actually ship you a box of fruit. Another big playbook thing that we have to call out here is, you know, thanks to Hamilton Helmer for sort of providing us a framework to think about this, but recognizing a counter positioning opportunity to build an amazing moat around your business. And with PDD, Colin realized that with the newly launched WeChat mini programs, there was an opportunity to leverage the WeChat social graphery commerce. And not only that, but he realized that it would be defensible from the largest competitor out there in e-commerce, Alibaba. And since Alibaba competed with Tencent and basically wouldn't use WeChat platform. And in fact, I think Alibaba actually banned their sellers from encouraging the use of WeChat and made them use their own chat platform. Of course there are others who could compete with Pindo Duo on WeChat, 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 Pindo Duo strategy was working and then copy them, they would have needed to do serious damage to their own existing business to convince Tencent to sort of allow them the amazing native functionality that they were providing to Pindo Duo. Alibaba can't take advantage of the viral effects on WeChat. Well, I think there might be another structural reason too to why they couldn't respond, which is the payments layer. WeChat pay and Alibaba mortal enemies, right, and it was Alibaba really going to let people buy stuff on tab out and T-Mall using WeChat pay when they're fighting tooth and nail against Alibaba. Yeah, that's a great point. I hadn't thought about that either. It's a deep mode at least against Alibaba, not against other startups, but definitely against them. I could be wrong here. I don't know enough about the supply side of these platforms, these e-commerce platforms in China to say, but I think they might have been able to also build a 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 contract manufacturers and remnant capacity on their lines. I think a lot of these contract manufacturers are even just converting to now being fully dedicated PDD manufacturers. That's a defensible mode in that. If you get a whole bunch of manufacturers on the supply side to go give you a meaningful part of their business and you're deeply integrated via the C2M initiatives that they have where they're giving them data, they're telling them what types of excuse to produce and what quantities. It's going to be really hard to switch off of that. Right, that creates some walking. Cool. Alright, I've got one more for a playbook. Go for it. And this is a negative one. I think the ones we've talked about so far are like, go do this if you want to be like Pindoduo. But the thing that they're experiencing now is diminishing marginal returns. So they obviously grew incredibly quickly to tier three and tier four cities and spread like wildfire through WeChat groups. They had basically a product with perfect product market fit for those users. So there's cheap goods. You buy it with friends. There's no real brands. It can take a while to ship. But it's so cheap and 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 wrapped my head around until recently because I always thought well over time as you build brand customers would get cheaper to acquire. But especially with great example as any of these D to C products now that have amazing organic growth at first because they find their niche, they find that community, they find the obsessed people. Then you run out of them and you have to switch to a traditional customer acquisition strategy that costs money. It really makes you understand and get religious about what is your obsessed segment addressable market, the people for which you're going to have to pay incredibly little money for them to like your thing because 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 don't have to spend lots of money to reach are themselves responsible for a lot of buying power. Yep. A hundred percent. And this is reflected perfectly in this massive substance that PDD is having to spend on 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 virality before they hit the sort of gnarly fall off where diminishing marginal returns start to happen. But that is the place where they are now. One real quick playbook theme I want to talk about here is we've alluded to a little bit with agriculture and produce with PDD. They're also a good example of just like with every successive generation of internet companies, you can penetrate further and further into areas of the economy that you wouldn't have thought the internet could penetrate into before. Literally rural farmers grow in fruit are selling at massive scale on PDD. Yeah. It's pretty crazy. Yeah. Okay. So grading. I guess what we should do here, even though it's early, is grade the IPO. Like how good of a use of proceeds was the IPO a good idea that they make good use of it. And then answer a secondary question that we teased earlier, which is where do you want to put your chips right now? JD, tabo, team all or Pindoduo. Oh, I love it. I love it. Putting our money where our mouth is on the grade for the IPO for sure and a again early grading, you know, things could change markets or volatile and all that. And certainly this is a incredibly intensively competitive space, e-commerce in China. But it's up almost 5X since the IPO. 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 were buyers in the IPO. Tencent, at least I don't know about Sequoia, but at least Tencent has continued to be a buyer and secondary offerings along the way just goes to show the incredible potential that an informed insider investor like that who also controls the main platform on which the company operates, I think there is still an upside to be had in the company. You're going to heard bet here because you think that inside of some 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 are 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 IPO versus other things that they could have put their dollars to work into, how good of a decision was that. And that's fairly cut and dry, I mean, it's basically like you said, a 5X over two years. Any day of the week, I will take that, you know, 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 come with a separate grading scale for IPOs, basically like if you invested in the IPO, 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. Yeah, I like this. Yeah, which in this case, looking at that perspective, I think that's the point you were arguing earlier, they've made very good use of it. I don't have a, I have no idea how they could have made a better use of it, but the thing that does sort of, yeah, that's not really the interesting analysis though. The interesting analysis is like, if you bought into this IPO and you are still holding the shares today, obviously you're feeling good, but like actually even more interesting is like, let's think about, say you bought into the IPO, 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? Do you want JD, Pindo or Talbao? Of those who have benefited from coronavirus, Pindo Duo has benefited much more than the users that JD or, or Talbao, T-Mall have added, they have taken meaningful share away from Talbao T-Mall, Alibaba. The bet that you have to make is that they're going to over time do a good job of monetizing this so far valuable, but not that valuable user base. I guess the structural question is like, is the things that they're really good at, this gamification, retention, virality, team buying, are those things going to help them acquire the future users that they need to acquire and extract more dollars from their existing base? I don't know if the answer to that is yes. I think there's definitely a big aspect of what you said a minute ago, Ben, of like, what got you here isn't going to get you there going on in the company. So I think the question is, do they know, I think they probably do know that? Are they capable of building the next act? And this is actually a case where the most recent news is a little concerning. Oh, the CEO transition? Yeah. I know. 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 think they sort of religiously don't acquire the companies that they launch on their platform because they don't want to make that seem like what's going to happen to you and make you potentially scared of them or not scared of them. That's what I really need to. Right. If they threw all their weight behind PDD, how could that meaningfully change the trajectory? Well, and here's another interesting thing. I didn't dig too much into this, but there are articles. I believe Tencent has been testing, competing in this space on their own, natively like spinning up a social-comisch platform within Tencent. You know, there are all sorts of reasons why they could be doing that. You know, to learn more, experiment, all sorts of stuff, Facebook to talk about them. He's another example. They're building new stuff all the time that they don't really intend to invest behind. But if they were to decide to make this a big initiative, well, that would really suck for PDD. Yep. All right. To give an answer, because we could waffle on the fence forever, I am going to say I'd rather be Ali Baba. Like I'd rather be Taobao, especially at these prices. That's a big part of my analysis is PDD's so freaking expensive. Curious where you fall down on that. That's interesting. One reason I'm hesitant to say is I don't know enough about JD about what their strategy is and what a bull and bear case for JD would be. Certainly, it seems like they have the most attractive kind of unit economics in this space. I mean, they look like Amazon and they have a very affluent base. Yep. Yep. I wonder. 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, I figure like this is such a rising tide. I mean, I think e-commerce in China is growing at something insane, like a 30% keger. Yeah. I mean, if it went from 6% to 24% over the last eight years, they went from behind the US to I think ahead of the US 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 a Falcon Heavy. Like, it doesn't matter. You should just buy shares in all of them. Right. I like that. But I do think in terms of, it's pretty crazy that PDD essentially took 10 points of share from Alibaba in the last two years. I think I would bet on PDD. I mean, I'm biased 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 Bayzos is essentially Chairman of Amazon? You know, like, there's a CEO of AWS and there's a CEO of Amazon retail and Bayzos is sort of group level CEO. Is that what's happening? Or is it like Colin was like, oh man, I made a bunch of money and I'm going to write off into the sunset. I'm going to lock in these gains and yeah. It's a good question. I suppose it what matters is how if he sells a lot of his shares or not. Yeah. Which he did transfer a bunch of them out. What I don't know is how much of that was sold versus he had said from the Gecko, even in the IPO perspective, that he intended to create multiple charitable foundations, kind of like Bayzos. So I think that was part of the reduction. Oh, dude. He has such a thing for Bayzos. He even does the thing where he republishes the original shareholder letter after each PDD shareholder letter, which of course there have been two since the IPO. All two. He attaches the 2018 after that. Yeah. All right. There we have it. It's bringing home. David, I guess we've got a bet going and we'll have to revisit this at some point. This feels like a bet where the odds are in your favor to just be on one of those horses. Yeah. Agree. All right. Carvouts. So listeners, I have two. David has zero right now because he's been steeped in research and reading more in the series of previous Carvout, which was the dark tower. The dark tower. Yeah. Yeah. So I'll give my first one first and then for the second one, I think David may claim it. So for the first one, it's team buying on the Carvouts. 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 episode, I think you will love this book. It is called How to Make a Spaceship. It is the story of the X Prize and how that came to be and how the sort of amazing idealist behind the X Prize sort of grew up during the space race and started all these incredible organizations 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. You kind of like the like shoe dog. It's almost these like thriller bio book. It's just like it's exciting and you never quite know what's going to happen next and it's well written and well story told. So I highly recommend it. The second one is amazingly I had not read this before, but I finally read Creativity Inc. Oh, man. How did you not read that? I'm shocked. I'm shocked. I'm shocked. I'm shocked. I'm shocked. I'm shocked. 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 as a Pixar nerd because they give these behind the scenes glimpses into rewrites of movies so you can find out what was going to happen in up and then they rewrote it or what was going to 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 there of like how to run a creative organization in a repeatable way. It's just great freaking read. I would love to go back and reread it. Having read seven powers now and particularly the cornered resource power and the example of the Pixar brain trust. 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 the reading? Yes, there's also definitely process power where a lot of people have tried to copy Pixar and it hasn't worked and it took Disney actually acquiring Pixar and having their leadership come in and turn Disney animation studios at 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 animation that there is kind of a ghost in the machine in Pixar and now in Disney animation of like this is I think what Hamilton talked about in the process power of like you can't totally quantify the magic of the Toyota production system. You can have lots of people come in and try and learn it. You can read creativity ink but there's just something special in that group. That's a great point. All right, ready to bring it home? Let's do it. All right. Well, if you are listening and you are not subscribed and you like what you hear, 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. 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