Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal delve into the remarkable rise of Chinese e-commerce giant Pinduoduo. Founded by ex-Google engineer Colin Huang, Pinduoduo leveraged WeChat's social graph and mini-programs to fuel its viral team buying model, allowing it to amass a staggering user base and achieve a $100 billion market cap in record time. Despite its unorthodox approach and low take rates, Pinduoduo's innovative use of social commerce and direct manufacturer relationships has disrupted the industry, challenging established players like Alibaba and With Huang stepping down as CEO but remaining as chairman, the company's future hinges on its ability to monetize its growing yet lower-income user base and expand into higher-tier cities.

Summary Notes

Introduction to Acquired Podcast Season Seven, Episode One

  • Ben Gilbert and David Rosenthal introduce the new season of the Acquired podcast.
  • The focus of the episode is on the Chinese e-commerce company Pinduoduo.
  • Pinduoduo is described using a quote from their IPO prospectus, highlighting its unique business model integrating cyberspace with physical space, and likened to a combination of Costco and Disneyland powered by a network of intelligent agents.

"Today we are talking about, and I quote from their IPO prospectus, an exemplification of a multidimensional space seamlessly integrating cyberspace and the physical space. A combination of Costco and Disneyland, driven by distributed network of intelligence agents."

This quote explains Pinduoduo's business model as presented in their IPO filing, emphasizing their innovative approach to e-commerce by blending online and physical experiences.

Pinduoduo's Rapid Growth and Market Position

  • Pinduoduo, founded only five years prior to the podcast, experienced rapid growth with a significant increase in market cap.
  • The company's value increased dramatically during the COVID-19 pandemic, reflecting a surge in e-commerce activity.
  • Despite the dominance of Alibaba and in Chinese e-commerce, Pinduoduo identified and capitalized on an unaddressed market segment.

"Now, why is this a fascinating company? Well, first off, it's only five years old, and they went public on the Nasdaq two years ago. In 2018, three years into their existence, they are the fastest company ever to 100 billion dollar market cap, and they've nearly tripled in value since the coronavirus spiked globally mid March."

The quote highlights Pinduoduo's unprecedented growth trajectory, reaching a $100 billion market cap faster than any other company, and their success during the global pandemic.

  • E-commerce is experiencing a significant moment due to the global pandemic, accelerating the shift from offline to online commerce.
  • China, once trailing the US in e-commerce penetration, has seen a rapid increase, with online retail now accounting for a substantial portion of total retail spend.
  • This shift in consumer behavior has contributed to Pinduoduo's valuation surge.

"So the global pandemic has massively accelerated the shift from offline to online commerce, as I'm sure all of you are experiencing in one way, shape or form, at least as consumers."

This quote reflects on the impact of the pandemic on consumer behavior, with a notable shift to online shopping, which has benefited companies like Pinduoduo.

Listener Engagement and Community Feedback

  • The hosts express gratitude to listeners who participated in a survey and announce the winners of various prizes.
  • Community engagement, such as comments from listeners, can inspire episode topics, as was the case with Pinduoduo's episode.

"So I do want to give a shout out to Honam in the slack who inspired us to do the episode with this comment. 100 billion dollar market cap in five years from a standing start. This is just nuts."

The quote acknowledges a listener's comment that sparked the idea for the Pinduoduo episode, emphasizing the company's remarkable market cap achievement.

Acquired Limited Partner Program

  • The Acquired podcast offers additional content, including a VC Fundamentals series and a book club, available to subscribers of the limited partner program.
  • The program also includes monthly calls on Zoom, providing a platform for deeper engagement with the content and community.

"If you love acquired and want more, you should become an acquired limited partner."

This quote is a call to action for listeners who enjoy the podcast to join the limited partner program for exclusive content and interactions.

Pilot as a Sponsor and Accounting Partner for Startups

  • Pilot is highlighted as a reliable accounting, tax, and bookkeeping service for startups and growth companies.
  • The company's growth and reputation are underscored, with endorsements from notable investors like Sequoia and Jeff Bezos.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote introduces Pilot as a leading accounting firm in the US, emphasizing its focus on startups and the trust placed in it by prominent investors.

Colin Huang's Background and Role in Pinduoduo's Founding

  • Colin Huang, the founder of Pinduoduo, has a remarkable background, including winning a medal in a national math Olympiad and studying computer science at prestigious institutions.
  • His career includes internships at Microsoft and a significant role at Google before becoming an entrepreneur in China.
  • Huang's connections with influential tech entrepreneurs and experiences in e-commerce and gaming laid the groundwork for Pinduoduo.

"So my lead in was going to be that quote from the IPO perspectives of the Disneyland and Costco and the distributed intelligence agents. What is going on?"

David Rosenthal discusses his initial focus on Pinduoduo's unique business description from their IPO prospectus, emphasizing the curiosity it sparked.

The Evolution of Pinduoduo and Intersection of E-Commerce and Gaming

  • Pinduoduo started as an online retailer for electronics and evolved into a platform for selling agricultural produce via WeChat.
  • Colin Huang's entrepreneurial journey involved learning from existing e-commerce giants and experimenting with social gaming.
  • The intersection of these experiences and market opportunities led to the creation of Pinduoduo's distinctive business model.

"So if you remember back from our old Tencent episode, which I went back and listened to before recording this, it's like navel gazing research."

Ben Gilbert reflects on previous discussions about Tencent, highlighting the relevance of past insights to the current topic of Pinduoduo.

Ambitions Beyond Initial Success

  • Colin and his team consider expanding into new categories beyond their initial foothold.
  • They aim to eventually compete with major players like Alibaba and
  • The timeline for this expansion is aggressive, with ambitions set for a mere six months ahead.

"They start thinking about what other categories can we go into next and build on this foothold? And eventually maybe we can start to compete with Alibaba and JD. Eventually. Eventually being like six months from now, as we'll see."

This quote explains that Colin's ambitions for expansion were not just hypothetical but had a clear and aggressive timeline, indicating a strategic move to scale quickly and challenge established e-commerce giants.

Marketplace Model and Low Take Rates

  • Colin's team decides to create a marketplace model to learn what sells without the overhead of inventory.
  • They set a very low take rate for transactions on their marketplace, significantly less than competitors like Amazon, Alibaba, and JD.
  • The low take rate is a strategic move to attract users and learn from the market, not immediately to generate high revenue.

"Let's just do it as a marketplace. So we won't take inventory. We won't even really take much of a cut on the transaction. We'll make it super small. Like less than 1% of the transaction will take as a cut for our marketplace fee."

The quote reveals the strategic choice to prioritize learning and market entry over immediate profits by setting a low take rate, differentiating their marketplace from competitors.

Pinduoduo's Emergence and Growth

  • Pinduoduo, a separate entity initially, grows rapidly, attracting the same investors as the original company.
  • They merge the original company with Pinduoduo due to its success, fully transitioning to the marketplace model.
  • Pinduoduo's revenue skyrockets, reaching $70 million by the end of its first year post-merger.

"It's growing so fast, literally by the end of 2016, they would do $70 million in revenue, not GMV, revenue, with their tiny take rate with this marketplace."

The quote emphasizes the remarkable growth of Pinduoduo, highlighting its revenue achievement, which validates the marketplace model and the decision to merge with the original company.

Team Buying and Social Commerce

  • Pinduoduo introduces "team buying," a concept where users can get discounts by purchasing as a group.
  • The platform is integrated with WeChat, leveraging social networks to facilitate group purchases.
  • Team buying becomes a key feature, driving user engagement and sales.

"They come up with this concept for Pinduoduo that they call team buying. Now, this isn't new...but Pinduoduo is pretty different from that and team buying is pretty different than that."

The quote introduces the innovative "team buying" feature, which is a cornerstone of Pinduoduo's user engagement strategy, setting it apart from other e-commerce platforms.

Leveraging WeChat and Growth Hacks

  • Pinduoduo's success is partly due to its integration with WeChat, allowing frictionless transactions and social sharing.
  • They implement growth hacks like "price chop," incentivizing users to recruit others for discounts or free products.
  • The platform benefits from China's advanced logistics networks, enabling efficient delivery without Pinduoduo needing its own logistics.

"It all runs on WeChat's payment system...recruit people to come join you. And it's all natively baked right into WeChat."

This quote illustrates the seamless integration of Pinduoduo with WeChat, which is crucial for its user acquisition strategy and the implementation of its growth hacks.

Strategic Investments and Tencent's Role

  • Tencent leads a significant investment in Pinduoduo, granting them access to strategic resources like WeChat mini-programs.
  • Pinduoduo's user base grows exponentially, with a significant portion interacting through the WeChat ecosystem.
  • Tencent's investment and support are pivotal in Pinduoduo's rapid growth and market penetration.

"In February of 2017, Tencent decides to essentially king make Pinduoduo here in this category...They lead a $110,000,000 series B in Pinduoduo."

The quote highlights Tencent's strategic investment in Pinduoduo, effectively endorsing and empowering the platform within the WeChat ecosystem, which is instrumental to its success.

Pinduoduo's Unique Market Approach

  • Pinduoduo targets tier 3 and 4 cities in China, reaching an underserved market segment.
  • The platform attracts a predominantly female user base, particularly young mothers, by focusing on household essentials.
  • Pinduoduo's browsing-centric interface contrasts with search-centric e-commerce platforms, promoting impulse buying and discovery.

"This is the first experience with e-commerce...Pinduoduo is their gateway for these customers into the e-commerce world."

The quote explains Pinduoduo's strategic focus on new e-commerce users in lower-tier cities, positioning itself as the entry point into the e-commerce ecosystem for this demographic.

E-Commerce Shipping and Cost Structures

  • E-commerce sites with longer shipping times can succeed if customer purchases are not intent-driven.
  • Zulily and Pinduoduo are examples of companies capitalizing on non-intent-driven purchases with longer shipping.
  • Customers are willing to wait for products if the shopping experience is more about browsing and discovering deals.

"If you had pitched me in 2016 and said, hey, I'm going to create this ecommerce site and it's going to take forever to ship, I'd be like, well, that's immediately out, because the future is overnight shipping. Amazon has changed the world."

This quote highlights the initial skepticism towards the viability of e-commerce models with long shipping times, given the dominance of Amazon's quick shipping model.

Entertainment Value and Demographics

  • E-commerce platforms like Pinduoduo incorporate entertainment into the shopping experience, attracting demographics similar to those who enjoyed daytime TV like Oprah.
  • The entertainment aspect is analogous to mobile social games, but with the added utility of purchasing household items.
  • Pinduoduo's user base overlaps with demographics that engage in mobile social gaming.

"This is the demographic that in a different age and place and time would have been watching Oprah, right?"

The quote connects Pinduoduo's user demographic to a traditional TV audience, suggesting that the platform's entertainment value appeals to similar demographics.

Marketplace Dynamics and Algorithmic Feeds

  • Pinduoduo's feed-based algorithm allows new sellers to compete effectively without the need for established success.
  • The platform's algorithm-driven visibility can be advantageous for suppliers, though it may prevent building direct customer relationships.
  • Pinduoduo's model is similar to TikTok's "For You" feed, where content quality can lead to visibility regardless of the creator's prior popularity.

"The other aspect you bring up, the feed, this has a really important impact for the supply side of the marketplace."

This quote emphasizes the significant impact Pinduoduo's feed system has on the supply side, enabling new sellers to gain visibility and sales.

Direct-to-Consumer Model and Value Chain Collapse

  • Pinduoduo attracts manufacturers directly, allowing them to sell without branding or traditional distribution channels.
  • The platform's model collapses the traditional value chain by connecting buyers directly with factories and manufacturers.
  • Pinduoduo's approach has disrupted the roles of distributors and retailers in e-commerce.

"It's the actual factories and manufacturers themselves. They now don't need any branding, distribution, anything like that."

This quote explains how Pinduoduo's model enables factories and manufacturers to sell directly on the platform, bypassing the need for branding and distribution.

Disintermediation of Retailers and Brands

  • Pinduoduo's business model eliminates the need for traditional retailers by aggregating buyer demand through social network-based group buying.
  • The platform allows manufacturers to sell large quantities of unbranded products directly to consumers, reducing prices by cutting out middlemen.
  • Pinduoduo's success in disintermediation is due to its internet and social network foundation.

"They successfully disintermediated both traditional retailers and brands."

The quote summarizes Pinduoduo's impact on the traditional retail and branding landscape, highlighting the platform's ability to bypass these entities and connect directly with consumers.

Manufacturing Excess and Consumer-to-Manufacturer (C2M)

  • Pinduoduo sources products from manufacturers with excess capacity, utilizing a consumer-to-manufacturer model.
  • The platform pre-sells items, generating demand before instructing manufacturers to produce the goods.
  • This model allows Pinduoduo to offer a wide range of products without holding inventory.

"They started going to these contract manufacturers and saying, hey, we think we can generate a lot of demand for tissues, for jeans, for raincoats, for umbrellas, whatever."

This quote describes Pinduoduo's strategy of leveraging manufacturers' excess capacity to meet consumer demand, which is central to their C2M approach.

Challenges of Counterfeiting and Fraud

  • Pinduoduo faces challenges with counterfeit goods and knockoffs sold on the platform.
  • The company is investing in anti-fraud mechanisms to protect its brand reputation.
  • Consumer fraud, such as coupon hacking, also poses challenges for the platform.

"A long time. It's been five years, the rip for the last two years. And I know they're taking lots of steps to address this, has been massive amounts of counterfeiting."

The quote acknowledges the ongoing issue of counterfeiting on Pinduoduo and the steps being taken to combat it, highlighting a significant challenge for the platform.

Advertising and Revenue Generation

  • Pinduoduo generates most of its revenue from advertising and promotions, not just transaction take rates.
  • The platform has developed a sophisticated ad bidding system where merchants prepay for preferential product placement.
  • Pinduoduo's advertising model is similar to those of Google, Facebook, and Amazon.

"That sounds like it could be interesting. Now. So what we're talking about is advertising and promotions."

This quote introduces the discussion on Pinduoduo's primary revenue source, emphasizing the importance of advertising and promotions in the platform's business model.

Pinduoduo's IPO and Market Impact

  • Pinduoduo's IPO was significant, raising $1.6 billion and seeing a 40% stock price increase on the first day.
  • The company's market share increased rapidly, taking a considerable portion from Alibaba.
  • Pinduoduo's valuation and growth have made it a major player in the Chinese e-commerce market.

"So one of the knocks on this company is they're not profitable, their losses are huge."

The quote points out a common criticism of Pinduoduo related to its profitability, setting the stage for a deeper examination of its financials and market strategy.

Financial Statements and Cash Flow Analysis

  • Pinduoduo has a positive operating cash flow despite large net losses reported on the income statement.
  • The company's cash flow is bolstered by upfront payments, deposits from merchants, and prepayments for advertising.
  • The cash flow statement reveals a different financial health picture than the income statement alone.

"This company has had huge positive operating cash flow for the last like three plus years."

This quote highlights the discrepancy between Pinduoduo's reported net losses and its positive cash flow, revealing a more complex financial situation.

Growth Strategies and Monetization

  • Pinduoduo must continue growing or improve monetization per user to justify its valuation.
  • The company is expanding into tier one and tier two cities and attracting higher-income users.
  • Pinduoduo subsidizes high-value items like iPhones to attract users from higher-tier cities.

"They're listing things like iPhones on the platform now."

The quote illustrates Pinduoduo's strategy to attract users from higher-tier cities by offering subsidized high-value products, indicating a shift in its growth approach.

Experimentation with AI Features and KPIs

  • Statsig enables testing of new AI features for products to measure impact on KPIs.
  • Statsig can ingest data from data warehouses, allowing for integration with existing company data.
  • The platform is compatible with any feature flagging setup without requiring migration from current solutions.

"If you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPIs, Statsig is awesome for that."

This quote highlights the utility of Statsig in helping companies determine the effectiveness of new AI features on their performance indicators.

Collaboration with Statsig

  • David Rosenthal and Ben Gilbert express enthusiasm for working with Statsig.
  • They encourage listeners to start using Statsig and mention how they heard about it through the podcast.

"We're pumped to be working with them."

This quote reflects the positive sentiment from David Rosenthal towards the collaboration with Statsig.

Strategic Decisions of Facebook and Tencent

  • Facebook's decision to focus on advertising was strategically correct for the U.S. market.
  • Tencent's investment strategy in various companies, including PDD, Metwan, and Dee Dee, has positioned it well in the Chinese internet economy.
  • Tencent's role as a major shareholder in these companies has allowed it to influence the internet economy in China.

"The most interesting thing to me, going through the history and facts of what could have been different, is what if Facebook had made a different decision here in the US about how open they were going to let their platform be to big businesses being built on it and particularly commerce businesses."

This quote by David Rosenthal discusses the hypothetical scenario of Facebook taking a different strategic path and its potential impact on commerce businesses.

Tencent vs. Softbank Investment Strategies

  • Tencent has been successful in backing unicorns and achieving significant returns on investment.
  • The comparison between Tencent and Softbank's investment strategies suggests that Tencent may have outperformed Softbank.

"There's some work to be done here to compare Tencent as an investor to Softbank as an investor."

Ben Gilbert suggests analyzing the effectiveness of Tencent's investment approach compared to Softbank's strategy.

Tencent's Strategic Advantage

  • Tencent's control over the distribution platform WeChat gives it insight into emerging businesses.
  • Investment in successful companies allows Tencent to strategically support its chosen companies.

"They knew the future in that they controlled the distribution platform that all these businesses were being built on."

David Rosenthal explains how Tencent's control over WeChat provides it with a strategic advantage in identifying and investing in successful ventures.

Facebook's Ecosystem Benefits

  • Facebook benefited from the app boom through revenue from app install ads.
  • The debate is whether Facebook's method will be as enduring as Tencent's investment strategy.

"Facebook just made a sinful amount of money on app install ads."

Ben Gilbert comments on the financial success Facebook experienced from its advertising model during the app boom.

Pindoduo's IPO and Growth Strategy

  • Pindoduo required significant capital to sustain growth and expansion.
  • The IPO and subsequent funding rounds were crucial for Pindoduo to raise the necessary capital.

"I was going to say they were screwed because I thought they desperately needed access to cash."

Ben Gilbert discusses the importance of Pindoduo's IPO in securing the capital needed for the company's growth.

Tencent's Continued Investment in Pindoduo

  • Tencent invested in Pindoduo's equity rounds post-IPO, indicating confidence in the company's future.
  • Tencent's role as a major shareholder and investor is significant for Pindoduo's strategic positioning.

"At least one of the equity follow on rounds that they did equity raises after the IPO. I believe Tencent bought most of, or at least a significant portion."

David Rosenthal points out Tencent's continued financial support for Pindoduo after the IPO.

Team Purchase as a Growth Strategy

  • Pindoduo's team purchase feature was a key driver of product market fit and growth.
  • The integration of growth hacking into the product itself contributed to Pindoduo's virality.

"There's a thing that's, like, a splinter in my mind on team purchase that I'm trying to apply to."

Ben Gilbert reflects on the effectiveness of Pindoduo's team purchase feature as a growth mechanism.

Challenges of Social Commerce and Virality

  • There is skepticism about the sustainability of viral growth in social commerce.
  • The question remains if Pindoduo's team buying approach will continue to be effective as it expands into different product categories.

"Is it really about team buying when you're buying an iPhone, or is it about them subsidizing the price?"

David Rosenthal questions whether the team buying concept will remain appealing to consumers purchasing high-value items like iPhones, or if price subsidies are the main attraction.

Counter Positioning and Moats

  • Pindoduo capitalized on WeChat mini programs to leverage the WeChat social graph for e-commerce.
  • Alibaba's competition with Tencent and its ban on WeChat use by sellers created a counter positioning opportunity for Pindoduo.

"Recognizing a counter positioning opportunity to build an amazing moat around your."

Ben Gilbert discusses how Pindoduo's strategic use of WeChat mini programs created a competitive advantage over Alibaba.

Supply Side Network and Defensibility

  • Pindoduo may have built a unique and defensible network of suppliers different from those on JD and Alibaba.
  • The integration of contract manufacturers and Pindoduo's C2M initiatives strengthens its supply chain moat.

"I do think that a good portion of the supply side for PDD is different than the supply side on JD and Alibaba."

David Rosenthal speculates on Pindoduo's distinct supply chain and its potential as a competitive moat.

Diminishing Marginal Returns

  • Pindoduo faces increasing customer acquisition costs as it grows.
  • The challenge is to maintain growth and monetization as the company scales.

"Every user after that costs more money to acquire."

Ben Gilbert discusses the concept of diminishing marginal returns as it applies to Pindoduo's user acquisition strategy.

Internet Penetration in New Economic Areas

  • Successive generations of internet companies penetrate further into previously untapped markets.
  • Pindoduo is an example of an internet company reaching into the agricultural sector.

"You can penetrate further and further into areas of the economy that you wouldn't have thought the Internet could penetrate into before."

David Rosenthal highlights the expanding reach of internet companies into various sectors of the economy, such as agriculture.

Crusoe and Clean Compute Cloud

  • Crusoe is a clean compute cloud provider for AI workloads, partnering with Nvidia.
  • Crusoe's data centers use wasted, stranded, or clean energy, offering cost and environmental benefits.

"So Crusoe, as listeners know by now, is a clean compute cloud provider specifically built for AI workloads."

David Rosenthal introduces Crusoe as a company providing AI compute services with an environmentally friendly approach.

Grading Pindoduo's IPO

  • Pindoduo's IPO is evaluated for its return on investment and strategic use of capital.
  • The discussion includes weighing investment in Pindoduo against other e-commerce giants like JD and Alibaba.

"For the shareholders who decided to put their dollars to work in the IPO versus other things that they could have put their dollars to work into. How good of a decision was that?"

Ben Gilbert analyzes the success of Pindoduo's IPO from an investor's perspective.

CEO Transition and Future Strategy

  • The recent CEO transition at Pindoduo raises questions about the company's future direction.
  • The effectiveness of Pindoduo's initial growth strategies in acquiring new users is debated.

"This is actually a case where the most recent news is a little concerning the CEO transition."

David Rosenthal expresses concern over the implications of Pindoduo's CEO transition for the company's future.

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