Launching Banana Capital

Announcing Fund 1

I recently closed Fund 1 of my new firm, Banana Capital. I raised the oversubscribed $9.999m fund in Q1.

Banana Capital is an internet-first sector, stage, and geography agnostic tech-focused investment firm. Fund 1 will write $25k-$300k initial investments in early-stage companies (pre-seed through Series A) with select later stage investments. This will expand over time from pre-seed to pre-IPO and into the public markets. I’ve made 15 investments (some new, some follow-on’s to prior investments), with five set to close in Q2. Fund 1 will have a total of 35 to 40 core portfolio companies. To date, 65% of Fund 1 founding teams include non-white founders and 50% of the teams include more than one gender.

Banana has the DNA to be a founder’s first outside investor or their newest supporter as a multi-billion dollar company. During this fund, I won’t lead rounds or take board seats, allowing for more collaboration with founders and other investors. Like most investors, I can help with things like marketing, PR, recruiting, fundraising, bug squashing, and memes. What I can uniquely bring to founders is high independent conviction in what they’re doing and speed of decision making.

Thank you to all the founders and LP’s that chose to partner with me on this journey. I am forever grateful for your advice, support, and trust.

I talked with Natasha at TechCrunch, and you can learn more about Banana Capital here. If you’d like to follow along, find me on Twitter, subscribe to my Substack below for longer-form writing, or check out bananacapital.vc.

WeeCare, Carebnb’s, and the US Child Care Epidemic

The LA-based startup fixing America's child care deserts.

My partner and I welcomed our second daughter into the world seven weeks ago. Raising a child is possibly the most rewarding experience in the world, but 2020 feels like a strange time to do it. Every family is adapting to the changes brought by the COVID-19 pandemic, which has emphasized the many problems facing the US child care industry.

I first caught on to how LA-based WeeCare was addressing these structural issues head-on when I connected with co-founder and CEO Jessica Chang in 2018. Their team built a system to instantly spin-up a new daycare anywhere in the country. They recently launched a corporate benefits offering, allowing any business in the country to offer every employee a local child care solution overnight.

Child Care: A Massive Broken Market Hiding in Plain Sight

US child care is a $57 billion market (60% in-home, 40% in-center). An additional $22 billion is spent via government subsidies, and the amount of time spent and forgone wages by parents and family members providing unpaid care is orders of magnitude larger than the actual dollars spent. The largest historical and future driver of the market size is the participation rate of women in the workforce. If you read through investor presentations from industry leader Bright Horizons, a publicly traded operator of large child care centers valued at ~$10 billion, most of the industry’s profitability is driven by price increases, cost cuts through consolidation, and adding non-child care product offerings inside its centers.

It’s not a particularly large market, but it's often the largest expense for any household with children. These households spend more annually on child care than on housing or college tuition, and more than transportation, food, and healthcare combined.

60% of children under age six have parents who are both in the workforce, which (putting aside the often difficult decision to have someone else raise your kid) can make child care more affordable for working families. The unaffordability problem is more pronounced for single-parent households who spend an average 37% of their income on child care - up to 70% in some states like Massachusetts. It's a difficult reality that many single parents work all day only to pay most of what they earn to someone else to watch their young child(ren) for 10 hours.

Government subsidies have historically helped offset some of these costs. Unfortunately, the number of US facilities receiving subsidies decreased 59% between 2005 and 2017, with the number of small in-home centers legally operating without all proper licensing (and most prevalent in low income and communities of color) receiving subsidies down 75%.

There are also hidden costs of child care that are not captured by any of these metrics. 43% of professional women leave the workforce within two years of having children. 74% of women eventually return at least part-time, but only 40% ever return to full-time. 75% of women who leave the workforce say the top reason is child care related.

It’s estimated families without access to affordable care forgo $29 billion in wages annually. US businesses lose $4.4 billion annually due to employee absenteeism as a result of child care. In Louisiana alone, a lack of child care leads to $1.1 billion in economic losses. A survey also found 40% of parents regularly missed work due to child care issues in 2017, 16% of respondents quit their jobs because of child care issues, and 14% actually turned down a promotion in order to keep the same schedule or to ensure they did not lose access to a child care subsidy due to a pay raise.

Shrinking Supply and the Rise of Child Care Deserts

The state of the US child care market can be traced back to a massive supply / demand imbalance. There are roughly 690,000 licensed (60,000 unlicensed) daycares in the US, with 1.3 million Americans working in the child care profession. 8.3 million kids are enrolled in care: 900,000 with a nanny and 5.8 million with family, friends, or a neighbor. Approximately 7 million children under 5 are watched in a home: 4 million by a relative or friend, 3 million in a paid daycare.

Experts estimate there’s a 3:1 ratio of kids needing care to kids in care. The highest quality options often have waitlists of a year or more. This lack of supply primarily impacts women, and specifically those with low incomes, single parents, and people of color.

In Minnesota, the number of family child care providers dropped 25% between 2006 and 2015. The total slots available in Minnesota and Wisconsin dropped 5% between 2015 and 2020, and California’s total available slots dropped 9% between 2014 and 2017. Looking at data on US child care facilities, its apparent most of these closures are in-home daycares. No one knows why for sure, but one explanation is that older in-home providers are retiring without new educators replacing them. It’s a hard job, and stressful enough watching children all day, let alone running a business that typically isn’t very profitable.

This lack of supply has led to child care deserts: neighborhoods with little or no access to affordable child care. While this tends to skew towards low income and communities of color, a 2017 study found child care deserts are prevalent across the socio-economic spectrum. As few as 41% of top quintile, suburban US census tracts and as many as 60% of bottom quintile, urban neighborhoods are classified as child care deserts. This lack of supply means parents pay more, classes are fuller, and higher child to provider ratios generally lead to a lower quality of care.

Further explaining a lack of new educators entering the profession, child care isn’t generally a financially lucrative career. According to the BLS, as of May, 2019 the average wage for US child care workers was $11.65 per hour, or $24,230 per year. A Center for the Study of Child Care Employment (CSCCE) study found that 86% of providers who work with infants and toddlers are paid less than $15 per hour. The child care workforce is composed mainly of women, 40% of whom are of color. Nearly 15% of child care workers live in households with an annual income below the federal poverty line, and 36% below 200 percent of the poverty level. Half of all child care workers receive food stamps, welfare, or Medicaid.

Working as a child care professional has also historically been poor for someone’s health. A 2017 study of North Carolina family care providers found 29% did not have health insurance. Less than 50% met guidelines for physical activity, fruit/vegetable consumption, and sleep. Over 50% reported “high” stress, largely due to low wages that impose high financial constraints, 12-hour shifts, and no access to adequate space to take safe breaks.

WeeCare and the Carebnb

WeeCare created software built from the ground-up, entirely customized to simplify the process of running an in-home daycare. Founded in 2017, it launched its first daycare in January of 2018 and helps early childhood professionals manage:

  • licensing and regulations

  • curriculum creation and planning

  • launching, leads / marketing, virtual tours, and parent communication

  • billing, insurance, and taxes

  • government subsidies, and

  • all other back-of-house functions and paperwork

It’s essentially an in-home daycare “business in a box”. Customized software saves time for a child care professional spending an average of 56.5 hours per week watching children and reduces churn for WeeCare as they acquire clients for their customers. There’s often a significant disconnect between millennial parents and members of older generations providing care. Most don’t have reviews online, or even a website. WeeCare helps bridge that gap. And like any vertical SaaS business, there are lots of ancillary features (payments, insurance, etc) WeeCare can layer on over time to increase monetization and provider and parent stickiness.

WeeCare educators earn an income 2-3x higher than if they were working in a senior role at a large child care center - up to $100,000 per year, or 4x the national average. They can leverage their personal mortgage / rent payments for business use, and those with young families can spend the day around their own children while earning income teaching others.

WeeCare's in-home model often results in tuition prices 30-40% below market. The company is quickly scaling its subsidy program too. Over 80% of WeeCare locations have opted-into accepting families paying with subsidies, and over 40% have subsidized families currently enrolled.

In-home child care arguably provides better care for students. In home day cares average a 6:1 student to teacher ratio, compared to 12:1 in traditional centers, and safety and background checks are more strictly enforced. Homes also tend to be the primary option for families of color. It’s more affordable, convenient, and parents tend to be more comfortable with members of the community watching their children.

During the course of building and scaling the software product, the WeeCare team realized their customers needed help acquiring their own customers and turned it into a full marketplace that (after a lot of hard work) had acquisition flywheels sucking up both supply and demand sides of the marketplace, anywhere in the US, with the flick of a switch.

A Team Dedicated to the Problem

All of this comes back to the strength of the team. Co-Founder and CEO Jessica Chang was originally born in China. She landed a marketing internship at Cisco’s China division the summer before moving to San Francisco in 2002 to study Economics at Cal Berkeley. Three summers later, she was covering semiconductor equities at Citi while taking a full-time course load. She worked in M&A at Deutsche Bank after graduating and made the jump into a private equity operations role at Macquarie in 2007. Over the course of the next decade she started a family, bought and managed three preschools, and eventually landed at RadPad in 2016.

It was at RadPad where Jessica first met Matt Reilly. After a six month overlap, Matt was recruited to join Honey as Head of Growth. After a decade in growth and SEO roles, Matt kickstarted Honey’s initial growth flywheels. He left Honey, ultimately acquired by PayPal for $4 billion, to join WeeCare a year later. The duo then recruited friend Jesse Forrest, who was working as Director of Engineering at Tradesy, to join as CTO. The team’s growth, technical, and hands-on operational experience from previously scaled and exited startups sets the stage for today.

On-Demand, Scaleable Child Care

Fast forward to October of 2020, WeeCare built a product that can instantly bring supply anywhere in the US onto its network. Child care centers typically have a 20%-30% vacancy rate, and WeeCare can also flip on demand acquisition to fill any existing, non-WeeCare center’s unused capacity at scale. It takes less than a week to onboard a qualified provider onto the platform. This is (often more than) 10x faster than the national average of 2 months.

WeeCare’s home market of Los Angeles is a perfect case study of its model. It currently has over 900 schools in the Greater LA area, or approximately 18% of all in-home daycares in Los Angeles County. Digging into individual sub-markets on the map, it’s clear they have a deliberate supply acquisition strategy that hits specific sub-neighborhoods as needed.

Detroit and New York highlight two different phases of WeeCare’s growth within a market. Detroit is a newer city with WeeCare locations predominately in lower income areas, and New York reflects how its model, first launched in low income communities in LA, has began scaling into higher income neighborhoods like Manhattan.

WeeCare’s deliberate, productized approach has created a very capital efficient model. Using public data compiled in mid-March and a very basic estimate of supply compared to total capital raised, WeeCare was adding capacity roughly 10x more efficiently than its closest startup competitor, Wonderschool. Other startup competitors like MyVillage and NeighborSchools appear to have just started scaling outside their home markets. Compared to Bright Horizons, which operates 705 large child care centers, WeeCare adds new capacity 86x more efficiently.

Another way to frame WeeCare’s growth: Before WeeCare’s 2018 launch, Bright Horizons had a total of 695 US centers (page 21). By October of 2020, WeeCare had 2,700 US schools compared to a net of 13 additional centers brought online by Bright Horizons.

COVID-19: Closures, Panic, and Chaos

COVID unquestionably accelerated many of the aforementioned issues in the child care market. Attendance dropped as much as 90% nationally, and 80% of daycares in the SF Bay area closed during the peak of the crisis. In a March, 2020 survey of 6,000 providers, over 70% of home-based daycares had only one week of financial runway, and 63% didn’t think they could survive closing for more than 30 days. Experts predict loss of profitability and no federal funding could close 4.3 to 4.5 million slots in 2020, or roughly half the total supply of child care in the US.

Preschool capacity has disappeared as well due to licensing limitations and closures, while many K-12 schools (which allow most parents to work) have become virtual or staggered in the fall. And for many child care workers earning near minimum wage, going back to work actually means a pay cut from unemployment benefits in addition to risking their lives on the frontlines.

The anxiety for new parents sitting on waitlists exceeding a year have been exacerbated during this year's global pandemic. They’re now avoiding large centers with large class sizes. Since home daycares aren’t grouped by age, each house consists of only a few families and leads to less cross-contamination. Parents no longer commuting to work, mostly millennials raised in the sharing economy, are also finding convenience in local in-home options.

Worst of all, COVID has accelerated the number of parents (specifically women) leaving the workforce. Some due to job loss, many due to zero child care options. This accelerated when 865,000 women dropped out of the workforce when school resumed in September. According to a McKinsey study published in September, an additional one in four of all women are considering reducing hours, moving to part-time, switching to less demanding jobs, taking leaves of absence, or stepping away from the workforce altogether according.

During the onset of the pandemic in March, 12% of child care chains remained in operation. Home daycares fared slightly better at 25%. Over 250k child care professionals were laid off. In a corporate update, 21% (150) of Bright Horizons US centers remained open in March, with each classroom operating as self-contained classes (not the most efficient use of their massive centers). This number increased to 30% (210) by the end of June (page 26) and 55% (390) to end July.

90% of WeeCare’s centers remained open through the height of the Pandemic, and per Time, it continued adding capacity to reach to 2,700 in October. It also launched two new product lines: Fever Free and a corporate child care benefits offering.

Unlocking the Next Level of Growth with Corporate Benefits

COVID ultimately accelerated WeeCare’s end-game: the ability to quickly launch a daycare anywhere. It’s new corporate child care benefit allows any employer to provide child care for any (or every) employee as fast as one day. This includes support for a distributed team, an employee relocating across the country, or Instacart’s 200k essential on-demand workers in thousands of US cities.

Child care is an essential infrastructure for the US economy. In today’s work-from-home environment, most working parents (and moms, if we’re being honest) have not only continued working, but also became full-time teachers, caretakers, and often therapists for loved ones who have plunged into depression. Nearly 33% of the US workforce has children at home, and 10% of economic activity can’t happen if schools and daycares are closed. According to a 10-year study published in 2016, 54% of employers reported workplace child care benefits had a positive impact on absenteeism, reducing missed workdays by 30%. It also reduced employee turnover by 60%, and women who received assistance for child care costs were 40% more likely to remain at the same job two years after giving birth.

Employers paying for child care could expand the size of the market significantly as more unpaid, family, and friend-based care shifts to a professional setting. And WeeCare offers a solution to quickly spin-up the exact supply needed to support others in the child care benefits like Kinside, Winnie, and Care.com.

WeeCare’s ability to quickly spin up supply also benefits Bright Horizons. 66% of it’s 705 US centers are built on-site, and often funded by, its base of over 1,000 B2B customers.

Bright Horizons discloses these centers cost an average of $2.5m to build-out, and are unfortunately not often convenient for employees working from home, nor useful for distributed workforces. WeeCare is perfectly positioned to partner with large center operators like Bright Horizons to spin-up supply and fulfill contracts with their clients.

WeeCare’s Fever Free product launched in July represents another addition to its product stack. It’s the internal tool it used to detect family fevers from their homes pre-drop off, leading to zero COVID spread in any of its 2,700 locations.

Parents take a brief video of themselves and their kids using a digital thermometer. AI verifies the temperature reading and that it’s a real thermometer, and parents tap symptoms family members are feeling. I was surprised that competing apps are all self-reported, and WeeCare’s was the first product in the market to do this automatically.

WeeCare rolled this out to all their daycares in March, and opened it to other customers in Q3. Before launching, they were fielding inbound requests from daycares, then preschools, entire public and private school districts, and even universities. Inbound interest has also opened up channels to government entities, healthcare systems, and private sector businesses like film production and manufacturing plants.

Fever Free allows WeeCare to continue acquiring customers and building distribution if either schools remain closed and parents need in-home care, or if the world reopens and businesses are in-need of temperature monitoring. As WeeCare scales its instant child care + Fever Free solution, it becomes a very compelling partner in the child care benefits space.

Closing Thoughts

While the global COVID-19 pandemic of 2020 put the child care industry into turmoil and closed the majority of supply, WeeCare kept 90% of its centers (now near 100%) in operation. As you can imagine, more product lines and increased urgency in the problem it's solving have positioned it to grow even faster to end Q3 and into 2021. As WeeCare expands beyond in-home daycare, it’s on a path to positively impact every family in the US.

If you, your business, or someone you know is looking for a new child care experience, check out WeeCare. It’s likely better and more affordable than their current experience, and its model should become even more affordable over time. The team is working towards an incredible mission and I couldn’t imagine a more exciting company to be involved with.

Pinduoduo and Vertically Integrated Social Commerce

How the son of factory workers grew Pinduoduo from Zero to $100 billion in five years.

In 2015, Colin Huang founded his third company, Pinduoduo (PDD). By June of 2020, it had become China’s second largest ecommerce company and was valued at over $100 billion in the public markets. How did a company that helped farmers sell fruit on the internet rise so fast in a market dominated by Alibaba and JD?

Pinduoduo, meaning “together, more savings, more fun”, eliminated layers of middlemen and flipped the retailing model from being supply-driven to demand-driven. The team used a mobile-first approach that gave it a fundamentally different product DNA than incumbents. It used fruit as a wedge to combine consumption with entertainment and created a vertically integrated gaming company. It took advantage of down payments from suppliers and used stretched payment terms to create float out of customer transactions. It used that float to fund customer acquisition, and then leveraged clever growth tricks on an emerging distribution channel (WeChat) to acquire hundreds of millions of overlooked customers for practically free.

Humble Beginnings

Colin grew up in Hangzhou, the home of Alibaba located in the Eastern Chinese province of Zhejiang. His father never finished middle school and worked in a factory with his mother. Colin excelled in math. At 12 he was invited to the Hangzhou Foreign Language School, attended by the children of the cities’ elites. He credits this to changing the trajectory of his life. He was among the top students at the school and received a scholarship to study Computer Science at Zhejiang University, one of China’s oldest and most prestigious schools.

He joined the Melton Foundation his first year and secured an internship at Microsoft China making $900 per month - more than his parents combined annual salaries. He then transferred to Microsoft’s US HQ, making over $6,000 per month.

In college, Colin met NetEase (gaming) founder William Ding after helping him with a coding question in an online forum. This serendipitous meeting changed Colin’s life. William introduced him to many other Chinese tech luminaries like Tencent (WeChat) founder Pony Ma, and SF Express (logistics) founder Wang Wei.

Colin then moved to the US in 2002 to pursue a Masters in Computer Science from the University of Wisconsin-Madison. By graduation in 2004 he had a full-time offer from Microsoft, and an impressed professor wrote letters of recommendations to the large US tech giants of the time (Oracle, Microsoft, IBM).

The summer before moving to the US to start at Wisconsin, William at NetEase had also introduced Colin to Duan Yongping, fellow Zhejiang University alum and founder of BBK Electronics. The two grew very close. Colin considers him a close friend, mentor, and he even helped Duan with his investing. Duan recommended he move to San Francisco to work at a promising young startup. Colin then turned down all of his other offers to join a pre-IPO Google.

Colin joined Google as a software engineer working on early ecommerce-related search algorithms. He quickly became a Product Manager. In 2006, Duan won the annual charity auction for lunch with Warren Buffett with a $620k bid. Colin joined alongside Duan’s wife and five other friends. It's said that this meeting with Buffett greatly influenced Colin’s crafting of the Pinduoduo business model. This included the power of simplicity, utilizing float, and redistributing wealth (as Buffett has famously pledged to donate 99% of his wealth after death).

Colin returned to China shortly after to work on a secret team launching Google China. He reportedly grew tired of constantly flying back and forth to the US pitching Google founders Larry and Sergey on trivial matters. The last straw was a trip to get in-person approval of a change in the color and size of Chinese characters shown in the search results. He left many of his unvested options behind and Google eventually shut down the division. Colin then followed many of his mentors into a journey of entrepreneurship.

The Birth of a Serial Entrepreneur

In 2007 Colin founded his first startup, Ouku.com, an ecommerce site selling mobile phones and other consumer electronics. His mentor Duan’s company was a large player in the Chinese electronics supply chain. Duan was an angel investor and likely helped in the early days. Colin built up Oaku to “several hundred millions of yuan” in revenue (~$20-40 million USD), but he stepped down and sold the company in 2010 after realizing JD’s scale would always grant it better terms from suppliers and he could never beat them.

Almost immediately, he brought members of the team to build his second company: Xunmeng. It was a gaming studio that built role playing games on Tencent’s WeChat. Some ex-Oaku and future Pinduoduo employees launched Leqi, which helped companies market their services on other ecommerce sites (like Alibaba’s Taobao and JD). Both companies took off. Then Colin got sick.

He had an acute form of Otitis media, which causes severe inflammation and pain behind the eardrum. This typically causes a loss of appetite and occasional fever, and Colin specifically struggled sleeping. He stopped going into the office, and briefly retired in 2013 at 33 years old. He spent over a year at home. He considered moving to the US to open a hedge fund. He also thought about starting a hospital after going through the painful process of treating his ear infection.

Over the next two years, Colin came up with the idea for what became Pinduoduo by observing China’s two largest internet giants: Alibaba (ecommerce) and Tencent (social, games). He’s quoted as saying "these two companies don't really understand how the other makes money." Both are massive, successful companies, however neither had figured out how to penetrate the others business.

Pinduoduo fell directly in the center of the two; social gamified ecommerce. It helped manufacturers cut out middlemen by selling discounted items directly to low income consumers, and monetized largely with advertising. It fell within the intersection of unique insights Colin gained growing up poor and every previous business he, his mentors, and his team had worked on.

Pinhaohuo: Selling Fruit in WeChat Group Chats

Pinduoduo was initially founded in early 2015 as yqphh.com, or Pinhaohuo (PHH, “piece together good goods”). PHH’s initial business model consisted of buying fruit in bulk from farmers and then selling it directly to consumers. China’s fresh fruit market was growing fast in 2015, but less than 3% was sold online. Colin raised an angel round from his mentors, and once again brought over the team from his prior companies. Many were lifelong friends, including current members of PDD’s management team like Sun Qin, Lei Chen (first CTO, now CEO), Zhenwei Zheng, and Junyun Xiao.

Pinhaohuo’s business grew entirely through group chats on Tencent’s popular WeChat (often called the Facebook of China). To start, they bought boxes of fruit from a local Hangzhou fruit market and separated them into smaller boxes. On April 10th of 2015, they spent a few hundred USD to run one ad on an official Hangzhou WeChat Account (similar to a Facebook Page) that showed up in users’ feeds. They had more than a thousand employees, relatives, and friends of the company share the post. By May 1st, they’d fulfilled a total of 5k orders. Daily order volume surpassed 10k soon after. They paid an average of $0.30 cents for each of these earliest users.

Pinhaohuo also relied heavily on WeChat Pay, WeChat’s in-app digital wallet that had launched in 2013. Most users carried a balance due to the popular Red Envelope feature, in which users sent small monetary gifts to family and friends during the holidays. Routing all payments through WeChat Pay provided extremely low payment fees, low friction for order placing, and PHH’s low order sizes enticed early customers to pay with their outstanding balances. Most importantly, Pinduoduo’s primary competitor today, Alibaba, had also banned its sellers from using both WeChat and WeChat Pay. Its biggest incumbent competitor was un-incentivized to react to this newfound distribution channel.

Over 100 employees were directly responsible for sourcing, inspecting, and purchasing fruit directly from local farms. Initially, this model worked in Pinhaohuo’s favor. Fruit has a short shelf-life and this model reduced the number of supply chain middle men. Wholesalers, logistics companies, fruit markets, and supermarkets taking a cut to support unloading, re-loading, and high fixed overhead costs were all removed. Farmers could charge higher prices while also cutting prices for consumers by 80%.

Logistics infrastructure that was built over the prior decade to support Alibaba and JD’s operations made it possible for the company to grow so efficiently, so fast. As described later, many purchases were entertainment-driven with low intent, which allowed for slower, cheaper shipping. They partnered with SF Express for deliveries, which was founded by one of Colin’s mentors (and an angel investor in the company), Wang Wei.

By September of 2015, Pinhaohuo had became China’s #1 free app and was receiving over 100k orders per day. Then came a pinnacle moment in 2015 when it sold its first batch of Lychee fruits (below). Its single fulfillment center, built to handle 70k orders per day, broke down when demand suddenly spiked to 200k. The front-end of the business wasn’t well-connected to the back-end. The order printer jammed up and deliveries bottlenecked at the warehouse as SF Express wasn’t equipped to handle the demand. Meanwhile, orders kept rolling in. Most of the inventory went rotten and the team missed a majority of its deliveries that week. Daily order volume quickly dropped 80% to 20k and customer retention the following month fell to 25%.

Colin held an emergency lunch meeting in the warehouse. He instructed the team to inform customers their orders would be fulfilled. When many were delivered rotten, customers were refunded. They hired 100 new operations employees and opened six new warehouses. Finally, Colin beefed up the executive team and everyone began to re-architect the entire supply chain.

Pinhaohuo quickly automated the warehouses to intake, sort, package, and distribute inventory onto trucks to be shipped out. Within a month, most fruit spent only a few hours in any of PHH’s six fulfillment centers. The time from farm-to-table was often no more than two or three days. They also productized the supplier sourcing process. This made the business extremely capital efficient and allowed PHH to hit escape velocity. The business ramped to over 300k fruit orders per day, and 600k soon after. In only a few months, they had surpassed the fruit businesses of both JD and Alibaba.

By the end of 2015, 10 million registered users were placing 1 million orders per day. Customer retention was 77%. Half the orders were still coming directly from WeChat. This all exceeded the local shipping capacity of SF Express and the team had to find more courier partners (some owned by JD and Aibaba) and automate their logistics business. This transformation proved crucial as many upstart competitors quickly entered and failed with Pinhaohuo’s initial model.

Pinduoduo and the Team Purchase Phenomenon

In 2016, Pinhaohuo merged with another company Colin had built, a game-like ecommerce platform called Pinduoduo. This combined PHH’s logistics expertise with PDD’s intimate understanding of the end consumer - which had roughly 70 million users playing 30 different social-based mobile games. By Q1 of 2017, the combined entity had completely wound down its operationally intensive direct sales model in lieu of an asset light marketplace. PDD took a 0.6% cut of all sales, or enough to cover payment processing costs. The majority of its revenue would eventually be generated from in-app ads purchased by merchants, as described later.

Pinduoduo was founded in the second half of 2015, around the time many of China’s first wave of group buying startups failed. Most launched in the early 2010’s to help brands unload excess inventory. Many were location-based services that deteriorated in quality with scale and single-player experiences that didn’t influence others. Popular items included discounts on consumer goods, meals at high-end restaurants, swimming lessons, yoga classes, and photography sessions. Brands were promised the discounts would bring new customers, but in reality no affinity was built towards any of these group buying products or their merchants: all consumers cared about was cheap prices. Of what were initially thousands of players, only a few were still in the market by the time PDD launched in 2015.

The largest was Meituan-Dianping. The company formed in September of 2015 when first-place Meituan (“Groupon of China”) and third-place Dianping (“Yelp of China”) merged, giving them an estimated 80% market share and near total control of what was an early and battered group buying market. Today, Meituan-Dianping’s main business consists of food delivery. It's begun layering on a very high gross margin (89%!) in-store, hotel, and travel business - indicating where Meituan’s strategic focus was in the years following the merger.

Another survivor was Juhuasuan (“extremely cheap”), which was the second player and incubated by Alibaba. It focused on connecting Chinese manufacturers with overseas customers and eventually found success as a part of Alibaba’s Tmall focused on high-end products. Vipshop was founded in 2008 as a site for in-season discount and off-season overstock clearance, and used special offers to grow into what is now a public company valued at $15 billion. When JD eventually entered the flash sale market, it tried to differentiate from Taobao by claiming to never sell fake or low-quality products.

This all left an opportunity for Pinduoduo in what looked like the unattractive, low-end of the market. The general consensus among experts was that China was going through a consumption upgrade. Consumers appeared to be moving from cheap goods to quality and overseas imports. The combined Pinduoduo and Pinhaohuo teams began quickly experimenting with new products, including meat and seafood. One of their biggest experiments was team buying.

Pinduoduo’s model was simple: buy everyday items and receive discounts of up to 90% by completing in-app actions or inviting friends to buy them as well. Prices were set by suppliers, and a user's very first purchase was almost always subsidized at a discount by PDD. Subsequent purchases could be made at the full-price, or discounted with a team or through in-app rewards. Users could join existing teams in the app, but prices were even lower if users started their own team. Early products were so cheap that there was very low friction to buy. The K-factor, or the average people a new user invites, was never less than 1. Any money spent to acquire one customer was ultimately acquiring multiple customers. As PDD grew, invites became less prominent. Purchases can now be batched together automatically (almost instantly), making every purchase a team purchase (though at slightly higher prices).

Where others failed with asynchronous purchases of “nice to have” high-end products, Pinduoduo created a synchronous mobile shopping experience equivalent to going to the mall with friends. Cheap essentials like toilet paper created loyal customers that invited their friends, worked together, and came back again and again. Failed competitors mostly had their own apps or websites; PDD was built entirely on top of WeChat. This loose network of friends allowed it to weave purchases made by friends as recommendations throughout the app - including “someone just bought this item” pop-ups that overlay products as users browse. While most ecommerce listings had reviews, few built-in these trustworthy word of mouth-like referrals from friends.

Socialized team buying also gave a psychologically different pricing structure than a product like Groupon. Instead of a listed price, Pinduoduo’s team buying approach meant everything was negotiable and most items could be earned for practically free with enough work. All team buys required an upfront payment that was refunded if the minimum team size was not met within 24 hours. This reduced the friction of initially committing to a purchase, while subconsciously committing buyers to work together to reach the target.

Team buying also flipped the traditional retailing model from being supply driven (“how do we sell what we’ve produced?”) to demand driven (“how much should we produce?”). This is a fascinating aspect of the business that I’ll touch on further, and it was only possible due to Pinduoduo’s mobile-first DNA.

Mobile-First Ecommerce

It's easy to claim team buying as the primary driver of Pinduoduo’s rapid growth. In reality, it was one of many subtle UI and business model changes that PDD used to become China’s second largest ecommerce company.

The biggest difference between Pinduoduo and incumbents was that the product was designed for mobile (web preview here). Instead of manually searching for products like on Amazon or Google, products were sourced to users in a feed similar to Facebook, Instagram, Twitter, or TikTok. In the early days, the app often had no more than 20 SKU’s at any one time. This allowed it to focus on a few core products while incumbents worried about customizing a long-tail of listings. It could then customize those products for consumers (as discussed later) after it hit scale, greatly reducing costs. It was positioned like a digital Costco while incumbents operated more like Walmart.

Pinduoduo (left) vs Alibaba’s Taobao (right)

Without an endless stream of search results, PDD’s users had a constrained choice. It also gave more accurate data on user behavior and interests that fed back into its algorithm to target users later. This set the stage for what eventually became a very lucrative advertising business very similar to the Facebook news feed. Being mobile-first allowed it to build a customer acquisition engine centered on messaging and social media, not email or SEO. It took desktop-first competitors years to react.

Like a traditional social company, Pinduoduo started predicting what users might buy. However unlike a social product that weaves ads into an unrelated experience, and ecommerce where there must be a related search prompt, PDD’s core product was designed around spurring purchases as part of the browsing experience. And its algorithm could push deals, not specific items. It became a virtual mall.

Pinduoduo’s product allowed new suppliers to quickly reach customers. Competitors’ interfaces were search-driven, required heavy investment in SEO, and often centered on multiple product displays. PDD’s feed-based interface placed more exposure on single products. This gave it full control over distribution to influence consumer purchase decisions in ways most favorable to PDD and its suppliers’. This was similar to how TikTok helped new creators quickly build social capital and earn fans:

TikTok could deliberately control the allocation of social capital to its most talented creators, both new or old, as new users poured into the app. Alex Zhu, Musical.ly founder and now Head of Product at TikTok, likens the process to creating a new country and giving a greenfield of opportunities to a new class of creators. Hyper fast user onboarding and no friend graph let it use the entirety of time spent in-app allocating social capital. Source

By February of 2016, Pinduoduo’s monthly Gross Merchandise Volume (GMV) exceeded ~$15 million USD. They raised a stealth Series A round from IDG and Lightspeed China in March, and a $110 million Series B from Baoyan Partners, New Horizon Capital, and Tencent (among others) in July. Shortly after, they surpassed 100 million Annual Active Buyers.

Tencent's involvement proved critical, as it allowed them to further invest in WeChat as a distribution channel. They could analyze the flow of social information and apply those insights to product recommendations, pricing, shipping optimization, and the product roadmap (like the clothing store below). Alibaba had also considered investing but moved too slow, allowing Tencent to start accumulating what became a 18% ownership stake at the time of IPO.

WeChat then launched its now popular Mini Programs in 2017. This allowed developers to build pared down apps (often less than 1 MB) that lived inside of WeChat. Many developers experimented with apps that complemented their existing products, but for PDD it offered a more sophisticated extension of the native distribution channel it built on top of WeChat.

By Q1 of 2017, Pinduoduo’s Annual Active Buyers had doubled again to 200 million. It then raised raised a $214 million Series C in February of 2017. GMV continued doubling every quarter and passed RMB100 billion, or ~$14.7 billion by the end of 2017, less than three years after it was founded. This was a historic milestone that took Taobao, VIP, and JD over five, eight, and ten years respectively to reach.

Pinduoduo continued growing at an incredible pace, primarily over WeChat. By July of 2017, it had served over 300 million users. In Q1 of 2018, it had over 230 million WeChat Mini MAU’s (Monthly Active Users). This represented 57% of all 400 million active Mini Program users, and more than the 166 million MAU’s that used PDD’s own app.

In April of 2018, Pinduoduo raised $3 billion at a $15 billion valuation. Tencent invested over $1.4 billion which further cemented PDD’s role as a favored member of the WeChat ecosystem. By the end of the year, over 1 million merchants were selling on its platform. 11.1 billion orders were booked in 2018, up 158% from 2017 and an estimated half of all incremental Chinese ecommerce orders added that year. Its most popular item? Tissue paper.

Fruit and agriculture remained a core pillar to Pinduoduo’s business as it retained customers and offered a launchpad for other product lines. Agricultural GMV surpassed RMB65 billion (14% of its total GMV) in 2018, making it China’s largest agricultural ecommerce platform. The agriculture business grew 114% in 2019 to reach RMB139.4 billion, with over 12 million direct and indirect agriculture suppliers reaching 240 million buyers (most of the active user base). In Q1 of 2020, orders of apples, cherries, kiwis, oranges, and strawberries all increased over 120% year-over-year. Rice, wheat, cooking oil, meat, dairy, and vegetables averaged a 140% increase.

While some of Pinduoduo’s incredible growth could be attributed to WeChat, one of the biggest shifts in Chinese consumer behavior has been from the “search, pay, and leave” model of traditional ecommerce to social commerce. That wasn’t just WeChat. Much of PDD’s recent success has been due to its game-like mechanics.

Half Ecommerce, Half Gaming Company

When Pinduoduo submitted its filings to go public in 2018, many were surprised it described itself as “Costco meets Disneyland”. It’s a strange comparison; and perhaps “Dollar Tree meets Candy Crush” or “a digital TJ Maxx” are more appropriate as the product stands today.

WeChat offered a tremendous arbitrage opportunity to initially acquire customers. In the midst of its meteoric rise, Pinduoduo was acquiring new customers for as low as $2 each, roughly 20x cheaper than the $40 paid by JD and Taobao. Over time, competitors figured out how to use WeChat for distribution, and PDD needed new levers to grow the business.

Citizens in China’s lower-tier cities where Pinduoduo amassed its initial user base have a lot of free time. Lots of that time is spent playing mobile games, and many of WeChat’s most popular early Mini Programs were games. It explains why the initial PDD concept took off so fast - it was really just a game.

The deals on Pinduoduo changed every day. The app had colorful photos and discounts were hidden everywhere. There was a wheel to spin for daily coupons, discounts for sharing invite links with friends, free products in exchange for reviews, and rewards for daily check-ins similar to Snapchat’s streaks. Some discounts lasted as short as two hours. This prompted quick participation and impulse buys. There was even a leaderboard showing who had saved the most money. One-tap payments and saved info after the first purchase made this entire process frictionless.

In May of 2018, Pinduoduo launched Duo Duo Orchard. It was a game to grow virtual trees inside the app. The more purchases, actions with friends, and time spent in-app, the faster the trees grew. When the trees were fully grown, the player was shipped a box of fruit. It was a virtual stamp card. One month after launch, 2 million trees were being planted per day. The game had 11 million DAU’s by June of 2019 and 60 million by December of 2019.

Unlike many social or gaming products that sell ads alongside non-related content, Pinduoduo’s entire experience is part of the monetization model. Every interaction builds up to a purchasing event. Many of the ads mobile games are monetized with eventually spurs some form of commerce. PDD built commerce directly into its games to capture more of the value chain. And much of that value went to its suppliers.

Consumer to Manufacturer: Eliminating Layers of Middlemen

Before the internet, most of manufacturing and retailing was “how do we sell what we’ve produced?” Even today, despite having direct relationships with consumers, many brands still order inventory from their suppliers up front before any sales are made.

In Pinduoduo’s early days, it helped farmers in small villages sell fruit directly to their neighbors over the community’s newly purchased smartphones. Combining fruit orders at the front-end helped PDD predict volume. It could guarantee sales upfront and reduce risk for suppliers; similar to government subsidies that support much of the world’s agriculture production. As consumers cultivated rewards in virtual games, it built in even more predictability. Farmers could optimize their harvests (for product quality, not shipment length), had more predictable income streams, and consumers paid lower prices for fresher fruit than they could buy in-person because so many layers of inefficiencies were removed.

As it amassed users, Pinduoduo began predicting, and then influencing consumer demand elsewhere. Its team buying model flipped the retailing model from supply-driven to demand-driven. It would be as if Facebook went a step further than partnering with direct to consumer brands dropshipping from overseas, and instead created a Shopify-like tool for those brands’ suppliers. In some cases, these were similar to a Pinduoduo private label. In others, manufacturers were building a consumer-facing brand for the first time. As Colin wrote in a now-deleted blog post: it eliminated economies of scale advantages, made small scale customized services viable, and allowed both small manufacturers and retailers to compete against larger competitors.

Taking learnings from Google and adopting the model used by Taobao (and pioneered by Pinduoduo investor and ex-Taobao CEO Sun Tongyu), Pinduoduo turned this into a marketplace. They called this “Consumer to Manufacturer”, or C2M. There was high fragmentation in the original supply of local farmers and the model scaled very fast. It guaranteed demand to suppliers, who would in-turn pay for that demand. Suppliers could eventually bid on in-app feed placement, banners, links, logos, and keywords in search results. They could control prices, group sizes, and how many orders they would ultimately fulfill. This allowed them to precisely predict their volume and input costs months ahead of time. It allowed small producers to reap some economy of scale benefits typically captured by only the largest players in an industry.

Pinduoduo also helped manufacturers customize their products. The direct relationship with consumers gave them insight into consumer behavior. They could cut costs by reducing demand mismatches, tweak clothing styles, redesign food packaging, accelerate product development timelines, launch entirely new products, and even integrate PDD’s data directly into their manufacturing lines. Similar to how marketers might use Google keywords to predict demand, Chinese suppliers could do the same. This process eliminated layers of middle men across a host of industries and let producers (many without their own brand) sell directly to consumers.

Suppliers paid Pinduoduo an upfront fee when first listing on the platform to guard against fraud (they were also fined 10x the value of any counterfeit goods they were caught selling!). They were required to pre-pay for advertising that was redeemed over time, and received payment from PDD an average of 15 days after the goods were shipped out of their factory. Since payments from customers were collected at the time of sale, this gave PDD a negative cash conversion cycle, or float, that collected cash before actually delivering any goods or services (as highlighted below).

For a company like PDD that might see its business grow 25-100% in any given month, receiving cash up front from consumers and paying its bills two weeks later had massive downstream implications on its capital needs. This negative working capital provided excess cash to subsidize user acquisition and allowed the company to mitigate shareholder dilution as it scaled.

This was all scaling at a time the Trade War with the US was evaporating foreign demand for Chinese manufacturers. Chinese exports slowed in 2018, and February of 2019 brought the lowest of Chinese export volume in three years. The COVID-19 pandemic to start 2020 also didn’t help foreign demand. The C2M model that was core to Pinduoduo’s business model began as a broader country-wide push to modernize the manufacturing industry, but increasingly became a tool to stave off a recession.

Many of the suppliers joining Pinduoduo’s marketplace were invisible-to-consumer factories that lost business selling products to overseas brands who then marked up prices 5-10x. They were familiar with online retail, had excess capacity, and some had even tried and failed to launch their own consumer-facing brands. PDDs ability to pool demand allowed them to sell similar volumes of products to consumers at similar pricing they were getting from big brands. These savings were then passed along to consumers and further reinforced PDD’s “more savings, more fun” flywheel.

Pinduoduo heavily recruited these local suppliers that were losing international revenue. It launched 106 of these “manufacturer owned brands” in 2019, and aimed to create 1,000 more in 2020. According to a Citi note “more than 1 million merchants operated on PDD’s platform to end 2018, but they include only 552 established brands. That compares with 150,000 established brands on Tmall.” Most of these manufacturers will gladly accept foreign demand when it returns, but will continue to benefit from PDD’s newfound domestic business.

Moving up the Consumption Stack

In 2018, Taobao had over 500 million users compared to WeChat’s 1 billion. The gap between the two represented mostly citizens in third-tier and below cities, many of them senior citizens.

This increasingly became a problem for China’s incumbent ecommerce players as Taobao’s penetration was as low as 1% in some of China’s smaller cities. Third-tier cities and below makeup over 50% of the population and are estimated to make up 66% of China’s consumption growth between 2020 and 2030. While upper-class consumers cared about international brands, this newer wave of consumers cared more about lower prices and quality products. Traditionally, over 55% of Singles Day GMV, or Chinese ecommerce’s annual discount day, came from third-tier cities and below.

Pinduoduo built its early business model around these young consumers in rural communities and China’s smaller cities. Meanwhile, incumbents tried serving them with drone delivery. PDD would first target rural customers around a city, get farmers and other merchants on board, and then move to the city center. In some cities, PDD saw penetration as high as 35%. Pinhaohuo’s initial user base was 80% female who likely drove most of their household purchasing decisions. For many of its earliest customers, PDD was their first experience using ecommerce.

Colin has said “People living in the five rings of Beijing wouldn’t understand our purpose. The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in the Anhui province.” He uses Tian Ji’s Horse Racing Strategy as an analogy to Pinduoduo’s model:

Tian Ji and the king of the Qi Kingdom both like horse racing and race each other often. They frequently make bets. The king of Qi has better horses and Tian Ji loses every time. One day, Tian Ji’s friend says “take me to the race next time and I can help you win”. His friend learns that for every race, Tian Ji and the king both choose three horses classified as good, better, and best. There are three rounds, and the winner of the race is the one who wins at least two rounds. Both of them were using their “good” horse for the opponent’s “good” horse, “better” horse for the opponent’s “better” horse, and “best” for the “best”. The king had a slightly better horse in all three levels, and won every round. Tian Ji’s friend then brings up an idea: use Tian Ji’s “good” horse for racing the king’s “best” horse, then use the “best” horse against the king’s “better” horse, and the “better” horse against the “good” horse. As a result, Tian Ji loses the first round, but wins the second and third round, winning the race.

Similar to Tian Ji, Pinduoduo noticed that incumbents were overlooking lower income consumers. These consumers flocked to PDD’s low prices which allowed it to operate under the radar while building a model that allowed it to quickly scale up market, catching competitors off guard. In Q1 of 2019, 44% of new users came from first and second-tier cities. Over $1 billion in agriculture products were sold in the first two weeks of June (up 310% year-over-year), 70% of which were bought by consumers in these large cities. By November, 45% of PDD’s GMV came from Tier 1-2 cities.

The Ongoing Battle for the Chinese Consumer

By March of 2020, over 630 million active buyers had made a purchase on Pinduoduo in the past year. The app had 488 million MAU’s, with many still accessing its services solely through WeChat.

Pinduoduo’s growth did not go unnoticed. By 2018, JD launched its C2M site, Jingzao. JD also launched a near-clone of PDD’s app called Jingzi at the end of 2019, which specifically targeted smaller cities with team buying discounts.

Alibaba launched its Teja group buying app in March of 2018. It announced similar C2M initiatives two years later, with plans to integrate consumer data collection for suppliers into every aspect of its products. It's also focused on negotiating exclusivity with these suppliers to keep them off of Pinduoduo’s platform. Its agricultural flash sales platform Juhuasuan launched in 2019, headed by Jiang Fan (below, left), a 34-year old executive in charge of both B2B Tmall and B2C Taobao. Industry experts believed he was a candidate to eventually lead Alibaba and its battle against Pinduoduo; however he was recently demoted due to personal misconduct.

Startup competitors like Taojiji also emerged in late 2018, gaining 11 million users in two months. One year later it had 130 million registered users, but struggled with the retention PDD had mastered, and was out of business by December of 2019. All of these competitors burned hundreds of millions in capital to move down market towards a consumer base Pinduoduo had already secured. At the same time, Pinduoduo was spending to move up. Its entire business was built around this C2M model, meaning its value proposition for suppliers increased as it grew.

One of Pinduoduo’s primary strategies to move up market was TV ads. Many consumers knew of PDD but were skeptical of the product quality. They used exclusive product drops tied to specific shows, celebrity endorsements, aggressive promotions, and in-app countdowns to convince users to try the app. Starting with fruit, this built trust in what has now become 18 broad categories like clothing, household goods, appliances, and electronics - all of which have much higher prices and been long dominated by Alibaba. The below commercial aired on one of China’s hottest TV series, the Voice of China, exposing them to millions.

The strategy worked. In January of 2019, 37% of GMV came from top-tier cities. By June, this increased to 48%. In Q3 of 2019, users in Tier 1 cities spent 3.2x more per transaction than the average user. Young users opened Pinduoduo 89 times per month in 2019 (up from 84 in 2018) compared to Taobao’s 81 times per month. DAU’s were using the app over 20 minutes per day. 

PDD’s marketplace model kept costs flat as incremental revenue on larger orders fell to the bottom line. These new users also aggressively invited their friends. This meant that, while paying similar ad prices, PDD’s ROI was almost always higher than its competitors. It consistently spends almost all of (and sometimes more than) its reported revenue in a quarter on marketing. This is essentially PDD using the two week float provided by the 5.1 million merchants in Q4 of 2019 (up from 1 million in 2018) to acquire customers before paying them out. It was significantly under-earning too. PDD’s revenue in Q1 of 2020 was only 3% of GMV compared to JD’s 28%.

What’s next for Pinduoduo?

Over the next decade, we’ll see Pinduoduo double-down on selling to Chinese consumers. They’ll add new gamified features that predict future purchases while building on top of sticky fruit orders, increasing order sizes, and driving prices lower. It will go deeper with proprietary supply agreements, continuing to build what’s equivalent to a PDD private label. We’ll likely see more products that pool demand to be sold to the highest bidder, and some that require upfront payments or have long payment terms that increase PDD’s float.

Pinduoduo started experimenting with travel deals in 2016, and officially launched a travel business in late-2019. These included tours, vacations, and hotel rooms. In June of 2020, it added trains and domestic flights.

Pinduoduo recently announced a move into real estate. Users paid a ~$1k refundable deposit to take part in a team purchase on a 1,000 unit property under development where 600 units were sold. It appears unrelated to the core business at first, but real estate has a high GMV and typically precedes many other large purchases made by new families. Similar to growing a fruit tree, we may see the company design a complimentary game around the process of building a house or town that ultimately concludes with a purchase.

In 2019, it began heavily emphasizing live streaming. Analysts project China’s live stream market will generate $136 billion in transactions in 2020, up 121% from 2019. Producers broadcast for free and partner with influencers to push garments, cosmetics, and household products. It’s relatively non-scheduled in nature and works well with PDD’s pop-up and flash deals. Consumers put more trust in the product quality when purchased directly from a live stream of the warehouse (below). Many of these warehouses featured foreign goods that had just cleared customs, inviting viewers to ship them directly to their home. And natural to PDD’s model, users earn discounts by inviting friends to watch.

A live streamed event in June of 2019 sold 400 cars over Pinduoduo in 18 seconds. PDD’s recently launched online pharmacy sells both OTC drugs and medical devices. It’s a market fraught with inefficient middle men and pharmaceuticals represent a recurring, sticky product like fruit. In April of 2020 PDD invested $200 million in appliance and electronics retainer GOME, who it now partners with for in-store product demonstrations. It's possible the newly launched DD Bank game precludes financing and insurance related to these larger products. And it will likely integrate consumer usage data directly into many of them, hinting PDD’s custom appliances may one day automatically restock food directly from its farmers.

We may also see Pinduoduo open itself for other retailers to tap into its direct relationship with manufacturers. It also appears to be doubling-down on helping foreign brands sell into China. Amazon may have taken this first step in both of these initiatives, opening a store in November of 2019. It featured 1,000 foreign brands across health, beauty, apparel, and electronics. Amazon has historically struggled in China. Its market share shrunk from 15% in 2012 to less than 1% by 2019. This partnership gave it immediate distribution to hundreds of millions of Chinese consumers. For PDD, it boosted its image within China, giving it instant credibility selling foreign-brands from a trusted source. It also gave PDD access to Amazon’s global network of suppliers and logistics providers.

Pinduoduo recently created its own logistics tracking platform. Similar to Alibaba’s Cainiao which PDD previously used, it won’t own its own fleet or warehouses and instead links together third party providers. It's already the second largest logistics network in the world behind Cainiao. This gives PDD more granular insights on package location and will let them optimize order routing. They’ve opened this up to third parties for free. Couriers will likely be able to bid on demand and earn revenue on previously empty trips like delivering products from an urban center into a village and then bringing produce back into the city. This may allow for faster deliveries and make PDDs produce even fresher. It starts a road down merging online and offline behavior, as described in this video.

Like many other Chinese tech giants, Pinduoduo rolled out its collaborative enterprise software platform called Knock in February. The main features include messaging, to-do lists, basic photo tools, and voice calls. It excludes features popular on other similar products like video conferencing, file transfer, and task / expensing approval. Everything is linked to the back-end of PDD, and hinting it will have benefits similar to Slack’s shared channels for many of PDD’s suppliers.

Colin is personally very passionate about improving the efficiency of Chinese agriculture. Pinduoduo is building 1,000 agriculture plantations which will expand it into coffee, tea, and walnuts among many others. PDD built custom software for farmers to run their businesses and launched Duo Duo University to teach them how to run a business and improve their crop yield. The Chinese labor force is aging, and the new wave of workers will want standardized workflows and quality control on their phones. More efficiency will further reduce PDD’s prices and make its product stickier with suppliers and consumers over time. Its not a stretch to think Pinduoduo could one day provide the software powering most of China’s agricultural and manufacturing production.

Pinduoduo has also started building more in-app games. One in particular is a Farmville-like game called Duo Duo Farm. Another is Duo Duo Crush, a Candy Crush-like game where nearly every action incentivizes a purchase.

One of their newest games is Duo Duo Piggy Bank. Users collect virtual coins by inviting their friends, browsing products, and completing tasks. Once they have enough coins, they can start manufacturing a product in the Dream Factory. This involves performing more tasks to generate electricity to keep the factory running. Finally, they earn extra fuel to expedite the shipment.

These are likely the beginning of many other gamified experiences Pinduoduo will build into its product over time.

Conclusion

Pinduoduo still faces some high-level challenges. China’s discount market has a noted problem with counterfeit goods that are popular with lower income consumers both on and offline. Despite being smaller, PDD generated more complaints than Alibaba’s Taobao and Tmall combined in 2017. A week after its July 2018 IPO, it met with government officials to discuss how to handle these complaints. Short-sellers have made valid claims that PDD’s financial reporting may overstate GMV and Revenue to US investors, and that its hiding employee costs in an undisclosed related entity. The company does not have a CFO (fairly common in Chinese tech), which doesn’t help these allegations. And Colin recently stepped down as CEO to move into a chairman role and began giving his stock back to the company to grant to other employees. Public market investors should be sure to do their diligence on these matters.

Pinduoduo’s rise has been nothing short of impressive. It represents a case study of an excellent team quickly building and scaling a transformational business. Like Amazon used books, PDD used fruit as a wedge to build what became one of the world’s largest ecommerce companies in five years. It went a step further than Tencent building games, or Facebook selling ads, and created an asset-light vertically integrated social gaming company. It built farmers, and eventually manufacturers, a business-in-a-box solution for operating their companies. And it entertained consumers while giving them low prices on products they buy everyday.

If you liked this, please subscribe above for more posts. I’m also on Twitter at @TurnerNovak.

Thank you to Hans at GGV for pointing me to early resources; Ben and David at Acquired for their excellent recent episode on Pinduoduo; and James at Lightspeed + @JoshConstine and @Leonlinsx in the Type House for feedback on early drafts.

Due to the potential inaccuracy and translation errors in some foreign publications, I cannot personally verify every figure shared here. I have linked to all sources wherever possible. This is not investment advice and I currently have $0 invested in securities tied to Pinduoduo.

Snap Partner Summit 2020: Recap and Reflections

Snap opens itself up to developers and adds more features that will increase users, advertisers, and monetization potential

Today’s Snap Partner Summit (replay) gave us new Snapchat usage metrics and more importantly, features that will be core as Snap opens itself up to developers and expands its products beyond the Snapchat app. Many of these new features appear to bolt into Snap’s Ad Platform, giving advertisers access to over 229 million users that use Snapchat every day.

Impressive New Snapchat Usage Statistics

Snap reminded us it still reaches more 13-34 year old’s in the US than Facebook or Instagram, and the 100 million users it reaches in the US is more than Twitter and TikTok combined.

Snap said 125 million people got news from Snapchat over the past year and “hundreds of millions” watch content on Snapchat Discover. Snap announced that 20 Snap Kit apps are now in the Top 100 of the iOS and Google Play Stores, up from 15 in March. The Snap Map now reaches 200 million MAU’s (Monthly Active Users), and Snap Games have been played by over 100 million unique users. They also disclosed DAU’s (Daily Active Users) in India were up 120% year-over-year (YoY), though likely on a base of only 4-5 million.

Snapchat: the Camera, AR, and the Snap Map

Snap reminded us that over 30 times per day, 135 million people create AR with its camera daily, and 170 million interact with it. A big announcement was SnapML. This allows developers bring their own machine learning models into Snap Lens Studio. They highlighted language learning and commerce as early use cases. They also announced 3D face meshing, skeleton tracking, and AR material programming. Importantly, Snap also announced products built in Lens Studio work in all Snap SDK’s - inducing its AR glasses, Spectacles.

Snap also disclosed a new social feature called Local Lenses where users share persistent AR experiences within a neighborhood. It looks like an expansion of the Landmark feature it announced last year.

Lens_Local-Lenses-Landscape

It also hints a push into supporting local SMB’s, and how Snap may monetize the Snap Map. It suggested the Snap Map will become more contextualized, with plans to offer features similar to Google Maps: hours of operation, reviews, Snap stories unique to the location, and delivery options like Postmates, DoorDash, Uber. This sets the stage for integrating both advertising and miniaturized apps that live within Snapchat (more below).

Surprisingly a little early than expected, Snap also announced Alexa-like voice-enabled lenses called Voice Scan. This builds on its Scan Platform through a partnership with SoundHound, which it also announced is now linked to Lens Studio and thus Snap’s AR Developer Platform. They also threw in some teasers (see below) on how integral commerce will become to the Snapchat Camera.

Discovery has always limited Snap’s AR products. It was first done through the in-camera carousel, and Lens Explorer (“Browse” in the image above) which launched two years ago. User-created lenses can now be tagged with voice commands. Voice Scan is significant as over 1+ million lenses have been created by the community to date per Snap, up from 900k as of March 31st. The highest viewed UGC lens appears to have over 14 billion views based on Snap’s disclosures.

Snap also rolled out a action bar that will live at the bottom of the app and contextualize based on the user and how they’re using the app. It looks like a subtle change, but undoubtedly makes it easier for older users to use Snapchat as it continues bringing them into the app. It also elevates the Snap Map as a core product, which should become a focal point as Snap’s AR products continue leaving our phones.

All of these new features have interesting applications today, and are also building blocks for the next decade. Snap has become more vocal lately about its intentions to move into spacial computing, or projecting things onto the physical world around us. All of these products, which are already used by most of the youth in the developed world today, are first steps that will eventually converge outside our phones.

Content: More Reach in the US than Netflix

Snap announced a few new content features. Specifically, the Happening Now bar, which now sits at the top of the Discover page (far right). They also expanded on their participatory AR content, allowing users to become part of the show.

It re-highlighted metrics it’s driven home in recent earnings calls. Time spent watching Discover was up 35% and time spent watching its Original Snap Shows doubled YoY. Specifically, it highlighted Will Smith’s show “Will From Home” has now been watched by over 35 million people, up from 15 million in Q1. For context, he has 46m followers on Instagram and 29m on TikTok.

As mentioned above, 125 million people got news from Snapchat within the past year, and “hundreds of millions” now watch Snapchat Discover. Snap also disclosed that Snap Originals (which it described as “lasting franchises”) are now watched by over half of all Gen Z in the US and 70% of people who viewed one episode of Dead of Night came back to watch the entire series. These all seem very relevant compared to the 70 million subscribers Netflix has in the US, per Statistica.

Bitmoji and Snap Games: A Distributed Social Network

Snap officially re-announced Bitmoji Games, a cross-platform SDK to bring users’ Bitmoji into other publishers games on nearly every platform: PC, Mac, Xbox, Playstation, Switch, iOS, Android, and others.

This allows for quick personalization, and continues laying the groundwork for a back-end giving developers access to Snap’s friend graph, easy in-app purchases, and a distributed metaverse, social network, and digital economy that spans Snap’s developer ecosystem. Bitmoji is uniquely positioned to do this as its already used by practically all would-be early adopters and its IP is inherently cross-platform: 2D, AR, and eventually VR.

Snap disclosed that over 100 million people have played Snap Games, and play an average of 20 minutes per day. Ready Chef launched six months ago and has been played by over 25 million unique users. Play sessions are 2x longer when with a friend, proving that no install, built-in monetization, attribution, in-game chat and voice, and a pre-built friend graph can be very powerful for developers. They announced new partnerships with four new studios, including Voodoo, a French publisher that has over 3.7 billion app downloads across its portfolio.

Most importantly, all of Snap Games are built on HTML5, which is likely architected for cross-platform distribution as Snap opens itself up to developers and eventually launches its own hardware.

Snap Mini’s: Other Apps in Snapchat

In arguably the most important announcement, that Snap used the same HTML5 base as Snap Games to launch Snap Mini’s. These are pared apps that live within Snapchat’s chat and accessed from the same interface as Snap Games, which has already been used by over 100 million people. After launching in chat, Mini’s will likely hit the Snap Map and AR lenses next.

Early Snap Mini’s are from a set of curated partners: Headspace, sports betting, booking concert and movie tickets, class schedules on Saturn, registering to vote, and collaborating on flashcards to study. Like most of its products, Snap likely keeps this closed for a year or two before opening it up for any developer to build on.

Bitmoji, which Snap acquired for $64 million and may have north of 300 million MAU’s, also has a keyboard that could potentially plug Snap Mini’s into any other app. They specifically announced a partnership integrating Bitmoji into all Samsung keyboards.

If you’re familiar with Tencent’s WeChat, Snap Mini’s will look familiar. WeChat Mini Programs facilitated over $115 billion in transactions by 300 million people in 2019 (25% of the user base), up 45% YoY. Snap could go beyond WeChat by eventually extending these outside Snapchat, and they’ll likely be interoperable with other pieces of the Snap Platform and the eventual Snap Operating System that will live on its hardware products.

Snap Kit: The Snap Platform

Much of the above ties into Snap Kit. It now has 800 integration partners (~125 added since Q1) and 148 million MAU’s. Specifically, 20 Snap Kit apps are now in the Top 100 of the iOS and Google Play Store’s, up from 15 in Q1.

Snap announced dynamic AR lenses in Creative Kit. This allows developers to use Lens Studio to build and integrate the creation of a Snapchat lens in their own app. Two examples given were sending a snap to a friend inviting them to join a Houseparty room and a 3D model allowing users to swipe up and purchase a fractional share of a vintage car on Rally Rd.

Finally, Snap officially announced Camera Kit. This officially opens up Snapchat’s camera for other developers to bring into their own app. This builds upon the Snap Camera for desktop with Triller and Squad as early launch partners. Its not hard to see how these products arm the long-tail of consumer social rebels and help both Snap and all of its partners generate more long-term value for their businesses.

Snapchat and the Power of Friends

Behind all these product announcements is a reminder Snap is building on a very strong competitive advantage: a messaging network of hundreds of millions of close friends in markets with high per capita income.

In the short-to-medium term, all these products increase Snap’s monetization potential. More video ads in content and games. More AR ad inventory and commerce opportunities as it opens up its camera. Monetization from the long-tail of business across the world as they open up the Snap Map and Snap Mini’s. It’s likely these features also drive new users into the app, which continues to build on the user acquisition flywheel Snap created with content and AR.

Over the long-term Snap Kit, the Bitmoji SDK, and the Bitmoji keyboard spread Snap’s products into every other app. We didn’t get any updates on Ad Kit, Snap’s Third-Party Ad Network built into Snap Kit, however, it will likely integrate with all Snap’s other distributed products over time as well. And voice will become increasingly more important in the context of hands-free computing with Spectacles.

One of the biggest tests for Snap will be figuring out a monetization model beyond advertising. No one has cracked this outside of China yet, and Snap’s messaging network of close friends makes it possibly the best positioned to do so.

Attack of the Clones: TikTok’s Rival Kuaishou Lands in the US

Plus: Developers can build apps inside Snapchat, Microsoft opens up Office

On Wednesday May 27th, a new app hit the top of the US App Store: Zynn. I threw some initial thoughts on Twitter suggesting this may be a big deal since it was backed by Kuaishou (and ultimately Tencent) which was later confirmed by The Information.

As I mentioned, Zynn is essentially a bare-bones TikTok clone with a reward system. The camera tools feel much more like Instagram than TikTok and there is no ability to search by video sound (or search for anything), a key part of TikTok’s DNA.

The initial content appears to be ripped directly from TikTok. The upload dates on these videos go back as February and March, showing how the app was seeded for three months before launching. Most accounts are related to themes like snowboarding, street racing, or food (for data targeting purposes?). Some accounts (1, 2, 3, 4) appear to have re-uploaded the most viewed videos of a top sound on TikTok. Some combine posts from multiple TikTok influencers (Zynn, TikTok). There’s an account re-posting videos from a beauty influencer as she uploads to TikTok (Zynn, TT). Many of the initial accounts follow each other, and most profiles like exactly 6 or 7 videos. Clicking on these Zynn links, the videos can’t be viewed on desktop and the mobile web experience forces you to download the app. This is a stark contrast to TikTok’s approach.

Zynn began climbing the iOS charts in May. It's unclear when exactly it launched on Android, but it hit the top of both the Google Play and App Store (#1 overall) charts as of Friday, May 29th. It doesn’t seem to be slowing down either: total downloads on iOS were ~241k on the 27th and 28th, and Android increased from 19k to 28k (per App Annie).

The app’s aggressive reward system likely propelled its rapid rise. Users earn small amounts of cash watching videos (around $1.20/hr), bonuses for hitting certain thresholds, and as much as $20 for each friend they invite.

The very big catch behind all of this is the minimum withdrawal amounts and that you can never actually redeem all your rewards. There are some big totals, like $50 gift cards to Amazon, Walmart, and Domino’s. This practically requires users to invite their friends and stick around for while if they want their cash.

Normally I wouldn’t suggest something like this was sustainable, but The Information confirmed what I figured out: Zynn is owned by Kuaishou, ByteDance’s (which owns TikTok) closest rival in China. And Kuaishou itself is backed by Tencent (one of ByteDance’s other largest rivals), Baidu (a Chinese search engine), and Sequoia (an investor in ByteDance) - and just raised $3 billion from them in December.

An Overview of Kuaishou

Kuaishou was founded in 2011 by Su Hua and Cheng Yixiao. They previously worked at Google and Baidu. It launched as a way to create and share GIF’s and quickly evolved into short videos. By 2013, it had over 100 million DAU’s (Daily Active Users); three years before the Chinese version of TikTok (Douyin) launched in 2016.

ByteDance and Kuaishou have a long rivalry. I wrote about ByteDance two weeks ago. One recount of the story describes Kuaishou as having a similar multi-app strategy as ByteDance, although moving slower. Kuaishou’s initial users were rural and working class, often called “the forgotten 80% of China”. Most of the content in its early years was these non-urban users doing weird stunts. Analysts often described Kuaishou as “Jackass for mobile”. One of its most popular creators during this time was a woman who ate and drank random objects.

Combined images show the homepage of ‘Gourmet Sister Feng’ (left) and a live stream of her eating a light bulb (right).

By 2016, Kuaishou was at the top of the Chinese short-video market. Kuaishou’s revenue lagged ByteDance’s first breakout app Toutiao because its advertising product didn’t launch until Q3 of 2016, two years after Toutiao’s. This likely impacted how much revenue and cash it had to re-invest in growth. It also struggled gaining traction outside China in major markets like India and Indonesia where TikTok (launched in 2017) now thrives. Like ByteDance, Kuaishou went through many periods where its products were blocked by WeChat (nearly six months in 2018!), which impacted its growth as well.

A pinnacle moment in this rivalry came in 2017. Kuaishou was reportedly out negotiated by ByteDance for Musical.ly after it refused to also buy News Republic and Live.Me, two other products backed by Fu Sheng, the founder of Cheetah Mobile and influential Musical.ly angel investor. ByteDance bought all three; and subsequently merged Musical.ly and TikTok while de-prioritizing the other two. TikTok went on to consistently top the download charts in nearly every international market. It was late to enter Latin America, and Kuaishou’s international app Kwai eventually gained traction in Brazil. Latin America still appears to be a focus. In June of 2020, its Snack Video app cracked the top 20 in Indonesia, Peru, and Colombia.

By Q1 of 2020, Kuaishou’s short-video product reached over 300 million DAU’s in China, up from 200 million in December. This was lower than ByteDance’s 400 million DAU’s in China and 1 billion globally, but still impressive relative to other large digital platforms. It reported revenue of $7.2 billion in 2019 (beating its initial target of $4.36 billion) in its eighth year in business - better than Facebook. This was primarily through taking a cut of live streamed commerce, a market that’s projected to reach GMV of $136b in China in 2020, an increase of 121% year-over-year.

Coming back to Zynn, suggesting we take it (or at least Kuaishou’s attempt to enter the US) seriously isn’t that crazy. Kuaishou’s core product likely has operating margins in the range of 30-40%. This would have generated nearly $2 billion in cash in 2019 to re-invest elsewhere - on top of the $3 billion it just raised at a $28.5 billion valuation.

US consumers are generally the holy grail for internet businesses. As shown in the chart below of Facebook’s ARPU (Average Revenue per User), North American users bring in 3x more revenue than Europe, 9x more than Asia, and ~14x more than the Rest of the World. This could be further defined as “developed markets” since RoW and Asia-Pac includes countries like Australia, Japan, and South Korea, which have similar income levels to the US. The US also typically drives Western culture, which makes it the perfect market to seed content for similar markets.

For a Chinese company printing cash and looking globally for growth, cracking the US is likely a high priority. The big US players like Facebook and Google don’t exactly move fast, and neither them nor Amazon or TikTok have business models built on live streamed commerce. ByteDance saw success in 2018 and 2019 with TikTok, and we’re now seeing Kuaishou attempt the same with Zynn. The majority of Kuaishou’s Chinese revenue is generated via live streamed commerce, and its user base primarily lives in smaller cities and rural areas of China. This contrasts with ByteDance’s beachhead in China’s richest cities, starting with advertising and expanding into ads and commerce. This difference may foreshadow the strategy each company takes in the US.

Is Now the Perfect Time for a Cash-Based Referral Strategy?

In the past 11 weeks, the US has seen an unprecedented 40.8 million unemployment claims. While many jobs will come back as the world leaves lockdown, many Americans are currently stuck at home all day with no job.

Zynn’s referral and “pay to consume” user acquisition and retention strategy has been tried before by another Chinese company QuToutiao, or “Fun Toutiao”. If you’re familiar with ByteDance, you know its initial product was a hyper targeted news app called “Toutiao”. QuToutiao (launched in 2016) is a Toutiao clone that pays users to use the product. They ended 2019 with $778 million in revenue and 46 million DAU’s who spent over 60 minutes per day on the platform. Its publicly traded (QTT) and valued at $750 million, or ~1x its 2019 revenue - not exactly a premium compared to Kuaishou’s 4x, Facebook’s 8x, or Snap’s 15x. This is likely because investors believe QTT will always have to pay out the majority of its revenue to users and won’t be able to increase its margins. Its sales & marketing expense was 80% of revenue in 2019.

This “pay to consume” model has also been tried by Kuaishou itself. It launched Kuaishou Speedup in August of 2019. It paid Chinese users to watch videos, very similar to Zynn, and reached over 10 million DAU’s within the first 20 days. We could be watching the same playbook here in the US. Many Chinese companies see FinTech as a key initiative, and Kuaishou recently launched a red packet product that allowed Chinese users to send monetary gifts to celebrate Chinese New Year. This combination of rewards, payouts, and P2P gifting could be early moves in a digital wallet effort.

The irony of Kuaishou copying ByteDance, by copying the rewards strategy used by another app that copied a different ByteDance product, while copying TikTok that ByteDance initially copied from Kuaishou, shouldn’t be lost.

We should also not forget that TikTok got to where is today through an unprecedented user acquisition strategy that hadn’t been tried yet at scale: dumping money into competitors’ ad products to grow its own user base. As I wrote:

ByteDance flooded the world with marketing. It reportedly spent $3M/day on user acquisition and PR throughout 2018 and 2019, beating short-video competitors in each market by simply outspending them. TikTok spent over $300m on Google ads in 2018; and $10m/month in India alone. In Q1 of 2019, 13% of all ads seen by users of Facebook’s Android app were for TikTok (Apptopia). At the peak of the ad blitz in September of 2018, 22% of all ads seen on Facebook’s properties by Apple devices in the US were for TikTok.

ByteDance gets lots of criticism for spending so much on ads, but it's worth resurfacing Elad Gil’s 2010 reminder that sometimes it's worth spending money to kickstart a valuable network. Facebook used a similar strategy with Instagram by favoring it in the feed, which helped it quickly convert new users… 50-75% of Instagram downloads ultimately came from Facebook in the years following the acquisition.

TikTok acquired Musical.ly’s 60 million MAU’s in 2017 and was likely much closer to Product Market Fit when it started its marketing strategy than Zynn is today. The initial TikTok product essentially started where Vine left off, and the flood of marketing allowed it to quickly level up its content and user base.

Public reports estimate TikTok paid ~$3-5 per user, which is 4-5x less than the $20 Zynn is promising per referral. Referrals are also an interesting strategy at this moment in time when considering digital ad prices decreased ~30% in Q1.

Zynn: A Mobile-First Live Streaming Platform?

Less than one month after launching, there are early signs Zynn’s strategy could be working. As of June 4th, I saw videos in my feed from real users, not the initial seeded accounts. The comments, which initially consisted entirely of referral code sharing and “friend for friend” requests, are slowly starting to resemble TikTok and YouTube. I found one user with more followers on Zynn than TikTok. This account registered on May 15th and now re-posts some videos a few hours after TikTok. Raina Huang, a TikTok / YouTube / Instagram influencer who eats food, launched her account on May 22nd. She re-posts videos from TikTok, and occasionally sees similar engagement on Zynn.

Live streaming will likely be a high priority for Zynn. Looking at the picture above, “Say something” looks much more like a comment on a live stream, not an uploaded video. Kuaishou disclosed over half of its 400 million registered users had live streamed at least once as of May, 2017, and that 10% of streamers have sold goods. Most TikTok power creators don’t have that skill set, and its arguably still open for the taking. One things for sure: distribution (or content?) is king, and China is willing to pay for it.

The Power of Friends

Paying for content and distribution starts to look much more like traditional media than social media. Products with friend graphs and true user-generated content have structural competitive advantages vs those that don’t. One of the reasons Facebook and Snap are such valuable businesses is because they can place ads beside the content their user base creates for free.

Over the last 4 quarters, Facebook generated an average of $186 in revenue per US Facebook app DAU. It paid all-in costs (expenses and capital expenditures) of $28 per global “Family of Apps” DAU. Facebook’s disclosures with the SEC make it difficult to understand its costs by market, but assuming they’re even around the world, its operating margins are roughly 85% in the US. That’s very good. We see this with Snap as well: roughly 70% of each $1 in new revenue it generated over the past two years has converted to cash on its balance sheet (or Snap’s case, less cash was burned).

Starting with Facebook’s numbers, let’s assume Zynn spends an extra $20 per user for the initial referral bonus. This increases the total cost to $48 per user, or an operating margin of 74%. Kuaishou will likely keep paying bonuses to users to retain them, at least for now, which will also eat at its margins.

It doesn’t seem to have a strong recommendation algorithm, which hints at a weak targeted advertising product. It also generates most of its existing revenue (in China) through live streaming, which means it will likely take a 50% cut of “tips” and pay out a majority of the live streamed ecommerce GMV it generates to creators. Using Facebook’s $186 US ARPU as an anchor and assuming the average marketer targets a 3x ROAS (Return on Ad Spend), Facebook facilitated roughly $558 in commerce per US user in 2019. Kuaishou had over 100 million daily live stream viewers in 2019, and Zynn’s lack of editing tools I described earlier could hint at a long-term focus on live streaming. It disclosed over 19 million users had earned income live streaming on Kuaishou through September of 2019, up from 10 million at the same point in 2018. An announcement of its 2019 funding round also mentioned strategic initiatives in gaming.

Zynn / Kuaishou’s US operating margins may look closer to 30-40% at scale. That’s still impressive and worth paying up for today, provided it can retain its users. They’ll need to get them generating content to boost their margins, which may have already started happening, and could be accelerated if they pay influencers to post, like TikTok.

This ties back into my original point: Broadcast-based, or one-to-many social networks, are starting to look much more like traditional media companies that pay for content and distribution. Jeff Bezos famously says “Your margin is my opportunity”, and digital advertising companies are among the highest margin businesses of all-time. Snap cloned Facebook’s self-serve advertising platform in four years, and TikTok will likely do it even faster. Why wouldn’t their competitors give up margin to build similarly massive businesses? Maybe instead of thinking of these platforms as winner take all, we should think of them as TV Networks 2.0; the next iterations of Comcast/NBC, Disney/ABC, CBS, Viacom?

The large platforms like Facebook, Instagram, YouTube, Amazon, and TikTok will continue to get larger; but newcomers will be able to beat their distribution advantages with capital efficiency and superior product decisions. Products that rely on friends and true user-generated content will continue to have the strongest competitive advantages and highest margins over time.


Links I’m Reading

Snap will let other companies build versions of their apps within Snapchat. This appears to be an extension of its SnapKit developer platform, and may look similar to WeChat’s popular mini-programs. Considering Snapchat is used by over 88 million North Americans for over 30 minutes per day, there will be lots of opportunities to build on top of. Its no secret Snap sees its future as a camera-based computing platform. Snap Kit, the Snap Map, AR Lenses, and now mini-apps are strategic pillars that will converge as Snapchat eventually launches a phone, AR glasses, or another piece of hardware that isn’t on anyone’s radar yet.

Microsoft took the lid off its Fluid Office Framework. Its an open source, web-based framework that embeds Office into other products with real-time collaboration. Its launching on Office.com and Outlook. Teams integration will come next, and non-Microsoft products soon after. Microsoft has been building this for 18 months with a team of approximately 140 employees. This should increase the stickiness of Microsoft’s bundle and likely creates many opportunities for other products to build on top of it. It will also bring up strategic questions that other companies building in the space will need to answer.

Instagram to start showing ads in IGTV. 55% of revenue will be shared with creators. IG also announced users will be able to purchase badges that appear next to their comments during a particular accounts live stream. This feels like a long-time coming, and puts even more pressure on TikTok and other platforms to launch creator monetization.


I write about the intersection of business and technology from my perspective as a venture capitalist. If you’d like this in your inbox twice per month, please subscribe! If you’d like to read what I’m thinking about more often than that, follow me on Twitter at @TurnerNovak.

Loading more posts…