Help your ecosystem and your ecosystem will help you, the lesson taught by the uncontainable rise of PinDuoDuo

The US e-commerce ecosystem today is clearly dominated by a few giants, often making it harder for startups to innovate. Here’s an example, with each quarterly earnings call, Amazon continues to conquer US commerce and steamroll its competitors. Today, Amazon’s e-commerce market share in the US is nearly 50%. That’s more than three times the market share of its two nearest competitors, eBay and Walmart, combined. In its wake, hundreds of retailers and startups have fallen or been acquired. Another giant, Facebook, continues to dominate online marketing, with more than 2.2 billion active users last quarter. Along with Google, these two giants continue to dominate the critical online advertising market. The mobile shopping experience hasn’t changed in the last 20 years and these tech giants together act as gatekeepers to the e-commerce market. It’s currently difficult to imagine how a new disruptive player in the US could become mainstream and transform the way Americans buy on the internet.

Globally, a different story is unfolding.

At Cathay Innovation, we’re thrilled to celebrate the monster IPO of our portfolio company, PinDuoDuo (PDD). Despite being founded only three years ago, PDD has grown at meteoric rate across all the Company metrics. In Q1 2018 alone, PDD sold US$10 billion of goods through 56 million users. At the end of June 2018 (according to Jiguang.com), PDD had 56 million of Daily Active Users, representing 162% of JD.com and 30% of Taobao, Alibaba’s marketplace GMV. The number of PDD buyers already reached more than 300 million users in China, which is almost as big as the population of the United States! This is the fastest growth in the history of both the internet and in humanity. Strikingly, most of its customers are from Tier 3 and Tier 4 cities across China, who historically weren’t online shoppers. PDD managed to help hundreds of millions of people enjoy the benefits of digital commerce in a way that is at the same time both more fun and economically attractive.

Cathay Innovation had the opportunity to work with Colin Huang, PDD’s founder and CEO, early in PDD’s history. While the Company was born with social features, we committed at the time it started to transform from a self-operated fresh food seller to an open market place, from fresh food to all kinds of goods. As PDD’s first global fund to become investor, we were also excited to work with Colin as he was an extraordinary human being and repeat entrepreneur that wanted to leverage his unique blend of experiences in e-commerce, modern search, and gaming.

Unlocking growth through an engaging and social product

PDD is a new kind of e-commerce company — vastly different than all the major tech giants. Its rise is based on social virality created by an innovative approach meeting the needs of people and not by acquisition spending. The socialization of mobile commerce invented by Colin was initially based on leveraging the whole WeChat community through PDD’s own app or directly via WeChat programs. The idea was to onboard a critical mass of buyers and merchants, to offer to each of them a unique and improved experience. People can have access to various offers, discuss with their friends or anybody else about the products, and benefit from discounts if they all buy together. One other interesting innovation is that search is not the main way to find and access an offer, but more so due to people browsing in PDD platform to find offers that would fit their needs, and then they would invite their peers to participate to these interesting group buying opportunities. As a result, the experience is gamified and leads to buying that corresponds to the customers inclinations — creating on mobile a fun digital experience giving access to the opportunities that they would find in a giant farmer market or a virtual Costco. The merchants are also interested at the possibility to sell to these groups (with smaller acquisition costs per unit transaction) and enjoy differentiated marketing towards these small focused groups that now provide access to social feedback at scale directly from the buyers. PDD quickly rolled out a range of product lines, ranging from vegetables, to toiletries to sports clothes, and basically anything that people needed to buy daily.

PDD’s e-commerce experience is at its core fun (centered around a social and gamified application) and extremely convenient (frictionless payments, mobile, easy delivery, etc). In a matter of two years, PDD managed to change the DNA of the mobile commerce experience at scale. Everywhere else in the world, people continue to transact on an individual basis, searching for some products, filling his or her basket and paying to be delivered. Isn’t it surprising that such an innovative disruption with scale was not born in Silicon Valley?

The Chinese digital ecosystem currently provides a favorable ground for new ideas to thrive

At the beginning of its history, PDD leveraged WeChat, the leading social messenger in China (and de facto operating system for most mobile operations), to create the social virality among friend groups necessary to start. By leveraging the existing communication services, they found a faster way for PDD to take off. PDD didn’t succeed because of any extraordinary support from other large internet companies, but because the Chinese ecosystem today enables innovative startups who play their cards well to grow scale very fast.

Large technology companies aren’t just partners, but often investors in leading Chinese startups. Tencent for instance invested in Pinduoduo Series C round. This open attitude to capital investment creates additional room for innovative ideas to become great companies, and grow the size of the market much more rapidly. Chinese tech giants like Baidu, Alibaba, and Tencent provide over 40% of all venture capital invested in the country, a number that dwarfs the 5 percent of capital injected by Facebook, Amazon, Netflix, and Google in the United States.

We believe the involvement of the largest companies, both as financial backers and partners to catalyze the growth of rising startups, is important. It both enables an ecosystem to thrive and benefits the same large players as well.

At Cathay Innovation, we have put this belief into action. We invited many large corporates from various industries to be strategic investors in our fund — partnering with them on their innovation strategy and helping them collaborate more effectively with startups. We believe that digitalization of the world is not a zero-sum game where innovators will cripple incumbents. Rather, we see a blended approach where the digital revolution will radically transform existing industries.

Taking a walled garden approach is often shortsighted. Winning startups can grow very fast, while also growing the pie. Just ask the PDD team that has brought a wide range of new customers to the internet and increased the size of the e-commerce market in China, thanks to a lot of innovations.

Times are changing. As proof, the Pinduoduo customers rang the metaphorical bell from China, a first for a technology company. Here again, PDD will look to and partner with the world even more, but by creating its own approach.