$PDD | Pinduoduo and Vertically Integrated Social Commerce - Turner’s Blog

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?

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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.

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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 Yungping, 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).

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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.

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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%.

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