AVCJ Awards 2018: Exit of the Year - IPO: Pinduoduo

It took Alibaba Group’s Taobao and Tencent Holdings-backed JD.com five and 10 years, respectively, to reach an annual gross merchandise volume (GMV) of RMB100 billion ($14.7 billion). Chinese social e-commerce platform Pinduoduo did it in two. While Alibaba had 666 million mobile monthly active users across all its retail marketplaces as of September, Pinduoduo had nearly 232 million, up from 71 million a year earlier.

The company’s meteoric rise from inception in 2015 to public listing in 2018 has been driven by a different approach to consumer engagement. While other e-commerce platforms have search-based interfaces, Pinduoduo is structured more like a news feed. It emphasizes individual products, creating demand where previously there was none. The idea is to make shopping fun and inclusive. 

When Pinduoduo began trading on NASDAQ in July, following a $1.63 billion IPO, it had a market capitalization of just under $24 billion. Investors such as Gaorong Capital, IDG Capital, Tencent, Sun Vantage Investment, Cathay Capital Private Equity, Sequoia China Capital and Lightspeed China Partners achieved liquidity and also substantial paper gains. The company previously raised four rounds of funding, most recently a $1.37 billion Series D in March. 

“One key factor in Pinduoduo’s success is its ability to change the traditional e-commerce model from ‘consumers search for products’ to ‘consumers discover products through social network,” says James Mi, founding partner at Lightspeed China.  

Remarkably, the company nearly didn’t emerge at all. Mi, who used to work with founder Colin Huang at Google, recalls the entrepreneur describing his plan for a new start-up, but the proposed model had nothing to do with e-commerce. Rather, Huang wanted to launch a business that offered online-to-offline (O2O) services. “We discussed the idea for a while and ruled it out due to the limited efficiency of O2O services,” says Mi. “Colin subsequently shifted his focus back to e-commerce.”

Fun and affordable

Huang has described his vision for the way in which social networking combines with traditional shopping on Pinduoduo as “Costco meets Disneyland.” Sharing is the very essence of the business model, with users able to qualify for discounts by sharing product information with friends. The other key selling point is value for money. The most popular products are small-ticket consumer staples, which means the average order is just RMB6, compared to RMB60 for JD.com. 

Supply chain optimization efforts also help keep prices low. “Previously, manufacturers would have to go through different levels of resellers before their products could reach consumers. Pinduoduo’s model fundamentally changes that by aggregating consumer demand very quickly, removing the middleman resellers, and allowing products to reach customers faster,” says Mi.

The company has adopted a customer to manufacturer (C2M) supply chain structure, whereby it aggregates user demand and tries to connect this demand directly to manufacturers and merchants with strong supply chain capabilities. This reduces production costs as well as cutting down the layers of intermediaries. The process may involve helping suppliers – usually small and medium-sized enterprises (SMEs) – find factories that can manufacture their goods in large volumes. Pinduoduo even provides suppliers with information on consumption patterns, so product designs can be changed accordingly.

The company reported revenues of RMB3.37 billion for the quarter, a 697% year-on-year increase, while GMV for the 12 months ended September was up 386% at RMB344.8 billion. For 2017 in full, revenue increased more than three-fold to RMB1.74 billon. It is worth noting that the company switched from an online direct sales model to a marketplace model in 2017. More than four fifths of revenue came from advertising while the rest was from sales commissions.  

Sustainable growth?

The question facing the company is whether the rapid pace of growth in revenue and user numbers can be sustained. On top of continuing to explore monetization options around advertising and commissions, the next stage of Pinduoduo’s development could be characterized by accentuating the inclusive elements of its business model, notably by deepening coverage of rural areas.

“[The company] has been a game-changer for farmers in China, who can now sell farm products directly to consumers through Pinduoduo and deliver them much more quickly. Farmers are earning more without going through wholesalers and resellers.” says Mi.

In China, most farmers run small-scale operations and lack basic information regarding trends in consumer demand. Pinduoduo is applying the model employed with urban SMEs to rural areas, aggregating demand for agriculture products and sharing that information with farmers, so they can learn more about how their goods are sold and how they should be priced. Delivery times are also reduced.

The company has so far launched this initiative in 730 counties, committing RMB3.4 billion in capital. It claims to have helped farmers sell more than 1.83 million tons of agricultural products last year.

Meanwhile, Pinduoduo is also drumming up demand for fresh produce among its users. For example, Duo Duo Orchard is an interactive game that enables users to grow virtual orchards, watering and tending crops on a daily basis. On accomplishing certain tasks, they receive fruit boxes in the real world sourced through the company’s merchants. It wouldn’t be Pinduoduo if there wasn’t a social aspect as well: to get more water, users must invite friends to participate or share links to agricultural produce.   

Pictured: James Mi (left) of Lightspeed China Partners, Anthony Wu (right) of Banyan Capital, and Raffaello Raffles' Ricky Tsang

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• Topics
• Greater China
• IPO
• Technology
• China
• Venture
• Banyan Capital
• Lightspeed Venture Partners
• TMT