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China's $1.5 Billion Social Commerce Startup Could Transform Online Retail

Pinduoduo, or PDD, is a kind of Facebook-Groupon mashup that founder Colin Huang believes could revolutionise e-commerce.
Pinduoduo's website | Source:
  • Bloomberg

HANGZHOU, China — Colin Huang belongs to a rarefied cohort of Chinese entrepreneurs who launched their careers in Silicon Valley and then returned home to start successful tech companies. Huang, an ex-Google engineer who worked on early search algorithms for e-commerce, is already on his fourth and most ambitious startup.

Pinduoduo, or PDD, is a kind of Facebook-Groupon mashup that Huang believes could revolutionise e-commerce. PDD just raised more than $100 million, according to people familiar with the matter, valuing the company at more than 10 billion yuan ($1.5 billion) less than two years after its founding. Huang is one reason China has created as many $1 billion startups this year as the U.S.

The idea behind PDD is simple enough. Typically shoppers know what they want before they get online. A person goes to, say, Amazon or Alibaba, plugs in a keyword and then picks out what they want after sorting through a few options or reviews. Huang’s idea is to give shoppers an experience more like spending a day at the mall with friends. You share ideas about what you like, get feedback from people you trust, maybe gossip a bit. Then, if you make purchases together, you get a discount.

It's a twist on so-called social commerce, an idea that has been tried with little success in the US For a time both Twitter Inc. and Facebook Inc. put buy buttons on the ads featured in a person's newsfeed. The latter even offered a kind of currency called Facebook Credits. The tests were discontinued because most users don't want to be solicited while hanging out with friends online.

Companies like PDD that start as shopping sites with a social component sometimes work better. Huang has wisely embedded his app in China's ubiquitous messaging service WeChat, used for everything from social networking to mobile payments. To further entice users, he drew on his previous experience with a successful gaming apps and made sure PDD was fun to use. "A few companies have tried this before, but no one has really been able to do it," says Huang, who sports a buzz cut and has an unrestrained laugh. "We felt we had a competitive advantage."

So far, he looks to be right. Demand has exploded, prompting PDD to move into airy Shanghai offices where Huang expects to double his headcount to 1,000. PDD is now the largest private e-commerce company in China by sales volume and is closing in on Vipshop Holdings Ltd., the third-largest e-commerce player behind Alibaba Group Holding Ltd. and Inc.

PDD's rapid growth has led to some cases of botched deliveries and damaged merchandise, prompting complaints from unhappy customers. The bulk-buying business model has flopped elsewhere too, most famously with Groupon Inc. But Huang has had no trouble finding backers, raising his first round of venture money in 2015 and closing the latest in February. Zhen Zhang, whose Banyan Capital led the first round, was attracted by the simplicity of Huang's concept. "He is taking advantage of people's willingness to save money and tell their friends," he says.

Huang, 37, grew up in Hangzhou, now home to e-commerce pioneer Alibaba. His father, who never finished middle school, worked in a local factory along with his mother.

Colin was identified early as a bright child, and, at 12, got into the prestigious Hangzhou Foreign Language School. He found himself among the children of the local elite. He held his own among the brightest at his new school too, and the experience changed his life. "The middle school opened up my world," he says.

Huang went on to study at Zhejiang University and then got a master's degree in computer science from the University of Wisconsin. One lesson he learned was the economics of internships. He says he earned about 6,000 yuan ($900) a month working at Microsoft Corp. in Beijing; he then did an internship at its headquarters in the US and made about $6,000 a month.

As he prepared to graduate in 2004, Huang faced a choice: He could join Microsoft, the absurdly profitable owner of the Windows and Office monopolies, or he could opt for Google, then an unproven search engine that hadn't gone public yet. To the bafflement of many peers, he went with Google. "I chose Google for the uncertainty," he says.

The search engine company did pretty well, of course. After a rocky IPO, profits rose and the stock soared. Though Huang was a minor shareholder, his net worth surged to several million dollars. He was also present at the creation of modern search, when Google was figuring out how to answer user queries online — and advertisers were learning how to market alongside those search results.

Huang moved back to China in 2006 when Google was trying to establish itself against local rival Baidu Inc. amidst heavy online censorship. Before long, Huang tired of flying to Google's Mountain View, California, headquarters, where he had to pitch even minor matters to founders Larry Page and Sergey Brin. The end came after he travelled to get them to sign off in person about changing the color or size of the Chinese characters shown in search results. It was time to move on. Huang resigned, leaving a slug of unvested options behind.

He started his first company in 2007, an e-commerce site called that sold consumer electronics and mobile phones. Revenues surged, but he realised was just one of thousands of similar sites and sold it in 2010. He had more success with his next ventures. The first, called Leqi, helps companies market their services on websites like Alibaba’s Taobao or The second is a gaming company that offers role playing games over WeChat. Both took off and Huang found himself "financially free."

Then he got sick. He caught an ear infection and struggled to sleep. He stopped going to the office, eventually deciding to retire in 2013 when he was just 33. "Once I stayed at home for several months, I got lazy," he says. "So I stayed at home for a whole year and spent a lot of time thinking about what I should do." He considered moving to the US and opening a hedge fund.

Huang came up with the idea for PDD in part by watching China's two top internet companies — e-commerce giant Alibaba and Tencent Holdings Ltd., the dominant games company and owner of WeChat. Both are big, fast-growing and successful, but neither could penetrate the other's business. "These two companies don't really understand each other," Huang says. "They don't really understand how the other makes money."

Huang and his team did. They had experience in both e-commerce and games, and were convinced there was an enormous opportunity in bringing the two worlds together. Huang raised $8 million from a group of investors led by Banyan in May 2015 and launched the app a few months later.

Most people use the PDD app within WeChat. You open up the messaging service on your phone, then click on PDD. The home screen has tabs for categories like food, clothes and bedding. Once you choose a category, you get a vertical list of products you can scroll through, say lychee or apples in fruits.

The app has the feel of a game, with colorful photos and hidden bargains. Deals change every day and, as you scroll through a category, the discounted price is shown below the image. You click on an image of mangos at 34.8 yuan for eight and find the price is 39.9 yuan if you buy alone. To get the discount, you have to find a friend to join in the purchase. Because you're already on WeChat, you can instantly pitch others.

The motivation can be compelling. Recently, a track suit in red, white or black was on sale at 48 yuan for a single purchase. You can click a button and pay 29.8 yuan if you say a friend will join. That sends shoppers off in search of friends willing to participate. If you can't find another buyer, you get a refund. Ren Shuying, a Beijing accountant, is a dedicated user. "I check it out every day and chat about products with friends," Ren says. "I’ve bought all sorts of products — things to eat or wear."

With usage increasing, PDD raised about $100 million in 2016, giving the company the resources to attract more merchants and customers. The total amount of goods sold on the platform, or gross merchandise value, went from 100 million yuan a month in early 2016 to 4 billion yuan a month now, Huang says. That puts PDD just behind Vipshop, a flash sale website that trades on the New York Stock Exchange with a market value of more than $8 billion. "We think we will pass them in the next 12 to 18 months," Huang says, his PR handler shifting nervously nearby.

Huang sees PDD as a way to create a richer retail experience for both shoppers and merchants. Customers learn from friends about products or services they love. Producers have the opportunity to customise for small groups of buyers online and innovate in ways that were impossible before. Merchants can also cut out retailers and get more direct feedback from customers.

Blue Moon, one of China's biggest producers of laundry detergent, said sales have surged on PDD since it began working with the app in September. They now total 10 percent of the company's online revenue, about the same as on Xu Hongyuan, a Blue Moon manager, forecasts that will rise to about 15 percent by the end of the year with more promotions, though still short of the 60 percent on Tmall.

It’s not clear whether Huang can realise his vision without fixing customer service; PDD generated more complaints last year on the website of China E-Commerce Research Center than Alibaba’s Taobao and Tmall combined, even though those sites are far larger. "They put too much attention on growth," said Cao Lei, director of the Hangzhou-based centre. "They grew too fast and their management and service mechanism lagged behind."

On a sunny morning this month, Huang took two visitors on a tour of his offices in Shanghai to show what the company is doing to address customer complaints. There are rows of desks where 200 of his 700 employees work on quality control. Mail is stacked high and enormous sacks are stuffed with returned shoes, clothes and electronics. If a customer gripes about poor quality or counterfeit goods, PDD will collect evidence and take up the issue with sellers. "The rules we're applying to merchants on the platform is very strict,'' he says.

Recently, PDD has taken steps against merchants who sell fake goods — and been hit with fierce pushback. "They even sent some people to our office in the middle of the night to threaten our employees,'' he says. "They also chase our employees back to their homes and threaten their wives and kids.'' PDD now has guards at the front of its offices.

PDD also fines merchants for fumbling deliveries. A spokeswoman for PDD said all the fines go into coupons customers can use to shop on the site.

PDD’s backers remain loyal. Duan Yongping, the billionaire founder of smartphone makers Oppo and Vivo, got to know Huang just as he started working at Google in California and the two have remained close. Duan said he backed PDD and other Huang ventures because he understands the importance of customers. "Most entrepreneurs focus on growth, profits and expansion and forget about the users,'" Duan says. "He is doing an excellent job."

Betty Wang, a director at Advantech Capital, was convinced there was an opportunity to invest in fresh produce websites and checked out more than 20 startups before focusing on PDD. Then she tried using PDD as a consumer, alerting her friends on WeChat that she wanted to buy a box of green kiwis. Five people joined her group and they all got a discount. "Using WeChat was a very smart method of reaching people," she says.

Huang is aiming high, but he’s unlikely to spend the rest of his life on PDD. He says he has two role models: Lee Kuan Yew, the founding father of Singapore, and Benjamin Franklin. He admires Lee for leading a poor city-state into the modern age. As for Franklin, Huang marvels at how many different things he accomplished in his life. "He retired from business at the age of 40. He became a scientist and a politician,'' Huang says, as the sun sets over Shanghai. "That is a genuine life."

By Peter Elstrom and David Ramli, with Gao Yuan and Sarah Frier; editor: Robin Ajello.

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