Wei Hao, Investor of Pinduoduo and eBroker: How Can You Identify a Company that Can Scale to RMB10 Billion within One Year?

The Four Features of a Company that Scales Quickly.

Before becoming a co-founding partner of Sky9 Capital, I was the Executive Director of Lightspeed China Partners, and my major investment areas included social networks, mobile platforms, and e-commerce, among others. I participated in a series of projects including investing in Pinduoduo, eBroker, FaceU, and DaVdian.

For an early-stage VC investor, to be able to find and invest in a “company that can scale quickly” is certainly the most exciting and most challenging part of the job.

Recently, among the start-ups that I invested in, there were two that scaled to RMB10 billion within one year. One was the social e-commerce platform “Pinduoduo” that I invested in while I was at Lightspeed China Partners; the other was the Internet-based financial platform “eBroker” where Lightspeed China Partners did the Series A and Sky9 Capital invested in the Series A+ round.

Based on my experience, I’ve noticed that a company that can scale extremely quickly usually has the following features:

First, it’s fresh and new. Only new and interesting things can distinguish themselves from things that exist already, and this can, of course, bring more opportunities.

Pinduoduo is the e-commerce platform that was the earliest to adopt the WeChat group-shopping model. In 2015，when I got in touch with Pinduoduo, what the consumers on the internet were used to was still the B2C e-commerce model. Pinduoduo used WeChat and popular social networks to obtain traffic, marking the start of a new method of obtaining traffic that is more in line with the mobile internet era, and so it was able to expand its scale very quickly and smoothly.

eBroker’s explosive growth was because it provided a new service for customers and agents of international financial planning products. Originally, these international financial planning products lacked transparency, there was information asymmetry, and consumers lacked efficient and high-quality service providers. Also, because there were only a few companies monopolizing the market, customers could not get good financial returns. eBroker used the internet to establish a centralized platform for agents, which removed the middleman. This platform enabled the agents to improve their income while also making available a wider variety of products to consumers.

The second feature is lightness, specifically, asset-light. These companies do not rely on burning money for expansion.

In the market, there are certainly companies that scaled to RMB10 billion in a period of 3–5 years, but the difference between them and companies like Pinduoduo and eBroker is that these companies had an asset-heavy model. Their logic was to “First establish the brand and develop the customers, and then expand the company size.” A common practice of this type of company is to spend a great deal of money to offer subsidized services, or give away products free of charge, in order to attract users. They advertise aggressively on the subway, on the sides of buildings, outdoors, and internet streaming commercials and they will need a great deal of financing to support their subsidies and giveaways. Some technology-oriented companies also have a similar development track, as they usually need large funds for technology research, and only after their investment has reached a certain scale will they be able to harvest users and growth.

Yet, it is hard to estimate the effect of this kind of subsidy and promotion war, and success is slower. Unlike those companies, a platform like Pinduoduo is extremely asset light. Its expansion is not achieved through low prices achieved through subsidies, but instead through the organic growth of their business model. Through group-buying e-commerce, each group often has 4–5 users placing orders together; they focus on low-ticket items that are attractive and high-quality to attract users to place orders, and then they utilize users’ normal, social behavior to promote brand propagation and finally achieve explosive growth. This process does not cost a lot of money and at the same time can expand very fast.

In my opinion，VC’s should invest around the concept of “lightness”. A counter-example is O2O, which was popular throughout China in 2012. That was an asset-heavy model. Currently, most companies using that model have struggled. The results speak for themselves.

Third, successful companies are broad. That is, they have a broad and high-quality user base as their foundation.

At the very start, Pinduoduo got its start doing group-sales of fruit, and what they relied on was the rising middle-class consumers. Purchase of imported fruit is an embodiment of the consumption upgrading of this group of people. Similarly, eBroker targeted the large consumer population who, during the period of RMB depreciation in 2016, held large amounts of United States currency and hoped to buy international financial planning products. Having a broad user base with massive consumption power is the foundation for scaling.

Fourth, change. That refers to the ability to grasp opportunities that appear as the industry changes with the times.

Now, when I look back and try to sum up my experiences from investing in Pinduoduo and eBroker, I find that behind the growth of the two companies, there are certain specific contexts for the timing of when they found their success. For instance, only the shift from data traffic primarily originating from PCs to being primarily mobile traffic could have led to the birth of group-buying e-commerce. Only people changing their fund management concepts could have led to the foundation of the large-scale development of eBroker. Pioneering companies that are able to expand their scale in a short period of time usually have a more acute sense of smell than most people. They have seized the core of the changing times and taken action to innovate to seize the opportunities of the day.

How to View Barriers to Entry？

However，leading corporations with these features are often neglected by many investors. When we began to invest in eBroker, there were hardly any other funds vying with us; when we invested in Pinduoduo, the competition was not intense, either. Why was this true of both cases? The reason is: as far as many investors and investment institutions are concerned, such corporations have no barrier. Without a barrier, the investment risks are considered to be too high.

Most people think the barrier must be related to something technical or to its business model and they would think that the platform model and traffic collection model of Pinduoduo and eBroker really have no strong barrier. But, in my opinion, the pioneering companies’ perfect timing for entering the market, combined with the strong growth and vitality of their business model, in and of themselves constitute a “barrier of scale”.

For example, Pinduoduo entered the e-commerce market quite early in the growth stage of mobile internet, and so it was able to seize consumers’ attention very quickly through social networks. Then it achieved a scale effect and built up their brand, which formed a barrier against other mobile e-commerce competitors.

Of course, when investing in an early-stage company, investors will try to use history to forecast the future. But for such a company, we usually have no history for reference. So that would require the investor to have the courage to bear this kind of risk.

When I paid close attention to eBroker, many venture firms thought overseas financial planning products was too risky. But I felt, when weighed against the possible return, this risk was still manageable. At that time, we had worries about risks too, but this apprehension does not change the consumer megatrends. Indeed, at this point, the RMB rate has become more stable, and people’s demand for overseas financing has become more diversified, thus, eBroker has gradually grown into a comprehensive platform for overseas financial management products.

When we face an early-stage, high-risk project, the judgment of the founder is also a very important factor. The founder of a pioneering corporation that can expand its scale very fast in a short period should have proven themselves to be a strategic thinker.

I still remember when I chatted with Zheng Huang, the Founder of Pinduoduo, about this company for the first time in 2015, he was not clear about the business model yet. Yet he knew clearly that, 10 years into the future, the e-commerce environment would not be the same. The era of mobile internet has come, so, there must emerge new companies to change the e-commerce pattern of the PC era. That means, he did not establish a business because of a pursuit of some fashion or trend, but rather, his decision was made on the basis of his judgment about the change of the entire era that would affect everybody and about the business environment. It was this vision of Zheng Huang’s that made me believe he could accomplish this thing.

Where Can the “Next” Possibility of E-commerce Lie？

Now, a question I think about every day is: where is the next company that can scale to RMB10 billion within one year？I am sure, most early-stage investors are thinking along the same lines.

Judging from the project type, rather than the popular companies that spread extensively by relying on offline methods such as new retail and sharing economy, I prefer to find pioneering deals that are pure internet plays. That is why I pay close attention to the apps favored by Chinese youth now. To become a user of such apps and to enhance my understanding of the latest trends are lessons I try to keep up with every day. And I still firmly believe that asset-light companies are more suitable for early-stage investment.

In the past, I invested in many e-commerce and consumption-related projects. Some people think that the e-commerce industry has already stagnated and is saturated, but I do not think so. In my opinion, entrepreneurs in e-commerce can still seek opportunities in the following four areas：

First of all, new markets. In selling Chinese things abroad, we have a very big advantage –a large variety of SKUs. Nowadays, the development of overseas e-commerce platforms is about a decade behind China, and so, in Southeast Asia, India, Russia and other regions, we still have chances to establish platforms.

Secondly, new groups of people. Nowadays, many platforms aim mainly at the middle-class, and there are indeed good opportunities. Yet, the future mainstream consumers will be the younger generation, and we should also have different ways of operating to adapt to these new groups of people. Also, will other groups of people increase their demand for e-commerce shopping gradually? How can we meet their demands?

Thirdly, new ways of obtaining traffic. Pinduoduo has utilized the advantage of WeChat to innovate the method for e-commerce customer acquisition. Now, it has also become very common to obtain traffic through social networking and content-driven methods. In the future, entrepreneurs should be thinking: what other new ways can we have to obtain traffic, and how can e-commerce be innovated around this point.

Finally, new categories. Vertical e-commerce has already entered a bottleneck stage，as the driving force for shopping guides and content has become very weak. There are very few chances left in these categories, and in my opinion, furniture and fresh edible goods might be the last remaining frontiers.

On the whole, the requirements for entrepreneurs in the e-commerce field will become higher and higher. Selling can be both very simple and very complicated. The entrepreneur should not only focus on online consumers but also know how to manage the “traditional people” such as the suppliers. He or she should not only be familiar with the entire supply chain but also get along well with competitors and rivals. So, it is very hard to establish a new business in existing e-commerce categories. Looking at companies in the e-commerce sector, besides their views and patterns, I also pay close attention to these entrepreneurs’ experience in internet products.

Sky9 Capital (www.sky9capital.com) is an early-stage venture capital firm focused on the Chinese market, with a focus on consumer internet, enterprise services, and deep technology.