Acquired - Meituan

Episode Date: March 10, 2021

We dive into the history behind Meituan, the juggernaut Chinese "super-app" which dominates China's services economy, offering consumers everything from food delivery, restaurant reviews, travel booking, bike-sharing, movie ticketing, and countless other entertainment and lifestyle services all at the touch of a button. Already China's 3rd largest tech company by market cap (behind just Tencent and Alibaba), Meituan did $15 billion in net revenue in FY2019 and continues to grow rapidly. What makes it so special, and how were they able to become the market leader in such a competitive space? This story is packed with lessons that apply equally beyond China tech to high-growth company building and investing everywhere. Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!The Meituan Playbook is available on our website at https://www.acquired.fm/episodes/meituanLinks:Meituan's English language walkthrough video: https://www.youtube.com/watch?v=5wxgQVjDviQThe Tech Buzz China podcast: https://www.techbuzzchina.comGGV's Evolving for the Next Billion podcast: https://nextbn.ggvc.com/podcasts/Bernard Leong's Analyse Asia: https://analyse.asia Carve Outs:Extraterrestrial:  https://www.amazon.com/Extraterrestrial-First-Intelligent-Beyond-Earth-ebook/dp/B081TTY4NX/John Luttig's newsletter: https://luttig.substack.com

You've been a VC in my heart for a long time. I take offense to that and also thank you. Welcome to Season 8, Episode 3 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal, and I am an angel investor based in San Francisco. And we are your hosts. Ben, your bio there, it's a little different this time. Congratulations, my man.

Thank you. Very long Seattle, excited for the future of the Pacific Northwest. It's very exciting. Well, well-deserved promotion to managing director. Well, thank you. And I mean, frankly, it's most exciting just to have a new $100 million early stage fund to invest in Pacific Northwest entrepreneurs who also might be acquired listeners. Well, today we were talking about a company that frankly couldn't be further from the Pacific Northwest. Well, maybe you could. I suppose if you're on the East Coast of the United States, you might be literally halfway around the world. But today we dive into a Chinese app that started as a Groupon clone by a founder who had previously started a Facebook clone

and a Twitter clone. But this bike-sharing Yelp-esque DoorDash of China is much more than a clone. This AI-powered delivery company is also a ride-sharing company. It's a real-world supermarket, a merchant analytics platform, a fintech platform for those merchants who need So what on earth is going on? So you're saying it's like DoorDash and Airbnb and Square and Booking.com and Expedia and Uber and Instacart and more. Yelp, Fandango, Safeway, the list goes on and on. So Meituan is what people have dubbed a super app. And if you're confused, well, so were we before we started the research.

So over the course of this episode, we will dive in to unpack this curious company, how it became China's third largest tech company behind only Tencent and Alibaba. And it was founded over a decade after each of those two companies. It's pretty crazy. It's like, frankly, amazing that it's in the same category as those or quickly rising into that same category. And of course, wildly displacing Baidu, the classic third in the big three Chinese tech companies. Yeah, alongside Pinduoduo as well, which we covered last summer. This story is honestly amazing. I mean, we'd heard, we'd referenced Meituan on the show. Oh, it's the super app. It's this really interesting Chinese thing that is unlike anything in the West. This story is incredible. Frankly, a shame we haven't told

it before now. Indeed. Well, that's why we have eight seasons of Acquired. Well, are you an Acquired Slack member? If not, what have you been waiting for? It is a spectacular community discussing, of course, all things Acquired and recent episodes. But more importantly, it is just a genuine and smart group of people having thoughtful, nuanced, and respectful discussion about the tech and investing news of the day. You can join at acquire.fm slash slack if that sounds like your cup of tea. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation,

and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know, from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service,

software development, you name it. These agents collaborate, they learn from each other, and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentech AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. Well, lastly, to keep this short and sweet, if you are not an acquired LP, you should totally become one. Aside from all the things we tell you about the LPE program on every episode,

we just shipped a killer episode on the state of SaaS in 2021 with Emergence Capital's newest general partner, Jake Saper, where he dove deep on their recent investment thesis, Deep Collaboration. Do you have to say deep in a deeper voice? Deep Collaboration. I'll handle. Deep Collaboration. It's also been a big month for acquired guests and hosts in terms of promotions to general partner. It is. The wave is upon us. Well, we, of course, explored the insane state of tech valuations right now in the frenzied market we are in with Jake, as well as deep collaboration. So tune in LPs or feel free to join at acquired.fm slash LP

if you are not, and we can't wait to see you there. Well, David, before you take us in, listeners, as always, this show is not investment advice. David and I may have investments in the companies we discuss on this show, and it is for educational and entertainment purposes only. That's my disclaimer. It is your show to run now. Take us in. Tell us everything. Well, I sure hope it's for both of those purposes. I mean, equal measures. Okay, before we dive in, we have to say a big, big thank you to the TechBuzz China podcast. They did an excellent job covering Meituan and its crazy story. I think among all English language reporting on China tech for Meituan specifically, they did a fantastic job, along with, as always, the Evolving for the Next Billion podcast by GGV and Bernard Leong over at Analyze Asia. You used all of their work in this podcast. They're all fantastic. Definitely go check them out if you follow China Tech, and you definitely should be following China Tech, no matter where you live. Okay, so Meituan, we start,

history and facts, back in February, we're in early March now, so right about the same time of year, of 1979 in Longyan, China, which is a small, by China standards at least, city of about 2 million people in the southern part of the Chinese coast, kind of not too far from Hong Kong, about like a Shenzhen six-hour drive, sort of north of there, if you have a sense of Chinese geography. Are you like on Google Maps? Yes. Okay. Like this is a very descriptive explanation here.

Well, the more of these episodes explanation here well the more these episodes we do the more i get to know uh china's geography but yes i was on google maps and we start so in february 1979 in long yan with the birth of a baby boy named wang shing and wang is going to be our protagonist here one of our protagonists through this story. And this was a pretty interesting time and family he was born into. So this was right at the beginning of Deng Xiaoping's reform and opening in China that we talked about on the Alibaba episode a lot, also talked about on the Tencent episode. And Xing's father was one of the very kind of first early generation of entrepreneurs in China after the reform and opening, you know, part of that let some people get rich first doctrine. And so his

father owned a cement factory, so a long way from a tech entrepreneur, but he was a real like small business entrepreneur in China in the 80s and 90s. So Xing grows up in this sort of new middle class, upper middle class family. And in middle school, he gets interested in computers, like so many of us. And he convinces his parents to buy him a clone, this is going to be appropriate, of an Apple II. And then shortly thereafter, he convinces them to upgrade to a PC. Wait, there were Apple II clones? Of course there were, it's China. So I don't know if it actually ran Mac OS, but it was some knockoff of an Apple II. Wow, crazy.

Totally crazy. talked about on previous episodes. So he starts going online and doing what early internet users in China did at the time, was they would go on the kind of proto message systems, the bulletin board systems in China, which literally every future Chinese tech billionaire was hanging out on these BBSs. I know. I feel like I'm like, I swear to God, I've heard this story before. It's like, I don't know, like Coupa Cafe in Palo Alto or something. It's like literally all of them. They're all hanging out on these BBSs. Pony Ma's there. Jack Ma's there. William Ding from NetEase is there. Of course, Colin Huang from Pinduoduo is there.

You just named five of the 10 most valuable Chinese companies. Totally. Or at least Chinese tech companies. It's amazing. So Xing's there. He does very well in school. He ends up going to Tsinghua University in Beijing, which is one of, if not the best university in China, where he studies electrical engineering. So he's very much on the path here. He graduates in 2001, and he does what every dutiful future Chinese internet billionaire would do. He goes to the US for grad school. Didn't he go to University of Delaware? Yeah. So this is where his path diverges a little bit. And David, this is, what, 15 minutes from the hospital where you and I were

both born? Yeah. And it's probably 15 minutes from the hospital. I was actually born in Philadelphia. You were born in- That's right. But your- In Christiana, right? Next door neighbor or something was a doctor at the hospital I was born. It's crazy. But I went to high school in Wilmington, which is the biggest city in Delaware. Let me tell you, Delaware at this time, I love it. It's a very beautiful place. But I was there going to high school at the same time as Xing was going to grad school at UD 30 minutes away. This was not an internet hotbed. Far from it. No. It was an engineering hotbed, interestingly enough, with DuPont and Gore,

with all the sort of materials and mechanical, but no. It's actually a pretty good CS school later down the road, but not at this point. No. Literally nobody is thinking about starting tech companies in Delaware in 2001, 2002, 2003. I can guarantee that from firsthand experience. So I have to imagine that this was like pretty serious culture shock for him. So he stays a couple of years, but then unlike many of the other personalities we just talked about, he ends up dropping out because he wants to get into tech and the internet. and he thinks, you know, maybe this isn't the right place to do it. And in 2003, this website does show up among students on the University of Delaware campus, a new kind of hot social networking site. I think they actually raised some money from some pretty

prominent venture capitalists on university campuses. And Xing is like, this is it. I have found my calling. I'm going to go recreate this in China. Of course, we're talking about Friendster. I was going to say, I thought Facebook was started in 2004. Yes. Yes, it was. Quick diversion down friendster isn't there like some affiliation with like reid hoffman and mark pinkis like isn't the friendster story deep into people who went on to build you know phenomenally successful social products later i think so i always give the friendster story and the friend feed story

mixed oh that was brett taylor yeah that was Brett Taylor. Yeah, that was Brett Taylor. And that was like after Facebook. That was like a 2006, 70. It was like an aggregator, right? Yeah, yeah, yeah. Let's put a pin in this. I think we owe Friendster an episode or at least an LP episode. Yes, we got to dive into the history there, especially because it would go on to seed Meituan. So Xing leaves Delaware, he moves back to China. He goes back to Beijing and he hooks up with some of his former Tsinghua classmates and he starts duo duo you. Apologies if that's not the exact correct pronunciation. Yeah, we probably need to say that for several things on this episode. Yeah, several things. We apologize. We're trying our best. Literally translates as many friends. And the idea is he's going to, you know, just like he saw Friendster kind of take hold at the UD campus, he's going to target

college campuses in China, build up this social networking site. Unfortunately, like Friendster, it doesn't really work. It's probably too early. It's too early for Friendster in the US. In China at the time, college students, yeah, they probably were using computers, but your average person did not have access to a PC. Mobile was still distantly on the horizon. So he tries to pivot Duo Duo U into a sort of different kind of service still for students, for Chinese students studying abroad to kind of stay in touch with each other. That doesn't work either. But then in 2005, Ben, as you said, Facebook arrives on the scene. And so Shig is like, ah, okay, I've got it this time. And he realizes that

maybe he made a mistake the first time. And that was that he didn't clone Friendster exactly thoroughly enough. He's not going to make that mistake this time. So he and the team, they create a new site. They call it Xiaonei, which literally means on campus. And they take Facebook, they take Facebook, thefacebook.com, and they recreate it to the exact pixel, like the same shade of blue, the same text, the same layout, the same everything. Literally, the early versions of the site had the footer at the bottom of Mark Zuckerberg production. No way. How do you clone that? Is it like they didn't know what it meant? So they were like, no, no, you definitely do what it meant. It's just like, no, we're going to like,

because people, you know, people in China were hearing about Facebook. And so I think the idea was like, it's like, let's convince people this is Facebook. We're going to pretend to be Facebook. Fascinating. Amazing. Amazing. But it works. A lot of people start using it.

A lot of Chinese students start using it. It works so much that just like the real, the Facebook, they need to start buying servers more than they can afford to pay for it themselves. I feel like I'm watching a knockoff of the social network. It is totally a knockoff of the social network. This is so great. And it's even better by the twist that this story is going to take later on. So they probably try and go raise money. They can't raise money. I bet VCs at the time were like, this is crazy. You literally say a Mark Zuckerberg production at the bottom. I'm not going to invest in this.

Well, the Chinese venture ecosystem is also dramatically underdeveloped. I mean, you think Sequoia China only started in 04. And I think the venture ecosystem before they got there certainly existed, but it wasn't anything like what the US venture ecosystem looked like in the dot-com era. No, and I don't think it was particularly risk-seeking. We'll get to this later, but yeah, Dianping actually was one of Sequoia China's first investments, and that wasn't until 2006, which is the same timeframe as this. And David, you're dropping names we haven't gotten to yet. Meituan will eventually emerge with Dianping, become Meituan Dianping, and then drop the Dianping. It's cleaner and go just to

Meituan, And that's how we get that. But yes, you already are putting in an interesting point that is the company that they ended up merging with and buying later in a mega crazy merger, that'll be a huge point of this episode, already existed by this point. And this guy is working on a Facebook clone. Totally. So what they decide to do, they end up getting an offer from another entrepreneur in China named Joe Chen to buy the company. So they sell the company to him for $2 million in October 2006. And Joe obviously wouldn't have bought it if he didn't see the potential for this thing. And the Facebook of China, that sounds like something this could become. He's like,

well, but the name though, Facebook already at this point is starting to expand beyond colleges. And if you really want to go big, you want to be, you know, the Facebook for everything. And so this name of on campus, not so great. Let's change it to a new one that, you know, a new one that incorporates everybody. Literally, why don't we call it everybody? Why don't we call it Renren? So yes. Oh, this became Renren? This became unbelievably Renren. This is Renren that we're talking about.

And David, what is Renren? Renren is the Facebook of China. I presume many listeners know about Renren. It's a public company. But yeah, they became enormously successful. Literally, we're called the Facebook of China, which is funny given that they started as a pixel for pixel clone of the Facebook of China. And they raised a bunch of money from SoftBank and Masa back in 2009, 2010. And then they went public on the New York Stock Exchange in 2011 before Facebook. They were the Facebook IPO before Facebook. They raised $740 million in the IPO at almost a $6 billion market cap. And Wang Xing created the whole thing, but he sold it for $2 million. million dollars which you could chastise him for but it actually was the right decision if you knew what he was going to go on and create and how much more valuable that would become a hundred percent the right decision i mean it was either sell it or it was gonna die and hey he's still a kid right

and he gets two million dollars great so what does he do he says guys i can do this all day this is like 2007 i I'm just going to spin a wheel and roll some dice, pick whichever US internet company, web 2.0, hot company I'm going to recreate. Let's go on to the next one. So he sold What Will We Become Renren at the end of 2006. By the beginning of 2007, he's back in the game with Funfo, which literally means, have you eaten? But it's a kind of idiom that's more like, hey, what's up in China? What do you think that is? What is the network that people were using to send, hey, I'm eating my breakfast and my breakfast is Twitter. It's Twitter. He creates Twitter. Again, it's just

like, and this one is supposedly... I didn't actually go look at any screenshots or whatnot, but it was, I think, even more insidious that you could like... Or clever would be another way to put it. That you could actually think that you were using Twitter based on how they did the domain names and stuff. It also becomes a huge hit. So we're talking about 2007. Twitter launched in 2006 out of Odeo, midway through 2006. Funfo gets 2 million users right off the bat. So that may have been more users than Twitter at the point in time. Unfortunately, though, for Wang Xing, it's so successful that it attracts the attention of the CCP. Because it's like Twitter. You can say whatever you want on there and people are spreading political dissent on there. So the CCP shuts it down for a period of time. I don't know that this is exactly, but I think it might have been like 12 or 18 months that it was shut down. It's honestly amazing that Renren didn't get shut. I mean, I'm sure that the deal was struck

there so that, hey, you get to exist as long as we get to have some content moderation on there. But the fact that he was able to build and sell a successful social media company in China is kind of amazing. Yeah. Actually, it's a good point. I didn't look into this, but maybe part of selling it and Joe getting involved was maybe around that i don't know that's speculating so funfo gets shut down and then um it does eventually reopen and i think it's still live today but in the intervening era sino weibo and tencent you know move into the micro blogging space and you know it doesn't become a winner. But hey, Wang Xing's like, well,

second time, I guess that was technically the third time he had Friendster and then he had Facebook and then he had Twitter. That didn't work. Okay, I'll go on to the next one. Now we're in sort of late 2009, early 2010, and there is a very particularly obvious US tech company, tech in quotes, company that makes sense to clone at this point in time. Am I thinking of the right company? They were the fastest ever company to a billion dollars in revenue. I also thought that billion dollars in revenue, same thing as you. I went and looked it up. It was fastest ever to a billion dollars in valuation at the time very different than revenue we're talking about groupon of course which took the world took the u.s by storm in the late 09 people are losing

their heads in the tech community for this company completely completely going gaga i mean now it's kind of cute right like companies we know companies that are valued at a billion dollars before they've you know come out of stealth but at the time it was you know when series a's were getting done at like a six million dollar post that a company you know a year old would be worth a billion dollars complete lunacy and also people were when you say tech company in quotes, like Groupon took scores of salesmen pounding the pavement in order to go and convince local businesses

to do this thing. Their churn rates were terrible because it was awful for the businesses and they would leave immediately. And so they had this awful cost structure, this awful retention lifecycle problem with customers, but they had so much capital in relative to other tech companies that it was go-go time, pump it all in.

Well, it was revenue. They probably did hit a billion in revenue pretty quickly because it was one of those things where you could pump capital in and get revenue. You just didn't get any profits out of it or anything defensible. So in March 2010, Wang Xing and the team incorporate Meituan, coming from Mei, which means beautiful, and Tuan, which means together, beautiful together. And at this point, he's developed, despite his not yet hitting it big with his cloning factory, he's developed quite a bit of a reputation in Chinese tech, entrepreneurial, and venture capital circles.

And the Chinese VC industry has matured a lot by 2009, 2010. So right off the bat, they raised $12 million from Sequoia, China when they launched in early 2010. And then a year later, in the beginning of 2011, they raised another $50 million from Alibaba. So this is pretty big. Again, these numbers seem quaint today, but at the time, $12 million essentially seed from Sequoia in China, that's huge. You're entering this mega hot space. Then you raise $50 million from Alibaba.

This company is crushing it. And we'll talk about this more later. So I just want to tease it here a little bit. But raising money from an Alibaba, Tencent, I guess we used to say Baidu, but it hasn't come up much in this episode or, frankly, in recent conversations. They're a VC and a big tech company. They're a FANG company and a VC all in one. And so they give you a ton of capital because they have a ton of capital. And then they can also really help

your business. I don't want to get too far ahead of my skis. But for anyone wondering, Alibaba, why are they leading the Series A? That's how China works. That's very much how China works. So there's just one problem, though, which is that for all of Wang Xing's capability, vision in a certain sense. It really is vision and knowing what, you know, to clone and how to make it, adapt it for the Chinese market, all the capital behind him, all the great resources. He's not the only one who has this idea that, hey, Groupon might work in China too. In fact, he's not even one of like a dozen or one of like 50. Or one of a hundred. He is literally one of 5, 000 entrepreneurs in china who would have the

same idea and start groupon companies you think we're exaggerating this period is is like known in chinese tech history as the the period of the quote-unquote thousand groupon war and thousand is underestimating there were there were 5 000 companies at one point 20 to 30 new groupon clones getting started every single day in china including groupon itself which did a jv with tencent to enter china which you know if you're gonna enter china you gotta do it with tencent they do a jv i think if anybody can succeed here it's groupon called gaopeng and this just turns into like this becomes a bloodbath on the order that like is unbelievable like people in the u.s you know in western markets think oh man food delivery in the u.s that was a bloodbath there were like

four different players that were going after this china scale is all we need to say it's like oh in that previous company we're talking about, it's like, oh, well, they had only 2 million users. Everything in China scale is so much bigger and faster and more competitive and more gritty. And I mean, the 996 thing is real. If you hit onto something, you better be working 99 hours a week, six days a week, or else someone else is going to with your idea. Yeah. Well, definitely somebody else is going to.

So the other thing, like you said, Ben, the nature of the Groupon business is there's not really any tech involved. You need a website, basically. But the business is local salespeople going to merchants, restaurants, karaoke bars, massage parlors, and the like, and walking in the door and signing them up to get on Groupon and then running marketing stunts in local cities, getting users to sign up. And every city is just as hard to sign up as the previous city. Like you don't really have scale advantages by being already in 50 markets. It's just like, well, no one's in this market yet. So it's war to win that market. Yep. Now, unlike many of the other thousands of competitors, Wang Xing figures out in this process, you know, people were thinking up until this point, you got to remember, like the technology adoption curve, the computing adoption curve in China looked very different

than the West. You know, most users in China never experienced the internet on PCs. They just went right to mobile. And at this point in time, that was only just starting to happen. So the people who did use the internet in China were in the tier one elite coastal cities in Beijing, in Shanghai, in Hangzhou, the big in Shenzhen, in Hong Kong, people that had access to computers. So most of these startups were focused on those cities. But Wang Xing realized, hey, the tier two, the tier three, the smaller cities, people are starting to get mobile phones or they have access to the internet in internet cafes. And this product, the Groupon product,

is actually a really good fit for those cities. So he and the company expanded to many, many more cities than a lot of their competitors. And that was one of the key things that helped them, I won't say win because nobody won here, but survive. Become one of the few remaining last standing. Become one of the few remaining last standing companies. And also, you know, having Sequoia and particularly Alibaba capital and might behind them helps a lot. But by the end of 2011, so this whole cycle plays out in like one year, maybe 18 months. By the end of 2011, there are just a very, very, very small

number of these companies left. There's Meituan, there's the operations of the BAT themselves, which they have small operations, but mostly they've invested in companies. And then there is a very, very different company that is still left standing called Dianping business, what do you do with all that mean that's happening around you in a very near adjacency? It's funny. We'll tell the story now. I mean, I could maybe argue they shouldn't have gotten into this at all because they had a great, great business. But the net result of them getting into it is that they then become Meituan Dianping, and now they're the fourth largest internet company in China. Okay, so unlike Meituan and Wang Xing, who weren't just unabashed about copying, it's like that was their thing. They're like, yeah, we copy. We do it better. That's what we do. Dianping, which literally means reviews in Chinese, was actually a genuine innovator. I don't know if they were unique among Chinese tech companies in this era, but they were certainly special and were and are an incredible internet company. So people sort of derisively at the time would call Dianping the Yelp for China.

But A, it was and is way more than Yelp. And B, Yelp was the Dianping for the US because Dianping was founded in 2003 and Yelp was founded in 2005. Totally. It was crazy realizing that in the research. I'm like, Yelp for China? This company started when I was entering high school. Yeah. Back when Wang Xing was still at the University of Delaware was when Dian Bing was founded.

So the founder is this super, super sharp guy named Tao Jung. And Tao was... So he was on the Evolving for the Next Billion, then called 996GTV podcast and talked about his journey. Great episode. We'll link to it in the show notes. So he had been a consultant in the US and then a technology consultant and then went to Wharton and did his MBA at Wharton. And he had been planning.

He graduated in 2003. And he had been planning kind of like all the future internet billionaires at the time, that he was going to go back to China after doing his MBA at Wharton. And he would pick a US tech business model to clone and raise money and run that playbook then. But unlike Xing, who is very confident in his abilities, shall we say, Tao, he kind of looked around at at the landscape in 2003 and he was like, I don't know, all the good ideas have already been cloned already. Like, I don't know why I would be able to do something better that's already being done in the US, but I do kind of want to start a company. You know, I've had all this great experience in the US and, you know, one thing that I really

like doing while being an MBA student in Philadelphia, not far from the University of Delaware, was I would use the Zagat guide when I would go out and, you know, go to restaurants in Philly. I wonder if there's some innovation to be done there about bringing, basically bringing Zagat online. And, you know, the thing is in china restaurants are kind of different and there is nothing like the zagat guide in print or online and it actually would be way more useful because in china you can order pretty much anything at any restaurant like you really really want to know what the good stuff is at each restaurant otherwise you might you might order, they might have four or five fantastic dishes that they do better than anywhere else. But when you get the menu,

it's literally a Chinese menu. It's like a book. You could order anything you want. You don't really know. I need kind of a guide to all these restaurants. Okay, well, maybe this could be useful. I'll code it up. So he moves back to China after graduating. And he moves to Shanghai, which was not a tech hub at the time. And he codes, builds the website himself. Wow. I didn't realize he was a technical founder. Yeah. I believe he had done technology consulting before Wharton. The story is he built it himself. So super small scale, small ambition. He wants to build a company, but he's not thinking like Wang Xing here. It takes off like wildfire. And in contrast to the Groupon business model,

online reviews for restaurants, and in particular for dishes within restaurants, is actually an amazing internet native business because of the asset that you build. Yep. It has an unbelievable moat around it. If you really hit the critical mass of not just restaurants, but then the dishes at each place that are good, who can compete with you once you know every restaurant and every dish, especially when those restaurants have a Chinese menu with a zillion options on them? This is a pure internet native data play. Yeah. So he does end up hiring and building a company around this,

which we'll get into in a sec. But they come up with a bunch of key innovations. So Yelp hasn't even been started yet. And they have, so it's ratings and kind of a guide to restaurants. But like you said, Ben, it's not just the restaurants, it's the dishes at each restaurant that you can individually rate. You can also rate and see category ratings for each restaurant, like the food, the decor, the service. You want to know like, go on Yelp. The thing that sucks about Yelp is like, this is a four-star restaurant. Every restaurant is a four-star restaurant. Why is it four stars? Is it that like, the food is really good, but the service sucks? Yeah. And they've tried to get into this, but yeah, I think it's safe to say Yelp has just

not executed well as a public company. In the last five to 10 years, it's just been disappointing. Totally. Very disappointing. Then there's stuff like, you know, on Yelp, you see the dollar signs, even on all US review platforms. It's like, oh, this is a three out of four dollar sign restaurant. Well, what does that mean? So on Dianping, you see the actual average price of checks of bills at restaurants so you can be like oh yeah i know exactly what this price is it leads to much much much better discovery they focus on photos and even short video like way before yelp or google maps or anybody realized that was important yeah i was reading that Deon Ping is in some ways a reviews hub like Yelp, but in other ways, it's a content business that they're actually good at sort of building

a massive trove of curated content and presenting that in a thoughtful, beautiful way to the user. Yep. Yep. I mean, this whole idea, you know, the Instagramming of food, it didn't start with Instagram. Deianping in no way is Instagram, but that's kind of where it started. Like, oh, I'm going to take a really nice picture of this meal that I'm about to eat at a restaurant and I'm going to put it in my review on Dianping. They also go much deeper into the value chain. This, I think, was one of the things that Yelp whiffed on more than anything else was on Dianping, you see the reviews, but you can also book a reservation at a restaurant. You can order ahead what you want to eat at the restaurant.

You can get discounts at the restaurant and they do go in a small way into delivery from the restaurant. Never made any sense to me why all those are separate businesses in the US. You got Yelp, you got OpenTable, you got Grubhub. All the elements were there, but it was such a bad experience for the consumer to do that across three separate apps. So Dianping takes off, spreads like wildfire in Shanghai, and then bleeds out to other kind of tier one coastal elite cities. Like we said, it becomes one of Sequoia, China's very first investments. They raised $1.5 million

from Neil Shen in 2006. Do you know what Sequoia China's first fund size was? I don't know. I can't remember if Doug said on our episode. My sense is it was still a large fund. This million and a half dollar check, I do not think was like a big bet for them. No, no, no. But this was not a capital intensive business. And then, do you know who leads their series B? Is it Google? It is Google. Yes. Tech giant strategic investor in China. Not Baidu, not Alibaba, not Tencent. It's Google. And Google who can't do business in China at this point. So at least I don't think they were i think

this was right before they got kicked out of china so how did this happen because i remember seeing this and i sort of just like accepted it at face value because like yeah google gv or google capital or capital g has been investors in all these companies but like right this was what 2005 six somewhere in early? Early 2007. Seven. What was going on? I don't know. I don't know exactly how it came to be other than, you know, the nature and dynamics of

the Tianping business was very much like Google. They sold advertising much in the same way that Google sells advertising. It was an educational, high touch, very high margin experience. You know, they didn't have feet on the street at local stores. All the assets, it was an internet business. It was great. And was Google investing in other Chinese companies at this point? Not that I know of. I don't know how the relationship came about. Maybe perhaps through Sequoia because, of course, Sequoia was, along with Kleiner, were

one of the two VCs in Google and on the board. And perhaps that's how it came about. So Dianping goes along. It's doing great, building a wonderful high margin internet business. And then 2011 hits and the thousand Groupon war era. And so then all of a sudden, they've had the food and restaurant market in China, at least in tier one cities, the internet food and restaurant market completely to themselves with this wonderful business. That market didn't even exist in tier two and tier three cities. And now you've got 5,000 competitors, including this crazy Wang Xing guy backed by Alibaba, also backed by Sequoia going around with these foot soldiers. That's literally what they call them.

They're like armies going into these restaurants and being like, hey, sign up for these Groupons. So crazy. Such a terrible, terrible business model. Terrible business model. So Dian Ping's trying to be like, gosh, what are we going to do? How are we going to compete with this? They know, they realize that this is a completely different company, completely different DNA, much worse business to get into. Not to mention, they're

not even in the tier two and tier three cities. But they kind of decide like, well, crap, we got to play the game on the field. Right. Is this the wave? Is this the technology shift? And interestingly, it wasn't a technology shift. It was like a societal behavior shift. The technology shift was to mobile at this point, which is crazy to think about for the first six, seven years of Dian Ping, six years, people were just using it on PCs. Totally. And mobile wasn't really a thing yet, or at least not in the smartphone way that we know it today. But yeah, what they chose to sort of react to was, ooh, there's this big business model the smartphone way that we know it today. But yeah, what they chose to sort of react to was, ooh, there's this big business model transformation going on

that we need to be a part of. And other companies are going to steal our customers. And I think the really strategic insight that they have, which because they do, despite having much less capitalization and a different business model, it's them and Meituan at the end of it that are left standing. The strategic insight they have is that because we have this other, for lack of a better term,

Yelp-like business, our Dianping business, because that's what it is. Yelp is the Dianping-like business, the inferior clone. We have more A, touch points with consumers. So we can, in theory, acquire consumers better. They're coming in through multiple front doors. We'll have to go spend and subsidize to get them in through the front door for our Groupon product, for new customers in new cities. But for our existing customers that are already using us, we've got the free real estate right in front of us. Every time they want to go out to eat, they're going on Dien Ping.

It's like, okay, great. They've got an advantage there. They also have a, in the medium to long-term, capital advantage in that the Dianping business is a great cashflow dynamic, high-margin business, which can be used to fund... In a non-dilutive way, whereas everyone else has just taken on as much capital as they possibly can to compete with us. Exactly. And then finally, at this point, I don't know how much this was the case. Certainly it is the case today. They have this huge data asset, right? Like they know what consumers like because literally the customers tell them. And then if you've been

a Deon Bing user for a long time, they know which restaurants, which karaoke bars, which massage parlor, which experiences you like. And then for new users, you can do collaborative filtering and AI and whatnot and predict pretty well what people are going to like. That's a huge advantage in this business. Yeah. If you can structure data that was previously unstructured, there are so much more interesting things you can do with it, like understand what people's preferences are in order to target them with different offers. Yep. Yep. Yep. So by the end of the thousand group on war, it's Meituan, it's Dianping left, but they're kind of sitting there looking at each other. And, you know, both of them obviously very smart in their own ways. And they're kind of sitting there looking at each other. And, you know, both of them,

obviously very smart in their own ways. And they're like, huh, this whole group buying business, you know, we've won, we've gotten a scale, our revenue numbers are much bigger than they used to be. But like, we're not getting any technology leverage out of this business. I mean, literally, it is a discounts business, we add another $100 million in revenue. Very little of that is flowing to our bottom line and our cost structure margins are not improving. We need every new restaurant we sign up. We need more people in our sales army. Every new customer, literally the whole business is we're subsidizing customer experiences. Tao actually says publicly at this point that he predicts,

even at the end of this, that he predicts the entire group buying space is just going to die, that there's no future in it. And Groupon had gone public. Oh my gosh, doing this research has brought back so many memories. Remember when Groupon went public and that was literally the high watermark? They never traded above their IPO price. I remember when they fired the CEO and when Andrew Mason left to go spend more time with his family, just kidding, the board fired me. That moment sticks in time for me as a pivotal moment in tech history. Such a character. And so not his fault too. It was just a bad business. So their market cap was down 90% from IPO price within like eight to 10 months.

Wow. And so that's the moment that we're sitting in here. And this is now late 2012. And there is this interesting thing going on. I have thought before doing the research that the whole food delivery online to offline, which is the Chinese version of talking about this, originated in China, and that it was DoorDash and Uber Eats and Postmates that copied it here in the US. It basically emerged at the same time in both places so right around the same time as tony and stanley

and the indian crew and evan at stanford were starting to think about food delivery and doordash was the same time that meituan and dian ping are kind of looking around and be like we have all these restaurant customers we have all these people who visit our properties who are consumers is there something better we can do. Is there something that we can now bring on these gig economy laborers and direct them and coordinate them in a way that was completely impossible before well this is existing in china too now with ride sharing and dd so they both go hard into basically converting this failed group buying business into a food delivery business. And so did Deon Ping still have sort of a successful Yelp-like business

going on at this point? That has continued from 2003 all the way through 2021 and the future. And it's arguably one of, if not the most important linchpin of the whole combined company. Yeah. It's fascinating because as you just repainted there, it was Tony and company at DoorDash thinking about this. If you rewind further back, of course, you have Grubhub and Seamless and I think Just Eat in the UK exists already at this point. And there was a player in China that we'll get to in a minute. Oh, interesting. But of course, they didn't actually have the delivery fleet themselves.

They were just the, you can order with us and then it'll be on the restaurant to take care of whatever they want to do. It's also worth noting, you know, in the US, how quickly we forget that Uber Eats totally stole DoorDash's business model. DoorDash came up with something. Uber Eats was doing something completely different. And they were like, oh, no, shoot that. And that's actually even better for us, given the fact that we already have all these drivers. So all this to say, I think you are totally right to say the discovery sort of happened simultaneously with DoorDash

and Meituan and Dianping. But it totally is worth noting that like food delivery wasn't new. It was organizing food delivery in this way that was new. And you hit on one really important thing and then another one that is a totally the same dynamic with these companies. Well, the one that's most the same is Tony and team's core insight with DoorDash. One of their core insights was suburbs. Like, hey, you might think that this food delivery would only work in a dense city like New York City, like Alfred was talking about on the special episode we did with them. But no, actually, there's huge demand. There's even more demand for this product in suburbs where they're not great food options. And logistically, it's easier too, because you can park and you can move around easier as a courier and whatnot.

So wait, was that the case also in China? It was. So of course, food delivery works great in the tier one dense cities. But remember, because of this group buying craze, Meituan and then Dianping had expanded out to hundreds of cities across all of China. And similarly, if you live in Shanghai or Beijing and the like, well, nowadays you use Meituan and it's great for food delivery. But even before that, you could get anything you wanted, anytime you wanted with minimal effort. If you live in a tier two or tier three city and you're just getting a mobile phone for the first time, you are not having that experience.

You don't even have e-commerce because Alibaba doesn't serve you. Pinduoduo doesn't exist yet. Yep. Exactly. Exactly. So it's not quite suburbs versus urban versus cities in China. It's more tier one versus lower tier cities. But the other dynamic, the drivers.

So unless, you know, DoorDash had to build up their driver, their courier staff from scratch, both Meituan and Dianping, but especially Meituan, they just recruited this massive army of foot soldiers to go do door-to-door Groupon sales to merchants. It's not that hard to give those folks a cheap Android phone and a scooter and convert them into couriers. Smart. And not only that, but they had the whole management organization structure built out as well around that.

So wait, were they employees? Is there the same sort of concern over the delineation in China that there is in the US? That's a good question. I don't know. I think it is different, but it doesn't seem to be as much of a big deal. The US, it was like the biggest issue was, well, yeah, sure, mobile's here, but they also can't be full-time employees because that won't work into our cost structure. They have to be only paid for the time that the phone tells them, okay, now in order. And in China, I do wonder, maybe we should do a, this feels like a good sort of LP topic to dive into worker classification in China and understand that better.

Yeah, I have no idea. That would be fascinating to understand better. So in May of 2014, Meituan goes out, Wang Xing goes out and raises $300 million from Alibaba, Sequoia, his existing investors, and General Atlantic, new investor, and rolls out this food delivery thing from the get-go in 100 cities across China. So let's review investors here real quick. So Meituan has Sequoia, China. They have Alibaba, and they got Alibaba to double down in a big way. And then they got General Atlantic. Yep. And Dianping has still at this point, fairly little capital because they've been living off the cash flow from the Dianping product. And they've been around 10 years.

They've been around 10 years from also Sequoia, China and Google. But Google's tapped out at this point. They're not going to invest anymore in China. But not Tencent or Alibaba or Baidu. They're uninvolved to this point. To this point. So Tencent, being the brilliant folks they are and seeing everything going on in the country through their ownership and operation of WeChat, which we'll talk about more in a minute, they see this dynamic too. And they approach Dianping and they invest an undisclosed amount in Dianping, but must have been a very large amount of capital into the company in early 2014. So right around the same time. So now we got Tencent backing Dianping. And of course,

Tencent and Alibaba are brutal rivals and Baidu too, but poor Baidu. We'll get to them in a minute. So they dump all this money into Dianping, but Tao and Dianping, they know, they see they're building up their own food delivery operations, but they're not moving as fast as Meituan and Wang Xing. They still have the internet company DNA, not the Wang Xing DNA. So at Tencent's urging, Jianping goes out and leads a $80 million strategic investment in another company in the space. In fact, in the OG company in the food delivery space in China, a company called Ulema, which I think I'm saying that right. It is spelled E-L-E dot M-E. And this is going to become a very important player in the story, but I think it's pronounced Ulema. And what they do is

basically create what Meituan is today. So they integrate the Ulema delivery courier network into the Dianping experience. So you're in the Dianping out and you're looking at reviews, you're choosing where to go to eat, and you've got right there integrated food delivery from these restaurants that you can see what dishes are great. You might experience when you're going out to eat, you'll see the calls to action in the app to go do Ulema food delivery next time instead of going to eat. It's a pretty powerful combination. So wait, who led the investment in Ulema? Tianping did. food delivery next time instead of going to eat. It's a pretty powerful combination.

So wait, who led the investment in Ulema? Tianping did. So there's still a private company. So Tianping raised money from Tencent. And they had obviously cash flows that generated big profit on their balance sheet. And they invested some 80 million of that into Ulema. So now it's unclear how much that was. I think it was probably a joint. And knowing a little bit about Tencent, they operate very collaboratively, like a joint. Hey, you know, Tencent probably thought this was a good idea. Tao and Dianping were like, yeah, this is a good idea. This will be a great way to learn. We can partner. You know, maybe this leads to an acquisition. We'll also be building this up on

our own, et cetera. Okay, so we're like totally in Tencent Dianping land here. Yeah, while Alibaba is doubling down on Meituan. So we're setting this up that this is going to be, it's like a two-on-one fight of Dianping and Ulema together, united against Meituan. Clever. Very clever. So Ulema, a little bit of brief history on on them they're actually

kind of like the real doordash story of china so it was started in a college dorm room by college students in shanghai in 2008 so like way back and so that's what two two and a half years or so before meitwan is founded. Yeah. So before the whole group buying craze, like it was, they were way too early to this space. And the story is that they were like big PC gamers in college, the founders, and they didn't want to leave their dorm rooms to go get food. And, you know, so they started a food delivery business, just like Tony back at Stanford. They were running around campus delivering food themselves. The CEO, Mark Zhang, he actually goes to work as a delivery courier for restaurants that do it themselves.

Just like Tony went and worked for FedEx and stuff. There's so many of these China stories that I feel like I'm listening to an old episode that we did. I know. Going through them. So they bootstrapped for a couple years. Again, they're too early to the space. They raised a little bit of money from GSR and then from Matrix China in early 2013. That was a very prescient investment, kind of right at the right time. And then later in 2013, once it starts becoming clear that, hey, group buying kind of sucks. This online to offline food delivery thing is the next wave. Ulamar raises a big new round, a Series C,

from a new financial investor who has a very well-honed and educated point of view, shall we say, on the space. Who do you think that investor is, Ben? Is this before the Tencent-Dianping round or after? Before. Before, okay. Not Tencent, not Alibaba, financial investor. So that 80 that came in from them was after this. So this is the round immediately proceeding? Yep.

Pure financial investor? They really see where this space is going. Let's see. They see where the space is going so someone else in food delivery uh who bet big on i don't know sequoia china how gangster is that so sequoia they are in meituan they are in dianfe they got eyes everywhere they are in ulama neil shen you dog oh my gosh that That's crazy. I thought I was like, oh, that's too easy. It's going to be like a NASPRs or like a Fidelity.

This is just another one of those. Like the China ecosystem is so different. That could never happen in the US. Could you imagine? Being an Uber and Lyft? Yeah. And Postmates and DoorDash. Right, right. That's crazy. Totally crazy.

So quickly after that, then the Dianping slash Tencent $80 million round happens in Ulema. And then shortly after that, Tencent is like, oh yeah, this thing is working. We'll back up the truck. How about another $350 million from us? So this is where things get nuts. And at this point, Dianping, I believe, is still running their own food delivery operations in some cities. But the strategic weight is behind Ulema at this point. We should say to listeners, we're speaking in dollars here because that's the best way that David and I can compare apples to apples to everything going on in the US and of course, previous episodes too. But of course, this is all actually happening in RMB. Yes, yes, of course. So this is where things just go like completely off the rails. So Meituan couriers and Ulema slash Dianping couriers

literally start fighting in the streets. Like there's blood in the streets. So there are viral videos that start going around in China. The government gets involved. They have to like broker peace here. Like videos of like gangs getting into brawls on the streets and like turf wars over restaurants and delivery routes. What incentives do they possibly have? It's not like they have

huge upside in the company. Why are you fighting for your tribe? I think the culture, I mentioned a little bit ago that the management structure and culture from the group buying days, it's a very militaristic culture. So if you go on Meituan's website now and go on their English language investor relations, they have a video, an amazing video kind of showing the operations of the company and the super app and everything you can do with it. But when they show the courier network, it's like military style, like lines and rows of couriers with like a commander out in front giving the orders. It's crazy. It's interesting. It's not quite like the independent gig laborers in the US. No, that doesn't sound like it. So it feels to me like they're employees and they found

some way to make that work. Yeah. So throughout 2014, 2015, the two camps are sort of neck and neck. By the way, also, we should have said this market is exploding. So the food delivery market in China is about four times bigger than the food delivery market in China is about four times bigger than the food delivery market in North America. And it is growing at a 30% annual CAGR, the whole market. So both of these two camps are kind of neck and neck in 14, 15, they each have about 30% market share. And then in August 2015, Ulema raises another $630 million. Meituan had raised in January of that year, another $700 million. So like huge, huge, huge amounts of capital pouring in. And that ULMA raise comes in August of 2015. And that's right before the shoe drops on October 8th, 2015. The announcement of the century. I mean,

I remember reading about this when it happened here in the US and thinking like, oh, wow, that's interesting. But now knowing all the context behind this, Meituan and Dianping announced that they're merging. So you've got these two rivals, but it's almost like a proxy war with Dianping and Meituan. And you say proxy war because it's between Tencent and Alibaba. Well, it's between Tencent and Alibaba, but it's also between Meituan and on the streets, literally on the streets, it's between Meituan and Ulema. And then in terms of capital, it's between Tencent and Alibaba with Sequoia also on both sides. Sequoia on all three sides here.

David, I need a diagram. China. And then Meituan and Dianping are merging. So poor Ulema, their whole strategic advantage was the product integration with Dianping. And they just raised, they're new investors, they just raised $630 million of capital. Two months later, their main strategic partner, their product advantage, not only goes away, goes away to their direct competitor. Oof. Brutal. Wow. So without spoiling it for the audience, I only know of Ulamav because of how they come into play later in this story. And knowing all of this history about them, that they were actually a Tencent investment, that they were actually a Dianping investment and partner, is going to be astonishing given where they end up in this war. Yeah, what's about to

happen. So supposedly, once the Meituan and Dianping merger happens, Tencent and Sequoia supposedly go to Ulema and say, because remember, they're investors in Ulema, and they're like, hey, look, writing's on the wall here. I think what makes sense is, why don't you sell your assets to this new combined company? Clearly, they're going to be the winner here. Let's all just consolidate. You'll get some small piece of this. We'll all be happy. And of course, Tencent and Sequoia are going to be very happy if this happens. Right. Because now they're the largest shareholders in what is a company that just has room to run that no longer is just going to be a monopoly at this point.

Competing. Yeah. So to his eternal credit, Mark, the CEO of Ulema, is like, screw you guys. No way am I going to do that. And fortunately, he has one strategic option left on the table. Is it the party who just sold their entire stake in Meituan? Indeed it is. It's Alibaba. So walk us through this. For folks listening, one thing that happened as a result of this Alibaba-backed Meituan and Tencent-backed Dianping merging is that in a part of that merger where I think Meituan was slightly the larger shareholder, and it was kind of a merger of equals, but Meituan won out a little bit, Alibaba decides now's the time to get out. And not only did they decide now's the time to get out, they back the scrappy, smaller party who we all thought was kind of screwed in this whole thing. Not necessarily smaller, but definitely they were at a strategic mega disadvantage.

Now, yeah. How does Alibaba decide to sell their stake in the combined Meituan Dianping? So I think, this is my interpretation here, I think what happened is Alibaba must have been so pissed at this because, remember, Alibaba is like, they're like the grossly put, like the Amazon in China, like e-commerce is their thing, Taobao, Tmall. That is their home turf and financial services around that,

whereas Tencent, despite Renren, games, social networking, communication, while they're bitter rivals, they can kind of coexist in separate spheres here. hyper-strategic new market developing where they each have these investments, but it's encroaching much more on Alibaba's space than it is on Tencent's space. Tencent getting into local commerce food delivery is just purely additive to them. That's offense. Whereas for Alibaba, this is defense because it's not a big leap to think, oh, I could deliver food while I could deliver e-commerce stuff too. Totally. It's like if you're an e-commerce player, this emerging world of online to offline, or as people sort of refer to it, the sort of Amazon of services, this local, it's sort of like the Amazon Prime. That is going to encroach someday on Amazon because if you think about the US, like right now we have a difference between Amazon and Amazon Prime.

At some point, everything will just be two hours. And so you have to imagine that if you're Alibaba, you're like, whoa, this fleet of people delivering stuff super fast in every city in China, that is where we need to be at some point. Yeah, and now all of a sudden Tencent, like we can't hold on, we can't stay involved in Meituan Dianping

because Tencent, our bitter enemy, is now right here alongside us as fellow 20% shareholder in this company, learning everything and just getting all this upside while this is strategically very threatening to us. And so why wouldn't you try and box Tencent out? Like my sense here is like, look, Alibaba bet right on the larger surviving company of the two. I mean, of the two, it was Dian Ping that merged into Meituan. And so if I'm Alibaba, I'm like, get the hell out of here, Tencent. Yeah. Well, and what was Sequoia's role in all this?

Totally. We'll never know, but. Right. There's a lot that's super untold here. Totally. I completely agree. I would love to have been a fly on the wall for those conversations. I mean, the dollar sign got to the place where Alibaba was down to sell their stake.

Yep. I mean, that just had to be what happened. Yeah. So Alibaba sells their entire stake in Meituan Dianping for $900 million. And Mark from Ulema turns around and enemy of my enemy is now my friend. Alibaba invests $1.25 billion into Ulema for a 25% stake right off the bat. and then they don't stop in 2017 they put another billion dollars into ulama so baidu had a poor baidu did have the number three player in the space they had homegrown built up a food delivery business and had like yeah like 15 percent ish market share

15 20 market share so less than ulama and meituan Dianping, but they bought it, consolidated that into Ulema. And then in April, 2018, Alibaba buys the rest of the company, does a wholesale acquisition of Ulema for $9.5 billion, which was until that point and i think may still be the largest dollar sized china tech acquisition in history wow crazy all in this sort of same market yep like we haven't even gotten all the crazy stuff that meituan does these days but this is purely the like food delivery and restaurant recommendations and reviews and you know kind of deadish groupon corner of the business yep and at this point alibaba's pumped more than 10 billion dollars into this business because they bought they bought lumaf outright for nine point something

billion outright for 9.5 and they had invested something. Yeah, a billion five plus the money they had invested into Meituan back in the day. Plus they had their own internal operations that they were spinning up to. It's insane. I want to talk for a minute about the attractiveness of the opportunity to be the winner in this space. And there's two quotes that I want to bring up from Tao Zheng that he had on the great Next Billion podcast by GGV Capital. The first one is, if you have three or even two players in a market like this, nobody's going to make any money. The second one is even more damning, which is, in this kind of business, the only rational way is to merge unless you think you can kill the other guy. And he had sort of described that Dian Peng had been talking with Meituan about merging for two years. You can sort of understand

why when you flash forward to today and look at how freaking profitable the combined company has gotten. But at this time, no one's making any money. It's just a knife fight of investors pouring money in, much like DoorDash and Uber Eats, fighting for market share, subsidizing customers. It is a complete race to the bottom. Yeah. And what's so wild about these betrayals, double crosses, triple crosses, and the end state of Alibaba and Tencent being on separate sides here is there is never going to be a merger, another merger between Meituan, Dianping, and Ulema. It is now a fight to the death, unfortunately, for Alibaba.

And I think, I mean, there's a lot of stuff going on around commerce in China and Alibaba with Pinduoduo and JD and everything we've talked about in previous episodes. But Alibaba share price has not done well over the past couple of years, especially in comparison to Tencent and others and Meituan and Pinduoduo. This is a big reason. They are losing big time in this space to Meituan. So 2016, when Ulema bought Baidu's business, they then became larger than Meituan Dianping. So they had the upper hand.

2017 though, they lose, Meituan grows hugely, the combined company, Ulema and Alibaba lose majority market share. And then by 2018, so we're like two years in here, Meituan now has 60% market share. Ulema's down to 38%. And then by 2019, Meituan's just further pulling ahead. They have 67% market share. Ulema's down to 30%. So this is Meituan Dianping with that line of, unless you think you can kill the other guy, which they're doing. Which they're doing.

They're killing Ulema. Yeah, yeah. So we've talked about this a little bit already, but why are they doing it? It's the Dianping part of the business that's so strategic. Consumers have this reason to come to the app and engage with it much more deeply than you would if you're just ordering food delivery. So this is where the whole super app side of the thing really comes in. I mean, if you think about it, it makes so much sense. Like the amount of time that I waste

flipping back and forth between I look at stuff on DoorDash. I'm like, oh, that looks good. Can't really trust the reviews. So I flip over to Yelp, which is my like source of truth for reviews. I'm like, how many stars they have on Yelp? And you can't really trust those either. Totally. And they're like, I'm like, oh, three and a half stars. So zero stars. Okay, skip. But like, I am bouncing back and forth between the two. It makes so much sense for that to be one platform. Totally. It's such a horrible product experience. Like same deal. I'm sure everybody has this like, yeah, I want to order something, but I want to try something new that's not in my usual list of restaurants. I have no freaking clue.

You know, I look on DoorDash, I look on Yelp, I can't figure it out. And DoorDash and Uber Eats have every incentive to push me to click buy because they participate in the transaction. Yelp's incentives are actually the pure one here because they're just an advertising-based business. They don't care if I actually dine at that restaurant. They're more neutral in this party. So you can sort of trust their reviews more. That's why I always feel like I'm looking at these reviews in Uber Eats and DoorDash and I'm like, I don't know. Yeah, totally. And based on, I've talked to people in the past at both of those companies and I'm like, guys, I need reviews. Why don't you give me reviews? Just give me reviews in the product. And they're like, well, it's complicated

because the restaurants are our partners. And we want to like, yeah. Yeah. I'm curious how Meituan gets around it or how Meituan has sort of dealt with that. Well, I think it's because the Dianping assets, there's millions of reviews in the system and very detailed granular down to the dish level that are just already built in, in there. They're there. It's not like, you know, they're creating new ones, but it already exists. So Wang Xing and Beituan, he's not satisfied with just that. He's like, I'm going to press the advantage here. I've got people coming to my app. What else can I do with them in the app to sort of increase the cross-sell opportunity, increase my customer acquisition, front doors, increase the value customers are getting out of

using my app? They get into travel. This is crazy. They get into hotels. They get into flights. Do you know how they know about the travel industry? Well, because Neil Shen started Ctrip. Ctrip. Yep, exactly. Which was the dominant and primarily B2B focused, but the dominant player primarily B2B focused, but the dominant player in Chinese travel. Yeah, Ctrip was the booking.com of China. They were dominant. All travel, hotels, flights domestically in China, you were doing on Ctrip. And still huge. It's still huge, but they only have 20% market share now.

And Meituan has 46% market share of travel in China. Unbelievable, which they launched five years ago? Yeah, or less. It's as if like an Expedia launched four or five years ago, and then boom has close to a third of the market share. Yep. So travel is huge for them and importantly, has a much better margin structure than food delivery. So they're getting a huge portion of

the contribution margin in the company is coming from this travel business, which is getting traffic from the food delivery business and the reviews business. You can start to see the fly wheel go in here. They get into local services. So this is very adjacent to restaurants and to all the reviews in the platform, Massages, karaoke, local events, experiences, ticketing, just book all that right on the app. They get into home services. You want your dry cleaning done. You want your laundry done. You want your house cleaned. Stuff that you would use like Thumbtack for in the US. Great. Bring it all in the app. It's so fascinating.

They get into transportation. They start competing with DD. And then I think they partner with DD later. They get out of the ride sharing game directly. They buy MoBike so that you can book bikes on the app. They get into groceries. So like Instacart type business. You want groceries delivered? Great. You want to shop in person in a grocery store and pick out your items? Great. Just scan them right there in the grocery store on the Meituan app and pay and walk out the store and have somebody, a courier, come and bring them and deliver them to you. It's so fascinating because if you would have told me before starting the research on this company, the Chinese super app, I would have been like, oh, WeChat. But WeChat is kind of like the app store launcher or like the app launcher.

Like it's your home screen in a way where it's like, oh, here's a bunch of different apps that integrate, you know, that I can get to from my chat experience and integrate with my chat. This one's like an app that enables you to do anything in the physical world. Yep. Well, it's funny you say that, Ben, because both of these things are true. A lot of people use the Meituan app that you can download from whatever app store you're using on whatever phone you're on. Just as many, if not more people use the Meituan mini program on WeChat. So this is why Tencent is just so dominant. Like, A, they invest in the best companies on the platform because they see the uses on

WeChat. They did this with Pinduoduo. They've done this with Meituan. They put their hand on the scale in light touch ways. But many programs on WeChat, it's a full-fledged app experience right there within WeChat. So Tencent and the WeChat ecosystem is getting all the benefits out of this. So Tencent is a major e-commerce player in China without having to build any of their own e-commerce themselves. And it would be an exaggeration to say they're eating Alibaba's lunch at this point. But between Pinduoduo and Meituan, they've got these huge monster players that they're invested in and are being used through

their ecosystem on WeChat and Alibaba's boxed out. Yeah, it's crazy. From a capital allocator perspective, Tencent is like Berkshire Hathaway. They don't care about owning these companies. They don't want to control them, as Warren said in his most recent letter to shareholders. They're indifferent to whether they control them or not, but they look at great businesses and say, we want to own some of that. So they're like Berkshire in that way. They're like Facebook in that they own the most dominant messaging and social network app. So they're a FANG company, they're Berkshire,

but they're also Sequoia. And they're like Apple in the App Store. They're like Apple in the App Store, but they're also like Sequoia. They're one of the best pure sort of financial investors who also then puts their hand on the scale to send you traffic. They're a highly trafficked destination with WeChat. And then they just decide who to open that up to. And of course, like you said, in light touch ways, but undeniably, people decide to take money from them because that opportunity is available. Oh,

and by the way, they might do it to your competitor if you don't take their money. Right. As we've seen. It's crazy. It's just, it's incredible. So September 2016, Meituan hits 5 million transactions a day that they're doing across all of their verticals on the platform. March 2017, so like what's that, six months later, they hit 10 million transactions a day on the platform. By 2018, they have 600 million active users. They have over 50% market share of food delivery. They're crushing Ulema.

They do over $10 billion in revenue, growing 100% year over year. God, doubling at that scale. Unbelievable. And that's when they launched their IPO. So they go public in September 2018. And this was a big IPO, big China IPO at the time. But like so many things, I was like, oh, wow, like that's impressive. But at least I was.

I didn't understand the extent of all of this. Yeah, me neither. So they raise about $3 billion at a $50 billion market cap when they go public. Which is up from 30 in their last round that they did. Yep. And then in 2019, they grow another 50%. They do $15 billion in revenue. They turn profitable. They do a billion dollars in operating cash flow. They're net income positive. And then COVID hits. And this is interesting. I think unlike DoorDash, where COVID was an unalloyed good for DoorDash, it's a little more complicated

for Meituan. Ultimately, I think it was good. But remember, their hotel business and their travel business is also a big part of the platform. So that got crushed, as you might imagine. And the highest margin part of the platform. And the highest margin, yeah. It accounts for a smaller part of their revenue, but a big part of their profits. Big, big part of the profits. So Q1 2020, their total revenue is down 12%

across the company and hotel and travel is like crushed. And Q1 of 2020 in China is like Q2 of 2020 in the US. Right. It all hit in December, January. Yep. By Q2 of 2020 though, revenue is back up, total revenue up 9% year over year for the company. And people are starting to wake up around the world at this point. They're like, oh, wow, wait, COVID is good for tech companies and good for these next generation commerce and delivery platforms. So the stock starts to go on a tear. In May of 2020, the stock goes from a $65 billion market cap at the beginning of the month. So up modestly from the IPO at the end of 2018, but flat-ish, to hits $100 billion market cap by the end of May

2020. By October, it hits $200 billion market cap. By February of this year, just a couple weeks ago of 2021, it hits $300 billion market cap, becomes the third largest market cap tech company in China behind Tencent and Alibaba. And it's traded down a little bit since then. It's now at a $270 billion market cap as we record this. But wow, what a story. Absolutely. I mean, there is a stock market story going on here. There is a pandemic story going on here. There is an execution machine story going on here. And I think the biggest one that I want to talk about in a minute is a business model and profitability story going on here. Yeah. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity

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to Huntress. Well, David, I want to sit with some of these numbers from today and unpack them a little bit and understand the company's position and how much it has changed in the last year. Because if we look at this, let's talk about the largest tech companies in China right now. There's Tencent, number one, the $850 billion market cap. So worth understanding for those out there, China doesn't have a trillion dollar tech company, though that is a strictly US phenomenon right now. I bet it'll change soon, but that is what it is today. Alibaba hasn't seen the sort of reward that Tencent has. It's sitting there around $675 billion. Meituan, where we just talked about between $270 and $300 billion,

it's a pretty steep drop sort of obviously between Alibaba and Meituan. So they're not yet in the league of that sort of company. But they're right there, neck and neck with Pinduoduo. It's a $200 billion company, which we've covered. ByteDance, the parent company of TikTok. And what's the other? Douyin. Douyin. Well, Douyin and Toutiao. And Toutiao with $180 billion. So the list sort of turns quickly into these $100 billion to $200 billion. Actually, lots of private companies.

ByteDance is private. You know who would be in here but is not publicly traded is Huawei. Yeah, right. That we've covered before. Right, of course. So you've got Pinduoduo, ByteDance, then Kuaishou, JD, Baidu, Xiaomi down from there. So Meituan is in sort of rare air here. And a lot of that, of course, is because of the stock run up from the

last year. But the growth story in terms of profitability for this company is absolutely insane. So as David mentioned, they've been profitable since Q2, I believe it was, of 2019. But then in the last year, they grew their profits, their sort of operating profit line, from $225 million a quarter to a billion dollars a quarter. So they just kind of figured out, oh, there's where the operating leverage is in our business. It's when we tack on a bunch of other businesses that we can amortize the cost of acquiring these customers over all these different revenue streams. And we can get them to, I think that now it's 27 transactions per user per year

across 475 million transacting users. So you just have this situation where like... That's just bananas. Totally. Like your Airbnb, you get half a transaction a year. Your DoorDash, I can't remember what their number of transactions is per year, but whatever this is, this super app, it's DoorDash plus it's Fandango plus it's, I don't think ride hailing is included in here

because like you said, they're more of a partner in that now, but like they just own this big basket of transactions that they've already acquired you for. So that's 30 transactions a year across an active user base that is roughly the size of, I'm guessing, the population of all of North America. I don't know what the population of Mexico is. Right. Because the US is what, 360 or something? 360 million? Yeah. I thought it was like 330 or 340, but then Canada's at another 30 million to that. I don't know what the population of Mexico, but more than the whole population of the US and Canada.

Yep, it's wild. It's a huge number of users transacting with I think six and a half million merchants 27 times per year. Then when we go into segments, the largest segment of that growth was food delivery. But obviously, they had lots of growth in hotel and travel and would have had even more sans pandemic in the last year, which I do think will rebound in a big way over the next

couple of years. New initiatives has actually been a huge revenue driver, revenue driver for them has yet to be a big source of profitability, but that's things like actually setting up grocery stores. Like they're, they're really going hard. They're doing things like local flower delivery, local medicine delivery, uh, and having these hubs of actual grocery stores. Yeah. When you hear Tony at DoorDash talk about all the things DoorDash can do in the future, just look on over at Meituan and take whatever they're doing today and cut it by three quarters. And that's the vision for DoorDash. That's such a good way of putting it. And DoorDash is already priced as if this is going to happen

for them. Meituan here is trading at 14x revenue, and DoorDash is trading somewhere in that same neighborhood, around 15, 16x. And so investors have sort of decided that this phenomena that happened when you win food delivery and you can tackle these other businesses on too, is just going to go well for DoorDash, which is totally fascinating. I want to get into the product aspects of this, but one of the big things for me in this story is like the primacy of the Dian Ping product and what it all unlocked and the fact that it is existing front door type product, compounding moat type product. And they've got business model, you know, orthogonalism here where their restaurant partners don't really want the level of granularity of reviews that you would need. Right. You know, the only way to arrive at the endpoint that Meituan has arrived at is by

inheriting 15 plus years of these existing relationships and data with restaurants in this particular way. Two other things I want to put in context here for Meituan and its current valuation. So on a scale of the business, let's just take revenue as opposed to GMV or profits. Which we should say revenue is only growing like 30% per year, not the monster three to 400% that we're seeing in profits. Yep. But on a size, on a scale versus DoorDash, we don't yet have full year numbers for 2020 for Meituan because they haven't reported Q4 yet. But let's just take 2019, full year 2019 numbers. As we said, they did about $15 billion in USD of net revenue in 2019. And net revenue being that is all of their take of all the food delivery, plus all their just like revenue from all their other businesses, selling movie tickets and book

and travel and all that stuff. Yep. DoorDash in 2020, so with the benefit of COVID, which accelerated their business, I forget exactly the numbers. 3X. They 3x revenue from 2019 to 2020. Yeah, they 3x revenue in 2020. Even with that 3x in 2020, a year later for DoorDash, they did $2.9 billion in net revenue. So we're talking about a business that is at least 5x the scale already of DoorDash. Likely 6 to 7. Likely 6 to 7x the scale. Now let's turn to the profitability side of the equation here. So like we said, they generated a billion dollars in 2019. Again, sticking to 2019 in operating cash flow. Zoom, which obviously is a completely different business and much higher margin, you know,

incredible gross margins, incredible business on every dimension. They just reported the other day, 2020 numbers, Q4 2020 in full year, 2020 numbers. And they did $1.5 billion of operating cash flow in 2020. So already Meituan is doing more operating cash flow likely than Zoom. That's a really good... Because I've never thought to compare those. That's a really good... Obviously, completely different businesses. But Zoom, in my mind, is the canonical pure software margin, incredible cash flow monster. And just the scale of Meituan. I think of Zoom and DoorDash on opposite ends of the spectrum. And here's Meituan that's doing 6, 7x the scale of revenue of DoorDash and more cash flow dollars than Zoom. squash their competitor so they have pricing power the other that we talked about is that

just they're layering on all these other sources of revenue on top of cac they've already paid or at least for new customers that they're acquiring you know they're able to spread that across so many different transaction types that they'll do another one that we haven't talked about is that like amazon they're now making a lot of money on online marketing services, which is pure profit revenue. You have users buying stuff on your property. As soon as you introduce the ability to advertise to them, you get to keep 100% of those dollars that the merchants are paying you. It's an unbelievable gross margin business, as good as it gets. And so 16% of revenue is now the ads business that they've layered on top, which is a business that you only get to earn the right to have when you have a scale business where

people are coming to your destination and buying things on it. So there's yet that other level of just leaning into operating leverage there. Well, then there's even another level beyond that of they're also selling b2b sass to merchants of every type on their platform so you know you're uh you're a restaurant right like all the services that square provides you except for the core payments infrastructure but like you know managing your inventory doing your booking system like all all that stuff your payroll your hr well and betoan's happy to sell that to you not to mention now they have your financial data doing your booking system, like all that stuff, your payroll, your HR. Well, and Beethoven's happy to sell that to you.

Not to mention now that they have your financial data, they're happy to be your lender also. They're pulling the sort of square capital game here where they're giving loans to merchants. Totally. Which, as we've also covered on many an episode, is an excellent, excellent business to be in. So they have figured out how to do food delivery and not lose money. And that is a massive understatement. So all these things point you in a direction of, oh my God, this company is a monster. How could you be short? What's the concern here? Maybe travel doesn't come back and that's their highest margin revenue. So, you know, if that doesn't come back, that's a big deal. Yeah. Seems unlikely it's not going to come

back though. And I think it already is coming back. And it's clear that like they're taking share in that space. Yep. So I think, you know, look, this company is a juggernaut like there's just no two ways about it i do think two i won't say bear cases but things like to be watchful of that i could see one is they obviously have a fantastic relationship with tencent tencent owns 20 of the company i think everybody's very happy with that but as much of a juggernaut as uh meituan is tencent is as much of a juggernaut as Meituan is, Tencent is even more of a juggernaut as we keep harping on on this episode and frankly, on this entire show. If that relationship were to sour at all, because Tencent is the ultimate top level source of and control of traffic in the Chinese ecosystem right now. Now, ByteDance is on the rise. They're

a threat to Tencent and whatnot. But for the time being, Tencent is dominant. Any fracture in that relationship would certainly be detrimental to Meituan. So for the 50% of their customers who use their mini program, do they actually own the customers or does Tencent really own the customers and they're just letting Meituan use them? I guess the true test of this would be if Tencent got mad and punted the mini program, made it hard to find or kicked it off completely, how many of those people would actually go and download Meituan's app directly? Right, right. I mean, I think a lot. Yeah.

There's nobody else out there that has the scale of different service lines and merchants and reviews, most importantly, the review database and asset as Meituan. So I think it's very defensible, but it's a dependency of the business. I think the other, this is more forward-looking than risks to the existing business, but we didn't talk as much about what's in the new initiatives line for Meituan. And there are a lot of things, but the biggest and the most important strategically right now is community group buying, which for those of you who aren't familiar with it, despite sharing two words with group buying and the Groupon space, is quite a different phenomenon and a uniquely Chinese phenomenon right now, but it's hugely strategic.

Well, and just to explain it super quickly, it's group buying in e-commerce, not group buying at your favorite local boutique. It is you inviting your friends in a fun way to shop with you for something that's going to be shipped to you. And the cost structure is totally different to operate that type of business than a Groupon business. Yeah. And there's that. So what you're describing is Pinduoduo's business, which is a competitive front as well. Oh, I thought that's what you were alluding to. No. So it's actually, well, that's part of the whole ecosystem, but very specifically around groceries is so the idea is that a member of a community becomes a selling agent for the goods producers, in this case, mostly groceries.

So you're a farmer, you're producing groceries of the like. An agent from various communities brings people into then, as a group, buy buy from you so you're disintermediating the whole grocery store value chain and this is a a major front that meituan has invested in hugely in adding to the app and so you can as a group leader start a group, build relationships with producers, get clients, make money, run a business here. And then as customers, you get much better produce at a much better price. And a lot of this traffic is flowing through WeChat too. So the two leading players right now in this space are Meituan and Pinduoduo, which is also broadening into this business. So you weren't really thinking about like, ooh, Meituan's not going to be successful in taking

PDD's core business. You're thinking is for the next frontier they're chasing, that they're both chasing and will have overlap. They may not win that. Yeah. I think one of the themes that I see from this episode is like the more stuff you control particularly in china tech the better your company is and the better your economics get and the more your flywheel spins and the more customers you get yeah and so part of the thesis is like meituan because of their incredible strength already can keep winning every front. But if they don't win every front, they could end up like Alibaba, where all of a sudden they're losing on a bunch of fronts. Right. Oh, man. There's a big game of King of the Hill going on constantly, and you got to always be defending your turf and be trying to find the next one.

Totally. Now, again, that's the future. I don't think that's a bear case for me to on right now or bendo i do right man it's so funny okay so we have danced around the idea of power but we haven't named any yet so why don't we formalize that and get into our power section here so of the seven powers the hamilton helmer seven powers of counter-positioning scale economies, switching costs, network economies, process power, branding, or cornered resource. The first one that really, really, really hits me here are scale economies, where Meituan has been able to become very profitable very quickly because of scale economies. And I think the way to think about it is sort of the Netflix comparison, where because Netflix has the most viewers, they can pay the most for content because they can

amortize it across the most viewers. It's like, hey, there's already 475 million people using Meituan and transacting. Can we put something else in front of them that they could potentially also transact with? And the fixed costs to stand up whatever that business are, are the cheapest for Meituan relative to anybody who's standing it up and doesn't have all those people they could spread out the fixed costs of standing up that business to. That's sort of how I think about it. Yeah, they can go invest. I don't know, they probably have announced how much they're investing in community group buying but they can go invest billions of dollars into it and it's worth it right because they have 600 million users that they're going to stick that in front of yeah or if like let's say

the business is cheap to stand up but expensive to acquire customers like it's not for me twan right right because they already have all the customers and they just cross sell across. Yep, totally. So that's the big one that hit me like a ton of bricks when I was like, why is Meituan so freaking profitable? So the other one that I was thinking about, and I'm not, maybe we can talk through this live. I don't know what the right taxonomy is here, whether this is a cornered resource or switching costs, but the power of the review database,

both the reviews themselves and then all of the data around it for recommendations is enormous here. And I think we showed in the story, like just such a key part of what's become defensible in this space. And I already thought that Yelp blew it on so many fronts in the US, but like, this is just such a stark contrast of like how valuable Yelp could have been and totally how not valuable they are. So I think this is switching costs because once you're on the, as a consumer, once you're on the as a consumer once you're on the dianping review platform it's i don't think it's necessarily a cornered resource in that like you could go use another review platform and somebody else could stand up a review platform and have all the

listings that dianping has but as a consumer you wouldn't get the benefit of all the 18 years worth of review data that's already in there right huh and you're the more simplistic angle on that would be well it is a cornered resource and it's may twan's cornered resource and no one else has all those reviews yeah so maybe it's that too i was thinking about it like in a slack context of like yeah i could switch from slack to some other other messaging platform for my company, but then I'd lose all the message history that I have. Yep. Either way, whatever you want to call it, I think that's a big power.

Yeah, for sure. What's interesting to me here is they don't really have network economies. Like a lot of the times when we do stuff on this show, the answer is network economies. It's interesting for a 10 cent backed company. It is not a social business. It's just not. I mean, maybe they will be in this group buying thing, but that's not where their power comes from now. If your friend switches to something else, you don't care. You care, I suppose, if your favorite restaurant is not on there anymore right right i think there's some lightweight social features of like you can plan trips together you can book restaurants together you can do orders at restaurants together that kind of stuff

but i do think there's a two-sided network effect of the merchants and which you alluded to the merchants and the consumers that as a consumer you want to have all the merchants on there and as a merchant you want to have all the consumers but that's not that defensible like there are other platforms like ulema that have all the merchants and could have all the consumers too yeah so anyway i think we're speaking the same language here that lots of scale economies may be a cornered resource and if not a cornered resource, then definitely switching costs. Yeah. Is there counter-positioning here too? Versus who? Well, I'm thinking about Ctrip. And I don't know enough of the detail about how they've

won the travel market from Ctrip, but I would imagine that they were probably able to subsidize the consumer side in order to gain share in a way that ctrip couldn't because meituan has as we've said all these other businesses that they're also getting contribution dollars from their customer base maybe i think the way that i sort of think about counter positioning ising is why is it that C-Trip would be doing something harmful to their own business by chasing this? And I'm not sure they would. It's just that it would be really expensive for them to go and acquire all these customers. So it's more like scale economies. Yeah. Yeah, I think you're right. As always, we feel they're open for interpretation,

but we need Hamilton to tell us that's okay. All right, what would have happened otherwise? The way we want to do this section is what would have happened if they didn't merge? And the answer is only one of them would have been left standing. The question just is, how do you get there? They both could have raised one more round of capital and then merged, or one of them could have raised one more round of capital and then merged, or one of them could have raised one more round of capital and then they would have squashed the other one. And I think it just becomes this thing of like, if they both kept raising huge amounts of capital, eventually, they both just go out of business because those businesses were not profitable. And arguably,

there's some point where you've taken on so much capital where your business can't get valuable enough to justify a combination. But I think it was just kind of like a high stakes game of chicken where they had been talking for years and when was the right time to merge and how much dilution can we spare before? How many new shareholders do we have to bring on before we actually do get to merge and say, okay, you own this much, I own this much, and we get profitable. And Tao Zhang talks about this on the Evolving for the Next Billion 996 podcast that, yeah, they've been having conversations for years. Maybe Ulema knew about it, maybe they didn't, but yeah, this was going to happen at some point. Yep, yep. Playbook. Yeah, you said you have a bunch of them, right? I do have a bunch of them. So one of them is the thing we haven't talked about yet which is the joy of being in a growing market so e-commerce

in 2017 was a 20 saturation industry that had saturated you know 20 of all commerce real world services was only five percent so while alibaba is definitely in this growing segment where more commerce is shifting to online, there was way more opportunity in the retail services industry. And that leads to the sort of excitement that investors and entrepreneurs had around the offline to online, or as they refer to it, the O2O business, which ended up actually becoming the key to ascending to become one of the top three Chinese tech companies. You had an e-commerce company, which was sort of online to offline, but a far less complex version of a previous generation. Baidu, which is a digital-only company with search, and Tencent, which is gaming and social,

a digital-only company. And so your way of getting to capture enough margin dollars to become as big and successful as a business as one of those was this offline-to-online movement. And they were sort of the ones that emerged successful in that. And it was in this crazy, fast-growing, plenty-of-headroom-ahead-of-it thing, where you had only 5% penetration in 2017. It's also a good thing to highlight. In the West, I don't think we think as much about the fact that what this story proves, which is that everything can come online.

I think if you were to ask people in China, and certainly if you were to ask Wang Xing, whether there were any category of dollar spend in China that he could not bring on the platform someday, he would say, absolutely not. It can all be on the platform. Literally, they're going to rural farmers, and they're selling online directly to customers facilitated by Meituan. They're karaoke. Any activity you want to do, any store you want to visit, you pay with Meituan in a store. You want to go shop in a local grocery store in the equivalent of a Safeway? Cool. That's cool. Do it with the Meituan app while you're there in the store. Right. And David, I know this is like a personal investment thesis of yours, which is don't bet on the incumbents to effectively go through digital

transformation in the long run. You just bet on tech companies to figure out how to successfully move the needs served by those incumbents online. Yeah. But I think it's even from that perspective for me, this is eye-opening and only possible because China leapfrogged in a very real sense with bringing their population online. But just like all these things that you would never even think could be a digital transaction can become a digital transaction. Yeah, that's a great point. Speaking of things that we don't do as much in the West, I think this thing that Meituan

did in amortizing their customer acquisition costs over a crap ton of businesses that they put in front of the customer. American companies don't do this as much. It's like taking our large customer base and offering completely different things to them. I mean, Amazon's probably the best example by bundling more and more things into Prime to sort of expose you. I never would have thought, oh, this company that sells books, or let's even say it's further in their journey, that this company that has the everything store is also going to be one of the top two players in movies, in streaming movies. I wouldn't have bet on that. But Amazon does a really good job of understanding you're our customer and we're going to put more and more

stuff in front of you. I don't know that other companies do that as much. People kind of stick to their lane. Yeah. This was my other big playbook theme I really wanted to highlight for me, which is thinking about exactly what you said through the lens of how China and Meituan and seeing everything that's going on there. Amazon's the best at this in the West, and they're getting like a C on a global scale. Right. Uber really wanted to do it and sold this vision of we're going to, there's Uber everything. We're going to eventually be able to move all this stuff around. And, you know, it doesn't matter if you're taking a ride or something's taking a ride

to you, you're going to get it through Uber. And like, it just didn't happen. And I think what's also really interesting for me is that the product experience, the customer experience is so much better when it all works together. it works in the US of reviews are disconnected from the food, which is disconnected from the dishes, which is disconnected from how I order it for delivery, which is disconnected from how I order it in the restaurant, which is disconnected from how I book the restaurant. That's a crappy customer experience. Right. I look it up on Yelp and then I book it on Resi or Talk or OpenTable. And then the billing is completely separated from all those things. But if I ordered at home,

then actually I should go to DoorDash, even if it's coming from the same restaurant. It's like, it's a nightmare. Total nightmare. It's a great point. Yeah, the vertical integration not only creates a business that can capture more profits, but also a better consumer experience.

Yeah. It's like the ultimate irony, given that Wang Xing and everything in China started as just copying the US. And now it's like, wow, the US is so far behind. Yes. That's a huge point I want to drive home on this episode is like the world, and we've talked about this on other episodes too, but China is not the place copying all the American companies at this point. There are so many things, including payments infrastructure and fintech generally, social buying. The US culturally has not adopted social buying the way that it has in China. And everything that Meituan is doing, it's hard to even put a category on it because it's offline to online. It is the services economy. And we don't have a direct comp. We have 20 companies that roll up to that sort of

same thing. And I think that there is a huge point to take home, which is China is leading in innovation on mobile and on the internet in a way that in many categories, the US will be years before they come to. Totally. All right. What else you got? All right. so another big one that we didn't really talk about, which was a secular trend going on in China that enabled all this to happen was the growth of the middle class.

You know, the fact that tier two and tier three cities became an addressable population that could spend on things like smartphones and then things that, you know, were apps on smartphones wouldn't have been possible a decade, two decades before this came online. 100%. So I think that's a big realization.

And then the continued diffusion of wealth out from, I feel like a couple of years ago when all this was getting started, online to offline and Meituan and Dianping, it was second and third tier cities. Now it's fourth tier cities. It's the countryside. It's, you know, that's what community group buying is about. That's a really good point. I hadn't followed the sort of continued dispersion of wealth throughout the, you know, the lower middle class as much.

I would be remiss if I didn't underscore again, Tencent's unique strategy of both being a financial investor and a thumb on the scale partner. You know, it's a little, you got to make the deal because otherwise someone else is going to. It's just a, it's a wild amount of leverage that they have in any deal. And then they sort of come through like that's just a deep, deep pile of capital available to you to go chase an opportunity and push someone else out of business, and they'll give you traffic on top of the opportunity. And most of what you're spending your capital on is traffic anyway, so Tencent actually can afford to invest less in your company and invest more in the form of traffic, but they don't. They do both. It's huge amounts of capital and huge amounts of traffic. So it's

an unbelievable business, and it's something that is not done for one reason or another in the u.s probably for antitrust concerns yeah probably two quick things on that one was we didn't talk about the valuations of the last rounds that dian ping and meituan raised before they merged but it exactly reflects what you're saying so meituan raised 700 they merged, but it exactly reflects what you're saying. So Meituan raised $700 million at a $7 billion valuation. And Dianping raised like $300, $400 at a $4 billion valuation. Because Tencent's like, we bring the traffic. Right. You'll sell us 10% of your company.

Yeah. You're not going to need all that money. Whereas you have Stripe raising these pittances at $100 billion valuation. Yep, yep, yep. And then the other thing is, I think it was on our Roblox DPO preview analysis with Mario. Was it you or Mario who said, I think it was Mario that said, Tencent is like the most interesting man in the world because Roblox is entering China with a JV with Tencent.

I was like, I don't always enter China, but when I do, I enter with Tencent. You have to. I mean, it's crazy. And Tencent owns 50% of that or 49% of that JV. It's like for us bringing you into the country and the privilege of that happening, we're going to take half of your revenue. Bananas. It's crazy.

So I brought up antitrust there. And that's the thing that we didn't talk about on this episode at all. What does antitrust look like in China? Because if they're able to squeeze Ulema out and really be the only player and really have pricing power over consumers and over restaurants and over all these, that's something that in the US would get deeply scrutinized, especially in the climate that we're in now. So how does that work in China? That's a good question. Honestly, that's probably the biggest risk from an investment thesis standpoint of anything in China, which is, I don't know, but I think it basically, the way it works is whatever the Communist Party wants to do.

Right. Or allow or not allow. I have no idea. But yeah, if the business model and free market dynamics are such that you just have as much room to run as you want on pricing and profitability as you want, like in our system in the US, we would frown upon that. In another system, you could imagine someone saying, okay, well, we just have to have a cut. Yeah. And I don't really know how it works.

I don't know whether it's a cut or more like, that's cool. You keep doing that. But if stuff starts happening that we don't like politically, kind of like Wang Xing's Twitter clone back in the day, the plug gets pulled on you. And we're seeing that risk with Alibaba now with Jack Ma and the anti-IPO plug getting pulled. So that risk with Alibaba now with Jack Ma and the ant IPO plug getting pulled. So that risk is real. Yeah, it's a great point. Okay, a couple more here. So we are seeing food as the go to market strategy for a company that is ultimately getting into all consumer services. You know, we thought about it in this way of like getting free profit dollars because you've already paid off your costs and expanding in all these other businesses.

But what we're actually seeing here is land and expand, but in consumer. It's like this classic B2B concept where you have a go-to-market wedge, you get embedded, and then you start selling more and more stuff. This does exist in the US, but it's what enterprise companies do. Salesforce. Oh my gosh, you bet. You bet. So there's definitely an element there. This land and expand leads to more stickiness, more retention in the very same way that you do in the enterprise. And David, to your point on

switching costs, that's where the real switching costs come from. When you're buying everything from one provider, it's hard to rip that provider out. Yeah, totally. All right, so that is all I've got for Playbook. Do you have any more? Nope. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yeah, Vanta is the perfect example of the quote that we talk about all the time here on Acquired, Jeff Bezos,

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how does the value that they're capturing in the world compare to the value they create? Are they doing a good job of that like Google or are they doing a bad job like Wikipedia? Or of course, not a business foundation, but... Groupon created a lot of value for consumers, not for merchants. That's a great point, unfortunately. And then secondarily, the more altruistic one, value creation versus value destruction. So on this first one, they're doing a damn good job capturing value. I think if they were in a knife fight still, you'd be like, guys, you can't seem to turn a profit in this

business. I'm worried about the long term. That's no longer a concern. So I think kind of a no-brainer here on creating a ton of value and capturing their fair share of it, and probably will capture even more in the future. Value creation versus value destruction. In the US, a lot of people feel very strongly that these food delivery companies are not great if you own a restaurant. That it's not great to participate, but you also kind of have to participate because they're aggregating. That DoorDash and Uber Eats are capturing more and more of the consumers. And the couriers, too. There have been strikes, union organizing.

For sure. Everyone's getting squeezed. So what dynamics carry over to Meituan? Is it as gnarly or gnarlier for restaurants using Meituan as it is for DoorDash? Because you could imagine it's even worse because they also have the platform that says your restaurant's a one-star restaurant. And then they're trying to extract some big percentage of orders. Oh, by the way, they have all the customers. Yeah, I don't know. I didn't find anything one way or the other in my research.

And in part, it's because we're all reading newspapers all the time in the US. There's going to be many, many people who feel fine writing a takedown piece of some US-based tech companies. We're not really reading the Chinese press that's critical of these businesses. Well, I don't know. This is way out there at the limb speculation for me. So listeners who know much more about China or live in China, feel free to correct me in the Slack or email us at acquiredfm at gmail.com but i think the government in china

one of the things that would make them upset and come after a monopoly platform would be like i think it's in the government's best interest in china for restaurants and local businesses to be successful. And if Meituan were putting them out of business, I think the CCP would want to go have a chat with Wang Xing. That's a great point. Yes, there's a check and a balance in that way. Well, listeners, if you know more about this,

we'd be very, very curious. Yeah, totally. All right, so grading. Is there any scenario where it was not an a plus for these two companies to merge and for let's define this real quick if you're a shareholder of meituan or a shareholder of dianping in 2016 is there any way that you could have had a better return on your dollar than these companies combining and achieving not only the profit, but the market cap that they have today. Yes, 100%. If your name is Alibaba, this was an F minus. Oh, yeah. Because

if you think about it, their cost basis was they invested at rounds from the valuation of what a billion dollars through $30 billion. I'm sure way less than a billion. The Series B was $50 million in Meituan. So I don't know, maybe the valuation was 300 something. Okay. So they got obviously a very nice markup by these companies merging at a combined value of, I guess, what would the combined value be? I don't know. At the IPO, at least, it was $54 or $56 billion. Was the combined value $30 billion? At the merger, I think I want to say it was more like $15. Okay. So, you know, nice return. The downside, actually, for them, well, two downsides. One,

their first blunder was getting out of something that would then go stack another $300 billion of market cap on top of that, or just shy of 300. The second mistake was investing in the competitor. Yeah. The biggest, biggest overall mistake was allowing this to happen. I mean, maybe there was nothing they could have done to avoid it, but now they have an existential threat competitor to Alibaba that exists out there with Tencent as the primary shareholder that's just been destroying them in this market and potentially in many more to come. Yeah. And they're doubly exposed. I mean, they're exposed in their core business, but they made a huge bet on the rival that didn't pay off. Yep. We should be clear too. Ulema still exists. It's not dead. The story is

not over. It's a big business. By most standards. Yeah. There probably are a lot of listeners in China right now who are screaming at us like, Ulema is not dead, which is totally true. But Meituan has 67% market share. So then the question becomes, if you are Tencent, was there any better outcome than these companies merging? Tencent is just so gangster. They're like Sequoia China, but with traffic. Yeah. And that's exactly what they're like. Sequoia China is only slightly less gangster. I think Tencent and Sequoia did better in this transaction than the

company itself. Huh. Here's a question. Has Sequoia done better on Meituan or DoorDash? That's a good question. So I pulled up at the IPO. Because Sequoia passed on Seed, but they invested in Series A and everything afterwards in DoorDash. about $5 billion at IPO. So that's a $4.9 billion. So $4.5 billion return at IPO, but then the company is up 6x since IPO. Well, just think about it. They own 10% of a $270 billion company if they held. So it's a $ 26, $25 billion absolute return. So how much did Sequoia return on DoorDash ballpark? So pre-IPO, Sequoia owned a little over 18% of DoorDash. I forget what the dilution was in the IPO, but let's assume 10%. That seems reasonable. Seems reasonable. Okay. So that would take them down to what? I don't know. Let's make it easy. 15% that they own, which is probably a

little more than that of DoorDash. So now 15% of where they're trading today at a market cap of 50-ish billion. Yep. So 7 billion. So yeah, they're doing a lot better on Meituan. No competition. Way better on Meituan. Fascinating. It was closer on DoorDash at the end of IPO day,

but no competition now. You know what this also makes me think of? For a long time, this rule in venture capital that I remember at madrona i remember afterwards like always you know ownership ownership ownership ownership ownership is paramount i wonder if that's different now i certainly have a different perspective like 18 ownership and doordash well yeah i mean that's great but like shoot i'd take five percent ownership and

mate on over that yeah just i mean it gets back to the thing that Paki flagged for all of us a few weeks ago, which was, what is the likelihood that you could become a mega, mega outlier, multi-hundred billion dollar company? And I don't know, David. I still think it's important from an early stage investment perspective because there are still very few Meitwans. If the argument was there's more Meitwans being created than ever, and there are a dozen, two dozen, three dozen near trillion dollar or soon to be trillion dollar companies, that'd be one thing. To me, at least the way I've sort of rationalized it is, sure, all the valuations got bigger, but it's still incredibly rare to be one of those,

whatever we want to call this class of company. I think that's totally true. On the other hand, I do think there's some trickle-down effect here, where depending on your fund size, I think there are a lot more $1 to $10 billion companies out there than people imagined a few years ago. Very true. Order of magnitude, if not two more. Yep. So if you're a fund size of, call it less than $500 million, ownership maybe isn't quite as important as you thought it was. It's an interesting idea. Well, I think that about wraps it for grading. We have some good carve-outs today that we should hit here before we head home.

Do you want to start? Yeah, I can start. So my carve-out is a great short book that I just read. I broke my rule about not reading any recent books, but this one felt like not too much of a commitment and just a really interesting, timely topic called Extraterrestrial by Avi Loeb. Have you heard about this, Ben? No. It's great. So Avi is the chair of the Harvard Astronomy Department. And the book is about, do you remember Uumuamua, the extraterrestrial, the visitor from the other solar system a few years ago that came through our solar system. This was all over the news and it was picked up by telescopes. It was this very odd object that entered our solar system. It's very rare for objects outside our solar system to enter our solar system. It had all these really interesting properties. Scientists weren't

sure what it was and there was all this buzz like, oh, could it be like an alien spaceship? And then over the years, the scientific consensus has basically said like, oh, it was a really flat shaped inner solar system asteroid comet, I guess it would be. Anyway, Avi has written this book and he's a widely respected, incredible scientist. He's the chair of the astronomy department at Harvard. and he's a widely respected, you know, incredible scientist. He's the chair of the astronomy department at Harvard. And he's like, I don't know what this was. The properties of this thing are such that to decide it is a natural phenomenon, you have to bend over so backwards on so many dimensions that like if you occam's razor this thing obviously the answer that comes out is this was extraterrestrial technology and he's basically like look can

i prove that i don't have a photograph of it but like he goes through all the evidence oh and he's really going against the scientific community here and it's popular it's a pop book this isn't like a scientific article but he he makes this great point. He's like, you know, Pascal's wager, uh, which is, does God exist? And Pascal's famous wager is like, well, if you think about the consequences of one or the other, you're probably better off believing God exists because you'll be happier probably during life. And then if God does exist, you're better off low cost for you to do so yep exactly and so dr lobe proposes what he calls the mua mua wager of question is was this alien technology or not

and similar to pascal's wager it's low cost to humanity to believe it was, but the upside is enormous versus the other way around. If you believe it wasn't, there's no upside, it's just status quo and the potential cost is enormous. And so he's like, well, if we believe, and he actually really genuinely believes it was extraterrestrial technology, well, what does that open up for humanity? It opens up our minds to think about, well, if other civilizations out there can traverse light years, well, how could we do that? That's really cool. It's really cool. I should read it just to get my head out of, just to read something different. I feel I consume a lot of the same media or the

media that keeps me in the same headspace. Yeah, it's really good. And it's like 100 pages. That's awesome. All right. Adding it to the list. My carve out is my favorite sub stack, and it is called Luddig's Learnings. And it's a guy named John Luddig. He's a principal at Founders Fund. And we actually cited his work on the SPAC episode, the SPAC LP episode that we did. This, like his writing spans so many different topics, but every single one I read, I'm like, oh my God, yeah. Like, wow, that's, uh, huh. That is really well-reasoned, logical, and the outcome is a little scary and makes me sort of question things. And the first one was, I maybe even talked about it on the show, around internet tailwinds

that are slowing down, mobile tailwinds slowing down, and sort of moving into a new type of businesses that will be created in the future that are just less favorable business models than existed over the last 20 years. And all these interesting decelerating trends, which for all the conventional tech wisdom around everything continues to accelerate, I found was fascinating, you know, around like, can we possibly have any more time in front of screens? No. So can there be bigger advertising businesses? Like here's the only ways you could make them bigger. There's a lot of things like that in the piece that I found was really interesting. The second most recent one that I thought was great was around, um, timeless versus

time full advice. And it was around, here's a few examples of sort of five pieces of advice that are generally widely held to be true. But if you just go to a different part of history, it would be terrible advice. So why do we hold them to be timeless? And maybe you should do the opposite now. And they're very like, they're things that we all take to be very sage pieces of wisdom. I read that. That was a really good piece. That was really good. One of them was homeownership, right? It's a good idea to own a

home. And he was like, if you look at the tax advantages and you look at the massive increase in demand for homes, of course the prices were going up because more people than ever could buy homes, wanted to buy homes. Is that the case now? There's all these reasons why you should actually examine that. New tax incentives, all sorts of stuff. And then the most recent one was around this go-go time that we're in right now that he calls finance as culture, which is, of course, everything that we're seeing with stocks only go up and everybody, you know, pop culture discusses finance and has various elements of finance that drift in and out of it. Finance has become sports. Finance has become entertainment. Finance has become

conversations with friends and examines what are the reasons that this could either, you know, pop or continue and sort of which camp do you want to believe? I just find all of his writing so good. And John, if you're listening, thanks for really writing really thought provoking work. fund connection is starship man holy smokes holy smokes flu came back landed and and waited like a whole minute or two before it blew up a whole minute i mean that's enough time for people to deplane when it lands on mars totally if it blows up only a minute afterwards then we're no i it's an unbelievable accomplishment and actually i was thinking when i watched that video of it landing earlier today and they have some beautiful footage of it i was wondering related to your first carve out of like well did we just pass some test like in star trek there's this

thing called the prime directive where you can't interfere with a species who hasn't discovered warp technology yet and when it came back and landed i was like do we just hit some threshold is there like somebody gonna pop out and know, we get to meet aliens now? And obviously, you know, it's not warp technology. It's just a bigger rocket, but so exciting for what it means for the future of space travel. Oh, on every dimension. So cool. Just think about how many Starlink satellites they can launch off of a starship. I don't know if that's part of the plan or not, but like... They can launch six to seven times as many and is totally part of the

plan. Yeah. Incredible. I think it's 60 in a Falcon 9 deployment versus a 400 in the Starship deployment. That'd be so cool if like two years from now, we're all on Starlink internet. Yeah. I mean, I literally had someone at my house today coming and fixing the internet. So, uh, if there was a more foolproof system, then the, um, my decibel readings were off getting from the pole to the inside of my house, which then got split. So it increased the decibel readings. I learned a lot. I didn't know decibels were involved with coax cables and sending signal, but it is. And, uh, it was a pain and it would be great

if, I don't know, maybe Starlink has sort of the same way that it ends up getting internet to your router. But yes, a better system than the ISPs we all deal with would be wonderful. That would be wonderful. All right, listeners, that's it for today. Yeah, I think you should join the Slack. I think you should come join us. We want to talk to you about this episode. We want you to talk to other smart people. I'm, I'm defraying from my script here, but David and I just did some research and we realized that over 50% of the messages in the acquired Slack are DMS. And most of them are not to us. Cause like, we just don't get that, that many of them. So yeah, it's kind of cool. Like we're doing more with the Slack and we were

looking at, uh, Slack, the company actually gives you some cool analytics and graphs. And if you look at the daily active usage and weekly active user graphs for the acquired Slack, it's at a small level, but they're on an exponential curve. It's super cool. For sure. For sure. And it's mesh. It's not hub and spoke.

So everyone is talking to each other, sometimes with us in channels, but also sometimes, you know, finding co-founders and finding investors and finding customers and making hires. It's just really cool. So I freaking love the community that we've developed here. And you should join us in the Slack.

If you want to be a deeper part of what we're doing, join the LP program. We'll be on Zoom calls with you once a month. And LPs, we've got one of those coming up. So we'll see you soon. And yeah, then you get to hear Jake tell us about SaaS in 2021, which was a privilege to talk to him about. Such a fun guy.

So, all right. If you like this episode and you're still listening, which would be shocking to me if you made it this far into us just telling you all the different ways that you can be a part of what we're doing. Well, it's like the end of Ferris Bueller, you know, when he's like, you're still here. What are you doing here? Go home. Literally, I'm looking at the time count where we'll cut some of this that we're recording, but we're at three hours and nine minutes. Like, go home. All right. I'm cutting us off. Listeners, thank you so much. Share this episode. We'll see you next time. See you next time.