Many startups dream of luring a high-profile investor like Tencent. Apart from raising the startup’s public profile, a prominent investor helps draw attention from other would-be investors and is therefore hugely beneficial from a funding point of view.
But there is always an exception.
Pinduoduo, a Chinese e-commerce site that is yet to celebrate its third anniversary, launched a US initial public offering on Tuesday under the name of Walnut Street Group, and aims to raise up to $1.63 billion.
Preliminary terms show the company plans to issue 85.6 million American depositary shares at between $16 and $19 each in a deal sponsored by Credit Suisse, Goldman Sachs and CICC. If it succeeds in listing by July 26 as scheduled, it will set a world record as the first startup to list at a billion-dollar valuation within three years of its founding.
While Pinduoduo's growth has been stunning, its attitude to its biggest and most famous investor is as much of a shock. While most companies would be keen to play up its connection to a giant like Tencent, Pinduoduo has gone the other way since raising $94 million from the tech giant in February last year.
The company, dubbed a dark horse in China e-commerce as it grew into the country's third-largest online shopping marketplace by gross merchandise volume behind Alibaba's Taobao and JD.com, has repeatedly and vehemently pushed back at any suggestion it is a Tencent affiliate.
Pinduoduo founder Huang Zheng has repeatedly stressed the company's independence and said Tencent has never offered the company any preferential treatment despite being a financial investor.
DOWNPLAYING THE CONNECTION
Pinduoduo is clearly working from a different playbook to most Chinese startups. But, from the company's perspective, its strategy makes sense.
Pinduoduo's partnership with Tencent allows it to massively increase its traffic through accessing the gigantic user base of WeChat, China’s dominant social messaging and payment app. Pinduoduo has said it is connected to over 1 billion users through Wechat, more than three times its own user base of about 300 million people.
However, one of the drawbacks is that Pinduoduo users will increasingly access its services through WeChat’s mini app program instead of going directly to Pinduoduo's own app, leaving the company increasingly dependent on WeChat for user traffic.
Huang has warned of the possibility of turning into one of WeChat’s many mini apps. “If I [Pinduoduo] disappear Tencent won’t disappear. Tencent has thousands of sons [subsidiaries].”
From an operational standpoint, Pinduoduo has already reached a scale large enough that adding new users is no longer a priority. Instead of finding new users through WeChat, it is more important to identify and maintain core users on its own app.
In an apparent move to reduce its dependence on WeChat, Pinduoduo has in recent months started to redirect traffic onto its own app through promotions and discounts.
However, it is highly unlikely Pinduoduo will be able to shake off its dependence on Tencent over the long term because it has largely built its fame from users sharing links to its product on social media platforms.
Pinduoduo does sell products to individuals. But its key selling point is to offer discounts for buying in groups; a product bought by an individual buyer is typically double what the buyer could pay by ordering in a group of five or more. As such, orders through Pinduoduo are mostly made by groups of friends, family members, or neighbours.
In order to get the discounts, a buyer can either start a group purchase or join a group purchase launched by other users. Information and tips on these group purchasing opportunities are frequently shared on social media platforms, with WeChat accounting for the bulk of it.
Unlike Taobao and JD, Pinduoduo needs to ensure its users actively share its product links or the platform will quickly lose appeal. With WeChat being the dominant social media app in China, it is almost impossible for Pinduoduo to operate without it.
In its preliminary IPO prospectus, Pinduoduo set out its relationship with Tencent as one of the risk factors in its operations.
“If services provided by Tencent to us become limited, compromised, restricted, curtailed or less effective or become more expensive or unavailable to us for any reason, including the availability of our mini-program within WeChat, our business may be materially and adversely affected,” the e-commerce site said.
“Failure to maintain our relationship with Tencent could materially and adversely affect our business and results of operations.”
Apart from being a strategic partner, Tencent is also Pinduoduo’s second-largest shareholder with an 18.5% stake before the IPO.
Many analysts believe Tencent will maintain its relationship with Pinduoduo since it helps the technology giant compete with Alibaba, the leader in Chinese e-commerce.
While Tencent goes head to head with Alibaba across multiple businesses, it has never been able to compete directly on e-commerce since it does not have its own online shopping platform. As such, Tencent needs to keep Pinduoduo to challenge Alibaba’s e-commerce dominance, or at least preventing it from gaining further market share.
But Pinduoduo is far from Tencent’s only tool against Alibaba.
The tech giant also owns 15% of JD, the second-largest e-commerce site after Taobao. JD clearly has a closer relationship with Tencent since its app is linked directly to WeChat, instead of running as an independent mini app program like Pinduoduo.
Pinduoduo's biggest risk, however, lies in the fact its promotions are in direct violation of WeChat’s information sharing rules. WeChat has said it would ban accounts that frequently induce users to click onto external links by offering cash rewards, or virtual prizes such as coupons and vouchers.
Pinduoduo goes directly against these rules, since users can get cash discounts by sharing these links. The app said it was banned by WeChat multiple times, although no further action has been taken yet.
While the chance is slim, it is not at all impossible that Tencent will limit Pinduoduo’s exposure on WeChat or even ban it permanently. As the company itself admits, the relationship with Tencent is perhaps one of the major factors investors should consider when investing in the IPO.