An ex-Googler grew his shopping startup into a $23 billion empire in under 4 years. One early investor explains how he did it.

Colin Huang

In just three and half years, Chinese e-commerce platform Pinduoduo grew from a burgeoning direct-to-consumer delivery service into a multibillion-dollar company with a successful IPO under its belt. When the Shanghai-based startup went public in late July, its stock soared to nearly $27 a share — 41% higher than the company originally anticipated — making Pinduoduo worth nearly $24 billion.

Its remarkable growth is the result of a confluence of factors, says Ron Cao, partner of Shanghai-based venture firm Sky9 Capital. Cao has helped oversee much of Pinduoduo's growth since his firm led the e-commerce platform's Series B funding round in 2015.

At the time of Sky9's investment, Cao said Pinduoduo was a fast growing e-commerce platform primarily focused on selling affordable, perishable fruits.

But with a fresh cash injection of $110 million from a number of investors including Lightspeed, Sequoia, and Tencent, Pinduoduo rapidly expanded its purview: Now, the site sells nearly every product imaginable (breast enhancement cream, smartphones, mangoes, toilet paper, and men's loafers to name only a few) along with fashion goods, sports items, books, and electronics.

Pinduoduo's CEO, former Google engineer Colin Huang, has described his company as "a combination of Disneyland and Costco" that sells low-cost products to shoppers through bulk suppliers. Once a group of people opt in to buy an item, the platform ships it out directly from the supplier at a competitive price.

In an interview with Business Insider, Cao broke down how Pinduoduo became such an instant success:

Pinduoduo is focused on the right geographical market.

While Pinduoduo founder Colin Huang has spent several years working at Google in the US, Cao said the CEO's ambitions have always been focused on China.

In China, says Cao, the e-commerce market is ripe for innovation.

"Everyone is on mobile, and mobile payments are so easy," said Cao. "I don't have to carry my wallet when I walk around in China. You can charge everything to your phone — even small shops on the side of the street will have a scan."

Popular socially platforms like WeChat also helped set the groundwork for Pinduoduo's success, said Cao.

"Five or 10 years ago, this wouldn't have taken off," said Cao. "Whatever Pinduoduo is trying to do couldn't have happened without that infrastructure."

It found a way for users to share on the platform.

"Pinduoduo went viral immediately," said Cao.

Because the platform only offers steeply-discounted products to a group of buyers rather than individual shoppers, users were incentivized to share the product among their friends so they could get a better deal.

"People formed groups. It intentionally forced you to get other people involved," said Cao. "Even today, you can't buy something for yourself. You have to join a group."

Cao said that Pinduoduo's social element was crucial to its success — and a key factor in what his firm looks at in other companies to determine their future potential.

This type of social commerce incentive can spur enormous scale, said Cao: "When a platform incentivizes users to push a product on to someone else, it has the ability to go viral."

Pinduoduo is focused on products that people frequently buy.

When Cao's firm first invested in Pinduoduo, the platform was almost entirely focused on selling perishable fruits, a big business in China, where shoppers typically purchase fresh produce each day.

Fresh fruit, said Cao, is the type of high-frequency purchase that helped the company take-off with new users.

While perishable food only served as a primary market by which to test out Pinduoduo's larger ambitions, its focus on high-volume transactions provided ample learning opportunities, said Cao.

"[In China,] people like to buy fresh fruit every day," said Cao. "This allowed Pinduoduo to learn how these things work. Fruit is a very difficult market because it's so perishable. Users were able to buy very quickly. It was a challenging experience that helped them learn how things work very fast."

See the rest of the story at Business Insider