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The Chinese Social+ Model

Things do not look really great for some new internet companies in China.

Pinduoduo, the Chinese "social+" ecommerce app that shot from obscurity to a $24 billion IPO in just three years has been accused of cooking its books by short seller Blue Orca. The activist fund alleges PDD's losses last year were 65% greater than it claimed. PDD has dismissed the allegation.

The pricing values money-losing Pinduoduo - which counts Chinese internet giant Tencent Holdings Ltd (0700.HK) as a main backer - at $23.8 billion including all outstanding share options, compared with a valuation of $15 billion following a funding round in April.

Elsewhere Qutoutiao, another Chinese upstart that rushed to market in September, reported losses in Q3 8886% larger than in the same period last year. The Chinese model of building presence before profit is becoming more and more costly.

 Nasdaq-listed Qutoutiao, a news and content distribution platform, reported an unaudited net loss of RMB 1.3 billion ($150.5 million) for the third quarter of 2018, an 8886.1% increase from the same period last year. The company’s net revenues for the period were RMB 977.3 million, an increase of 520.3% from RMB 157.6 million year-over-year. Apart from increasing costs to retain users, share-based compensation expenses of RMB 717.7 million were recognized to consolidate corporate loyalty and encourage contribution. This is Qutoutiao’s first fiscal report since it’s IPO in September. Qutoutiao’s average daily active users for the quarter were 21.3 million, up 229.0% year-over-year.

Sources: Fortune Newsletter

Sir, could you give a bit more insight into this Chinese model of building 'presence before profit'. I did a quick Google search and couldn't really find references to it.

Thanks.

It is simply the capacity to keep increasing user growth without any consideration of profitability.  In other words, the main growth is to have many users even when losing money. Then after that has been done and consolidation done via network effect [the more the users, the better the service], one can begin thinking of profitability. As I have noted, that business model is always in places where follow-up capital is possible. In Nigeria, we are not there yet. While Amazon could have operated for years with no profitability, Konga was not lucky. Even Jumia has to consolidate many things because it needed to reduce losses and/or push towards profitability .

Read this piece where I explained managing long gestation period before profitability.

Awesome...thanks for the explanation sir.