Episode 31: The Uber - Didi Chuxing Merger with Brad Stone, author of The Upstarts & The Everything Store

[0] Any other way that we could phrase that would be great.

[1] Yeah.

[2] If you guys want attention for this podcast or not.

[3] Welcome to episode 31 of Acquired, the podcast where we talk about technology acquisitions and IPOs.

[4] I'm Ben Gilbert.

[5] I'm David Rosenthal.

[6] And we are your hosts.

[7] We have another guest episode today, and we are very, very, very excited to welcome Brad Stone.

[8] David will tell you about Brad before we die.

[9] in, but I wanted to do a little bit of administrative stuff before.

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[31] Now, David, over to you to introduce Brad.

[32] Yeah, we are super honored and excited to have Brad on the show today.

[33] He is the, actually our second guest from Bloomberg after our great show with Alex Sherman a couple months back.

[34] But Brad is the senior executive editor of global technology at Bloomberg, and before that, he covered tech in Silicon Valley for nearly 20 years as a reporter at Bloomberg, Newsweek, and the New York Times.

[35] Most relevantly, and fun for us, Brad is the author a few years back of the canonical history of Amazon, the everything store, which as listeners know, we have discussed a lot on this show, And it's had a big impact on Ben and My Thinking is just a great book that we can't recommend enough.

[36] And Brad actually has now a new book out called The Upstarts, which covers the histories thus far of the kind of new generation of defining Internet companies, Airbnb and Uber.

[37] I've heard of those.

[38] We, Ben and I both read it.

[39] It's great.

[40] We highly recommend it.

[41] We're going to be talking about a lot of the content within it on this show.

[42] but definitely go out and pick up a copy.

[43] If you like this show and history and analysis of kind of waves of technology companies, you're going to love this book.

[44] So thank you, Brad.

[45] We're super excited to have you here.

[46] Thanks, guys.

[47] Yeah.

[48] And for listeners, in my kind of typical style, knowing we were interviewing Brad this morning, just finished the upstarts last night.

[49] And I loved it.

[50] I mean, it's truly, I talked a lot about the Everything Store on the episode.

[51] episode with Tom Alberg, but really the spiritual successor to that Amazon book.

[52] And it's interesting how it really is the next generation of a lot of the sort of same mentality and tactics in Uber that, and to a lesser extent, Airbnb, but in Uber that we saw on Amazon.

[53] Thank you.

[54] Yeah, it's hard to follow up the story of Amazon because there's really nothing like it.

[55] Then, you know, somewhere along the journey of trying to find what was next, they decided, okay, maybe there isn't a follow -up.

[56] Maybe you can look at the kind of wave of companies in a defining moment.

[57] in Silicon Valley, and that's kind of how I stumbled on this sort of dual profile.

[58] Very cool.

[59] Yeah, it's great.

[60] So today, we're going to talk about something that a story, a merger that probably a lot of our readers know happened recently, but hasn't gotten nearly, I think, enough press in the Western world, at least.

[61] And what press there has been has really been, thanks to Brad.

[62] He's been the foremost reporter on this.

[63] And that's the merger that happened last fall between Uber.

[64] and D .D. Shushing, uh, in, I, I, I hope I'm pronouncing that right.

[65] I, I may be butchering it.

[66] Um, in China.

[67] Uh, this is, this is a wild story.

[68] And, um, there are, there's so many lessons here that, that, that I think all of our listeners can take away.

[69] And we're really, really glad to have Brad here to tell up with us.

[70] So, um, I'm going to, I'm going to tell the story along the way, but definitely want to credit Brad, you know, it's his story that he did the reporting on.

[71] So with that, uh, I'm dive in.

[72] So we pick up the story in 2012.

[73] Uber's kind of already become a pretty meaningful household word, at least in the U .S., and is starting to expand internationally.

[74] They've gotten word that there's this company in London called Halo, which started with the black cabs in London, has had a lot of success there and is thinking of, is planning, plotting to come into U .S. and threaten Uber here.

[75] So in response, and Brad talks a lot about this in the book, Uber mounts a really aggressive international expansion campaign.

[76] And at the same time, Lyft and side car have really pioneered true ride sharing in the U .S., not just the black car, a limo and liberty drivers that Uber started with, but true ride sharing where anyone can drive.

[77] Uber's responded with UberX, and kind of the world is now realizing that the market for ride sharing is orders of magnitude bigger than anyone thought.

[78] Yeah, and David, it's worth, it's worth kind of noting there that in today's world, where we all take Uber X's everywhere, or that's the most common say when I'm going to take an Uber, it's an Uber X. Uber did not pioneer ride sharing.

[79] In fact, and they were reluctant to embrace it.

[80] Travis spent a lot of early 2013 trying to get Lyft and another company's sidecar shut down in California because he saw, he saw it was a disruption and he thought it was illegal.

[81] And when, when the California, at PUC didn't do anything, that's when he embraced Uber X wholeheartedly.

[82] If you can't beat him, join him.

[83] I think that's kind of Uber's motto, right?

[84] I want to say one more thing about Halo, though, because there's an interesting lesson in tactics.

[85] Halo in 2012 promoted the heck out of its international expansion.

[86] And that was a huge mistake because they mobilized, they not only mobilized Uber to grow more quickly in the U .S. And then Uber got to markets like Chicago and other cities before Halo.

[87] ever really moved on its promise to expand.

[88] But Halo also stirred all this entrepreneurship in China.

[89] And so, you know, what you have to understand these days is there are entrepreneurs all over the world that are watching sites like TechCrunch religiously.

[90] And it was Halo and not really Uber or any of the other ride -sharing companies that started stirring these companies in China to start competing.

[91] Yeah.

[92] And that's exactly.

[93] Thanks for, thanks for tuning me up there, Brad.

[94] It's like you wrote this story or something.

[95] that's exactly what I was going to say that all around the world people are starting to wake up to the potential of this market and nowhere more than China are entrepreneurs sort of attuned to the size of this opportunity and ready to go after it with just kind of aggression that makes you know even a company like Uber look tame here here in America so they're as Brad writes about there about 30 companies between 2012 and 2013 they get started in China, all going after this ride -sharing Uber opportunity.

[96] And one of those companies get started by a young entrepreneur named Cheng Wei, who at the time was a 29 -year -old salesman at Alibaba in Huang Zao.

[97] And he had been kicking around some entrepreneurial ideas with his boss at Alibaba, a guy named Wang Gang.

[98] And actually earlier that year, it's kind of started this side project, an app that they called Momo.

[99] And Momo was essentially, you know, on iOS, the sort of Fine Friends feature, it was essentially that.

[100] And so they're working on this app on the side at Alibaba, see the market opportunity in ride sharing, and immediately pivot and rename the company D .D. Dash, which translated into English means Hong Kong, call a taxi.

[101] And so when they pivot, they decide to leave Alibaba, go full time.

[102] Cheng is the CEO, and Wang invests the initial seed capital into the company.

[103] and they're kind of off to the races along with everyone else.

[104] So I wanted to ask Brad here, I mean, you spend a lot of time, probably more than anybody, interviewing these folks.

[105] What did they like, you know, kind of what drove them to start this company?

[106] Well, I mean, I just love Chang Wei.

[107] He, you know, he was great.

[108] I should say, you know, his English isn't so good and my Chinese is non -existent.

[109] So my partner in crime on this story was Lulu Chen, one of my Bloomberg colleagues in Beijing.

[110] And we, you know, we went to visit Cheng Wei at Dedi's headquarters.

[111] And I loved him because he presents his story as a series of small personal humiliations.

[112] So, for example, he, in his very important college entrance exams in high school, he leaves one page blank by accident and gets into a lesser school.

[113] And in college, he gets a job selling life insurance and he doesn't sell a single policy.

[114] And then he signs up to work at a health care company only to find out that it's a chain of foot massage parlors.

[115] And he sort of finds him.

[116] He walks into an Alibaba office in Shanghai, gets a job, meets Wang Gong, his mentor.

[117] And really, they start on their entrepreneurship path because Wang Gong doesn't get a promotion.

[118] And they start kind of brainstorming ideas.

[119] You know, Momo actually, you know, it wasn't their idea.

[120] It was something that's sort of a kind of hack that existed on the Apple.

[121] store in China.

[122] And they sort of realize the power of GPS and the potential to do things like a halo in China taxi hailing app.

[123] And yeah, and then they launched this company called Dedi, only to find out that, you know, dozens upon dozens of other companies have had the exact same idea.

[124] So, you know, here you've got this young kind of whippersnapper and Ching Wei, Wang Gong, you know, we spoke to on the phone.

[125] He very rarely does interviews, but sort of flamboyant, investment.

[126] who, you know, as just by virtue of his small angel investment in D .D., you know, has minted at least a billion dollars.

[127] And, you know, it was, these guys were, they had nothing, you know, and it was 30 is the number of companies that launched.

[128] You know, there may have been hundreds that spun up to address this opportunity in Beijing at the beginning of 2012.

[129] So, you know, they, the odds were against them.

[130] But I think, you know, as well as we'll talk about, there was, you know, they had, they had some experience in the industry and knew what it took to succeed in China.

[131] And Brad, I think you pointed out in your book that it was roughly the American equivalent of 100K that he put into Didi as his little angel.

[132] A pretty good investment.

[133] Kind of on par with Sequoia's 600K into Airbnb two years earlier that you also cover in the book.

[134] I'm also struck by both the similarities between Travis Kalanik and Chang -Wei, you know, in terms of their histories and their failures in the past.

[135] I mean, these were neither of them when they started these companies were household names, you know, far from it.

[136] But also like the complete opposite in terms of their outward personalities.

[137] Like it must have been, you know, did that come through?

[138] And as you were talking to both of them, like, you know, this, this sort of underlying sort of drive that they have that I suspect has in many ways been motivated by their past failures, but just contrasted with these wildly different surfaces.

[139] I mean, I think that this is a cultural thing.

[140] It's funny because I was recently telling some of my colleagues in Asia that we need to stop describing Internet CEOs and founders as humble.

[141] But I think, like, they're all trying to present a humble veneer that, you know, there's just kind of cultural value in doing that.

[142] Whereas, you know, in the U .S., somebody like Travis is, you know, doesn't have.

[143] hesitate to be presented or to present himself as extremely aggressive.

[144] Of course, Travis did that over the first few years.

[145] But behind the facade, they are very much alike.

[146] I think one of the reasons, you know, D .D. succeeded and beat all these companies is that, you know, Changwe had a vision, which is that smartphones and technology could make the, you know, could make transportation more efficient than China.

[147] But along with that idealism, there was a ruthlessness to go and pursue that goal to kind of, you know, like everywhere else in the world, right hailing, you know, was quasi -legal in China, you know, and yet nevertheless, he sent those early employees, you know, to cities to go and launch without permission.

[148] And in some places, they were shut down.

[149] And then, you know, he nevertheless kind of persevered.

[150] And that's kind of what it took in this industry, relentlessness in the approach.

[151] In thinking about that perseverance and that relentlessness, You know, as you meet with the founders of the founders of Uber, founders of Amazon, do you get the sense that when you talk to these people in person, there's a something about them that's just different than other people, that this relentlessness and this kind of ruthlessness that sort of thing could be predicted?

[152] Like, are they the inherent forces of nature that set them apart from other people or, you know, what is it about them?

[153] That's the big question.

[154] I mean, first of all, I wouldn't put anyone else in the category of a Jeff Bezos, right?

[155] because he stands alone and had, you know, had the vision before anyone, you know, that the internet was going to change the world and bet so heavily on it and then had years of people thinking that, you know, Amazon was really just a boring retailer.

[156] I don't know that the Ubers and the deities of the world have suffered the way that, you know, Amazon and its employees suffered for many years.

[157] I think in terms of Cheng Wei, probably what marked him and his story is that, you know, he, and I'm sure we'll get to this, like had, had, had, great people around him and then was able, I mean, the dynamics of the Chinese market are so unique that the Dedi's smartest move very early on was to hook into 10 cent.

[158] And when they did that, you know, everything became possible.

[159] To pick up the story there, you know, I think what's striking reading the book and hearing about these, the early days of the rights hearing competition in China is it makes the, you know, the Uber Lyft fight that, you know, we think is so ugly and distasteful, you know, here in the States, you know, it makes it look like kids in a sandbox, right?

[160] Like, these 30 companies were just brutal to each other.

[161] And in particular, you know, they all started raising large amounts of money and then going, being willing to go deeply, deeply gross margin negative by paying drivers a lot more for each ride than the riders were paying the companies.

[162] So it kind of like, it kind of becomes that they're laying siege to each other's business.

[163] businesses in a way, you know, this is war.

[164] And one of the tools, one of the ways that they start raising money is from the large, the large, the big three internet companies in China.

[165] And D .D. Dash is actually the second one.

[166] They raise money from Tencent.

[167] But before that, their competitor, Quade, raises money from Alibaba, which, of course, is Cheng Wei and Wang Gong's former employer.

[168] So, you know, Brad, you talk to all these guys.

[169] Like, what was going on?

[170] Right.

[171] Well, I think when KwaiD went and raised money from Alibaba, it was definitely a blow to the D -D guys because, you know, that's their, you know, that's their alma mater.

[172] And that's, you know, Alibaba, obviously, the e -commerce giant in China.

[173] So I think that there was a moment of almost panic, you know, that Alibaba had placed its bet.

[174] It was, it was on Kwai, and as a result, you know, Wang Gong.

[175] the investor and Chengway's mentor, his next call was to Tencent.

[176] Now, as it happened, then, it was probably difficult to see in 2012, but, you know, Tencent has this social network slash messaging platform called WeChat.

[177] That is, which was, of course, QQ before that, you know, on the desktop.

[178] And this was like, you know, sometimes it's better to be lucky than good, right?

[179] I think that's right.

[180] And I think, you know, the big moment for this industry, you know, so Kwai and Deedi start to emerge by virtue of the investments.

[181] of Tencent and Alibaba.

[182] Baidu is still sitting on the sidelines.

[183] And what happens at the end of 2013, beginning of 2014, and again, almost sort of lucky is that over the Chinese new year, WeChat integrates Didi as a way, and there's a product called Red Envelope or Red Package, and it's basically a way for Chinese WeChat users to give each other small gifts.

[184] and the idea of giving somebody a gift on Diti, the gift of a ride, kind of takes off.

[185] And both Tencent and Alibaba, the sponsors of these ride -sharing companies, realize that the next battlefield in this long -standing war between the Internet Giants and China is going to be mobile payments.

[186] And that the taxi companies, the ride -hailing companies, are ways to spur payment value with mobile payments.

[187] And so they start to kind of use these two ride -sharing companies as proxies and funnel.

[188] money, you know, right off their balance sheet into these companies as a way to drive payment volume.

[189] And that is when Didi and Kauai D start to just take off on steroids, not only growing very rapidly, but burning tremendous amounts of money.

[190] Yeah, because this siege is continuing and both the, you know, Alibaba and Tencent are pouring tons of money in.

[191] But other investors, you know, are also venture firms and private equity firms also pouring in lots of money.

[192] I mean, it gets to be billions of dollars that these companies are burning just trying to subsidize rides to get kind of get big fast and beat the other one, right?

[193] That's right.

[194] And then you've got people like Yuri Milner at DST, you know, who all the big investors had missed on Uber.

[195] And believe me, they berate themselves nonstop.

[196] And that's an interesting aspect of the story, you know, that these companies very early on did not look like the prototypical internet companies.

[197] And so, you know, a Yuri Milner who prides himself on hitting all the big ones passed on Uber.

[198] And so bets big on ride -sharing or ride -hailing in China.

[199] And so, you know, makes an investment in D -D -D -D and then kind of sees this destructive war playing out between these two indigenous Chinese ride -hailing companies.

[200] And gradually over, throughout 2014, starts to broker a piece.

[201] Not only because both companies are losing a lot of money and just, you know, and siphoning cash off Alibaba and Tenton's balance sheet because, you know, I think that they also had the sort of foresight to know that Uber was coming and that the Chinese companies were probably better off together than they were apart.

[202] Yeah.

[203] It's interesting thinking about the big three in China.

[204] They're investment firms.

[205] They're their own business.

[206] And in America, like, or the U .S., we tend to have, I mean, there's corporate venture, but you don't have, like, oh, Facebook invested in them.

[207] So, you know, Google needs to go invest in someone else.

[208] those corporations just buy companies, right?

[209] And then they subsume them into their offering.

[210] But we don't really have this, like, first tier of funding is kind of corporate venture like there is going into China.

[211] Well, the funny thing, we can make an interesting juxtaposition with Google and Uber because Google Ventures invests in Uber.

[212] It's their biggest investment ever.

[213] And then they start competing with Uber, right?

[214] They roll out a ride sharing, well, they start talking about their ride sharing service, but they scare Uber into thinking that maybe Uber will be a competitor.

[215] And, you know, and relations between the two companies are strained, whereas, you know, Tencent invests in Diti and, you know, it doesn't, you know, doesn't ever compete with it.

[216] And, you know, and as a result, you know, it's so it's interesting.

[217] It's a different model.

[218] I mean, you know, I think maybe sort of smart, you know, that kind of Tencent knows that that is not in its core competency.

[219] Yeah.

[220] Well, it also feels like, to an outsider perspective, it feels like these big three Chinese internet companies are willing to, sort of more directly exercise their influence in the market there, you know, if that's the right way to put it, then the internet companies are in the U .S. I mean, it's really hard to imagine Google or Facebook sort of giving preferential treatment to, you know, like if Facebook started giving preferential app installs to, you know, one ride -sharing app over another or one, you know, other form of company over another, you know, I can't imagine that going well here.

[221] You're right.

[222] That's a great point.

[223] That's a great point.

[224] And, you know, not only, and we'll get to this, but not only was Tencent prioritizing Didi on Weechat, but when Uber comes into China, it starts blocking Uber from Weechat.

[225] So I think, I think that's a good point.

[226] I think that there would be some regulatory or antitrust scrutiny if Google was to play favorites in the way that Tencent and Alipaba did in China.

[227] Yeah.

[228] So Yuri Milner kind of comes in, brokers this piece between, between Dedi and Kuwait, and they know Uber's coming.

[229] DD ends up, you know, quote unquote, winning the battle.

[230] They get 60 % of the combined company.

[231] Chang Wei stays on as CEO of the company.

[232] And I just want to sort of step back for a minute here and talk about this is like two years after these companies were founded.

[233] So they go from getting started, inspired by Halo, not Uber, you know, having this sort of wide playing field.

[234] And then a bloodbath emerges, the big internet companies get involved.

[235] they raise and burn billions of dollars and like 700 days go by.

[236] You know, I mean, the pace is just like blistering.

[237] Well, and one funny thing from the book, you know, there were moments of like just technical meltdown for these companies and they, you know, they mythologize these periods within the company.

[238] I think they call one seven days, seven nights where they worked so hard to prop up the infrastructure that one of the engineers had to go to the hospital because his contact lenses had become sealed to his eyeballs.

[239] So that kind of tells you how hard and how fast they were moving at the time.

[240] Yeah.

[241] I mean, it's like, you know, when Mike Zuckerberg talks about Facebook going on quote -unquote lockdown, like I'm pretty sure the employees still go home at night.

[242] But in China, they don't.

[243] Well, and in crunching the numbers, it looks like it literally was about twice as fast.

[244] We can't, we don't know exactly when Uber hit a $1 billion valuation, but they did their series B on 300 million in December 2011.

[245] and their Series C in August of 2013 on $3 .5 billion.

[246] So if you look back at their seed in August of 2009, they probably hit a billion dollars about four years after founding, approximately twice as long as these, you know, their Chinese counterparts.

[247] So it really is an insane pace.

[248] And you just think about the size of the Chinese market and how car ownership is so much less developed in China.

[249] And so there was, you know, just more of a hunger.

[250] for this kind of service.

[251] So Uber, you know, as we've been mentioning, you know, they're not blind to this, too.

[252] And actually, it turns out that Uber had had this kind of like small sort of clandestine presence in China.

[253] Since 2013, there's this story that Travis and a few other Uber executives go over to China and Travis sort of famously, you know, calls back to headquarters in San Francisco and says, like, hey, like, I need you to, I need you guys to tweak this.

[254] the tech so that, like, we can, like, we're going to go out here, our executive, sign up a few drivers and just, like, run some tests here in China.

[255] And so they start doing that in 2013, but they're just sort of testing.

[256] And then when, when Dedi and Qaeda start, are in the midst of their merger, that's when Travis decides, okay, he's going to put his foot on the gas and launch for real in China.

[257] And Uber does.

[258] And pretty quickly, while D .D. and Qaeda are consumed with the merger, Uber gets to a 30 % market share kind of right off the bat.

[259] So it's now sort of, they're a real player in the market.

[260] How did that happen so quickly?

[261] Yeah, I mean, it's funny.

[262] We'll go back to like the story of technology in China is always the, as always the story of the big three.

[263] And one of the things that happened was, you know, Uber.

[264] So when they launched, you know, the integration was very poor in China because they were using Google Maps and, you know, we all know Google is pretty much blocked in China.

[265] So the integration was poor.

[266] And also this idea of launching via the black car or limo market in China was always a limiting one because it's just not that big of a market.

[267] So Uber kind of toodles along for a year and a half.

[268] And then makes the very kind of smart observation that Baidu has sort of missed this wave of mobile payment competition and needs to catch up.

[269] So they solicit an investment in Baidu.

[270] They start using Baidu maps, you know, which is much smart.

[271] about transportation in China than Google.

[272] And the product just gets much better.

[273] At the same time, at the beginning of 2014, Dedi and Kwaii are merging.

[274] And, you know, as with all mergers, it's an awkward one.

[275] And they kind of slow down.

[276] So I think, you know, Uber took advantage of sort of this opening and made up some ground.

[277] But, you know, as we'll see, it was, it was temporary.

[278] Yeah.

[279] So they come in, you know, swinging into the market with Baidu as a partner.

[280] get 30 % market share.

[281] And Travis goes over and he meets, he meets with Cheng.

[282] He meets with the newly merged D .D. And Travis is, he sort of walks into the meeting.

[283] He thinks Uber's international.

[284] Didi's not at this point.

[285] You know, Uber has, Travis is convinced the better product, the better technology.

[286] They have Bidu maps, which are the best maps in China.

[287] And he essentially offers to acquire DDI

[288].D.

[289] He