Acquired - TikTok

0:00Cool. Yeah, we're jamming a lot in here. I know. Welcome to season five, episode eight of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle. And I'm David Rosenthal, and I'm a general partner at Wave Capital, an early stage venture fund focused on marketplaces based in San Francisco. And we are your hosts.

0:38Today, we'll tell the story of the most valuable tech startup in the world, Bite Dance. You may not have heard of it, but you have almost certainly heard of their most popular product, Doyin. Or wait, if you're in our Western audience, I mean TikTok. Valued at close to $80 billion, this privately held venture-backed Chinese company has completely changed how a generation of teens and 20-somethings globally use their phones.

1:07or another fun way to introduce TikTok, what is this machine learning based social media app that Skyrocketed the then unknown Lil Nas X to number one on the Billboard Hot 100 for 17 weeks, the longest of any song in history with his breakout track Old Town Road?

1:32Well, David, I mean, how on earth can this app create such a universal sensation for so many people at once to skyrocket it to number one like this? I mean, this is something that no other social media app has been able to accomplish. Well, not in quite a long time. The other fun thing that we're not going to talk as much about on the episode, but to say upfront, to also just build the acquired, you know, the human suspense here.

2:00You of course know who assigned the, I think it's $70, $78 or $79 billion valuation to, to buy dance, right? Is it Sequoia China? No. They were an investor. Oh, I wasn't an earlier investor. Oh, boy. All right, I can't wait for this. Yep. The hits keep on coming. Although this one actually is a hit. Indeed. Well, listeners, the way we'll be telling this story is through Bite Dance's 2017 acquisition of another China-based company, musically, so join us on this journey of bite dance acquiring musically to create the TikTok that we know today. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora, the agentic operating system that is redefining how the world's best legal teams work.

2:49Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

3:15for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:44And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

4:37Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. And now on to TikTok. On to TikTok. So to start history and facts, we're going to go all the way back.

5:06to the 1920s and Charlie Chaplin, the origins of... No, I'm kidding. Although, if we really, really wanted to give it the full acquired treatment, we would do that. But no, of course, I was referring to the great performer and the performing arts and the origins of showbiz, Charlie Chaplin. But no, we pick up the story relatively recently this time by acquired standards in 2012, not in China, but in the...

5:33San Francisco Bay area with a man and not a young man as we so often talk about on this show, but a man named Alex Jew who is in his mid thirties. He's from China originally and he is like not a young man to you.

5:49Well, hey, I mean, I just turned 35, so I definitely don't feel like a young man anymore. But in comparison to what we're about to talk about, you might think that TikTok or musically, if you knew it's initial incarnation, would have been started by a teenager or an heaven-speakal-like character. But no, not at all, as we will see. In many ways, Alex is kind of the anti- heaven-speakal. So he's in his mid-30s.

6:15And he's working as a UI designer at the Enterprise Software Giant, the European Enterprise Software Giant SAP, hotbed of consumer, global social app innovation. Oh yeah, totally the SAP mafia of social network startups. Indeed, indeed. After working, this is actually his second stint with SAP, Alex at this point has a long career in enterprise software.

6:45And after his second standard SAP that this is for working there for about a year, he's just been appointed as an in-house futurist at SAP. Focused specifically on the future of education, you can just see musically jumping right off the page here. I saw some tweet years ago that said, if you have the word digital in your title, then you have the right job at the wrong company. I think that might be the same thing for futurists.

7:14Yeah, yeah. Why is it all a bit like enterprise companies have futurists? Google does Ray Kurzweil the Google's Chief Futurist or something. Oh, I don't know. Maybe I'll have to look that up so His new role as Futurist Alex's new role is to and he says this is on his LinkedIn profile, which we'll link to in the show notes is quite amazing. He says his job was to research the future trends of education and learning specifically identify opportunities for breakthrough innovation and social impact and convert ideas into prototypes and applications. And what did this mean at the time in 2012? I remember this super clearly I was about to start

7:57business school at Stanford and what was all the rage both in the tech world and in the education world were MOOCs. Coursera and Udacity had just launched both in the amount of Stanford raised tons of money and they were going to digitize universities and learning and education and bring it all online.

8:19Neither of them, but you know, both of them are still around of course, but neither of them would go on to realize the potential that everyone thought they had at the moment or at least not in a near term timeframe. Interestingly though, it was actually an enterprise software company to you that would go public and become quite a large company that would help existing existing schools manage their online degree programs and actually my old undergrad classmate Jeremy Johnson who's now the CEO of Andela was one of the co-founders of that. So it was enterprise software. It did, you know, You could paint a story why it's sort of made sense for Alex to be working on this within SAP. But as he gets deeper and deeper into it, he becomes really convinced that there are a couple of problems with the way MOOCs and online education is being approached at the time. And he's totally right. The biggest one as he digs in is that nobody finishes the courses, and not only nobody finishes the courses, nobody even finishes like a single video of a single lecture.

9:19too long for most people unless you're in an actual degree program where you have to, you know, I mean, these students at college is barely, you know, stay awake through lectures like who's going to of their own free will and volition and watch a whole course? Yeah, reflecting back on it, I think like I would, if I'm going to watch even like the Khan Academy type stuff, it's going to be like one video at a time and maybe not even the whole video, you can get that thing that you need and pop back out.

9:44get in exactly, you're going to spend five minutes or less on there. And so as he comes to this realization, he thinks, so maybe the way to attack this is to make the videos short form, instead of long form, these educational videos. And he realizes, you know, look, this is not something that an enterprise software company like SAP is going to really be equipped to tackle here.

10:08is passionate about the space, though, and he does decide to start a company on the side outside of SAP while he's still working there. He's going to take his futurism talents elsewhere. Yeah, exactly. At least according to his LinkedIn, he does stop being a futurist at SAP. He goes back to working on other normal projects as a UI designer and actually stays at the company, according to his LinkedIn, for quite a few years to come. But on the side, he's working on realizing this opportunity and he calls up an old friend from back in China Lewis Yang who he had worked with at another company back in China and they started a company called a cicada education a real auspicious name cicada like the bug I believe so at least that is how it's spelled I don't know if where you grew up there were cicadas but like in Ohio every I don't know if it was 13 years or something these gnarly

11:01bugs like for two weeks a summer. Yeah, I mean, same where I grew up in Pennsylvania and then especially in New Jersey going to college, like did not make you want to study. Or a name a company after them. So so far, you know, there's this is an interesting, compelling story. You know, there are a few, a few twists here, but it kind of sounds like your typical, you know, Bay Area startup story on the surface. But when you peel back the onion a little bit, There's a couple really unique things going on for the time. So one, the dual China and US headquarters of the company, Alex, stays in the Bay Area, is still working at SAP there. Lewis is back in China. This is like...

11:49not done at the time. I mean, A, I remember, you know, starting to invest in companies that when I joined Metronat this time, remote teams period are like a no-no for venture capitalists and startups, let alone cross-continent, cross-border, cross-cultural remote teams is just crazy. But these guys have a little bit of experience with at least Alex does after undergrad. He first worked at China Pages in China as a designer, and then he spent three years at WebEx, where I believe I can verify for sure, but I believe he reported up to Eric Yuan. Wow. Founder and CEO, of course, of Zoom. Of Zoom. And Zoom would leverage this model, of course, as we covered on the Zoom episode, to amazing success. And Eric also did within WebEx of having engineering

12:43back in China and all over the world, really, while having go to market based in the Bay Area. Crazy. So Alex, after WebEx joined SAP, then left SAP and went to an insurance software company called eBay. And that's where he met Lewis, who was the best PM there. And they worked together briefly there before Alex went and rejoined SAP and moved to the Bay Area.

13:05So he calls up Lewis, this really talented PM who he's worked with before, and they go out and they raise $250,000. And Ben, you actually know the folks that they raised this angel money from, right? Yeah, yeah. One of the firms in there is China Rock Capital Management. It's a great cross-border China US firm that had important to this story has a Palo Alto office.

13:29Yeah, so they're kind of at the forefront of this crazy idea of building cross-border companies. And the idea is that they're going to take Alex's insight and make these and get experts across a wide variety of domains from pure education to professionals to create these short kind of three to five minute videos explaining a subject that they know really well. And there is the money, they start working on this. As you can imagine, it's not super compelling.

13:57Alex actually says later after the pivot to musically, he says, the day we released this application to the market, we realized it was never going to take off. It was doomed to failure. To have one thing so right in short form video and one thing so wrong in delivering education and entertainment type format in that short form video, it's kind of remarkable how they really, really deeply keyed into a trend.

14:26didn't exactly know at the first time. Yeah, I mean Alex, Alex Lang says he says, it's hard for a new startup. This is so true. It's hard for a new startup to fight against human nature. It's better to follow human nature. And especially in short form video, education is not, you know, just going to really compel somebody to open up an app on, of many on their phone. The other thing that they, so that's the big thing that they get wrong with cicada. But the other thing that they get wrong and this really goes on to inform music lane tech tech is the videos took way too long to create. And they were way too hard. A, just like cognitively, if you're an expert trying to convey like the essence of a subject in three to five minutes, like you can't, you could do that. If you spend a lot of time organizing and figuring out how to convey information, but also just like the tools. And remember, this is back in 2012, 2013, the tools within the product to create these compelling videos are way, way, way too immature for this to go mainstream.

15:23Yeah, if you think back 2014 was probably the iPhone 6s, that era. I know. I think that was the iPhone 6. Yeah. So, I mean, let's put an OS number on it. That would have been iOS 7 had just come out. 2014 was iPhone 6 and iOS 7.8. This means, like, back in the cicada days, you're working with, at best, an iPhone 5s.

15:52which is the small screen, as much as I love and miss that thing, like creating video content on that. It was going to be super hard. Yeah. And it was only what the second, just third generation of retina phones. So there's still lots of phones out there that are the, you know, at 320 by 480 or whatever it was. Yeah, totally. So, okay. We're now in spring of 2014. They've burned through most of the $250,000 that they raised.

16:19but Alex at least is part time on this. And I think he's hanging out a lot at the China rock office in Palo Alto and importantly leads to him taking Caltrian rides. Yeah. Well, I believe he was also probably working for SAP's campus down in Palo Alto at the time too. I was spending some portion of his time there. So they decided to take another swing at this. And yes, as he said, Ben, he is famously.

16:44commuting down from San Francisco to the peninsula as so many people do and and often he takes culture in to avoid the traffic and one day he's thinking about you know the failure of cicada thinking about what they want to pivot into and take a swing at next based on what they learn and he sees a group of teenagers on the train and They're playing with their phones and they're they're doing it together and he starts like observing them like uh what are what are these kids doing maybe I can learn something you know at the stereotype at the time you know remember the like adults, the older partners that were drawn to talking about this, like, oh, kids, like, they just sit on their phones and they don't talk to each other and they're not social and like, everything's, you know, digital. But that's not what's happening at all. These kids are like collaborating together, they're talking, they're chatting, they're being loud, they're not parallel playing, they're using their phones, but they're doing things together physically on them. And so what are they doing? They're taking videos, selfie videos,

17:43But they have like one person who's making the video. Another person is finding music on their phone to play in the background, to put a score to the video. And then other people are creating graphics and digital overlays that they're going to put on top of the video and narrate all together, you know, a story about their time on the train together. And then they're posting it out to other social media, to Instagram, to Twitter, to Facebook. And Alex realizes like, oh wow, this is actually A perfect use case for all this tech that we've built in for short form video. Look at these links that these kids are going to to create this content here on the train together. What if we made one app that made it really easy for all this to happen? And that would be kind of cool.

18:29Yeah, and important here to know about Alex is there's lots of different sort of founder archetypes. He's really the product person slash designer archetype, where part of the reason that he was able to raise that initial little seed money, he's able to not only design beautiful products, but observe problems in the world that can be solved with technology. And so the thing that we're sort of seeing here when you're thinking to yourself, wow, how was it a good idea to pivot?

18:58When deciding should we pivot should we not? Well, Alex was uniquely good at observing problems and with sort of like little resources figuring out how to solve that problem with technology. Yeah, so Lewis actually talks about this later. He says, so we change the product quickly from the.

19:16education video app to do an experiment what if we just provide some music in the product to allow people to quickly shoot a video with music will they feel very confident about what they create and if they feel excited about it will they share it and this is interesting he says we created the prototype very quickly and we tried to launch in China in Japan in Europe and in the US We just wanted to see, we were not sure which country was going to pick it up really quickly, but we had a gut feeling that it should be the US. The US is a music country. Everyone there is so into music, and the US is the center of pop culture worldwide. We got that gut feeling, but we still decided to try it worldwide. We just released it in the App Store, created some key words for people to search for, and the result is yeah, in the US people automatically started picking it up.

20:05fascinating. I did not know that that was a hunch of why they why they did it in the US. Yeah. So that's the official story of the launch musically. And as far as we know, we have no contradictory evidence that anything else was different, but there were two other apps that were blowing up at the same time that probably had a pretty big influence on the direction.

20:31No dub smash actually launched right around the same time as musically. They were they were pretty concurrent, but that a big influence on the direction that musically decided to go Snapchat. Nope, not Snapchat. One is in the US and one is in China. One is Vine. Oh, yeah. Twitter is a Twitter's biggest mistake. Oh, man, such a tragedy like doing this research reminded me of it. So Vine.

20:58was acquired by Twitter pre-launch back when the team was still working on the product and Jack Dorsey saw the potential for this and just loved it. And so they acquired the company in January 2013 before they launched the product. And Vine, I'm sure lots of our US listeners will remember this. It was six second looping videos and music and lip syncing was like a key use case. It was like lip syncing and NBA replace.

21:23Yeah, man. Such a good platform for sports replays. Users loved it and of course it had priority distribution on Twitter, but especially teenagers and man this story like this presages TikTok so exactly. So there was this Canadian teenager who goes by Ruth B who goes viral after posting a short clip of herself singing a few lines that she just made up about a song about Peter Pan on Vine.

21:50ends up turning it into a full song, gets a record deal, makes the billboard top 100 charts. And this is like, this should have been such a sign to Twitter that like there's something really interesting happening on this platform. But Twitter was going through its IPO at this time. They had crazy management drama. They didn't have enough resources to invest in it. And the platform just kind of peeders out. Yeah, and they ultimately shut it down. But of course lots of people saw What was going on here and I have to imagine that Alex and Lewis did and this had a big influence on the direction of musically. So the second one back in China is an app that's still a super large company today called Kwai Show. I believe that's how you pronounce it. And that was actually started in 2011 as a gift maker tool in China. They'd raise money from Morningside Ventures. Originally it didn't go

22:43super well. They were just a utility. And so they brought in one of their advisors and angel investors to take over his CEO, this guy named Sue Hoa, and Sue had worked at both Google and Baidu. And he pretty quickly transforms Quasho into a short video platform. And this is the first big short video platform in China. And it starts taking off like wildfire. What's morning side also the first money into bite dance? That's a good question.

23:13They might have been. I'm pretty sure. They might have been. They're really good early stage venture folks in China. And Quyshow also really interestingly starts taking off not among what you think of as the normal audience for tech products in China, which is sort of wealthy middle and upper class tier one city urban elites. Quyshow takes off.

23:36in the rural areas with sort of the 80% of the country that is still living in the provinces and are getting their first smartphones around this time. And Quysho is just for like people to make videos and talk about their kind of daily lives. There's a great 2017 techno article that talks about their strategy and it says it's like a really authentic place where people can be themselves and show their lives. And the way that It all works is the content that people see is not driven by who you are or who you follow. It's driven by an algorithm that is recommending it gets to know what you like and it recommends videos that other people make to you that just find their way to you. So you don't have to go out and find influencers, find topics. It just starts to get to know you and its surfaces, all this interesting stuff. Much like other companies that we're going to see in a minute here.

24:33There's one other interesting thing to note on why it blew up in America so in America this notion of sort of lip syncing has always been like a thing people knew about I mean, it's not like there was a dedicated video platform for it But it was sort of like a popular thing to you know sing along with music and you know famously there have been some big debacles where even pop artists were limp-sinking their own songs, and sort of got called out for that. This is a bit later, but just to drive the point home on lip-sinking as a cultural phenomenon in the US, but not China at the time, there was actually a TV show called Lipsink Battle. Yeah, where is this gonna come off in a second here? All right, well, I won't spoil it too much, but like, you gotta understand at this time that this is really unique for a Chinese technology company to be building a product that is

25:23you know, most popular in the US market. Like this was pretty unheard of and makes total sense when you think about the sort of cultural differences of where it could be appreciated. The super cool thing is the team learns their way into this. So we're still in 2014 when they make this pivot and they launch the MVP of musically. Now they're already thinking about music clearly by the name of the app as being a key feature, but it was more...

25:49Vine and Quasho, then it was what we think of musically in TikTok today. It was a broad short form video platform, and so they launched it and they do a couple really interesting things. So one, you know, Lewis talked in that quote about the name of the app and doing half-store optimization. This was appointment time when the app store and particularly the iOS app store started really prioritizing search terms. And so I don't know if you remember Ben like a bunch of apps and musically does this stuff a ton of keywords into their title. So the title of the app is like musically dash make videos for Instagram Twitter and Facebook with music with your friends.

26:34have fun like blah blah blah blah blah it just goes on and on and on they stuff all these keywords in there and that's what starts getting the initial download traffic that the app is getting in the US so this is where based on that they start to learn a couple things and this eventually leads to the big breakthrough of lip sync battle so They operate for a few months. The apps growing. They're getting really good retention and usage. People that are downloading it and trying it are sticking with it. But they're not like hitting a rocket ship growth yet. And so they start digging into their data. And they realize that on Thursday nights,

27:10in the US every Thursday night there's a big spike in downloads and so they start like going on the app trying to figure out why and they've always been really good about staying close to their users. They have lots of user research groups that they do to this day. Alex talks about how he creates fake accounts and just goes into first musically and now TikTok and interacts with users just try to get sense of what's going on and why they're using it.

27:32And they realized that it's because of the lip sync battle TV show which airs Thursday nights in the US on the Paramount network. I had totally forgot about this, but lip sync battle is actually a spin off from the Jimmy Fallon show. So Jimmy started doing this as a skit on the show on the Jimmy Fallon show. And then he went and he pitched it with a couple other producers to NBC as its own show. NBC turned it down, but Paramount picked it up and it became a huge hit. People love it.

28:00That's awesome. I had no idea the history of that. Yeah. Did they mention musically at all on that? Or was it just sort of like people getting inspired from the show that they wanted? No, so it's back to the app store app to optimization. They had put lip sync in the title of a bunch of versions of the app. And so after the show ends, people just go on and search the app store for lip sync and musically is what pops up. Makes total sense.

28:29Yeah, super cool. So it's now in spring of 2015 when they realize this is happening and because growth has been slow, they decide a couple things. One, we need to make a decision and go all in on a particular use case like classic enterprise software crossing the chasm type problem of you have a broad platform that ultimately will be useful for lots of different things. But in the beginning, you have to have one very specific use case to knock down that first bowling pin of why people are going to use the product. And they're like, Alex and Lewis realize, okay, lip syncing, this is it. We're going to go all in. So they redesigned the app. And they in particular, the onboarding flow for really making it clear that like, this is a great product for creating lip sync videos. And then importantly, the videos that they surface to you, once you're in the app, they start surfacing the very best

29:28lip syncing videos and this is when the flywheel really starts to kick off. So they change the onboarding flow to make it clear that musically is really great at helping you create lip sync videos to they then start sending users regular notifications like daily notifications with challenges of lip sync videos that they can create using the app. And this starts driving people to keep coming back. People were coming back in consuming content, but this starts driving people to come back and create content on a more than weekly basis. And this is the origin of challenges that ultimately the Yeehaw challenge would be one of the biggest of that would help drive, help drive a old town road, of course, but that's still to come.

30:15And then the product model is super cool. So if you think about Instagram, Facebook, Twitter, even Snapchat, all the successful Western social networks up to this point, the content that you see is based on who you follow. And so when people Log on to the app and create accounts for the first time who are they gonna follow? They're gonna do Ben and I were chatting before the show you know We've been playing with TikTok over the past couple days and Ben you're like oh I went in I followed a bunch of my friends and none of them have any videos on TikTok and on musically before that it didn't matter and this is what they take from Quyshow back in China because the content that the app

30:55surfaces for you is based on an algorithm of what it thinks you're going to like completely regardless of who you follow. So when you're a new user onboarded for the first time, it prioritizes content that you have no connection to. And that makes it super different from other apps, a, but also this incredible opportunity. Yeah, it's about finding the content fit with your interests, not the person fit so like a person that you know and not your own perceived content fit it's not like I would tell you that I like sci-fi and I like what's actually become quite clear to me from tiktok is what TikTok has learned is I like prank videos and I like extreme sports things. And it is crazy how I've been using TikTok for a year and didn't follow anyone and I followed people this week and it didn't improve my experience at all. It's like it's still the same stuff from people who I've never met that is just like very well tailored to me at this point. Totally. So once they make these changes in the spring of 2015,

32:01The app just takes off like a rocket ship. So two months later on July 6, it's number one in the US iOS app store. Since then, musically and then its successor, TikTok has never fallen out at the top 40 apps, which is pretty incredible. This is the beginning of the rise that puts it not just on Snapchat trajectory, but now, you know, well beyond to Instagram and even potentially bigger.

32:25And the interesting thing about this, two points I want to make. One is in apps where the expectation was set originally that I'm going to express interest in who I care about, and then I get to follow them.

32:37I get really annoyed later when that promise is broken. And Twitter starts doing the algorithmic timeline. Facebook starts to limit organic distribution and makes you sort of pay for exposure if you're a brand. There's all these things where you start to feel like, gosh, they're really messing with what the brand promise was here. TikTok from the very beginning is, we are going to show you what we think is the most engaging for you. And we make no promises about, I mean, yeah, sure there was that following tab, but like, that's no.

33:04where you live. You live on the tab where it's, hey, this is, this is what we think you'll most like. Yeah. Which is like the Explorer tab on Instagram that nobody goes to. Right. Right, right, right. And so their algorithm, of course, is not public, but there's been some really nice speculation by, and I might mess up his name, but it's a great medium post by Matt Schlicht.

33:24where he sort of talks about his experience, dribbling stuff out and trying to reverse engineer the algorithm a little bit on TikTok. And this is, of course, flashing forward a little bit. But I think it's important to really understand what it's doing. It's kind of like it's always a B testing. So the vast majority of what you're being shown is things that TikTok thinks you will like based on your previous viewing and liking history, but mixed in there is every video gets the waters tested so they can kind of see, hey, how engaging is this? And so it looks for what is the conversion ratio from view to like? What's the conversion ratio from view to finish viewing? And that sort of determines how it spreads wider and wider and wider. It's important to have a basic understanding of how the algorithm works. So when we say things like,

34:14the platform truly rewards and spreads the most objectively liked or objectively good talented videos, that's actually what it's doing. Well, it's even more than this. And this is as I was doing research and thinking about, again, what made musically successful more than its peers at the time and what's made TikTok such an incredible global phenomenon, it really is to bring it back to the American Idol analogy. It's like a personalized American Idol for every single consumer on the app. Because in American Idol, it's just a flat TV show, right? It's like, what can the producers go out and find from talent all across the country that's going to have the broadest mass market appeal? On TikTok though, they can have

35:03all of this content and all of these niches and have the personalized algorithmic feed for each consumer. And so they're able to take of so much more content and talent and creators and make them successful because they only need to find their niche audience. And they don't even need to go find it anymore. TikTok is finding it for them. Fascinating. But important in knowing that you don't need to find your own audience and you're lying on TikTok finding it for you, It means you don't get to form that direct relationship with that audience, so it's not necessarily going to lead to a follow or something where they're going to see your next piece of content. You may be a flash in the pan if that's your best and only great video. And so it truly rewards the venture investing philosophy espouse by Sequoia early on. You're only as good as your last investment. Yeah, or your last TikTok video.

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37:46So let's talk about what success for creators on TikTok means. And this is another area where the platform is really different from the existing social networks that come before them. Alex gives a great talk on YouTube at a gray lock event, gray lock, and our friends at GGV were the main venture investors behind musically before it was acquired and became TikTok.

38:14But Alex in this talk, he has this amazing analogy of building the social network of musically to being like building, like founding and building a country, a nation. He says, at first, it's like, you know, you find a new world, a new land, and you have nothing. You just have a land, you just have real estate. You need to attract people to come to that land and to attract The people, you need to show them a path to success. You need to create this image of your new land of being a land of opportunity. And the way that you do that is...

38:49some version of a path to wealth creation, because ultimately it's an economy that a country runs on a political economy, and it's the same thing with a social media platform. So he says, Alex says when users first come to a new social media platform, the first thing they're looking for is fame. That's like a stand-in for...

39:09And economy, it's like a proxy people believe once they have famed, then they can get money. And he says, but, but that's not enough. Once they have the fame, they have to monetize. And so the platform that can generate the biggest revenue streams for its biggest users, that's the one that will stick around. And he says the way that they did this at musically is first you centralize your economy. So you make sure you put your hand on the scale. You make sure that some of those initial people that are on the platform, those initial creators, the ones with the most talent that you are subjectively judging as the Arbiter's the platform, you make sure that they get rich. And so Alex doesn't talk a lot about how musically does this, but by dance with TikTok in China, they just are paying content creators. And people who are creating the best content, they pay them more money and they invite them to exclusive events. And they get all sorts of perks. And they broker introductions between them and marketers and advertisers.

40:06who are going to want to sponsor their content either directly or through the platform. That's like the first step. But then Alex talks about, and this is, I think, is a really amazing insight. He says, then though, you have to take a second step, which is decentralizing. So you start with a centralized economy where you're making sure that some people succeed, but then though you have to pull back and decentralize because if you want to keep attracting new creators, and this is where Facebook and Instagram have really failed to make this step. You have to ensure that there really is opportunity for everyone that there's the equivalent of the American dream. If you're someone who is new to the platform, you have to believe that there's a chance that you will a real chance that you get discovered and that you can find success even though you're starting from a cold start. And this actually is coming back to the American Idol analogy. Like, this is why the algorithm

41:01And the algorithmic feed within musically and then TikTok is so important. It makes it so different from Instagram. God, there's a lot there. But it's a pretty interesting analogy to the criticism of America right now that the American dream has failed. And actually, the, you know, once you're at one end of the poll or the other, you kind of tend to stay there. Like maybe you could see people arguing that our country needs a equivalent TikTokification.

41:28Also, quite ironic that this vision and rhetoric is coming from a cross-border US and Chinese startup that thing gets acquired by and becomes part of the largest startup in China. The two sub-points that he makes about this need to decentralize is one, exactly what you said Ben, you need to have true social and economic mobility within the platform, but also just as important too to your point about make money.

41:55you need a viable middle class. So of course you're going to have the elite, the upper class, the little Nazx, the people who become just so much bigger than anything they could have ever imagined, but you also need viability for...

42:10the middle. There's going to be people who just don't have talent and then they won't make it. But there are going to be the people who have a few successes or have a relatively small niche. How do you help them succeed? And this is something that the platform hasn't fully, fully figured out in the West. But we're going to talk about this a bunch more as we go through the rest of the episode. Yeah, it's really interesting. There's another point that's important to hit on that's part of musically success here. And that's They really do something pretty innovative in overhauling the app to be all in on lip syncing because they're able to allow people to be a little bit creative and get a lot of output which was kind of the magic of Instagram when it started. You could be a crappy photographer and put a cool filter on it and then no matter what it was going to look cool. And it very much rings true of the way to bootstrap a network which has come for the toolstay for the network.

43:08People were creating in musically because it could create a good product with little effort and sharing it everywhere else. And musically, watermarked every single one of those videos and made it very easy to share it everywhere else. If there's one big difference to know between musically then and TikTok now, musically really grew organically because people were sharing their creations that were far easier to make than you would think.

43:37everywhere they possibly could. This aspect of music Lee's growth is a page straight out of the playbook of Instagram, which did this exact same thing. And I know you did it. Yeah, exactly. Was make a really, really great utility that made the content you were creating as a creator.

43:56look much better in a very easy manner. Hippestematic was that the the street utility competitor to Instagram? Yep. And then provide that really easy sharing functionality. And really it was Twitter that Instagram grew off the back of and then Twitter shut them off the platform, but it was already too late. Yep, smashing grab job accomplished. So musically does the same thing on that front. So now by 2016 musically is...

44:24on fire. So they have 10 million DAU and over 90 million users up from 10 million the year before in 2015. So they're grown 10X, uh, close to 9X in 2016. There's also something else very interesting going on.

44:42in the year 2016 in social network land. Well, there's a bunch of things that we've covered on this show, but 2016 is the year that Facebook and Mark Zuckerberg are trying to crack into China. So, remember, Zach, I think this was the year that he made his annual challenge was to fold one. He was going to learn Mandarin, and two he was going to go jogging all around the world. And there was this famous moment I had totally forgotten about till doing research for this episode where he goes jogging through Tiananmen Square with a bunch of...

45:15Chinese Communist Party officials and he's working super, super hard. I mean, he views, you know, Facebook at this point is still on its exponential growth curve. They've acquired Instagram and Zuck is looking at China and seeing the billion people there and seeing the lack of a real, you know, Ren Ren is around. But nobody's really become the Facebook equivalent of China at this point. We chat is still in its infancy. And he thinks this is going to be the next big market for Facebook. Yeah, pretty wild.

45:45And as we would, as we would see that did not quite turn out. It did not quite turn out. In fact, quite the opposite. But, you know, 2016, this is, you know, the WhatsApp acquisition has happened. Mark has tried to buy Snapchat several times. He's of course acquired Instagram. He's quite Oculus. What's the Facebook playbook for entering these adjacent large markets? It's acquisition.

46:10I did not know this until yesterday, but it's been reported that in August of 2016, Zach invites Alex. Alex moved back to Shanghai at this point. to be full-time with the product and engineering team in China. Suck invites Alex to come meet with him in Menlo Park and express his interest in acquiring musically. And apparently the next month in October of 2016, a whole team from Facebook goes out and visits musically headquarters in Shanghai. So there's serious acquisition talks going on between the companies. Man, just imagine what would have been if this had happened.

46:47It's crazy to go to China because a very large part of the business was being run out of LA at this point. I mean, that musically had a Santa Monica office. There was a North America GM, another Alex Hoffman who was running...

47:02I'd say running that so well that the perception by most Americans using this was this is not a Chinese app. I'm not using something, you know, sort of not built here. I'm using a social media app like any other. And I think that the product team in Santa Monica had a lot to do with that. But of course, Alex and Lewis are the co CEOs of the company. So yeah, this apparently acquisition talks were quite serious, but the deal falls apart and hasn't been reported why I don't know if it was regulatory concerns or I don't think it was price concerns yeah it seems unlikely it was price looking at a 20 billion dollar pickup of WhatsApp I don't think it was price so we now enter 2017 musically is still on fire from a growth perspective they've just come out of these discussions with Facebook with renewed

47:55resolved to be an independent company and continue growing, not as part of Facebook, the big priority for that year that the team that Alex and Lewis decide on is to launch and grow back in their homeland in China. So now remember, they had launched the initial experiment in a bunch of countries including China, but then they'd totally deprioritized and focused on the West, first in the US and then had grown throughout North America and Europe.

48:23But in China, it was a different story. And it was a different story for a couple reasons. One, because everything is different in China. But of course they should be, if anyone, if any kind of Western social network or Western adopted social network is positioned to succeed in China, you would think it would be musically because the founders of Chinese and at least half of the company, more than half of the company is based there. But there are a couple things that are different. One, the business model for content is very successful in China, but very different from how it is in the West. In the West, of course, almost all media companies from traditional media companies through all the social media companies monetize through advertising. In China, the advertising market at this point was not yet anywhere near the level of maturity that it is in the West. Instead, direct monetization is the most powerful business model for social apps in China.

49:18which wasn't something that I realized until we did that 10cent episode and realized really that like 10cent invented the sort of modern video game business model and a lot of wear content in the West is shifting. Virtual goods, gifting, tipping, you know, payments of course being a huge part of that and a revenue generator for the platforms, but the gifting and tipping is really, really interesting. So now back to what we were talking about a minute ago with the management of the economy of the network effect between creators and consumers on a platform like Musically and TikTok, the China business model is actually a really elegant way to do that. If you allow for virtual goods, gifting and tipping that the consumers can show their appreciation to the creators for any given piece of content or a series of pieces of content, and then those creators are able to exchange those gifts, convert it

50:13in in part or whole into actual cash, now you can start to make a living and and build a middle class on a platform. So this is happening in China and Quysho is the pioneer of this. Remember, Quysho's user base is primarily rural, so advertising, you know.

50:31e-commerce companies and the like, don't really have all that much interest. This is pre-pinduoduo days, which we should definitely cover on another episode, but don't have all that much interest in reaching these audiences. Instead, they're able to monetize through this direct monetization. So that's one big thing. Musically has to figure out how to navigate this new business model or different business model in China to, though. And this is going to become much more important as we get towards the end of the story.

50:59Any time you're talking about a media business in China, whether social or otherwise, you are operating in a very, very different political environment than you are in the West. We touched on this a little bit in the Tencent episode, but Tencent by Dancers is going to come in here in a minute and basically any content company platform or non-platform in China.

51:24employs thousands and thousands of sensors that are going through all the content, working with the Chinese Communist Party, making sure that, of course, you're the content on the platform is upholding the laws of the party, but even the wishes of the party that is super different from a Western social network, be a Facebook or Instagram or musically at the time where anything goes. In late 2017, after working on this for...

51:49Most of the year, having this be the major priority in the company, Lewis gives a talk at a GGV event where he, I'm imagining he must be a pretty funny guy. He says, quote, I regret not having entered into China's market earlier. Now I can hear vibrating sounds everywhere, making me uncomfortable. So most listeners, or at least most Western listeners aren't going to get what he means there. But by vibrating sounds everywhere, making me uncomfortable, he's of course referring to Doyin.

52:19which is, at this point, has been launched by the number one content company in China. Most valuable startup in the world, Bite Dance and Do-Yin means literally vibrating sound or shaking music. And it's important to know too, like, Bite Dance before Do-Yin was...

52:40doing very well with Tautia. I mean hundreds of millions of users. This is the best news and information technology company in China. And so when they see, hey, this musically thing is taking off in the US, wow, they're not effective at entering China. And oh, yeah, the world is starting to shift where this short form video thing that maybe didn't make sense a couple of years ago in China does make sense now. It's effectively a fast follow where bite dance is like cool. We'll leverage out all we have from Tau Tiao to go and build doying, which is going to look a lot like musically does in the US. We're going to launch that here in China and beat them to their own country. Yeah, I mean, this is basically bite dances version of Instagram stories here. Yeah, we're about bite dance, which we've of course referred to a bunch in this episode. So Tau Tiao, which Ben just alluded to,

53:31up until this point was the core app of the company and the biggest and most important product. So what is Totiao and why does this make bite dance such a formidable competitor to musically? So Totiao is basically, you could think of it as like Apple news on steroids. Totiao literally means headlines. It is a news and content aggregation app, maybe more like flipboard back in the day, but unlike Apple news or flipboard or whatever. Well, people spend an insane amount of time on it and Ben, like you mentioned, an incredible portion of China, something like half of the internet users in China are daily active users of Tokyo. But two more importantly, really early on, bite dance realized with Tokyo, that

54:18they couldn't be limited by formats. So of course they have text and news on there, but they also have photos, they also have long form video, and of course they also have short form video. And short form video within Totiao is a big driver of engagement and content with the app. And the other really key thing about bite dance and the reason why they've succeeded above so many of their competitors in China is that their algorithmic recommendations, just like we were talking about with musically that made it, made musically so interesting and different, are the best in the world. They have the best AI technology to quickly suss out personalization for any given user about what they're going to like, and then go scour this immense vast corpus of content that they're bringing in to Tokyo every single day to find the very best stuff that you're going to love across.

55:13all different types of formats. Yep. And all, of course, vetted thousands and thousands of sensors employed by the company to make sure that that aggregated content going to users is vetted. So talk about a moat here and a super easily accessible adjacent market for Tokyo and by dance to get into is pure short form video. So they're seeing the super success musically.

55:39in the West. Now, bitedowns has always talked about having aspirations of expanding beyond the Chinese market and being one of the first of the new generation of Chinese internet companies that is going to be a global company. They see what's going on with musically and they say, okay, this is the perfect, you know, Instagram stories, be a copier and fast-follow model for us here. They're just real quick. The other reason why this is appealing to them is we talked a minute ago about monetization models in China and advertising versus direct monetization now by dance has direct monetization and is capable of that within their products as well But they're also the first company that's really starting to crack the advertising market in China and again, it gets back to this super sophisticated algorithm which gets to no users preference so just like Facebook advertising where they know you so well they can

56:34recommend content to you, they can also recommend ads to you. I mean, arguably, I would say with Facebook, like, it's better recommending ad content than it is at organic content because so much of the weight in the algorithm is who you know and who you follow as opposed to toe to toe and bite dance. Bite dance over the past couple of years has been turning this algorithm into advertising too. And they're really starting to build for the first time a digital advertising market in China. Yeah. And what's important to know here is they launched a gene that's going swimmingly in China, musically, frankly, is scared at this point because they're like, okay, we sat around and missed China for too long, and now we're probably going to get beat there. But similarly, Douyin is launched as TikTok in the US. It does not go well in the US. Musically is still, you know, it's got this...

57:21passionate, large, organically built user base, I think it's easy to gloss over the sort of importance of feeling like it's a native app for your country. There's not a lot of people using WeChat in the US because it doesn't, certainly the Chinese version doesn't feel like it's for people in the US because it's not, and the American version is so stripped down that it doesn't feel right either. But musically, Really did and that's a huge piece of that sort of Santa Monica office and so Tiktok versus musically in the US to the extent that you want to win this market It's at least so far going to be musically Yeah, well, so it's interesting. I really like the parallels to Facebook behavior with competitors are so apt here. So first by dance copied musically domestically in China with doing that launched at the end of 2016 nine months later

58:15and sort of fall of 2017. Doying already has 100 million users, and they're serving over a billion video views a day. So they've got this amazing technology that they lifted right out of TOTO, better than anything musically has. Two, they've got this incredible scale, but they've got the distribution relationship with...

58:34consumers from Tokyo so they're plugging dohyen within Tokyo to all their users. You know, it's kind of like at this point, you know, all the platforms and especially the Chinese platforms are super smart to the distribution hack of like sharing out your content onto other platforms and then exfiltrating those users. There's no way that bite dances gonna let musically come in and do the same thing on Tokyo. They're gonna do it. We're now in the fall of 2017 and that's when by dance launches TikTok and takes doughy internationally. So no, it doesn't get anywhere near the amount of traction that musicly has, but it's not really a full test. It's more like a toe in the water because it's shot across the bow too. Yeah, it's a shot across the bow because so we're now towards the end of 2017, musicly's been struggling, mightily, in this big effort for the year to enter China.

59:28And so they're ready to re-entertain acquisition talks. I don't know. I don't believe Facebook was involved in this round, but quite show the original short form video platform in China. And of course, Tencent are really interested in acquiring the company at this point in time. So now, remember Tencent is, of course, a big investor in an acquireer of...

59:51content all around the world, not just in China, you know, owner of Riot Games and League of Legends, investor and, you know, Epic Games and Fortnite and so many other things. And actually, amazingly, when you look over at bite dance, somehow that company has never taken investment from Tencent or Alibaba. Like, every sort of big start. But I do, I believe. I think, yeah. No, yeah. Kind of like independent.

1:00:15Start up out there. Yeah, like that was the big first generation of the Chinese tech giants was those three. And every other one that we've sort of covered, that's been a recent. Xiaomi Maituan. I believe Pinduo. I'll take money from one of those three, the BAT, the big three China. But bite dance is much more a sort of traditional venture funded mega unicorn. And Think about Tencent which of the BAT is by dance the biggest threat to at least right now Tencent for sure and we chat, you know Tiktok is Tencent's miss when you sort of think about what each of those three companies were and they're sort of loose US allegory You have Alibaba being the Amazon you have Baidu being the Google and you have Tencent being the the Facebook the Facebook Twitter sort of the social and and for

1:01:06both the bite dance and musically to come up developed in China under their nose and end up being today an 80 billion dollar valuation company is the first big credible threat to Tencent. Tencent of course is really motivated and interested and interested in potentially acquiring musically.

1:01:27And that's where the shout across the bell from by dance launching TikTok internationally right around this time is super important. So, once the dust settles, it's announced on November 10th, 2017 that by dance, not quite show or tencent, is acquiring musically.

1:01:46for between 800 million and a billion dollars, the exact number wasn't announced. It's really interesting and you gotta think about like, we have what drove that decision to sell to bite dance? I mean, you have to think it's, you know.

1:02:00A sort of, like, the power of thinking about, wow, what could these two platforms do together? And Alex actually takes some time off, but then comes back in, and he is now running TikTok, all of TikTok, within Bite Dance. And Lewis, I believe, stays on fully all the way through at Bite Dance. But also, man, if we were to sell...

1:02:19and presumably sell for equity definitely to Quysho and potentially to Tencent too to one of these other companies, you know, and we know now that we're going to have this direct competitor from Bite Dance and TikTok all around the world. Man, what kind of slog is that going to be? Yeah, that's a great point. It's interesting to know to the scale of both of these platforms at the time of the acquisition. So it's like, well, what did they get for 800 to a billion?

1:02:44They're musically had a hundred million monthly active users at this point and of course TikTok because of the scale of China TikTok slash dohyne had 500 million monthly active users are they're buying a big company at this point and not necessarily in terms of people or revenue But like that is a thing that tons of people around the world and really the Western world use all the time Well, we get into this maybe maybe to pull forward what would have happened otherwise a little bit like I have to imagine that musically didn't have a ton of leverage at this point in time, because Facebook's already out, right? We don't know what happened, but unlikely that they're gonna be in a choir. You know, you've got Tencent and Quysho interested. Tencent's probably the biggest point of leverage, but Bite Dance is doing executing a builder by right in front of them. Like, there's very little imaginable path that musically either on its own or as part of Tencent is going to win as a big standalone.

1:03:43network here. Yeah, Billion sounds like a big number. And it was only up a little bit from the post money on the last round. But when you think about it, it's only $10 per monthly active user. And when you think about what does Facebook make off of a monthly active user per year in the US, it's like 25, 30 bucks. And so to be able to go and pick up what might be the next generation of social networks and get those users in perpetuity for 10 bucks ahead, it's actually kind of a steal.

1:04:12Yeah, totally. So they do the acquisition, initially, musically, and TikTok stay separate, but then... Clearly, and this makes so much sense. Partway through 2018, they merged the platforms. They renamed musically as TikTok and all of the great. So they don't. This is the craziest thing. So I could not believe that this is how this worked, but because there's what I thought. I'm like, cool, you buy this. You already have the apps installed on everyone's phone. You just, you deprecate the old TikTok in the Western world and you You just rename musically TikTok and then boom, you're off to the race. I assume that that is what they did. Me too. And I can't quite figure out why they did it the other way, but here's what they did. They duped the backend database. So they basically said, if you have a musically account, then when you log into the next generation of TikTok that we'll be putting in the app store soon, your entire account will be maintained. So you're saying credentials, everything, but they actually created a new and combined app.

1:05:11put it in the app store as TikTok, and then told everyone to go download it, and say download it and log in. You had to go download a new app, musically. Download a new app. I'm like 90% sure. This is like, I love anyone to sort of check my research on this and acquired FMG. I'm actually going to let us know if that is the case that everybody did migrate. Here's the nutty thing is bite dance.

1:05:36Spent like a billion and a half dollars I think over the next several months doing a massive ad campaign in the Western world for TikTok and basically this is a they spent more than the actual acquisition in advertising dollars to make sure that they made a huge splash not only with new users and saying, hey, you know, you should, you know, you should go check out this new TikTok app. It's great. But ensuring that all the existing users moved over from musically. I think we've seen this on a couple of episodes now, certainly on Disney Plus, our most recent episode. But I think it's tempting as a technology company.

1:06:18And especially as a social media company, but really any tech company, any consumer-facing tech company to think that product and growth-hacky distribution is always the key to success. That's wrong. It's the key to success in the early days when you're figuring out product market fit and getting early growth.

1:06:38But then once you're past that point and you're trying to go mainstream, you need to be spending and spending smartly, marketing dollars, and you need to be doing it at a scale that is going to get you to break through. This is what...

1:06:51Disney has done with all their content forever, but that they're doing with Disney Plus. This is what Netflix does. This is what Amazon does. This is what Facebook does. And this is importantly, what Byte Dance did in China and had raised enough money to be able to do and learn the playbook there. And then now they're running around the world. Yep, absolutely. They merged the platforms in 2018. That's crazy. I didn't know that that's how they did that. By the end of 2018, they combined platforms do a unit TikTok have 500 MAU worldwide, which is more than 2x snap and already 50% of Instagram. It's the most downloaded app in the app store in the iOS app store for all of 2018, which of course downloads don't always translate to retained users, but still pretty impressive. Users spend an average of 52 minutes a day in the app, which I believe is significantly higher than any other

1:07:44social network out there. And then this year in 2019, Tiktok adds another estimated 300 million MAU to get to 800 million MAU total worldwide. They are approaching Facebook and Instagram scale here. But of course, 2019 before we wrap up history and facts, we can't not talk about the code here with Facebook and US and China and everything going on.

1:08:12between the countries and indeed between these companies right now. As we all know, 2019 hasn't exactly been a banner year for US and China political relations. We talked about this a lot in the first episode of this season on our Huawei episode. But in January 2019, the Think Tank Peterson Institute for International Economics comes out and says that TikTok is a quote Huawei-sized problem. I was thinking about this during our Huawei episode, it could be a potentially larger than Huawei size problem in terms of a national security threat to the US. And particularly, for many many reasons, but one specific use case is that lots of military personnel use TikTok. There are many videos of people in Western militaries. They're using it and TikTok is getting their location data, their facial data, biometric data through that.

1:09:07which the company is owned by Byte Dance, which is a Chinese company, if the Chinese government were to request that data from Byte Dance, even if they didn't want to give it to them, they would legally be forced to comply and give that data to the Chinese government. This news changes every day, so this may even change by the time we release this episode, but TikTok executives, or Byte Dance executives, are regularly asked this question and also regularly say, oh no, we won't do that.

1:09:36As you say, David, like you would be legally comfortable. They may want not to do that, but you know, and they do talk about, you know, according to Alex has talked about this for the version of TikTok in Western countries, not doing the data is actually stored in the US. I believe on AWS on Amazon servers in the US. There's that. But again, like legally, it's owned by bite dance. Would they have to give that data to the government, to the Chinese government if they asked for it? And then this becomes even more acute in spring of 2019 and through the summer and through today when the protests in Hong Kong start. And interestingly, you know, they're of course blowing up on social media all around the western world, particularly on Twitter and, you know, so much discussion of it everywhere, but interestingly, not so much on TikTok. And then people started asking the question, well, why aren't people talking about the Hong Kong protests on TikTok? Is it because

1:10:34You know, what TikTok says, which is like, hey, this is a platform for goofing off. This is for like making fun, entertaining content. Or is it because TikTok is censoring posts about the about the protests. And so listeners, as you can imagine, it makes some, you know, US politicians uneasy and saying, wait a minute, this is a thing that's like taking off in our country. Well, surely this, this must be subject to syphias review.

1:10:57This is the committee. I'm going to butcher it, but something about committee. Committee on foreign investment in the United States. What you've talked about several times on this show. Yeah. If a foreign entity wants to come in and buy a massive AI company or a massive defense company, then like it makes sense that the government would say, well, let us look at this first. We have this really interesting scenario here where these are both Chinese companies, granted with a one with a presence in the US, but tons of users in the U.S. and now close to two years after this acquisition got done, there's now politicians calling to Institute of Civius Review. So formally, a Civius Review has been opened on the musically acquisition, which of course was two years ago. It's already closed in the past, but when it was done, there was no Civius Review. I mean, A, because I think people weren't really thinking about this at the time. It's also a Chinese company by another company.

1:11:54Yeah, yeah, super interesting so I mentioned Facebook. I think you know all of what we just said is true and like these are really serious questions and potential problems and things for TikTok and the US government and the Chinese government you know and by dance and all of the ecosystem to grapple with at the same time conveniently who is out there fanning the flames of this fire in the controversy Mark Zuckerberg and Facebook. So, you know, remember 2016, Facebook almost bought musically. And their number one priority, Zach's number one priority for that year was figure out how to enter China. Well, here we are in 2019 and Facebook is completely out of China and proud of it because they're under tons of political pressure to put it mildly here in the US. And they also now have this emerging

1:12:53threat to their, you know, social network hegemony in the West with 800 million monthly active users in TikTok. So November, 2018, a year ago, Facebook launched Lasso, which was their TikTok competitor latest attempt to make a really jank independent app that's a copy of a, yeah.

1:13:13Superjank fails miserably. And so then in 2019, as this controversy really starts to grow, just a couple of months ago, in October, Zuckerberg gives a speech at Georgetown University where he calls out all Chinese owned social media in general about these issues around national security and around privacy and around censorship, but he specifically calls out TikTok.

1:13:40and bite dance as a national security threat and a threat to, you know, Western values and ways of life. Now, you know, again, he may not be wrong, like these are super, super, super important questions, but it's also a really convenient misdirect from like the equally valid and important questions about Facebook's role in influencing elections, Facebook's own role in free speech, you know, et cetera, et cetera. So it's against the backdrop of all this that the syphias review does get instantiated this month going back and relooking at this musically acquisition. So it'll be really interesting to see what happens here in the next this is probably going to take more than a couple months. But heading into 2020, you know, if syphias were to rule to try and reverse retroactively this acquisition, what would happen? Yeah. How can the US force to Chinese companies to

1:14:39Uncombined. I mean, I guess there's US shareholders of musically in lots of them. Maybe even more than 50%. I have to assume it was more than majority owned by venture investors given the four rounds that they did. Well, actually, it's really interesting, you know, going back to benefits true, what you said about how they integrated musically and TikTok. And if they actually use the TikTok app.

1:15:06and core infrastructure, and migrated musically onto it. I wonder if you know, it seems crazy from like a product decision, but I wonder if they were thinking about this. If this is now going to be an argument of a potential US governmental review. Yeah. Like, hey, this is, this is TikTok. This is, this was never musically hot. Yeah. The last piece of the puzzle here that we are definitely going to watch play out.

1:15:34Of course, a year ago, when Facebook launched Lasso, which you've never heard of, it failed miserably. But just a couple weeks ago, at the beginning of November in 2019, Facebook and Instagram launched a test of a new feature in Brazil in the Brazilian market that they're calling Reels and R-E-E-L-S. And just like when they launched stories and copied Snapchat, this is a much more fully featured TikTok.

1:16:03competitor in a new tab natively within Instagram. So we'll see how that performs. Oh, man. Well, this may need a follow up at some point. The blood thickens. We spent one of the reasons we spent a lot of time talking about the core of how the product operates at Musically and Tiktok and the algorithmic recommendation is one because that's how there was the secret to the company's success, but two, it may end up being the mode that protects them here from Instagram copying them. Because if you think about Snapchat, when Instagram copied stories, it was the same network model on Snapchat as it is on Instagram. I'm following, I'm interacting with people I know or people I care about or people influencers or whatever. Here, it's not. So like, is Instagram gonna be able to recreate the algorithmic feed within Instagram?

1:16:57Mostly, it's a great question. Yeah, it may be fundamentally different in the way that stories fit in nicely. This may not fit in so nicely. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

1:17:21Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real. Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

1:17:45Yup, AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

1:18:03And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. ServiceNow already runs more than 100.

1:18:22billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, Go check out servicenow.com slash acquired and tell them that Ben and David sent you. All right, acquisition category. For listeners who are new to the show, we like to categorize in acquisition, whether it's a people acquisition, technology, product, business line, asset, or other. And I actually called this one an asset acquisition, where the asset they were acquiring was the audience. They sort of were buying distribution instead of paying to build their own distribution.

1:19:20I don't have enough context to know if they actually needed to buy the product or not. I looked at this more like buying distribution. Yeah, it's interesting. We added, at some point, I can't remember which episode. Maybe it was Zillow Trulia. We added consolidation as a category. I think that's what I'd go with here because network defects when you add more nodes to the network. Yeah.

1:19:49Even with all the differences we talked about, you know, at the end of the day, this was the same product, you know, a different version of it, but the same feeling, the same need and use case. And so just like Zillow and Trulia or Rover and Dog VK, by being able to consolidate these two companies and these two user bases, both on the creator and the consumer side, they were able, I think to drive a lot more scale in their network effects sooner. I definitely buy that.

1:20:18which I'm gonna hold my comments on until creating. Alright, the suspense builds. I think we pretty much have covered what would have happened otherwise. Do you want to go into playbook? Yeah, I mean, the biggest thing for me is just like, I had no idea about all of these dynamics underlying how musically and TikTok and by dance work and this really orthogonal view to how all other Western social networks operate in having content be driven by the actual content and algorithms recommending it as opposed to the people making it. I think this is a huge, huge trend that is super important for entrepreneurs to be thinking about across all types of content companies. Yeah. Okay. I want to dive into that, but I want to take one step back first and say the way to emerge as a new social network.

1:21:11There's a narrative violation here and whether or not you like the term narrative violation, which is so yes. I love how acquired finally made the New York Times and the Times last year. Narrative violations amazing. Thanks Aaron. A narrative violation for sure happening right now is that you can't create a consumer a new consumer social network. Like sorry we live in the post-facebook world and like that's not happening and yet.

1:21:37TikTok did so what happened and the way that I was sort of thinking about this is initially to emerge as a social network in sort of V1 it was simple you could just enable people to communicate with each other with messages or whatever wall posts and show information about themselves so think sort of like basic friendster or early Facebook and this was like very primitive creative expression it was basically just a communication channel but the way to disrupt that world is to create a new canvas for people to easily be creative within. And this comes a little bit from Eugene Wei's theory from his amazing post status as a service, but you basically need a canvas that enables people to be creative without doing a lot of work and to have a large amount of variance in what can be created.

1:22:24because this will facilitate a new generation of creating, sharing, following, and thus TikTok was able to be sort of explosive in growth by nailing the format of this new method for creative expression. So you can consider that basically like an amplifier for the work that one has to put in on what they can get out the other side. And so by enabling sort of this new format, this new canvas that you have the ability to paint on and be more creative than you thought you could be. It sort of naturally attracts people to it. And then you can sort of bootstrap a new network on top of that. So TikTok is about sharing with anyone where Facebook and Instagram were about sharing with friends. So David, this is where I want to bring in your point.

1:23:12There's a much higher K factor or the viral coefficient when the content can get distributed to that much larger group. This really gets to your point of winner take all. It's really like diving into Metcalf's law, which is that that aphorism that the value of a network is proportional to the square of the number of connected users in a system, like our equals n squared. And the flaw in this and applying it to the Facebooks of the world is that you know, with something like Facebook, it's not actually n squared, because when a new person, I don't know, joins Facebook, it's extremely unlikely that it actually increases the value for me, but with TikTok, that's not true. It's actually, it actually is n squared. Yeah, this is like a totally new type of network effect that we're looking at, that actually acts as a global system instead of a whole bunch of stitched together bifurcated personalized systems. Yeah, it's really as you were saying that, I actually think,

1:24:09This mega trend, you know, well, this trend and theme is even bigger than we've been talking about because for the last 15 years, the phrase social network has meant a technology driven platform with Personal connections on it, you know, it is it's just been like the friend model of Facebook the follow model of Twitter or snap or Instagram or whatever like there is there's just this implicit assumption that all social networks are based on relationships between people, but that's not at all Tiktok is in many ways, you know YouTube is much more similar to this too it's The relationships are about the content, and it's about relationships. It's one to many relationships between creators and consumers, and unlike YouTube, though, on TikTok, a much higher percentage of consumers also become creators. Now, nowhere near 100%, not as high as, say, Instagram, but much, much higher than YouTube because the barriers to creation are much lower because of the short form.

1:25:25format versus the long form format on YouTube, I think you could make one of two arguments either that this represents a wholesale rethinking of what social media, quote unquote, is, or it's a different category altogether. Like, it's not social media. This is pure media, like UGC driven media. And so like, to this narrative violation of like, you can't create a new social network. Well, maybe that's sort of, you know, sort of true. Like if you think about how snap came on the scene and competed with Facebook, it was a competing social network, it was just they found a separate network of users and younger users that weren't attracted to Facebook, but it was a substitute product, right? And same with Instagram, this is not that. It really isn't. Even though most of the users are young right now, that is not going to be the case. Forever, this is a network that's going to have broad universal appeal, just like YouTube, because it's not about the people, it's about the content. And they can find the best content for you, whether you're, you know, nine or 90.

1:26:27Yeah, what you're really seeing is the purest distillation of social network versus social media. In a way that we had sort of blurred them together before, this is very much social media, really not a social network. Whereas you look at something like Facebook, it's much more social network. Yeah.

1:26:45And the why TikTok has been so explosive is it's all the benefits of YouTube, like true social media where someone creates content and it could benefit literally anyone around the world, not just their little community of people that they're actually friends with, but it's also the best of Facebook or Twitter where it satisfies that instant gratification, short form in the moment by size content.

1:27:10Yeah, in a way that YouTube, you know, I love YouTube and we got to redo that episode because we were so wrong, but I'm never gonna whip out YouTube while I'm standing in line, you know, waiting to check out at the register, but I might whip out TikTok because all the videos are 15 seconds or less. Which actually, this is a double-edged story, so this leads to what my sort of bear cases on TikTok long term.

1:27:34There's a bear case that is soft bank invested, which is its own bear case. And you could also say $80 billion valuation really by dance. Yes, yes. But the one that's more based on fundamentals is look Facebook.

1:27:49has been entrenched in my life since 2005 or six because it carries all the people I've ever met with me and like a lot of them fall off the network and maybe some move over to Instagram and don't post post on Facebook or whatever but like that's based on a really solid bedrock of important things in my life.

1:28:10And with TikTok being so much about instant gratification, and me not really knowing any of the people I follow, again, this could be different for lots of other people, but I think for most people, you don't know the vast majority of the people that end up in your feed. Will it actually have that sort of staying power that Facebook has had by having that social network that's important to you and to really bring it back to our previous conversation, like maybe social media has higher short-term value?

1:28:39because of the incredible propagation, but maybe social networks have more long-term stand power. Yeah, I think what it probably, thinking about this, I think to me, what this means is it is even more important for TikTok and other potential social media networks like it. Well, certainly like TOTAL to constantly refresh with new, fresh relevant.

1:29:08content because that's the lifeblood. Like, if the fire hose of new content creation that is coming into TikTok every day, if that dips or dries up, then the algorithms aren't going to have amazing new content to recommend to people. And the value of the library of old content probably gets stale much, much more quickly than the value of digitizing your relationships with all your friends.

1:29:36which means the better comp here is actually YouTube than Facebook. Yeah, totally. All right. Well, there we have it. Do we want to do... Grading? Grading. Let's see. All right, so I have a take. I was thinking about this before.

1:29:52Jumping on so that the task of grading if we think bite dance will make back the billion dollars they spent on musically with their current business model is actually like it's kind of tricky to back into that based on CPMs or you know average revenue. They're making today per user stuff like that so to take a different angle at it I I want to talk about an episode that we haven't done which is Facebook buying WhatsApp and without doing any research I preliminarily think that's gonna be an A. And the major reason being Facebook seems to have a monopoly on being the dominant social network. And that allows them to be the best marketing channel in the world to reach consumers targeted by demographic or interest. And if you think about it before TikTok, there were six social networks with over a billion users. And I looked this up a few minutes ago. It's in order, Facebook, YouTube, WhatsApp, Facebook Messenger, WeChat, and Instagram. And this is globally.

1:30:48So Facebook owns four of the six billion plus person social network or social media properties. Wow. So, if you take that lens on it, so like Facebook, which is a $200 billion market cap company, only having to drop 10% of their entire enterprise value to protect against the greatest threat to them out there, it was actually still a fantastic move at that time, even if they're not monetizing WhatsApp now. It was basically like a $20 billion insurance policy to allow them to keep printing that $20 billion in net income that they generate every year.

1:31:26bringing it back to musically, which was only a billion dollar acquisition. And if you believe that that was essential to enable TikTok to become the insane platform that it is today with somewhere between half a billion and a billion M.A.U.s. David, I think you estimated it at like 800 million. 800 billion, but they'll...

1:31:42assuming nothing major changes, it'll be a billion soon. Yeah. Yeah. Like it seems like a no-brainer that it'll be sort of this like first legitimate challenger to Instagram, which really is what Snap was supposed to be, but fell short of with only 300 million monthly. But again, Twitter, too. I think the difference is, yes, Snap had Snap's network effect was relegated to a specific demographic of people. I think there's a chance that that's different for tech tech.

1:32:11I think you're right. I think that's why if you take this top down market view and analyze it based on buying a ticket to attend that billion dollar social network dance, I absolutely think it was a fantastic purchase and probably one that will go down in history of one of the best ever. If one TikTok can hold on.

1:32:33like can actually, to the point that we were talking about earlier, create lasting value, like to have staying power to be able to make sure that even though they don't really own those personal relationships that they're an important part of your life on an ongoing basis, and two, really start to turn on the gas and monetize like Facebook has been able to. Yeah, yeah. Okay, so you're a... I'm an A? I'll say A. Hey, okay. All right, so I have one One overarching caveat to all of my great, I'm also gonna be an A, but one overarching caveat, which is this is all pending what happens with the CIFIUS review. Absolutely. That could throw a huge wrench in everything here. It could be like multiple billions of dollars of just lighting money on fire. Yeah, totally. So pending that, I'm gonna, I am, we are gonna grade this just from a pure business perspective, assuming that

1:33:30this is this ifiest review, you know, there was no view of it happening when the acquisition was done over the last couple of years and let's assume that the acquisition doesn't get reversed. So that said, I'm also an A for I'm not an A plus though. So I'm an A because for two reasons. One, this was the way like bite dance, this is what makes bite dance so exciting, all of these dynamics. That's the reason why it was and is the highest valued startup.

1:33:58privately held company in the world. So they would have been completely fine without musically, but I think they would have had a very hard time penetrating into the West. They would have been able to expand outside of China into other Asian countries by getting into the West and specifically into the US in such a big and quick way would have been really, really hard. So this is their path to do that one, two, as we talked about in acquisition category for consolidation just generally for like these two products in the space combining them is going to allow them to grow much faster and with far fewer roadblocks because again, it all gets back to content, this flywheel effect between content and the creators of creating and then consumers consuming that content and needing the fire hose of new compelling content by getting all of it all around the world onto the same platform.

1:34:55That's really gonna drive things much faster. I think it's not an A-plus though because to me an A-plus is like this one company and this one acquisition like created a new category save something like an Instagram like Facebook was not gonna succeed at doing Instagram on its own. I even forget what their clone was called. They needed to buy the company, you know, or Apple and next. So I think that's why I'm not an A-plus but with the caveat of Sypheus.

1:35:24Totally agree. I'm gonna cool. Well, do you want to do our first carve out in a while? Yeah, let's do it. I've got two saved up one because we haven't done it in a while and two for the holidays. So my first carve out is the Nintendo Switch Lite. I bought it when it came out and it's awesome. I haven't owned a video game console in years, but I'm traveling for Thanksgiving. So listeners, if my audio quality is a bit off on this one, I apologize. It's just been so great. Like I haven't even played. I have played no new games on it. I just bought Breath of the Wild on Black Friday. I'm sure this was with me a couple of weeks ago that you have a switch and you've only played the classic Nintendo games. I've only been playing NES, super Nintendo games, and then

1:36:11I bought a few. They're a bunch of, you know, both indie titles and reissue games from previous consoles in the Nintendo eShop that are all like so good. I'm not even like that excited to play Breath of the Wild. I'm just so enjoying going back and playing like Super Metroid and like Castlevania and all this stuff. So that's one. My second carve out is Jenny and I are with my family for Thanksgiving, and we went out last night and saw the movie Knives Out with Daniel Craig. And I knew very little about it. It wasn't expecting it to be awesome, but it was like really, really fun. Super great holiday movie. Really well done. All right. I got to see it. Mine actually has to do with this episode, but I won't tell you how until the end. So I'm going to recommend a nine inch nails album from

1:37:012008. I know where you're going with this. I remember discovering this in college and being like, well, first of all, I'm like a big Trent Resner fan and like a lot of the sort of harder, more classic nine inch nail stuff as like when you're like really going to like have some good speakers around and and rock out. And like unbelievable live shows.

1:37:26all the soundtracks that he's done with Atticus Ross, including social network and Gone Girl, and most recently Watchmen have been awesome. He released this album called Ghost 1-4, and it's a four-disc album. It's my favorite music to work to. Like it's sort of like deconstructed tracks. They're very minimalist tracks. It's a great put it on and like...

1:37:48think music. So my two favorite tracks on our track 26 on Ghost 3, track 29 on Ghost 4, you should go play both of those right now in Spotify because they're great. But the one that I'm recommending today is track 34 from Ghost 4, which is the sample that is the base of the beat in Old Town Road. And it is. The New York Times did an awesome, both.

1:38:16text piece and also a video reporting that's on YouTube where they go and interview the producer in the Netherlands who used this sample. It made the beat. It's so good. It's awesome and it's one of these things where I always knew like listening to Old Town Road. I'm like, I kind of, I know something like what this beat is, but I never put two and two together and then watching that New York Times video. I was like, no way! It's actually Trent Resner under this whole thing. So I just thought that was the coolest thing. Amazing. Trent Resner.

1:38:44And Billy Ray Cyrus, Will Nas X, and Tik Tok. And I'm blanking on the name of the producer from the Netherlands. But anyway, that is a true 2019 moment if there ever was one. Absolutely. Alright listeners, now is a great time to talk about one of our...

1:39:06favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences, or just evolving your existing core product, go to Statsig.com slash acquired to get started.

1:40:03All right listeners, that is all for today. So if you like this episode or really anything that we've done, please don't be shy about sharing it on social media or leaving us a review on Apple podcasts. We haven't mentioned that for a while, but it's an awesome way to help the show grow. And I think I learned recently that the iTunes charts are actually dictated by the number of subscribes.

1:40:25per unit of time in the Apple Podcast app. So if you listen in a different app and you want to help us bump up the charts, you should go and click subscribe in Apple Podcasts. We are starting to get into that territory where we're getting a bunch of nice organic traffic from people looking for new technology shows to listen to and seeing us in the charts. So thank you so much for doing that or leaving a review or sharing us. We really, really, deeply appreciate you helping to grow the show. And by the way, if you're an entrepreneur or aspiring entrepreneur and you're thinking about making the TikTok for a podcast. Get in touch with us. David, I have somebody email you after this. Awesome. If you want to go deeper on any company building topics, you should consider becoming an acquired limited partner. You can click the link in the show notes or go to glow.fm slash acquired and all new listeners get a seven day free trial. And with that, we will see you next time. See you next time.