Welcome to all the new subscribers! I write a longform analysis about tech in China from the perspective of a 🐢 VC, sent out every Wednesday. If you like the content, please share with friends!
So we have some good news and some bad news.
I’m kind of torn between generating high quality versus high volumes of content. It would mean either putting out one piece every two weeks that I’m happy with versus one piece every week that I’m content with. What’s your take?
The good news is that I have something pretty good in its place. I came across this fascinating mega Twitter thread from a product manager at Bytedance called Passluo who kindly gave me permission for translation. It's the age-old struggle of corporate innovation with Chinese characteristics.
Translated from Chinese with my comments in italics. If you’d like to hear more from Passluo, like this article.
Part 1: The dilemma
China tech giants' typical sources of revenue are consumer-oriented (like games) or through advertising. The population is large, and the growth methods are fast and straightforward. The leadership has long been accustomed to pursuing rapid growth.
However, the market for B2B focuses on specific verticals or enterprises. The absolute number of target companies is not large, and it's impossible to abandon customers like one would with consumers. It requires a comprehensive understanding of user requirements' and application scenarios. It was therefore destined to be slow work that requires long term investment.
From the enterprise's perspective, a software purchase decision is rational, and the sales cycles are relatively long. Unless it is a revolutionary product (like AI robocalls), growth is hard to accelerate. Most firms need to rely on market and sales personnel to constantly contact customers, understand the market needs, promote the brand and product, educate the customer base and cultivate sales opportunities.
The mainstream enterprise software on the market now are all from the 2012 -2015 wave; some are from even earlier. Beisen started its business in 2003, and Fanruan in 2006, Kingdee, Youyou and Kingsoft all started before 2000. It took decades for these companies to accumulate industry status, brands and moats. Even today, they are still being challenged by upstarts.
How can a leader with a consumer background endure the years spent on exploring the market, refining the product, interacting with users, building the brand then finally getting results? Even if they can bear it, their CEO and board of directors can't. The opportunity cost of experimentation is too high. The scale of B2B products wouldn't be large; there's only a handful of them with revenue of over 1 billion RMB. But what's 1 billion RMB to a Chinese giant? That's Bytedance's revenue for 3 days.
The dilemma of a B2B leader within a tech giant is that this segment is difficult to do well, high opportunity cost, low ROI and looked down by other business units. So we can see that most B2B teams in tech giants are led by middle or low-level managers who are anxious for quick success. They blindly apply the consumer playbook in their products and growth strategies which inevitably results in bad products and bad results. Morale remains low, and turnover remains high.
Alicloud is the exception to the rule. But first of all, Alibaba has B2B genes from its early Alibaba marketplace days; second is that Jack Ma backed Wang Jian against a crowd of senior dissenters. It's a big strategic bet, and the cloud space is evolving quickly enough, but even with all this, Alicloud was still only 10% of Alibaba's e-commerce revenue in 2019. DingTalk is still in loss-making mode.
Part 2: The talent's dilemma
In terms of talent, the bar is higher for B2B versus B2C, especially for product managers.. Though often people with industry experience don't understand tech and tech people don't have industry experience and don't know how to play the B2B game.
Let's look at the difference between B2B and B2C. The most popular word associated with B2C is '风口' or fengkou (meaning the focal point for a macro opportunity) because consumers have a very demand for high volumes of innovations. B2C solutions typically focus on solving existing needs or creating new needs. This process requires constant trial and error, which is time-consuming, laborious and costly. In contrast, the smarter way is to copy from those who had just found the fengkou.
As long as you can run faster than the pioneer fengkou guy, you will not need to care about the great founder, the lean startup, the agile development or the flexible architecture. As long as it works, it's okay. You don't need to care about whether the software is written in PHP, Python or other programming languages. As long as it can run, it's okay.
Paradoxically, the more often your service crashes, the better it is since it looks like that you've got a lot of users and are super hot right now. More people would notice you and investors will come flocking. Under this kind of environment, the B2C product managers typically are very detail focused and end-up seeing the woods for the forest. They often don't have a good grasp of the top-level architecture and long-term strategy of the product. Another kind of habit B2C PMs pick up is thinking that the virality spread of consumer products is the default way of distribution. That if they spent some money subsidising the users, or advertise, or doing WeChat marketing, users will come flocking. When they end up in the B2B work, they find this consumer playbook does not work at all.
There's a lot of opportunities in B2B; I remember an investor said that "in this age of digital economy, almost every industry is worthy of information transformation." But the volume in B2B verticals is generally minimal. For example, in the legal field, there are no more than 500k licensed lawyers in China and around 50k law firms. Those who are willing to pay for a professional software product may only be a few thousand law firms. Under such circumstances, only excellent execution with a remarkable strategy can work with a good result.
For B2C, if you can't fulfil some users' needs, no problem, you move on, there are 1.4bn people waiting for you. But for B2B, if there are only this many potential users, it's hard not to address your users' needs since you're limiting an already small base.
Lack of deep industry understanding means a common PM will not know about why CRM is needed in sales distribution. Since most of the PMs joined the internet industry once they graduated, they don’t have opportunity to experience other traditional industries. To make matters worse, the high salaries in the internet industry make them feel like it's easy to make money, they don’t even want to have a try.
How about those with industry experience? Tech giant thinks of them as inferior and dumb, unable to understand the internet and would rarely give them the opportunity. Even if they can overcome the odds and get in the tech firms, they are seldom given important roles that allow them to call the shots. But that's also not being fair to PMs; the truth is that even if you gave them a chance, a lot of them still wouldn't be successful. I know a tech startup that was founded by one of China's top lawyers., and their product is a piece of shit. The founder of iCourt has no lawyer license, but their revenue surpasses hundreds of millions. B2B people need to combine domain knowledge and technology knowledge to build a complete product or service; people who can do this are rare.
A company is really about its people. After large companies are formed, talent profiles and resource allocation becomes solidified, and the ability to introduce real B2B talent into the firm becomes very difficult. So you have a leader who doesn't understand B2B, leading a group of know-it-all PMs who are telling software developers, sales and operations what to do. Such a team wants to make an impact in the B2B field is mission impossible.
Part 3: The organisational cooperation dilemma
When the company is big enough, there's no way to collaborate like a small team anymore. With 360-degree feedback, performance OKR and KPI, quarterly assessment, year-end assessment, promotion defences... management has invented a lot of systems and tools with the view to keep the team collaborative and high performing. But as we all know, these systems and tools only reduce the manager's work but are a net negative for efficiency.
A PM in a B2B startup can think about an improvement, sketch on draft paper, use lunchtime to chat about this with a developer in R&D team. After dinner, find it in test mode and come up with interaction and interface. After the post-work shuttle at 10 pm, PM receives a message on WeChat, 'The feature has been released, go and check it out online'.
Meanwhile, what's the process like in Big Tech?
The PM needs to write a nonsense PRD, which gets queued and reviewed by the product directors. Then they have to make great prototypes which then get tested by someone else. Because only in this way can they get R&D approval. Then it takes one or two days to write technical solutions and documents. Finally, code delivery with a bunch more tests and release processes. Their weekly reports are full of their progress, but the customer hears zetch for 2 weeks.
I know at this point my readers will come back with the following response: 'They do this to ensure quality!', 'This is systematically software development', 'This to ensure lack of technical debt', 'Shows you haven't through software training'. To which I say, you don't get what I'm talking about.
I'm not objecting to scientific, standardised and systemic software development. There's a lot of smart people in tech companies. I'm just objecting to whether this is the ideal way to collaborate. The US has 'political correctness', and tech firms seem to have 'process correctness', norms and methods have become tools to avoid backlash, which means they are often reiterative and not agile.
There's also other ways to drag down efficiency. 13 weeks in a quarter, with 2 weeks at the end of each season to summarise and assess progress. They then spend another 2 weeks at the beginning of the quarter to determine the proposed goal, then the 2 weeks after that are usually spent on target dissemination and confirmation. Do the maths. How much time is left for real work?
In order to manage a vast organisation, big tech spends a lot of effort in formulating organisation collaboration specifications, however these standards make the company bloated and inefficient. For new teams working on B2B, the collaboration norms of an established big tech company become shackles that bind them. The voice of the market and the voice of the users are drowned in the endless meetings schedules.Just tell me how can a team like this can win?
Part 4: The track-choosing dilemma
Alibaba's Yuque, Tencent's TAPD, Bytedance's Lark - these are born out of internal demand and are user-favorite products. Although they are all B2B products, their product design principles and operation methods are actually more B2C-style, because they‘re for common work scenarios.
The reality is that internet companies aren't reflective of most companies; most companies have the following departments:
- Supply Chain Management
- Production Management
- Sales Management
- Organisation Management
- Customer Service
- Process Management
Relative to a startup, big tech can't do as well in terms of selecting an excellent vertical to go after for B2B. Most of them can only see areas related to their own business, or they have to start incubating from internal needs before gradually extending to commercialisation. To develop commercial products based on their own needs is a recipe for disaster. Big techs are unique beasts; products that meet their needs will not be suitable for the general public.
For B2B products, especially SaaS, the viability of the business model is based on the diminishing marginal costs that come from offering a standardised product to additional customers. But with the limited number of large enterprise companies in China, how does one achieve this diminishing returns?
Whether in China or Western countries, SMEs dominate the market. Also, they don't provide large scale income; they do provide good market feedback and potential for quick iteration on the product. For the employees of big tech, they have to prioritise internal needs above those of the market. This misleads them on real world needs. Even if you do find a vertical that has potential, it's hard for your leaders to support it.
Since it's hard for the B2C team to understand the vertical well, it's also hard for their leaders to manage the risks associated with this. For large companies, controlling risks is more important than looking for opportunities.
According to conventional logic, the big tech should be dominating the world. Because in every aspect of resources, be it talent or capital, they typically hold much more than a startup. But from the reasons listed above, they often fail in their attempts. At the same time, ex-employees, who've left the organisation to do their startups have found more success.
Part 5: The last word
So friends, what are you afraid of?
It’s a great age to start a B2B business in China today. There is a market and there is no need to worry about the intrusion of tech giants.
Though I’m complaining about the disappointment of big tech companies, I also want to encourage everyone not to be afraid. The charm of the internet is that there’s always a huge opportunity waiting for you.
Thank you all and best of luck!