|#549 MWAVC| — TikTok & The Sorting Hat 🧙🏾♀️
Hi,
Welcome (back) to MWAVC for my 549th post on about finance, investing, venture capital and all that jazz. My name is Ato (more about me here and here) and I try to write every single day, inspired by Seth Godin (Seth’s Blog) and Fred Wilson (AVC). I haven’t done the best job over the last few months (read: years 😬), but I’m working to be better and more consistent, even as I manage this crazy schedule.
In case you’re new here, quick introduction: I’ve been investing in some way shape or form for the last 12+ years and now work with one of the pre-eminent VC firms in Africa - Microtraction, and the family office that acts as the GP - Pave Investments. Read more on us here and here. Much of the writing I’ll share here are based on things I find interesting that I’d like to share and hear your thoughts on. This is also an outlet for my thoughts, lessons, asks etc. and I think you’d find most of it valuable if you’re remotely interested in learning about venture capital.
I’ll be developing the content further, including things I think will be helpful and would appreciate any feedback on what’s working vs. not, and what could be helpful for you over the long term. If you’d like to sign up, you can do so here. Or just read on.
TikTok & The Sorting Hat 🧙🏾♀️
Eugene Wei (former product guy at companies like Amazon, Hulu, Flipboard, and Oculus) in 2020 (!!!!). Suggestion at the end is that of the post is that if ByteDance offers itself for 30B$, the potential acquirer should offer double. Well, ByteDance is worth 223B$ today. Go argue.
Full blog post here - TikTok and the Sorting Hat
New blog post, this the first of maybe a 3 part series on the company du jour, TikTok.
This first piece isn't about the possible ban or divestment or the security or geopolitical issues but about what makes it so unique and fascinating to me. TikTok is remarkable as the first Chinese app I can think of to make real inroads in the U.S. market.
I had long thought the cultural barrier too significant to overcome, but it turns out that machine learning algorithms can now pierce the veil of cultural ignorance.
For a self-described cultural determinist like me, it's a miracle that an app launched by two Chinese guys out of Shanghai, Musical.ly , could evolve into a leading short video app in not just the West but other foreign cultures like India and the Middle East.
Musical.ly eventually hit their asymptote in the US—there are only so many teen girls who want to do lip synch videos—but ByteDance bought them and did two things to jump start their growth again.
First, they poured an insane volume of ad dollars into filling the top of their funnel. TikTok ads were everywhere you looked.
At first this seemed crazy. The 30 day retention was widely rumored to be sub 10% on this acquisition campaign.
Second, and more importantly, they swapped out the feed algorithm for one built by ByteDance, widely thought of as the algorithm company in China for their first breakout app, an algorithmically powered news app called Toutiao.
The ad money pulled a more diverse audience into TikTok, and the algorithm acted like the Sorting Hat from Harry Potter, matching content with the viewers who'd appreciate that content. This enabled new subcultures beyond teen girl lip-synching to form.
In the two-sided entertainment marketplace that is TikTok, its algorithm acts as the market maker. Because it works so well, TikTok could stand up an entertainment network without an explicit follow graph.
Most social networks use a social graph to approximate an interest graph. This is mostly fine, but at some scale this approximation diverges. I don't share the same interests as all my friends and family.
More importantly, at scale, social graphs come with all sorts of negative network effects, many of which Facebook, Twitter, Instagram, and other companies are grappling with now.
TikTok skipped that step and just used its algorithm to directly derive an interest graph. Its algorithm is so effective that it doesn't feel like work for viewers. Just by watching stuff and reacting, the app learns your tastes quickly. It feels like passive personalization.
This is massively disruptive, because the interest graph is more valuable than the social graph. Interests are what allow for effective monetization like targeted advertising or e-commerce or subscriptions.
An efficient algorithm for intuiting user interest can be used to compete in so many adjacent markets. E-commerce. Media/News. Audio (music/podcasts). Dating. Job hunting. Education.
Don't get me wrong, TikTok is a long long way from realizing any of that potential. However, Douyin, the Musical.ly clone that ByteDance launched in China, has realized some of that potential.
IMO, if TikTok is sold off along with its algorithm, every tech company should be bidding hard for it. I've heard $30B tossed around as a figure, I'd happily pay twice that without a second thought. This is a once in a generation purchase opportunity.
Would Microsoft, or some other tech giant, realize this full potential? That's far from guaranteed. I wouldn't put it past any of them to screw the company up.
But I'd be terrified of a competitor owning them instead of me.
I'm biased, of course. I think video is still massively underrated as a platform for all sorts of things from commerce to education.
TikTok is the closest to video as platform as I've seen so far and it's only scratched the surface of that potential. <END>
Currently Reading 🎒
The reverse pitch: How VCs win hot deals because the space is getting super competitive right now and AB need to stay ahead of the game😆
Currently Listening 🎧
All-In Podcast guys are becoming some of my closest friends! Dope epode on Nvidia and Sora here.
I hope this is helpful to some founders out there. I’m happy to speak more on this with anyone looking to build a company and wants feedback. Thinking of bringing my Office Hours back for founders to book 30 minutes to tell me about themselves, their businesses and ask for feedback, but haven’t made a full decision yet. Should I? 😬 (I’ve got 8 yeses to this so far, and looking for 2 more before I push it).
Remember: “Until the lion learns to write, every story will glorify the hunter.”
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Till tomorrow,
AB