David Wallerstein is Tencent’s Chief eXploration Officer.

Anu Hariharan is a Partner at YC.

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Craig Cannon [00:00] – Hey, this is Craig Cannon, and you’re listening to Y Combinator’s podcast. Today’s episode is with David Wallerstein and Anu Hariharan. David is Tencent’s Chief eXploration Officer and Anu is a partner here at YC. Just a quick reminder before we get going. If you haven’t yet subscribed or reviewed the podcast, it’d be awesome if you did. Alright, here we go.

Anu Hariharan [00:18] – Well, hello everyone, thank you so much David for being here. I want to introduce David Wallerstein who is the Chief eXploration Officer at Tencent. David joined Tencent in 2000 when the company had only 45 employees and today you have about 38,000?

David Wallerstein [00:39] – I believe so, yeah we’ll have to check with our head of HR, give or take 1,000, something like that.

Anu Hariharan [00:43] – 1,000, okay.

David Wallerstein [00:44] – A few thousand here and there.

Anu Hariharan [00:46] – Well it is clearly one of the world’s largest internet companies, as well as the largest gaming company in the world. And as many of you know, Tencent is also the creator of WeChat. Thank you David for joining us today and also for speaking at our private event.

David Wallerstein [01:01] – For YC, anything.

Anu Hariharan [01:01] – Thank you. Let’s go back to even pre-2000. You grew up in the US. What took you to China?

David Wallerstein [01:13] – That’s a very long answer and I’m going to try to make it short. It kind of relates to my work today. I was always pretty deeply concerned about the world and trends in the world. And I felt that, going back to the early 1990’s as a student, studying global trends and studying global history, I felt China was destined to become a very important country, that the economy was going to continue to grow. It had been growing in the early ’90s, but China was not a popular country for at least Americans back then, at least myself, the way I viewed the world. It was kind of on the side and other countries like Japan were a much bigger deal. I actually had spent time living in Japan.

Anu Hariharan [01:55] – You went to high school in Japan.

David Wallerstein [01:56] – I went to high school there, I was an exchange student. I lived with a Japanese family and I was a Japanese person basically for the time I lived there. I lived in Japan on and off for about four years and that made me very comfortable with just speaking a foreign language, an Asian language, and being the only non-Asian in the room has always seemed very natural to me, even since before I was 16. But then when I got interested in China, I redeployed this skill set to survive in Japan as a kid, which is just like, you just have to learn the language super fast.

Anu Hariharan [02:28] – So you went from Japan to China.

David Wallerstein [02:30] – Yeah.

Anu Hariharan [02:32] – I know you also talked about Naspers exploring in fact potentially acquiring Tencent pre-2001. Talk about how did you first come across?

David Wallerstein [02:42] – Yeah, so I was doing management consulting in China. Take that background I told you about and I ended up having a passion for getting foreign companies into China. Again, the theme that I was talking about, China is going to be very important for the rest of the world. The theme in my mind, really from the mid-’90s, was how do we help China integrate to the rest of the world? China is a productive member, all the great international institutions out there work for China as they do America and the other countries and China is just part of our global community in a very proactive way. And I thought the best way to do that would be to integrate the Chinese economy with the rest of the world and to accelerate that. I was very interested in the ’90s to bring some US companies to China, I was working as a management consultant predominately for telecommunications and what we called IT-related, it was pre-internet. And then I started helping these different companies and in 1999, very early, I think it was February 1999, I came across a company called Naspers, who became my client. I was very young at the time, I was 21 maybe. And they wanted to enter China’s internet market and they had recently done a NASDAQ listing and had quite a bit of capital to back their plans. It was like $100 million or something, which was a lot of money back then and is still a lot of money today. We started working together to invest in different companies in China, social networking companies, we didn’t call them that, they were dating sites back then or chat sites

David Wallerstein [04:18] – or blogging sites although that wasn’t a word either. Posting sites, I was very fascinated by these kinds of websites because they created a lot of traffic and the users seemed to want to spend a lot of time there. And that made a lot of sense to me.

Anu Hariharan [04:30] – It was more like page views.

David Wallerstein [04:30] – Yeah. It was about page views and I was always interested to find engagement, deep user engagement. Something happened when I was doing this kind of M&A investment type work for Naspers in China, and that’s that I noticed all the entrepreneurs tended to use this tool called OICQ at the time and often, they wouldn’t include any method to contact them like email or phone other than this tool. And one day it kind of hit me saying, wait a second, this seems really important. I was totally overlooking it, I was looking for websites basically, and instead I could see Chinese internet seemed to be connected or somehow structured by everyone’s use of this tool. We later changed their name to QQ in 2001 but in the year 2000 I had this idea that I should go down to Shenzhen, which seemed a little far for us foreign type people back then, we were pretty much all living in Beijing and Shanghai, and that’s kind of like where the hipsters used to all aggregate. Beijing, Shanghai, were having a great life there partying at night and stuff like that, feeling really good about ourselves and we didn’t really tend to get out of those cities very often. I remember feeling proud of myself getting on a plane to go see Pony Ma, Ma Huateng, our co-founder. And there’s a team of five co-founders that started Tencent and running the company as the executive team at the time I went to Shenzhen to go visit them, and that’s where the whole relationship with Tencent started, in the middle of June, 2000. I went down there to propose to Tencent

David Wallerstein [06:11] – that we should try to acquire them.

Anu Hariharan [06:13] – And what was their response?

David Wallerstein [06:13] – Well, I had a lot of different kinds of meetings over the years in China, being a consultant, and I was pretty accustomed to having those meetings go well. Generally people were happy to see me and wanted to find a way to work together. I think the Tencent folks pretty politely told me that it wasn’t going to work out, thank you for coming and goodbye. And I was kind of shocked. I had never really had that experience quite in that way before, but in the meetings it was clear to me that these were some of the smartest people I’d ever met in my life, Chinese, American, whatever. I was just completely blown away by how strategic they were in thinking about their business, how realistic they were in having this discussion with me. And I didn’t want to just have the meeting end on a sour note.

Anu Hariharan [07:00] – You didn’t give up, right? You actually ended up, Naspers lead the investment in Tencent a year or two later.

David Wallerstein [07:08] – We did later, that’s where things ended up. But it started off pretty difficult. Ultimately, I felt like we had to demonstrate that we could bring some unique value, first of all I invited everyone to dinner and we proceeded to get, as I recall things, pretty drunk that night. I do not recommend this for children at home, but it did happen. And then the next morning I went back to the company just to see if there was anything we could do together, and I remember bringing in some ideas from the US, from the foreign market that seemed actually pretty interesting to Pony and the other guys. And I said that’s it, I think the way to actually have a relationship here is to see what kind of value we can bring to Tencent from the outside world, and how could we help Tencent with expansion? Even from those early days, like mid-2000s, it was pretty clearly that was going to be the basis of a viable relationship. Ultimately it took about a year to buy effectively half of Tencent as Naspers. And really the day after we signed the deal I did a few things but the most important one was I said I’m moving to the US. We’re going to leave you guys alone entirely, and this wasn’t just only my idea. Up to the top of Naspers, everyone very much supported this kind of structure where, okay we might have a meaningful share in the company, but to make this thing work we absolutely have to never do anything to bother this company, and be good shareholders and really get out of the way. And so to make that very clear, I moved to the US really immediately.

David Wallerstein [08:46] – And at the same time I said, I’ll be back in two weeks. And I did that until maybe a couple years ago, I was going back and forth between the US and China every two weeks or so.

Anu Hariharan [08:54] – When did you become and employee?

David Wallerstein [08:57] – Yeah that was June of 2001. Like really, as soon as we signed the deal, even before we signed the deal I was spending a lot of time with the company and we were working together on different ideas to build the company, it was kind of like, I know this deal’s going to happen, let’s not worry about these papers and documents and all this frustrating legal stuff. Let’s just get to work. Meanwhile we’re sitting around here, let’s build a company, and it therefore was very clear what the relationship would be like after the deal closed because they know what it’s like to work with me. And then the other person who I worked with on the deal, his name is Charles Searle, he went on the board at Tencent, we’re still here to this day. So here we are, we started the deal together 17 years ago, we’re still doing it. Today Charles is on the board, I’m still on the executive team, and there’s been this really wonderful continuity between Naspers and Tencent where the principles that I just described to you have remained true all this time. And I think that’s a great guideline in general for complex shareholder relationships by the way. This may not be exactly the thing for the YC crowd right now but it’s a model that could come up later for founders, you don’t necessarily just have to go public or get acquired. There’s this other model where you could potentially sell a big chunk of your equity to a third party and have this more nuanced relationship, which could actually be an interesting outcome because you could sell a lot of shares but still retain a lot of shares,

David Wallerstein [10:15] – and you can even ask for more shares over time, like more options and things like that, it’s not unheard of. But we actually find the model can work really well with the right teams and we always thought this was going to be a very common model in business and it turned out that there aren’t so many of these types of deals being done.

Anu Hariharan [10:31] – It’s a very unique model, for that matter. In fact, not a lot of investments work that way even to this day in the US as we see wit companies.

David Wallerstein [10:38] – I would love to do more of them, but it’s hard to find that team that is willing to do it, and it’s helpful if the company is profitable because then you know how to value the company going forward based on profits versus just like only user growth or some other metric. It works better with profitable companies.

Anu Hariharan [10:54] – Let’s talk about that a little bit. You joined the company, what, in 2001?

David Wallerstein [10:58] – Yeah.

Anu Hariharan [10:58] – Pretty much when they only had 45 employees and maybe just QQ.

David Wallerstein [11:02] – Yeah, that’s right.

Anu Hariharan [11:02] – Today, Tencent, to the outside world, feels like they do a lot of things. They are also known as the biggest gaming company. They also have WeChat, probably one of the best messengers.

David Wallerstein [11:14] – Just one of many teams though. It’s an important one but yeah, there’s so many.

Anu Hariharan [11:18] – Talk about, it’s broad, from 2000 to 2017 is almost like, I’m talking about 17 years, but how did Tencent decide to evolve from QQ to all these other products, and what motivated the decision making to move to these areas?

David Wallerstein [11:34] – It’s a great question. I hope I can do justice to it. How do you cover 17 years in a few minutes right? There are a few important things to understand about Tencent that inform the product strategy. When I first met the company in 2000, we had a couple key things going for us. One was pretty much most all of the Chinese internet was inside QQ. The strategic question for the company and for us as investors, myself, getting involved would be like, okay, we seem to have pretty close to 100% market penetration. Can we maintain that going forward? What could possible make that go wrong? But we were starting with the wind at our backs, and I think that situation was true roughly from early 2000. By the way, QQ started in February 1999.

Anu Hariharan [12:21] – And QQ, just for the audience, is it just like a messenger?

David Wallerstein [12:22] – Well we started as a PC-based instant messaging service. Think of it, I know the media probably makes too big of a deal of this because they always think Chinese companies copy everything, but it’s the Chinese version of ICQ or AIM or MSN messenger, Yahoo! messenger. Yahoo! messener is the Yahoo! version of ICQ I guess, but it was the IM client.

Anu Hariharan [12:42] – Got it.

David Wallerstein [12:43] – It still has a lot of users today. Usually for a Chinese user back then, when they would get on the internet they’d start their session with QQ and often they were logging in via an internet cafe, a shared PC, and then at the end of their session doing their stuff in the internet cafe, they would log off QQ. Our average usage type is the second factor. The first was having this ubiquity in the market, like almost everyone using it. The second thing was the users only tend to stay in about four hours a day.

Anu Hariharan [13:11] – Four hours a day?

David Wallerstein [13:11] – Yeah. Like an average aggregated time for the users. Which is a long time. And so we started thinking okay, things can go wrong but so far they’re going really well. Almost all users are hitting four hours a day.

Anu Hariharan [13:27] – Was it four hours a day because they’re chatting with someone?

David Wallerstein [13:28] – Yeah, they’re logged in and QQ actually did two things. It did instant messaging and it did something called presence, and presence was basically just a way to indicate by lighting up your avatar that you were online. If you’re offline, your avatar would be black and white, if you’re online it would be in color, and that was very valuable back then because people would want to talk to each other and be in touch with each other in real time and you want to know is someone there or not. And then you can start adding subfields to presence like you can add a little tweet kind of thing like I’m really sad today, I’m really happy today, or here I just did this, whatever. It’s kind of like the precursor to Twitter kind of bundles in with your messaging. All basically packaged in this app. So that’s how we started. We faced this question. We’ve got a great situation going, how do we continue? What could get in the way? And we felt pretty early on, the answer was we have to keep innovating, we have to really deeply understand our users and what they need to anticipate the next thing that they want. Now we did find something that worked really well in the early days. From early 2001, we started doing mobile instant messaging, what we call Mobile QQ, and this is really how we went public on the NASDAQ in 2004 was on the back of this mobile service which connected the PC-based QQ application to your mobile phone. You can send a message between your PC to a mobile user and back and forth. To enable that service on your mobile phone,

David Wallerstein [15:02] – a mobile user would have to pay us 5 RMB a month, about 60 cents. If you didn’t want it then who cares, don’t have it. But if you wanted to be able to on the go, with your SMS, back then it was all feature phones, it wasn’t smart phones. If you wanted to be able to text back and forth with QQ, you would pay us 5 RMB a month. And there were so many users on QQ and this feature became sufficiently demanded that it really drove our financial performance right up to the IPO in 2004. Based on this, it’s important for everyone to know that we became profitable as a company in June 2001. And we’ve never not been profitable since. This is pretty much the time when Naspers closed the deal. They were closing the deal on a company that’s profitiable, cash-flow positive based on rolling out these Mobile QQ services across the country and we would bring the service to maybe Guangdong and we would have nice growth. Then we’d bring it to another province like Hunan and we’re saying okay, what’s going to happen in Hunan? Then the next day it’s like, oh! Get a big explosion of users, and it’s like great, now the revenue’s coming in and then it became a battle in the first two years, 2001, 2002, to make sure we had ubiquitous presence across all of the mobile networks in China, China Mobile, China Unicom, so on and so forth. And each deal would drive more cash for the company because the users were there. We had cash, we had profitability, we had this engagement with users, we had the four hours, roughly plus or minus on average logged into QQ.

David Wallerstein [16:25] – I don’t think I fully answered your question. People would do other things on the internet, they would just always have QQ logged in in the background. And then they might go in and start having multiple chats with different people, sharing information, whatever they’re going to do. But then they might also do other things on the internet but QQ is just always on the desktop somewhere. We felt like we had this latent opportunity. We started to do more experimentation to drive products for our users. Both for user value perspectives and also we had to make money because something to clarify, very different from the US market here, is that the ad market from our perspective has always been pretty challenging in China compared to the US. And particularly for us, we found our users did not like ads in the messaging experience. They would go through great lengths to develop software and these kind of hacks so they wouldn’t have to see the ads. And we felt like that was kind of endangering the user experience so we did always have an ad team and we’re getting much better and we have different kinds of inventory today. But the ads in the messaging window was never really a viable option for us, unlike our friends at maybe like Google or other companies.

Anu Hariharan [17:32] – Even Facebook. How did you modernize that?

David Wallerstein [17:39] – Right, so I want to make that clear because Tencent, historically, the rule of thumb, things are changing all the time. We’ve traditionally made 90% of our revenues, that’s the rule of thumb historically in my mind, from our users paying directly for our services and we call them value added services. And then the 10% would be like ad-related revenues.

Anu Hariharan [17:56] – And what are these value added services?

David Wallerstein [17:58] – Starting with the Mobile QQ service, 5 RMB a month. We’ll have a hopefully strong dedicated product teams thinking about nothing other than, how can I get users to convert to Mobile QQ? What more value can I add? And these are subscription services so you have to keep your churn rate very low. You really have to understand why someone values it and then what might cause them to leave and then we have to build all these features around the service to discourage someone from ever wanting to leave it. We want to have them forever. That was the first major value added service of Tencent. And we launched something around the same time which also grew pretty significantly, became kind of like our number two big service which we call Premium QQ. I was always dumbfounded that we really didn’t really see any US companies build, at least our peers in social networking, build a premium version of our services, especially when it’s been so successful and so important to our product strategy. Premium QQ is kind of like how it sounds, it’s just a better version of QQ. We have to put more types of value added services in there. And in the early days I remember a key aspect of Premium QQ was you can choose your own QQ number. What does this mean, have to explain these things. It’s a different market, right? The QQ number before was your identifier. It wasn’t like david at tencent dot com. We didn’t use email identifiers, we used an actual number. We did that because we wanted to have the numbering system of QQ work with the telecom network. We never really pushed that far in that direction

David Wallerstein [19:31] – but we just thought, maybe the QQ number is the telephone number, in the future it’ll just map really nicely with the switches in China. We did different things around that, they never really took off but that was the thinking, that numbers are better than names. You can just punch it into a keypad. You can choose your own, and in China numbers are very important. For example, some of the people watching may not know 8 is a very lucky number in China. If you’re going to deal with China, remember that. Eight’s lucky. If you’ve got some eights in your phone, it’s a good thing to have, a phone number or whatever. It means to get rich I think, prosperity. If you’re a user and you want to stand out in a crowd, what young person doesn’t want to have a little edge out there right? Get some eights in your number and then maybe when you show up in the chat room, your name shows up in a different color, like a red color, you kind of quickly establish yourself as a bit of a high roller and you kind of emerge from the crowd. The other thing I need to tell you is there was a lot of dating going on in QQ back in the day. I don’t know what happens in it today.

Anu Hariharan [20:30] – That’s true for most social outlets in the US. When Yahoo! messenger and other instant messengers had launched, there were rooms that were really dedicated chat rooms dedicated for dating.

David Wallerstein [20:41] – Yeah, I’ll definitely say that that was probably part of the experience. Not that I would know personally of course, but I just heard from a friend of a friend of a friend that that’s in QQ. If you can get an edge in such an environment by having a premium service that gives you more status maybe but in a fair way, and then more functionality, maybe we give you more storage space. I know storage kind of became less of a big deal with Gmail and all this later on. But we would continuously be building out our premium services package to make it like the ultimate thing to reduce churn and we’d have very dedicated teams very committed to just thinking about nothing other than the premium service package every day of the year.

Anu Hariharan [21:17] – Which drove also the monetization.

David Wallerstein [21:20] – Which drove monetization. These were kind of like two of the key pillars of our monetization leading up to the IPO. But we had to diversify, so now I’m going to get into the whole diversification discussion because we felt as a pure IM company doing mobile instant messaging on one side that’s like you have PC in here and you mobile kind of sticking off here, and then like this premium top of the pyramid here service and maybe both are only getting like 10% of their users. Of 100% you only get 10% paying, we felt like as a company we could just get taken out overnight by like we mentioned Yahoo! Messenger, MSN Messenger, AOL, ICQ, and in fact we were particularly concerned about Microsoft. I think think no discussion of Tencent’s history is complete without a serious discussion about Microsoft because around this time, 2001, 2002, I believe Microsoft did something very important for us. They bundled Windows Messenger into the operating system, so you would get your Windows PC and all of a sudden you got Windows messages popping up and we thought, this is absolutely going to kill us. And I know they’re a competitive company today, but back then, they really scared the hell out of us, excuse me. It was a scary time so we figured, what can we do to be competitive against this kind of powerful, no resources are limited type company like Microsoft? We really did two things, we went very local and we started building my value added services. Let me talk about the local part. We said our products may change over time. This really informed our strategy

David Wallerstein [22:59] – and the kind of customer engagement and product strategy. As our core value, we absolutely need to know our users better than anyone else in the world. We have to, at the most fundamental level, know everything we can about them in terms of their product preferences, what kind of features they like and don’t like, what kind of colors they like and don’t like.

Anu Hariharan [23:22] – And how do you do that? I know Tencent especially is very unique for really understanding the value of the customer versus just looking at metrics. In fact, you coined the term CE, customer engagement. Can you talk a little bit more about what methods do you use to really understand the customer?

David Wallerstein [23:38] – We can do that and then you’ll have to remind me to do the product discussion later. It’s something that’s really about the people who run Tencent and the culture of the company, and caring about users really goes to why we exist. Ultimately every business is established for some reasons, it’s often not apparent to the employees sometimes or the user sometimes because you say, this company just does X and I love X but you don’t really know why. And it’s often a very personal story or there’s a personal dream that takes you there. I think for our five core founders, they always just struck me as being, they care a lot about people. They’re really people people. They care a lot about China. But you have to remember in the 1990’s, China was very poor and people in China didn’t necessarily have a lot of confidence that they could even build a good company or that the company could even have an international presence. I spent quite a few years trying to unpack some of those ideas because I felt they were false, but China came into the world having been fully cut off until 1978 and then gradually opening up and trying to figure out what’s been going on outside of China for all these years. And now it seems crazy talking about that but that’s really where the world was 20 years ago. Our founders were always very interested to spend time with the users online. Like on the bulletin boards responding to users directly, responding in chat rooms and making friends. They were power users of QQ themselves. Some of them might even be guilty

David Wallerstein [25:18] – of being power daters in there. They’re just meeting people and they’re making the service for them, they’re just as much users of the service as other people are and they’re inherently curious about people and very good-natured. What happened to the company is it started with an idea and it quickly became successful. And we got a lot of traffic. And the way our founding team and executive committee responded to that was by actually feeling a sense of responsibility for the users and a deep curiosity to figure out what more could we do, and what do these people really want? You’re actually triggering a memory now. China had a lot of fundamental needs then that are maybe surprising to people now. Because in the late 1990s, early 2000s, there was almost no investment in private media in China. All television, all film, most of the magazines, certainly all the newspapers even to this day, most of them were state funded. You had this big gap with respect to just private media by everyday people. And there were so many services it was clear that people needed back then just because they were human beings, they want to laugh, they want to tell dirty jokes, they want to date, they want to play games. We were filling in this gap and I think as a class of companies, the internet companies in China, this is the role we’ve played. We’ve really led the role of bringing private capital and entrepreneurship to media and connections and services for consumers in China. But it really filled a vacuum where there was nothing there before

David Wallerstein [26:58] – and I think that was very much in the minds of our founders that this entailed a lot of responsibility if you’re going to manage all these users.

Anu Hariharan [27:08] – Maybe to tie it back to the local point, how did they figure out what the local needs were and diversify?

David Wallerstein [27:15] – Okay, the methodology. I love answering that question because it’s a pretty simple one. Basically from a pretty early point on, we knew that it’s essential to understand our users as deep as possible and we should use basically any methodology that we can learn about to deepen that understanding. We didn’t settle on any preference for any kind of methodology because each situation seems to need its own methodology. But we got very fascinated by what we were learning about what was happening overseas. I remember I did a specific trip in 2005 or 2006 to learn about things that Intuit was doing called Follow Me Home. How do you go crazy with respect to really getting into users’ heads? And I thought, that’s a really cool idea. I can just remember that example very specifically. We wanted to learn from Intuit and others, how do you do a Follow Me Home session? How do you actually work with someone, I don’t know if you’ve heard about that but you can go to their house and you can see, I want to watch you using internet services in your home. I want to see your home and I want to see how it fits into your life. And maybe you’re having an argument with a spouse on the side or some kids just got home and the TV is on, and where is the computer sitting? Is it in the kitchen, is it in the bedroom, and why do you put it in the bedroom? Space, is that it? We want to get into the deepest possible narrative behind the users’ use of our service. In order to understand their entire lives, their broader needs

David Wallerstein [28:51] – at the most fundamental level and then how internet services were playing into those needs. And we started having very difficult conversations with ourselves. If I skip forward a little bit, a few years down the road we built something called Avatars. And the Avatars service would grow for a while and then it would recede and have high churn rates and we’re kind of wondering why. And I think it was very important for us to ask these deeper questions like why do people really like Avatars? Because you could have a service that’s working that’s earning revenue and maybe getting a lot of recognition but even the product director, the person who came up with the product themselves, they weren’t really very clear why people liked it. They didn’t ask deep questions, they just kind of got lucky. People liked it and it kind of did new things and some things worked, some things didn’t. But we started going to a more fundamental level really in the mid-2000s. I think we always had the thinking going early on, but I think we’ve been getting better and better at these deeper, almost existential questions. When you say people like Avatars, it’s because they want to look better online. They’re like, well why do they want to look better online? Because they’re meeting other people. Why do they care about meeting other people? Because they want to make friends. Why do they want to make friends,

David Wallerstein [29:56] – just keep going down, down.

Anu Hariharan [29:56] – Ah, got it. Like the users in their desire as to what’s motivating

David Wallerstein [30:01] – Yeah, maybe they’re lonely, ultimately, or they want affirmation, everyone wants to feel appreciated and so if you came to that kind of conclusion, if that was the conclusion, everyone wants to feel appreciated, we’d say okay, interesting, how can we deliver a sense of appreciation to our users through our product? How can those values somehow be captured through the user interfaces and the structure of the product and maybe we don’t even get that right and maybe we were wrong about some of our conclusions, but we’re constantly trying to iterate at that.

Anu Hariharan [30:32] – What was the next big thing that came after Mobile QQ?

David Wallerstein [30:35] – Thank you so we did some of these services, I remember avatars probably came out around 2003, we built our portal around 2003. What we were trying to do, let me explain it again. I’ll get to the specifics, but at a strategic level, we wanted to offer, I thought about it in my mind anyways, as a spider web type configuration of value, here’s what it is. You have QQ at the center, then you have Mobile QQ here, you have Premium QQ here, now if we can add something else, let’s say it’s music, the question is, how can music not only add value between users in QQ but also add value to Mobile QQ, have a Premium QQ offering, like okay, if it’s Premium QQ, then maybe there’s a new album that’s going to come out next week that only Premium QQ users can listen to for like two weeks, something like that. We constantly find an opportunity and then how can the music service not just be about streaming music, but maybe the ringtones inside QQ, when you send someone a message, the notification could use the music service. Give us any kind of resource, and we’ll try to find the most efficient way to distribute it intelligently in different kinds of iterations and ways throughout the network and then you add something else, you have a fourth service and a fifth service and then you’re going back to the other ones and you’re trying to see how they’re all going to strengthen each other exponentially.

Anu Hariharan [31:53] – It’s like an interconnected network, you’re driving the value of all your services.

David Wallerstein [31:56] – That’s what we did as a company between users. You see how users are connected and each one might have 150 friends and then you get these amazing relationship grids between friends, but we also felt that way about the services and the value themselves. It’s just habitual thinking because we’re always thinking in that mode. If you add something new into the network and how can it basically, from a business perspective, from a value perspective, connect to all the other aspects of the service. What I found we did over time is we started to build these really intricate webs of product experiences that our competitors just weren’t doing. It’s hard to replicate and we thought, this would be very valuable to differentiate us from other typical instant messaging companies the more value added services we had around QQ and the more complex ways we could integrate them for user value, we felt like that would be very defendable and be very unique, versus other services where they might bring in music, but when another service brought in music, they might say click this button and stream the music. Okay, that’s cool, kind of sounds like iTunes, but could you do a little more.

Anu Hariharan [32:59] – You’re done after listening to the music.

David Wallerstein [33:00] – Yeah, how could you make that more interesting. We would be challenging ourselves to do that and working with those product managers in the music team to make sure they had that mentality, that they were pushing the boundaries to say how can I maybe work with another product team and where the executive team would often get involved because we have to do something other than just the general managers, what are executives supposed to do, we’re looking out for those opportunities. When are there disagreements? When is it the one team really wants another team to work with them but the other team isn’t willing to because of deadlines or they don’t like the idea? Our goal would be saying, reduce the friction and come to quicker decisions. Okay, you guys really should be working together, we’ve heard the arguments, work together kind of a thing. Or yeah this doesn’t make sense, okay we totally get it, back down kind of, how do you decide when to accelerate a certain kind of integration or to just let it go. We have sometimes some okay ideas ourselves. We like oh, we want the company to do this, sorry everyone, do this thing, but really driving that strategic integration between products, this was something that we established I think very early on, like 2002, 2003, we really started driving these integrations when we did our portal, I remember shortly after we had a CNN.com type news portal. We started doing these, what I thought were fantastic news updates in QQ, so when a major global event happened

David Wallerstein [34:29] – you would just get a popup on your desk from QQ. That was another great example of the integration that happened fairly shortly after and now I see in like iPhone, you get these news alerts and things like that, I was like oh, kind of reminded me of what we did back in 2003 with QQ.

Anu Hariharan [34:43] – Yeah almost 14 years earlier. That’s very unique what you mentioned, which is it was not just about building different products and even though it looks to the outside world that Tencent has a lot of things, it’s about that real integration across each of these products and services that increases the value.

David Wallerstein [34:59] – It’s like an ecosystem of value. The question would be, how can music fundamentally transform the whole QQ experience, top to bottom and other value added services that we have like the premium service, remember that example, I said okay, there’s new releases coming up, maybe there’s a concert coming to town but because we work with the music label, we can inform them of the concert and then also that premium group can be a helpful group for the music labels to work with too in some cases, so we’re like constantly trying to drive these webs of value in all these different ways. It becomes a thought process and an operating system for the company and I think we’ve become pretty good at it and it let us scale and scale, so now, if I just fast forward to WeChat, it’s really hard for people outside of China sometimes to understand WeChat. First of all it’s in Chinese, I understand, but it’s also a pretty complex product. There’s a lot of different things happening there.

Anu Hariharan [35:55] – Actually I had a question before you jump to WeChat, you started off as an IM service, QQ and Mobile and Premium, so why acquire WeChat?

David Wallerstein [36:03] – WeChat was developed internally, we acquired Foxmail, yeah Allen’s company I think it was around 2005 and he joined us and he worked in mail for many many years and then he had the idea for WeChat. I recall it being around 2010. He went for it and it was pretty successful right out the gate and we really wanted to foster a mobile first IM service even though QQ was very successful on mobile.

Anu Hariharan [36:29] – It started off as a desktop.

David Wallerstein [36:31] – Yeah but we had been doing mobile since I think late 2000. We had always built Mobile QQ for all the different operating systems, like Symbian or Java or whatever it was going to be, but we felt like, things were pivoting so much to mobile that we also had to have a mobile first messenger while still embracing QQ and QQ has a very healthy audience today.

Anu Hariharan [36:55] – That is something very unique to Tencent, because we had Yahoo! Messenger, we had AOL, but actually none of the PC messengers went to mobile first here, but Tencent was the first to do that.

David Wallerstein [37:06] – Yeah for us, we had to. It was the only way we could think of making money at scale back then and our users demanded it, they were on the move, they wanted to be able to text back and forth so we did that. But the WeChat point, we can talk about WeChat more, but I feel like just in a nutshell. As an executive team and as a company, we learned so much from building QQ over the years, but when we got to WeChat, it was a new platform but also had some great organic growth and all this really important core interaction around it. When it came time to building value added services around WeChat, it just came to us very naturally because we had just learned so much over a decade, probably like 12 years of learning by the time we got to WeChat and we had also been matured as people too before we were very focused on games and more like Avatar, like cute services and WeChat has plenty of that too but we also started thinking more about the economy, more about financial services, more about ecommerce, about how do you really transform a business or a hospital or a government using WeChat and I think we had so much experience with platform services and tying services together in a seamless way that when it came time to WeChat, it was like okay, good fresh platform, let’s get everything right this time, or let’s do some things that we couldn’t pull off the last time around in QQ, I feel like that was part of the thought process. Do you want me to talk a little bit about gaming?

Anu Hariharan [38:32] – Yeah I was wondering, how did Tencent decide to do gaming, outside of all the messengers.

David Wallerstein [38:37] – Yeah it’s a really good example for people to think about for us because the thing I love about the gaming case is that the first four years of our gaming attempts were characterized by utter failure.

Anu Hariharan [38:53] – Why did you decide to do gaming?

David Wallerstein [38:55] – Yeah so around 2003, what we call massive, multiplayer online games started becoming very popular in China, have you ever played World of Warcraft before?

Anu Hariharan [39:04] – I have heard about them.

David Wallerstein [39:05] – You get kind of really deep into this experience, it’s got a big software client, usually a couple gigabytes that you download and then it’s kind of this whole world. These kind of games were becoming very popular in China and we started thinking, it is possible that users like to interact with each other so much in these worlds, that they’re not going to want to interact via QQ anymore, this could be potentially like an existential threat to us. QQ was really text driven at the time, most of the interaction was in text. There was some voice, some video you could do, video instant messaging and things like that, but it was predominantly text and therefore, it’s pretty black and white. You would go into these worlds and you could feel like you’re really deeply interacting with someone. We felt like this is an existential threat to the company, we have to find ways to integrate QQ more with games or else we could just be like out of the picture, right? I think that was before we had the idea that this could possibly make money. It was more like, if we don’t do it, our users might just go into all these games and they’re like why do I even want to talk to someone in QQ when I can be dressed up as an avatar and I can have a deep, rich environmental experience, it’s a software environment. We started trying to license games and build games ourselves and pretty much everything we did for the first three or four years were spectacular failures.

Anu Hariharan [40:33] – I thought you were going to say were spectacular, but spectacular failures okay.

David Wallerstein [40:37] – Well whether or not we liked what we did doesn’t matter because the users didn’t, so that’s all that we can care about. That’s a very important thing for Tencent, I think we can pivot fast as a company because especially when we went into the gaming area, there’s a lot of artists and designers in games and they have something that they want to do. They want it to look a certain way, they want to have people experience a design a certain way and that’s their goal. For us, we’ve always been like, we want to find what users love, we want to find a gaming experience that they love, so if the colors need to change, if the artwork needs to change, if the design needs to change, great, users, we’ll show you a bunch of options, we’ll test those options, but show us the way. That’s kind of in the gaming world, it’s a different philosophy than some others that kind of have a top down, beautiful vision for an experience and then they have to realize it. We were always very practical, like oh that doesn’t work, let’s pivot it, no worries about it.

Anu Hariharan [41:26] – But you did try gaming for four years.

David Wallerstein [41:28] – Yeah, well what did work was our casual gaming experience. That’s really simple card games and things like that and we found quickly that that was a very nice complement to QQ because you’d be talking, we’d be chatting on QQ, hey dude, what’s up, yeah nothing much, he let’s go play a little pool, let’s go play some, whatever, blackjack, okay now we’ve found something more fun to do because typically we’d just be texting but then it’s like hey, I haven’t seen you for a while, let’s do something else in here, it gave the users a playground and added a depth to the interaction. But for a long time, that was the only thing we could claim that was working. I was very involved with our gaming strategy, particularly on the international front, so there’s nothing more exciting than going to a gaming company in the US and saying hey, we’d love for you to come to China, would you like to work with us and them saying like, no. There’s not going to be any market there, how big’s your market and we’d be like well, we think it’s going to be big, we’re not too sure yet exactly how fast it’ll take but let’s figure it out together and they’d be like yeah, I don’t think so. I was kind of, I had a frustrating period as a professional for a while, trying to find any Western companies to work with us. I love saying that because the moral of the story is, we’re the largest gaming company in the world, for quite some time now, I think it’s been at least five years, we’ve held that position. It’s kind of like wow, how quickly the world can change. Nothing new to Silicon Valley, but I lived through it.

Anu Hariharan [43:00] – At that time it was.

David Wallerstein [43:01] – What happened? Well we had all these licenses that didn’t go so great, games we built that didn’t go so great but we signed a game called Crossfire, it’s a first person shooter game okay you know like, shooting game and it just took off. When it took off, it started making a lot of money and that’s all most people need to see. They don’t want to hear your argument, they don’t want to hear your philosophy, the whole reason why QQ is amazing and China’s amazing, they just want to, show me the money, yeah it just took off and then we signed up another game called Dungeon and Fighter and that took off too, it did really well. I think with those two games, those were both licensed from Korea by the way, with those two games it became clear, okay Tencent’s a player. We hadn’t really become a leader yet, we became maybe number four, number five in the gaming industry, but it was clear there was something going on with our network and games and then these games just kept growing and they’re still very popular games. These are probably over 10 years old in the market, they’re still doing very well, they perform great.

Anu Hariharan [44:04] – That’s what’s really phenomenal about Tencent you’re at the core of it now, people recognize it as a gaming company yet you have this amazing product called WeChat which has actually got a lot of international attention over recent years and QQ is still strong and you have this integration of services that just increases, adds value to the user, so I think it’s very unique to see a company that was founded in 2000 or 2001 to constantly evolve as trends have changed.

David Wallerstein [44:30] – That’s what we do, but we still embrace the old stuff, QQ is still operating with many many hundreds of millions of users, it’s a little smaller than WeChat now I believe, but it’s not that much smaller.

Anu Hariharan [44:42] – It’s a little smaller, but not that much smaller because WeChat itself 890 MAUs, so it’s a little more now. Okay the last time I checked was two months ago.

David Wallerstein [44:50] – Yeah this isn’t that kind of discussion, but yeah we manage to, and we keep moving on, I think we have, I can’t even explain it sometimes. We do have this interesting ability to scale quickly, when we see a few games that are working, we can build a model for how we forecast the performance of a game, how we license a game, the templates, all that, the contracts and things like that and then we can just replicate it quickly.

Anu Hariharan [45:16] – Really well, at scale.

David Wallerstein [45:17] – Yeah because once our games became profitable, it’s like okay, let’s invest in great game licenses from around the world and then it’s just about the pipeline and the amazing thing about the China market, especially with respect to games if I think about it specifically is that there’s a lot of users there and a lot of users means there’s a lot of different needs for games and with haven’t found a situation yet where it feels like all the needs have been met, even though there’s big successful franchises and new things coming out all the time, there’s always a niche, those other five million or 10 million group of people that want a certain kind of experience that when you deliver it to them, there’s a good business there.

Anu Hariharan [45:54] – Switching gears a little bit, your current title is the Chief eXploration Officer. What does the Chief eXploration Officer do?

David Wallerstein [46:02] – Yes, it’s a good question. I wanted a title, I’ve been with the company for a long time, I wanted a title that deliberately is always going to make sense no matter what I’m doing and it can suit my needs whenever, I wanted it to be serious, but at the same time, I wanted it to be a crazy title deliberately. It actually started because I said I want to be called a C something, we had this discussion a few years ago, I was always Senior Executive Vice President, I thought no one thinks I’m a C level guy, this is really frustrating. I don’t care about titles at all, but I found other people cared, even inside the company they cared and I was always puzzled by that, so about two or three years ago I said okay, just give me some kind of C title, I said well what should that be? It should be like CX something, I said that’s it. The X, the X is cool, people like the X, I think it’s cool.

Anu Hariharan [46:55] – Yeah it’s really cool, it’s a cool title.

David Wallerstein [46:56] – It would be exploration, which is what I’ve always tried to do. I’ve really always wanted my role in Tencent to be going back to those days when I left Shenzhen right after our transaction with Tencent I became part of the executive team and I said okay, I’m moving to Silicon Valley, we’re only 45 people, we’re going to have 46 people now, one of them’s in Silicon Valley, we’re going to be a global company. We’re going to be a global company because we’re going to be part of Silicon Valley, we’re going to be working with all our peers here, we’re going to be exposed to technology trends, we’re going to be contributing, we are a global company from the early days and that was not in people’s minds, for a Shenzhen based company in 2001, not even sure if they’re going to survive or not, not even sure if they could handle the China market and feeling a little out gunned by the Beijing and Shanghai players because Shenzhen didn’t have a lot of technology, it’s like to say we’re going to be international, it was kind of a new idea. It was a new idea at the time. I’ve always tried to just, what I considered pushing the frontier at Tencent in any way, I always want to shake things up over there. Now, there got a point, 17 years now I’ve been with the company, about four or five years ago, one thing we talk about at Tencent is we want to use technology to improve people’s lives, we want to use the internet to improve people’s lives. Hopefully we’re doing some of that with everything we do. I personally always felt a little bit like there’s a lot more we can do.

David Wallerstein [48:22] – I think in some ways, we’ve become very adept at understanding people’s emotional needs, what the brain needs, emotion, entertainment, games, education, all that, music, art, all that kind of stuff, I think we lead in those spaces in China, but I was always thinking about our mission and looking at the entire human being. When you start thinking about the human being, a couple ideas really started to resonate with me and I couldn’t get them out of my head. One is that I want to see people living healthier lives, how can technology help every day individuals live healthier lives, I just felt like there’s so much happening with technology that can contribute to that and if we did it as a company, even if I’m driving some of this stuff on the cutting edge, we can’t be wrong. Even if we get it wrong, we can say we tried and I think that’s good for our users, it’s good for our employees, it’s a good use of some aspect of our profits. It’s always the right battle to be fighting. I felt, even though it’s risky, I can just push this forward and everyone better get out of my way kind of a thing. The other thing is, when you think about an individual though and you want to have them live healthier lives, you can understand their body, their blood, do they have cancer all those kind of things, but then you also have to think about the ecosystem that the individual’s living in and if you think about cancer for example, you have to be very sensitive about environmental circumstances. Air pollution water, contaminants in water, food,

David Wallerstein [49:55] – what are the causes of cancer, there’s so many of them that are traced to be somehow environmental in nature, so I started thinking more about ecosystem impacts on the individual and that’s how I really started thinking about this title and this role and trying to encourage the company to go in a very new direction, which is really thinking about how can we use technology to create a more resilient planet? I call it planetary resilience, it’s a bit of a mouthful, I want to find a better way to describe this quickly to people, it should be something that everyone’s talking about now. I started with these baseline concerns, based on things that I knew at the time. What I started doing more systematically with a small team that I have, I have what’s called an exploration team, based in Palo Alto.

Anu Hariharan [50:45] – How big is the team?

David Wallerstein [50:46] – It’s about five people. I believe small is beautiful and we have a lot of people at Tencent that can support us with any specific initiative, but at least for myself and working with at team every day, for me it has to be maybe no more than eight or something like that. We thought we would be like VC’s and VC’s look for great entrepreneurs and great technologies and great products and traction. I thought, we want to do that too, we love that discipline, it’s something that we feel like we know pretty well and we can do a good job at, you always can improve, but I thought we should do it with a twist. We spend about half our time roughly speaking, thinking about the problems in the world. That might be a little different and not really thinking about markets, that’s different than saying, where are the markets, where’s the next movie ticket you can sell or something like that. I’m talking about problems. We try to forecast what are the biggest challenges the world is going to face in the coming years? As a strategic directory and then you’ll start looking at factors when you’re asked those questions, baseline factors, like what does population growth look like on earth, human beings, when I invested in Tencent in 2000, 2001, the planet had 6.1 billion people. It was a different planet then, now we’re at 7.4, 7.5 roughly in just that period of time and then the forecast, which looks pretty likely to be realized, will be to add another billion people in 13 years, so if you can just track

David Wallerstein [52:09] – and understand these types of fundamental trajectories, it gives you a lot of power to forecast the future because you know, all these humans, we’re all going to need to eat, we need some fresh water, we like when our air’s clean, we need to get around, we need energy and we want to actually distribute these benefits to all, even if in an undistributed world there’s going to be a lot of demands for these resources, let alone improving the world, when you start thinking, that’s what we really do as the CXO, as the Chief eXploration Officer in our team, we spend a lot of time thinking about problems on one side. Then on the other side, we’re kind of acting like a VC but with a little bit of a twist, so we’re interested in all the latest trends and we think what Tencent is well suited to do is work with new technologies, things like artificial intelligence, new types of sensors like satellites or there’s so many kinds of sensors coming out now, genetic engineering, advances in energy or transportation, so we’re interested in all those things but we want to see those technologies, when our team works on those things, we want to see those technologies being applied to the world’s biggest challenges. It’s taken us in all these new directions which makes every day very exciting. We started just thinking about agriculture maybe a year or two ago and not knowing anything about agriculture, but just when you learn about the problems and the stresses on a planetary scale let alone local scale for agriculture,

David Wallerstein [53:35] – it’s just completely amazing and then you discover that the agriculture industry is fairly antiquated and there’s a lot of trends that suggest that world agriculture and food security is going to get more difficult over time, whether it’s like problems with fertilizer, topsoil erosion, water scarcity, just loss of land, arable land, things like this, you can just go on and on. The world’s addiction to meat, I can go on, I can get a little political about it. We’ll start with a problem and we’ll look for companies that we think are going to tackle that thesis and we might meet with dozens, hundreds of companies that don’t really do it for us, we’ll meet with a lot of companies and then finally, we hope we can find as many as possible but finally we’ll find a few that can work out and then we just want to keep building on our experience and what we’ve learned and what we’re continuing to learn in these areas, so it’s an area where I think by focusing on the problems, we’re very willing to go into an area like agriculture where we knew nothing about it and we’re applying these skills, I feel like at least myself, I was applying the same skills when we were trying to get into gaming in 2003, so I think I left this out of the story about gaming, but when we started doing gaming, we were complete nobodies, we didn’t know what questions to ask, we didn’t know how a game was built, I didn’t know that you had to have art or designers, I thought this was really cool, I’m kind of an artistic person myself,

David Wallerstein [55:05] – I get to work with artists now in the gaming world, whoa I didn’t even think about that when we started getting into games, and it’s amazing that with a lot of determination, you can learn a lot in a short amount of time, I think to get to 50%, it can be pretty quick and then getting the last 50% is why you have to have so much mastery and artistry and going to school and whatever you have to do, but getting up to speed half the way, you know for a lot of areas can be pretty quickly if you just want to do it and I think this is a really important skill set that Tencent has across the board is that we’ve been down this road so many times, going into new business areas like gaming and different types of gaming, that when we do the next one, a lot of the management in the company, a lot of our executives, they have experience doing the exact same thing so we kind of all share this operating system, like oh you’re doing agriculture now, what are the key questions to ask and unit economics and all the, I’m not saying, it takes time to get good at it but at least in terms of a willingness and a culture of being excited and curious to get up to speed on a lot of issues quickly, I think we have that in the company, so I think everyone’s very supportive.

Anu Hariharan [56:09] – It ties together. That has been the theme of Tencent it is not known as one company, it is a company which does really good things in many areas and now here you are, you have an exploration team trying to solve real big problems for human life.

David Wallerstein [56:26] – And what I want to do in Tencent with this position is say people in Tencent start thinking yeah, we should be doing stuff in agriculture. We’ve got our cloud, we’ve got WeChat, so many farmers are using WeChat, why didn’t we do that earlier, I want to be catalyzing those moments and finding those opportunities where these things that seem to be far off actually can rather quickly merge into the broader ecosystem and become part of the ecosystem, but the intention of why we’re doing it is very important. We’re not just seeking profits, although I think agriculture is very profitable if you’re playing in it in the right way, that’s why everyone’s getting fed for the most part at least, for the most part. That’s really the idea there in what we’re doing. We act as a VC, we have about roughly 70 companies that I and my team are managing directly, we have more that we manage with other teams and then we also have other Tencent teams doing investments in other areas, sometimes also in these resilience related areas. I tend to think my team is driving most of it but I love it when other teams at Tencent also do these investments, especially in China and yeah, there’s quite a few teams at Tencent doing investing, by the way, it’s not just only my team, we have what we call the M&A team that are also, that’s just the name from the past, they’re also doing investments so a company could get contacted by one of many different investment teams at Tencent and that’s also the philosophy of the company, that we want to be very market driven,

David Wallerstein [57:55] – we want to make sure that we have multiple teams approaching multiple strategies in an area, like we have QQ and WeChat and we have multiple teams doing investments for different reasons and a different team might look at it from a different perspective and either get excited or be less excited but in a way, it allows our executive team to have a lot of different strategies in play in the market and that way we have a lot of optionality.

Anu Hariharan [58:21] – Kind of class it all together.

David Wallerstein [58:23] – In what is actually going to happen going forward.

Anu Hariharan [58:25] – Thank you so much David.

David Wallerstein [58:26] – Sure thanks for having me.

Anu Hariharan [58:28] – Thanks for joining us for the Q&A and really appreciate you speaking to Y Combinator.

Craig Cannon [58:34] – Alright, thanks for listening. As always, the video and transcript are at blog.ycombinator.com and if you have a second, please subscribe and review the show. Alright, see you next week.