- David Wallerstein, Chief Exploration Officer at Tencent, joined the company in 2000 when it had 45 employees and now has about 38,000.
- Tencent is one of the world's largest internet companies and the largest gaming company.
- David was interested in China's growth and wanted to integrate the Chinese economy with the rest of the world.
- He initially proposed to acquire Tencent, but they politely declined.
- Later, NASPERS led the investment in Tencent and David helped bring value to the company from the outside world.
- He moved to the US and became an employee of Tencent in 2001.
- The relationship between NASPERS and Tencent has remained strong, with David still on the executive team and Charles Searle on the board.
- This model of a nuanced shareholder relationship could be an interesting outcome for founders.

- The speaker discusses the success of Tencent's business model and the difficulty in finding teams willing to adopt it.
- The profitability of a company is important for valuing it based on profits rather than just user growth.
- Tencent started as a PC-based instant messaging service called QQ, which became popular in China.
- The company expanded its product offerings and focused on innovation to anticipate user needs.
- Tencent monetized its services through value-added subscriptions, with users paying directly for services rather than relying heavily on ads.
- Premium QQ was a successful service that offered additional features, including the ability to choose a personalized QQ number.
- The speaker emphasizes the importance of understanding the Chinese market, such as the significance of lucky numbers like eight.

- The speaker discusses the importance of having a premium service to establish oneself as a high roller in chat rooms.
- Dating was a popular activity on social networks like QQ and Yahoo Messenger.
- The company focused on building out premium services to reduce churn and drive monetization.
- The fear of competition from companies like Microsoft led to a focus on localization and value-added services.
- The founders of Tencent were deeply interested in understanding their users and meeting their needs.
- The company filled a gap in private media and services in China.
- The company used various methodologies, including learning from overseas companies, to understand users' needs.
- They wanted to understand the deeper reasons why users liked certain features and how they fit into their lives.
- The company asked existential questions to better understand users' desires and deliver a sense of appreciation through their products.

- The company wanted to deliver a sense of appreciation to users through their product
- They constantly iterated and found ways to integrate different services to strengthen each other
- They built intricate webs of product experiences that set them apart from competitors
- They focused on strategic integration between products to create an ecosystem of value
- WeChat was developed internally and allowed for even more integration and value-added services
- Tencent was the first to prioritize mobile-first messaging with QQ and WeChat
- They learned from their experience with QQ and applied it to WeChat, expanding into financial services, e-commerce, and more
- Their initial attempts at gaming failed, but they recognized the potential threat and found ways to integrate QQ with games

- Tencent initially focused on creating a software environment for users to have rich gaming experiences, but their early attempts at game development were failures.
- The company eventually found success with casual gaming experiences, which complemented their messaging platform QQ.
- The success of games like Crossfire and Dungeon Fighter established Tencent as a player in the gaming industry.
- Tencent's ability to scale quickly and meet the diverse needs of Chinese gamers has contributed to their success.
- The Chief Exploration Officer title was chosen to reflect the company's global aspirations and the desire to push boundaries.
- Tencent aims to use technology to improve people's lives, particularly in the areas of health and environmental impact.

The Chief Exploration Officer at Tencent discusses their team's approach to using technology to address global challenges. They focus on identifying problems and finding companies that can tackle these issues, with a particular interest in agriculture. The team acts like a venture capitalist, but with a twist, as they prioritize solving problems rather than solely seeking profits. They manage around 70 companies directly and collaborate with other investment teams within Tencent. The company values market-driven approaches and multiple strategies to have optionality in the market.

- David Wallerstein, Chief Exploration Officer at Tencent, joined the company in 2000 and now it is one of the world's largest internet companies and gaming company with about 38,000 employees.
- Tencent's success is attributed to its focus on understanding the Chinese market, integrating services, and creating an ecosystem of value.
- The company monetizes its services through value-added subscriptions and prioritizes profitability over user growth.
- Tencent's success in the gaming industry came after initial failures, but they found success with casual gaming experiences that complemented their messaging platform.
- Tencent aims to use technology to improve people's lives, particularly in the areas of health and environmental impact. They focus on identifying problems and collaborating with companies to solve them.

David Wallerstein is Tencent's Chief eXploration Officer - https://www.linkedin.com/in/david-w-9ba600/

Anu Hariharan is a Partner at YC - https://twitter.com/anuhariharan

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.

Yeah, we'll have to check with our head of HR.

Well, it is clearly 1 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.

So thank you, David, for joining us today.

And also for speaking at our private event.

That's a very long answer, and I'm gonna try to make it short.

I was always pretty deeply concerned about the world and trends in the world.

And I felt that going back to, I guess, the early 1990s 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, or at least myself, the way I viewed the world.

It was kind of like on the side, and other countries like Japan were a much bigger deal.

I actually had spent time living in Japan.

And yeah, I was a Japanese person basically for the time I lived there.

I've lived in Japan on and off for about 4 years.

And that made me very comfortable 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 kind of redeployed the skillset that I had developed to kind of survive in Japan as a kid, which is like, you just have to learn the language super fast.

How, you know, and I know you also talked about NASPERS sort of exploring, in fact, potentially acquiring Tencent, you know, pre-2001.

So talk about how did you first come across.

Okay, yeah, so I was doing management consulting in China.

So take all that background I told you about, and I ended up having a passion for getting foreign companies into China.

Again, oh, the theme I was talking about with China is going to be very important for the rest of the world.

I was thinking the theme in my mind, really from the mid-90s, was how do we help China integrate to the rest of the world?

All the great international institutions out there work for China as they do America and the other countries in China is just part of our global community, right, in a very proactive way.

thought the best way to do that would be to integrate the Chinese economy with the rest of the world and to accelerate that.

So I was very interested in the 90s to bring US companies to China.

I was working as a management consultant, predominantly for like telecommunications and what we called IT related issues back to this 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 like 20-something, 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.

Maybe it was like a hundred million dollars or something, which was a lot of money back then and still a lot of money today, right?

So we started working together to invest in different companies in China, social networking companies, we didn't call them that.

They were like dating sites back then, or chat sites, 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 seem to want to spend a lot of time there and that made a lot of sense.

It was more like it wasn't a trend back then.

Yeah, it was about page views and I was always interested to find engagement, like deep user engagement.

But something happened when I was doing this kind of M&A investment type work for NASPRESS 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 1 day it kind of hit me saying, wait a second, this seems really important.

And instead I could see that like the whole Chinese internet seemed to be kind of connected or somehow like structured by everyone's use of this tool.

We later changed our name to QQ in the year 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, and we're having a great life there, partying at night and stuff like that, feeling really good about ourselves and and we didn't really tend to get out of those cities very often.

So I remember kind of feeling proud of myself getting on a plane to go see Pony Ma, Ma Huateng, our co-founder, and there's a team of 4, 5 co-founders that started Tencent and running the company as the executive team.

At the time I went down to Shenzhen to go visit them and that's where the whole relationship with Tencent started is middle of around June 2000.

I went down there to propose to Tencent that we should try to acquire them.

Yeah, well, I had a lot of different kinds of meetings over the years in China, being a consultant, and 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 gonna work out.

I'd 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 wanna just have the meeting end on a sour note, so.

You actually ended up, like NASPERS led the investment in Tencent a year or 2 later.

Ultimately, I felt like we had to demonstrate that we could bring some unique value.

So I started, well, first of all, I invited everyone to dinner and we proceeded to get, I recall things, we got pretty drunk that night.

I do not recommend this for the children at home, but it did happen.

And then the next morning I went back to the company just to see if there's anything we could do together.

And I remember bringing in some ideas from the US, from the foreign market, that seemed actually pretty interesting.

I think the way to actually have a relationship here is to see what kind of value we could bring to Tencent from the outside world, and how could we help Tencent with expansion.

Even from those early days, like mid-2000, it was pretty clear 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 1 was I said I'm moving to the US.

So we're gonna 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 may 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.

And at the same time, I said, I'll be back in 2 weeks.

And I did that for until maybe a couple years ago, I was going back and forth between the US and China.

When did you become an employee of Tesla?

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 as if, like I know this deal is gonna 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 the company.

And therefore it 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 worked with me on the deal, Charles Searle, he went on the board of Tencent.

We started the deal together 17 years ago.

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 of 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.

And you can even ask for more shares over time, like more options and things like that.

And we always thought this would be a very common model in business, and it turned out that there aren't so many of these types of deals being done.

Yeah, 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 with companies.

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 like just only user growth or some other metric.

So, you know, it works better with profitable companies, but

So you joined the company in 2001, pretty much when they had only 45 employees and maybe just QQ.

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 1 of the best messengers.

Just 1 of many teams, but it's an important 1.

So talk about, you know, it's broad from 2000 to 2017 is almost like, you know, I'm talking about 17 years, but how did you, what, you know, how did Tencent decide to evolve from QQ to all these other products, and what sort of motivated the decision-making to move to these areas?

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.

So when I first met the company in 2000, we had a couple of key things going for us.

1 was pretty much most all of the Chinese internet was inside QQ.

So the strategic question for the company and us as investors, myself, you know, getting involved would be like, okay, we seem to have pretty close to a hundred percent market penetration.

But we were starting kind of with the wind at our backs.

And I think that situation was true roughly from early 2000.

The company, by the way, QQ started in February, 1999.

And QQ just for the audience, is it just like

Well, we started as a PC-based instant messaging service.

So 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 they'll say it's the Chinese version of ICQ or AIM or MSN Messenger, Yahoo Messenger.

So Yahoo Messenger is the Yahoo version of ICQ, I guess, but it was the IM client.

And so that was really, 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 you know at the end of their session doing their stuff in the internet cafe they would log off QQ.

So our average usage times, the second factor, first was like having this ubiquity in the market, like almost everyone using it.

The second thing was, the users tend to stay in about 4 hours a day.

Like an average aggregated time for a user.

And so we started thinking, okay, Things could go wrong, but so far they're going really well.

Almost all users are in here 4 hours a day.

a day because they're chatting with someone?

Yeah, they're logged in and QQ did 2 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.

So if you're offline, your avatar would be black and white.

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 if someone there or not.

And then you can start adding subfields to presence, like you could add a little, like a tweet.

Like, I'm really sad today, I'm really happy today.

You know, like It's kind of like the precursor to Twitter and all that kind of stuff, bundled in with your messaging.

And we felt pretty early on, the answer was like, well, we have to keep innovating and 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.

So you could send a message between your PC to a mobile user and back and forth.

To enable that service on your mobile phone, a mobile phone user would have to pay us 5 RMB a month, about 60 cents.

So if you didn't want it, then who cares, you don't have it.

But if you wanted to be able to on the go with your SMS back to there, it was all feature phones, it wasn't smartphones.

If you wanted to be able to text back and forth to 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.

So 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.

So this is pretty much the time when NASPERS closed the deal.

They're closing a deal on a company that's profitable, cashflow positive, based on rolling out these mobile QQ services across the country.

And we would bring the service to maybe Guangdong and it would have nice growth.

Then we'd bring it to like another province like Hunan and we're saying, okay, what's going to happen in Hunan?

And the next day it's like, ooh, you know, get a big explosion of users.

And it's like, great, now the revenue is coming in.

And then it became really a battle in the first few 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.

So we had cash, we had profitability, we had this engagement with users, we had the 4 hours roughly plus minus on average, and logged into QQ.

So, and 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 kind of always on the desktop somewhere.

So we felt like we had this latent opportunity.

So we started to do more experimentation to drive products for our users, both for user value perspectives and also like we had to make money because, okay, something to clarify, very different than 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 their messaging experience.

So they would go through great lengths to develop software and these kind of hacks so they wouldn't have to see the ads in the software.

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 at it.

We have different kinds of inventory today, but the ads and the messaging window was never really a viable option for us.

Unlike our friends at maybe like Google or other companies, you know, they

They just driven these massive businesses.

Right, so I want to make that clear because Tencent historically, like the rule of thumb, things are changing over time.

We've traditionally made 90% of our revenues.

That's like 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.

Right, so starting with the Mobile QQ service, the 5 RMB a month.

So, you know, we'll have very, you know, hopefully strong, dedicated product teams thinking about nothing other than, how can I get users to convert to mobile QQ?

And these are subscription services, so you have to keep your churn rate very low.

So 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

That was the first major value added service of Tencent.

And we launched something around the same time, which also grew pretty significantly, would be kind of like our number 2 big service, which we call Premium QQ.

So I was always kind of dumbfounded that we didn't really see many US companies build, at least our peers in social networking, build like a premium version of our service, especially when it's been so successful and so important to our product strategy.

Premium QQ is kind of like how it sounds.

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 could choose your own QQ number.

The QQ number before was your identifier.

We didn't use email identifiers, we used an actual number.

And 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, but we always thought maybe the QQ number is their telecom number, the future, and it'll just map really nicely with the switches in China.

It never really took off, but that was like the thinking, like numbers are better than names

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.

So if you're gonna deal with China, remember that.

If you got some eights in your phone, it's a good thing to

It means fa, to get rich, I think, you know, like prosperity.

So if you're a user and you wanna kind of stand out from the crowd.

I mean, 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, and you kind of quickly establish yourself as a bit of a high roller.

And you've kind of emerged from the crowd.

So 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 there today.

That's true for most social networks, even in the US too.

I mean, I think when Yahoo Messenger and other instant messengers that launched, I mean, there were rooms that were really dedicated, chat rooms dedicated for dating.

I'll definitely say 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 the case.

So if you can kind of 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.

I know storage became less of a big deal with Gmail and all those things later on.

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Tencent's Chief eXploration Officer, David Wallerstein on WeChat, QQ, and Gaming