The Chinese unicorn ByteDance has become the world’s largest internet startup after recently closing a $3 billion round of funding on October 25th. Backed by the Softbank Group, KKR, General Atlantic and China-based investment firm Primavera, the company is now valued at $75 billion — surpassing Uber’s current valuation at $72 billion, according to CB Insights. Launched in 2012, ByteDance is a Chinese internet technology company that owns a number of machine learning based-social media apps such as Toutiao, a news aggregator app, and Duoyin, a platform that allows users to record and share short videos.
According to Bloomberg, the company made $2.5 billion in revenue last year. Like most startups, it is not yet profitable. But what makes ByteDance such a promising investment is its ability to capitalize on its leading AI technologies and unrivaled user base to outpace competitors and create sustainable revenue-generating and user acquisition opportunities.
The valuation of any internet company is almost entirely dependent on its users. ByteDance, needless to say, has an immense user base that spans from news to entertainment and now to social commerce with the company’s recent launch of several e-commerce apps. Its expansion into other sectors not only provides a diverse customer base but also high growth potential with opportunities to leverage its massive user base to direct more and faster traffic across its portfolio of apps. Moreover, ByteDance’s access to such large volumes of user data is a key competitive advantage against other social media apps. Toutiao, which uses AI-based algorithms to curate personalized news feeds for each user, currently has over 120 million daily users and 268 million active users as of August, more than 5 times than that of Sina, a top news site in China. ByteDance also runs the short video platform TikTok, which was the world’s most downloaded app in the first quarter. TikTok has already surpassed the 500 million mark for monthly active users. Few apps reach such massive scale, especially in such a short time.
Finally, ByteDance’s inherent quality and design of its core offerings coupled with its sustainable business model generate a self-fulfilling virtuous cycle of a “winner takes all” effect that ensures long-term profitability for the company. At the core of its business, ByteDance understands its customer’s psychology. The app is engineered for immediate and maximum addictiveness, with the short videos highly conducive to channel-surfing and full-screen videos blocking the clock. As ByteDance’s user base grows, data increases which allows ByteDance to provide more targeted, differentiated services to each user, ultimately creating more value per user and increasing their stickiness to ByteDance’s brand. Similar to Google’s model, the more users Bytedance acquires, the greater value its platform generates, creating higher barriers for other competitors to replicate comparable product offerings at the same quality. This virtuous cycle enables ByteDance to not only obtain high user acquisition rates but high user retention rates.
With its diverse online properties and continuously expanding user base, ByteDance can direct user traffic among its own apps (e.g. Toutiao refers viewers to any new apps ByteDance introduces by strategically locating those apps where their target users will most likely click on). As a result of the native synergies among its own online properties, ByteDance will be able to monetize through advertising and online shopping opportunities to a degree that will accelerate and outpace most competitors.
However, these investment merits are not without risks. The biggest risks that ByteDance face arise from the policy side. Given the tightening of China’s media environment, ByteDance will have to carefully navigate those regulations if it seeks to expand, especially with the backlash it has received from Chinese authorities for disseminating controversial content. ByteDance’s Duoyin app has been accused for inadequate protection of users after reports revealed viewers sustaining serious injuries by imitating the platform’s videos. Earlier this year, it was forced to shut down Neihan Duanzi, a popular joke-sharing app with 20 million viewers after authorities deemed content to be inappropriate. These risks will be somewhat mitigated by ByteDance’s recent measures of enhanced privacy settings, parental controls and a risk warning system. However, with regulatory restrictions and censorship comes content limitations and increased costs, and thus, limitations on ByteDance’s growth potential and profitability.
Finally, ByteDance faces competition from giants that could choke ByteDance’s growth. As ByteDance enters e-commerce and social networking, it competes head to head with established giants like Alibaba and Tencent who have greater financial resources and larger user bases. Nonetheless, ByteDance’s expanding user base and powerful AI technology still allows them to remain competitive even among these large industry players, and with continual R&D investment and targeted advertising, ByteDance will continue to grow and increase its market share.