This tea talk meeting started with Zsquare sharing their reflections on "Crossing the Chasm," followed by a divergent discussion among everyone regarding its implications for investment methods and several case studies.
Cong:
The key lesson from this book is that if we can identify companies that have the potential to break through the niche market and enter the mainstream market, there are significant investment opportunities behind them. There are many examples, such as Lululemon, which started by making yoga apparel. Initially, its value was easily underestimated, as it was perceived to be limited to the yoga apparel market, which was considered small. However, if we can recognize the opportunity for Lululemon to break out of the niche market and believe that it can succeed not only in the yoga apparel industry but also expand its advantages to other sports markets, everyday leisurewear, and even work settings, then it represents a great investment opportunity. Tesla is another similar case. Additionally, the currently popular made-to-order new-style tea beverages may also be a similar situation. Most popular brands today have gone through a stage of crossing the chasm. If we can identify this ability, it represents significant investment potential. Our investment framework is based on buying the Consistency of these leaders. Before breaking through, they already have leadership, and after breaking through, they have a larger reach to people outside their circle, and their advantages can be sustained.
Let's think about other examples of crossing the chasm and what important factors can be used as criteria for determining whether a company can break through.
Zsquare：
Crossing the chasm and entering the mainstream market depends on whether the boundaries can continue to expand. Bilibili (B站) is an example. It started with content related to the "ACG" (anime, comics, and games) subculture, but if it can expand its boundaries, today it covers not only anime and comics but also provides content on learning English, fitness, and more.
Cong：
"Crossing the Chasm" is essentially a book about sociology and psychology, discussing how to create and spread influence. People tend to conform, and creating influence depends on achieving social proof.
Zsquare：
In that case, Canada Goose also fits this concept. Initially, it was worn by skiers, but when celebrities started wearing it, people all over the world began to follow, creating a KOL effect.
Cong：
It's not just about KOLs because the general public tends to look up to KOLs without necessarily following them. For example, people may be amazed by extreme athletes' incredible performances, such as free solo climber Alex conquering El Capitan, but they may still feel that it's too far removed from their own lives and not relevant. Another example is when Tesla had only Model S and Model X, many KOLs recommended them, but the general public may have thought that these were recommendations from technology enthusiasts or wealthy individuals and not relevant to their own lives. What really drives the masses to follow is when regular people around them are influenced. The social proof provided by those around them has a significant impact. Taking Tesla as an example, the Model 3 was the key factor that helped Tesla break through the niche market and enter the mainstream market. The social proof achieved by the Model 3 mainly came from people around the target audience. For example, if I'm not a fan of anime, recommendations from anime KOLs would be irrelevant to me. However, if people around me who are similar to me find interesting videos on Bilibili and become fascinated by them, their influence on me would be significant.
C：
I want to reflect on my understanding of "Crossing the Chasm." Firstly, the book provides insights into our investment approach. Why do we choose to invest in companies from stage 1 to stage 10 instead of from stage 0 to stage 1, even though the latter could also be a significant investment opportunity? The reason is that after reaching stage 1, it is unclear whether it can reach stage 10 — there is a chasm in between. Staying in stage 1 is not safe. If we invest in companies at stage 0 to stage 1, they often enjoy high valuations due to short-term explosive growth and long-term significant market potential. However, if they cannot cross the chasm (in reality, many companies fail to do so), and they cannot stay in stage 1, it means that their fundamentals do not meet expectations, and their valuations will significantly decrease. Such investments carry high potential returns but also face a significant probability of potential losses. Therefore, we choose to invest in companies from stage 1 to stage 10. Secondly, the book analyzes the formation of the chasm and the logic behind why staying in stage 1 is not feasible. These insights are valuable. The formation of the chasm is primarily due to early market users' inability to influence mainstream market users. Early market users are often early adopters and visionaries who focus on whether the product/service represents a long-term direction and the technological content. In contrast, mainstream market users tend to be conservative and prioritize avoiding risks, practicality, and cost-effectiveness. The perspectives of these two groups of users are completely different. The influence of early market users on the product/service recommendation does not reach the conservative user group, making it difficult to replicate early market success in the mainstream market. Furthermore, since early market users are exploratory, their loyalty is low, and if a competitor offers a novel product/service, they are likely to try it. The early market's size is not sufficient to provide scale protection as a competitive advantage. Therefore, once a company fails to cross the chasm and enter the stage from 1 to 10, it will face challenges to maintain its position in the original market.
Lastly, the book provides methods for crossing the chasm, and these methods can also help us identify which companies are likely to cross the chasm. The first method is to have a point of entry where advantages can be established (become the leader in a specific segment) to convince the conservative mainstream user group. At the same time, this point of entry can be used to replicate capabilities and expand into a broad market. The second method is when the product/service provided is not the final product, but rather a part of a comprehensive solution or where the advantages are reflected in a specific part of the comprehensive solution. All other aspects of the solution should not have weaknesses; otherwise, it will not be able to open up the mainstream market.
Lastly, these points reminded me of two examples that are not directly related to "crossing the chasm," but I would like to share them. One example is Apple computers. Although it was initially a leader in personal computers, it quickly declined in the late 1980s because, as a final product, although it had strong operating systems, design, and software, it had a clear weakness in chips, which failed to impress the mainstream user group. Later, Apple focused on its strengths and switched to Intel chips and made its operating system compatible with Microsoft, regaining lost ground and dominating the high-end personal computer market, with a significant share of industry profits. Another example is Vipshop (唯品会). Although it had significant advantages in providing discounted branded products for female users, it lost market share for a period from 2016 because it handled its own logistics and distribution. On one hand, it lacked the scale effect to compete with socialized logistics, and on the other hand, it consumed resources that could have been used to improve user experience and customer acquisition. Now, after selling its logistics to a third-party service and relying on third-party logistics, it has significantly reduced costs per order and improved its operations.
Cong：
Indeed, it's not a very typical example of "crossing the chasm," but the case of Vipshop is similar to that of AMD. In the past, they were competing with Intel on both ends, but once they addressed their process deficiencies, their designs no longer had disadvantages. Similarly, after Vipshop handed over its delivery to SF Express, the cost per order decreased significantly.
H：
I had a discussion with investment friends about e-commerce, and we mentioned that Taobao was 1.0, Pinduoduo (PDD) was 2.0, and community e-commerce is 3.0. Handling excess inventory is a particularly good market, but Vipshop seems to be more like a 2.0 stage. Community leaders, known as "团长" in Chinese, are opinion leaders in their respective areas. They efficiently handle excess inventory, and all the excess products are shared within the community, quickly leading to sales.
Cong：
Effective traffic distribution needs to address the issue of trust. Community e-commerce solves this problem by leveraging the familiarity and relationships within a neighborhood. However, VIPS operates on a different logic, where a large group of people not only seeks affordability but also values brand authenticity and discounts. It aims to fulfill the "good value for money" aspect of the "multi-quick-good-cheap" equation. In a community setting, the SKU (stock keeping unit) range is limited and cannot be expanded indefinitely. Additionally, there is a difference in consumer frequency between buying groceries (a high-frequency demand that occurs daily) and buying clothing. The former can leverage the aggregation of community demand to achieve a certain scale, while the latter faces limitations. Moreover, it is highly likely that residents within a small community have similar clothing preferences.
H：
That's a valid point. Clothing tends to be more uniform within a small community.
Zsquare：
H, how do you assess projects in the primary market? How do you determine if a company that initially targets a small market can become significant?
H：
Assessing projects in the primary market is a probabilistic issue, and it doesn't involve making deterministic judgments. The first step is to determine whether the product/service offered by the target company is a more efficient solution. This applies to both primary and secondary projects. For example, when evaluating Tesla in its early stages, we looked at whether electric vehicles were a more efficient mode of transportation compared to traditional cars. At that time, we believed that electric vehicles were more efficient in terms of energy consumption and user cost experience; it just required time to prove it. However, determining which specific company will succeed is a probabilistic issue. In our previous logic, we primarily assessed the founders' abilities and perceived which teams had stronger execution capabilities, then tracked their progress. Now, we hope to establish a better methodology that allows us to observe and assess projects in stages, rather than waiting until a certain point where self-validation occurs. Especially in today's highly efficient capital market, if something has already been proven, we can only chase it. If we can make stage-based predictions, we can gain an advantage in primary investments. The book "Crossing the Chasm" provides some methods in this regard.
Zsquare：
Have you ever encountered a situation where you thought the team wasn't good, but it turned out that you were wrong?
H：
Yes, it happens. We need to optimize our methodology, but our methodology is primarily focused on excluding obvious failures in the process of judging who can succeed. It is difficult to prove that something will succeed, but it is easier to determine what will not. If we cannot even do that, then we shouldn't be in this business. Overall, we aim to ensure that the things we judge as wrong have a high probability of failure, while the things we judge as correct are covered by odds. As Charlie Munger once said, you need to know where others have failed and avoid going there, but it's impossible to determine where the right place is.
Zsquare:
What are your thoughts on the new-style tea beverage industry?
H：
When any consumer product becomes a consumption scene, it becomes worth investing in, and it's not just about product innovation. For tea beverages, it has reached a stage where it is a consumable category worth investing in. As for which brand is better, you can look into it. Apart from considering positioning, team, and data, when I wasn't so sure before, I visited a few locations, such as a store in a software park where Starbucks and Heytea were sold together. In a shopping mall, it's hard to distinguish how many customers were brought by the mall's own traffic. However, after the store had been open for a year, there were hardly any external customers, mostly office workers. In that software park, Heytea's customer flow far exceeded that of Starbucks.
C：
I agree with H's point of view. When people drink new-style tea beverages like Heytea, it's not just about having a drink or the taste. This reminds me of the consumption scene of Coca-Cola. Back then, during the transition from an agricultural society to an industrial society in the late 19th century in the United States, rapid industrialization led to a widespread occurrence of neurasthenia. Coca-Cola was initially used as a secret formula to relieve headaches. New-style tea beverages have a similar meaning now. The fast pace of urban life and working until the afternoon can be mentally exhausting, so people need a cup of tea to heal and soothe their emotions, to continue their struggle. For example, many consumption scenes for new-style tea beverages are afternoon tea scenes, and many times it's an office gathering to drink together. In such situations, it not only develops a habit of drinking, but also forms a consensus network effect because everyone needs to choose a new-style tea beverage that they all think is good.
Cong：
There are two major considerations for new-style tea beverage companies: 1) Whether the category of new-style tea beverages has already crossed the chasm; 2) Whether there can be a company that can rival Starbucks in terms of market dominance. In terms of global chain coffee brands, Starbucks is far ahead of others, and its success is not just about offering products but also about creating a specific scene and occupying a significant share of consumers' minds. What is the landscape for tea beverages? If the demand is primarily driven by novelty and taste preferences that continuously change, then the landscape is likely to be comprised of multiple companies that are relatively dispersed. However, if the consumption is driven by scene-based needs such as emotional healing, then the landscape would be different, and it could potentially be dominated by one or two major players.
C：
I tend to agree with the idea of a Starbucks-like situation in the tea beverage industry. Firstly, as H mentioned, it is a consumption scene where people feel exhausted and stressed after a day's work and need a drink. The taste may have some memorable aspects, but the habit of drinking is more important. Secondly, because many people gather to drink tea, there is a need for consensus and a network effect that can be easily formed. Thirdly, as new-style tea beverages are made fresh in stores, there is a channel occupancy logic, and dominant brands have advantages in securing prime locations in shopping malls and office buildings. They also have more stores, making it easier to reach consumers. This is similar to Coca-Cola's situation in the early days when it was sold in beverage shops. Coca-Cola had a significant advantage in the beverage shop distribution channel, which made it more accessible to consumers. Therefore, new-style tea beverage consumption is likely to become a habitual consumption pattern, and with the network effect of consensus, user stickiness can be strong. With a higher number of stores, higher density, and better location quality, economies of scale can be achieved. Of course, the scale will not reach the level of Coca-Cola because new-style tea beverages are much more expensive. However, in terms of store size, it is not impossible for them to surpass Starbucks because coffee is not widely accepted by Chinese people due to physiological reasons, resulting in a much smaller potential consumer base for coffee compared to tea. From the examples around us, although it may not represent the general situation, in an office with ten people, perhaps only 1-2 people drink coffee, 1 person drinks nothing, and the rest of the people would choose Heytea.
Cong：
Why hasn't there been a particularly great company in the affordable milk tea sector? For example, OneZo has been around for a while.
Rong：
Perhaps OneZo's ingredients and overall positioning are not good enough?
C：
I haven't thought about this clearly, but I feel that OneZo and similar affordable milk tea brands may have inferior product quality, which gives consumers many choices and makes low-end milk tea an option rather than a necessity.
H：
Drinking milk tea is a basic need, and Heytea is the most efficient way to satisfy that need. Heytea has fully established itself in this positioning and has no competitors.
Cong：
The long queues at Heytea are not only due to its popularity but also because they make the drinks too slowly. Starbucks has solved the standardization and efficiency issues. Can the slow process problem at Heytea be resolved?
H：
I believe that in the future, making a cup of Heytea and making a cup of coffee will take the same amount of time. It can be optimized.
H：
Has Clubhouse crossed the chasm?
Cong：
It may not necessarily be considered as having crossed the chasm. Clubhouse has a few issues. Why are people willing to listen? It's because influential people are speaking. However, there is no incentive for these influential people to continue speaking on Clubhouse as there is no monetization incentive. YouTube's traffic can be converted into private domain traffic, but Clubhouse lacks productized content, and voice communication is less efficient. Even if brilliant remarks are made, it is limited to the number of people who are present to listen, even if it's just a few dozen.
H：
In the future, if automatic recording or automatic transcription can be implemented, it can be productized. It will become a knowledge-sharing platform. I also believe that Clubhouse has not yet crossed the chasm and is still primarily driven by its trendiness. It is possible that platforms like Zhihu could implement a similar function. In the future, as long as recording is possible and the recording is owned only by the host, it could be productized. However, the format needs to change. There is a tonal issue as well. If it is just knowledge sharing, that's fine, but it can also move towards entertainment, like a virtual party where people can speak during the party.
H：
What about the spicy snack industry, such as spicy strips? Wei Long, a brand in the spicy strip market, has achieved billions in revenue and is a popular national snack. It's similar to Lao Gan Ma.
Cong：
That's impressive, but I'm not familiar with it.
Rong：
In the past, there was a village in Henan province where everyone was making spicy strips. Wei Long standardized the production process.
H：
Not just in the spicy snack industry with brands like Wei Long, but also in the new-style tea beverage industry with brands like Heytea and Lelecha, and in the Chinese pastry industry with Baoshifu, and in the Lanzhou noodle industry with Chen Xianggui... Nowadays, the restaurant industry is different from before. With the complete infrastructure of the supply chain, chain restaurants have a clear advantage in terms of cost-effectiveness compared to individual vendors. The industry itself is large and has the potential to give rise to large chain restaurant companies in different sub-sectors.
Cong：
It sounds similar to the situation in e-commerce, where after the completion of third-party logistics infrastructure, opportunities for other e-commerce companies arose outside of Alibaba. Branding in the supply chain becomes necessary because people's time is becoming more valuable, and they are willing to buy directly to save time instead of doing things themselves. Saving time also includes saving mental energy by choosing branded products or services that are significantly better in terms of quality and price, rather than engaging in price comparisons among similar homogeneous goods or services.
H：
Roblox is the only imaginative thing within the gaming community.
Cong:
I haven't played it before. Is it similar to the early days of Second Life?
H：
It's not exactly like Second Life. It solves two key things: 1) Social interaction—American kids are willing to socialize on this platform rather than on Facebook. It provides them with an online identity. 2) It enables user-generated content (UGC) in games by providing an engine. Professional individuals have established studios and used the engine to create games and sell them to kids. Currently, Roblox has achieved revenues of $1-2 billion. Of course, it also faces the challenge of crossing the chasm. Currently, the user base consists mostly of kids. The question is whether they will continue to use the platform as they grow older and if their social identity can be extended.
Cong：
Indeed, products that start off targeting young people often face challenges in maintaining their identity and user base after reaching a certain level of popularity and encountering societal pressures. For example, apps like Snapchat and QQ may have a higher proportion of younger users due to their better capabilities for socializing with strangers, which is a preference among younger individuals. However, as they grow older, they tend to switch to more mature and identity-verified platforms like Facebook and WeChat, which have higher requirements for authenticity and safety. It seems that these types of products haven't had a smooth transition to the mainstream market. On the other hand, platforms like Bilibili (B站), which initially targeted younger users in the realm of "二次元" (ACG culture), have gradually expanded their user base. However, they also face criticism for losing their original identity.
H：
Indeed, Roblox is a very imaginative platform and is also undergoing a transition to the mainstream market. Currently, it still faces some challenges as the quality of its games may not match more mature titles and there is a certain granularity to its gameplay. Although young users also use platforms like Facebook, they view Roblox as their own circle. However, there are now also many users between the ages of 17 and 25 who remain on the platform with more utilitarian purposes, such as making money.
H：
Virtual games and open worlds present a significant opportunity for the future.
Cong：
That's right. Completely open world games like the ones depicted in movies such as "Westworld" and Steven Spielberg's "Ready Player One" are currently not a reality in the gaming industry.
H：
How far has Westworld reached? Players can create their own characters and even become a bartender or quit their job. Open worlds require user-generated content (UGC) to have richness; otherwise, the lifecycle is short. The key is not only the technical aspects but also the underlying worldview of the game. It needs to have a god's eye view and express itself with an extremely simple worldview. However, the industry seems to be moving towards complexity, making it difficult to achieve richness.
Cong：
It's interesting that many successful games and social rules are actually based on the simplest logic. Despite their various flaws, they possess remarkable vitality. For example, Bitcoin's rules are simple, and even the mysterious Satoshi Nakamoto seems to have a god's eye perspective in mind.
H：
Exactly. Roblox aims to provide the roughest and most granular version of LEGO, and it has now evolved to the stage of enabling programming-based user-generated content (UGC).
Meanwhile, other successful game companies, like Take-Two Interactive, still follow the logic of large-scale internet games, which limits their scalability and results in their valuation being tied to the gaming industry.
Cong：
Let me add another similar example: AWS was initially inspired by a book called "Creation". Jeff Bezos was fascinated by the book, which described a game called "Creatures" where the author built complex intelligent systems using the most basic components, similar to how complex circuit systems are composed of simple resistors and capacitors. The author believed that complex AI systems could be created from the simplest components. This book sparked extensive discussions in Amazon's senior reading club. Amazon realized that if the company wanted to foster innovation, they shouldn't speculate on the specific services they might need, but instead provide the foundational vision to allow teams to self-organize like building blocks. Bezos organized a brainstorming session with engineers to explore the fundamental building blocks they might need: storage, bandwidth, information, payments, computing, and so on.
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