Startup luring top talent with $3mn pay packages

China may have a reputation for low wages and sprawling factories. But in a sign of changing times, one startup founder has embraced a strategy of paying top employees the highest salaries in the market — and so far it’s working.

Beijing ByteDance Technology Co. is the brainchild of an entrepreneur named Zhang Yiming. The company is best known for a mobile app called Jinri Toutiao, or Today’s Headlines, which aggregates news and videos from hundreds of media outlets. In five years, the app has become one of the most popular news services anywhere, with 120 million daily users.

Toutiao is on pace to pull in about $2.5 billion in revenue this year, largely from advertising. It was just valued at more than $20 billion, according to a person familiar with the matter, roughly the same as Elon Musk’s SpaceX.

In China, the Beijing company is controversial because of its recruiting. ByteDance hires top performers from giants like Baidu Inc. and Tencent Holdings Ltd., sometimes raising salaries 50 percent and tossing in stock options. Zhang is unapologetic.

“Our philosophy is to pay the top of the market to get the best,” says the slight 34-year-old in an interview at the company’s headquarters, his first with foreign media. “The company that wants to achieve the most, you need the best talent.”

Asked what the top of the market is precisely, his handlers squirm and try to change the subject. Zhang waves them away.

“Unlimited salary for unlimited talent,” he says.

Top performers can make $1 million in salary and bonus a year, plus options, according to people familiar with its hiring. Total compensation can exceed $3 million. Zhang declined to comment on specific figures, saying most employees prefer stock over cash.

To be clear, this is part of a bidding war for talent in the most coveted fields. The most senior AI engineers in China now often command compensation of $1 million or $2 million, though most of that is stock. Another startup recently agreed to a package worth $30 million over four years if certain targets are met, according to a person familiar with the matter.

It’s a sign of bubbly times in China. Venture capital funding soared 10 fold between 2013 and last year to about $50 billion, fueling battles for talent and concerns the startup market is overheating. Ride-hailing giant Didi Chuxing, group-buying service Meituan Dianping and Toutiao are now among the most highly valued private companies anywhere.

Toutiao may be unusually vulnerable. Unlike virtually every other startup in China, it hasn’t forged an alliance with one of the big three internet companies, Tencent, Baidu, Alibaba Group Holding Ltd. Now all three of the giants are refining their own news apps to steal business from Toutiao.

“In news aggregation, there are five or six different options so there is a growth issue,” says Kirk Boodry, an analyst with New Street Research. “It’s going to slow down.”

Zhang isn’t standing still. One reason he’s recruiting so aggressively is that he has ambitious plans to expand, with a dozen new apps in the works. One is a version of Toutiao for English speakers aimed at giving Americans a taste of the China phenomenon.

Still, the company’s backers are under no illusion of the risk. “They need to keep evolving,” says Neil Shen, managing partner of Sequoia Capital China and an investor in ByteDance.

The headquarters of ByteDance is in a former aerospace museum in Beijing, with a retractable roof. The airy space has only two floors, with the second 14.2 meters high, or about four times the height of a typical office.

On a recent sunny day, Zhang is dressed in a blue T-shirt and oval glasses. His English isn’t perfect, but he’s confident and forceful in explaining his company’s progress.

Zhang grew up in the southeastern city of Longyan, the only son of civil servants. He studied microelectronics and software engineering at Nankai University.

He learned the power of technology early on. While at university, he repaired PCs for other students and helped out a girl who was having trouble with a computer she had bought with her roommate. The grateful students invited him to dinner, the beginning of a romance that ultimately led to marriage.

After school, Zhang helped found four companies, including China’s first Twitter-clone and a real estate site, 99Fang.com. In between, he had a brief stint at a big company — the Chinese office of Microsoft Corp. — but quickly left out of boredom.

He got the idea for Toutiao from the changing habits of Chinese commuters. He was used to seeing people outside subway stations selling newspapers, but then in a matter of months they disappeared. He realized people were reading on mobile phones. At the same time, he knew machine learning and artificial intelligence were evolving.

“I keep wondering, is there a general, universal way to use all of these features?” he says. “So I left the company I founded before and started another.”

Zhang developed the app in 2012 and introduced it in August of that year. It caught on quickly.

The Toutiao app was made from the start for mobile devices. Click and there’s a list of stories under several tabs. You can choose to follow prominent people like Lei Jun, the founder of Xiaomi Corp., or create a tab for special interests like fashion or sports. What sets it apart from many other aggregators is that it learns what each user likes and adjusts content accordingly.

Wang Qianwen, a 23-year-old in the northwestern city of Lanzhou, browses Toutiao for financial news and entertainment gossip. She reads stories about stocks she owns and currencies, and explores credit card suggestions since she’s looking for her first card.

“I just randomly read some of the stories for a little more than 10 minutes each time and it’s pretty convenient,” says Wang, who recently found a job in a state-owned bank.

Toutiao pulls in advertising like Google and Facebook. If people search for stories on Italian restaurants or Korean pop stars, relevant ads will pop up alongside the results. If they are following fashion or financial news, targeted ads appear within feeds.

Still, its business strategy is controversial. It pulls content from hundreds of sources — newspapers, video services and websites — and then hosts the content on its own servers so people often never go to the original source’s site. That prompted a flurry of copyright lawsuits from newspapers in the provinces of Hubei and Jiangxi and online outfits such as Sohu.com Inc., arguing Toutiao was essentially stealing their stories.

Zhang says the complaints began as his company raised venture money, prompting media companies to push for compensation. He responded by negotiating deals with media partners to share revenue. Toutiao also created a platform that allows individuals to create content for the app — and get paid.

One of the beneficiaries is Cao Huan, a 24-year-old from China’s southwestern Guizhou province. A year ago, his parents were forcing him to help fellow villagers build houses; now he makes three- to five-minute videos with his younger brothers about rural life and says he makes as much as 40,000 yuan a month, mostly from Toutiao. “I definitely see this business going somewhere,’’ says Cao.

Such efforts haven’t quelled the controversy. Tencent sued the company this spring for copyright. Media groups argue Toutiao has no right to use their content unless they agree to a deal.

“Nuisance lawsuits are an all-too-common competitive tactic in our industry, but these have had no impact on our business,’’ says Liu Zhen, senior vice president of corporate development at ByteDance, noting the company has also sued Tencent and other rivals.

The debate has drawn attention from the country’s most influential government-backed newspaper. Last week, the People’s Daily mentioned Toutiao in three separate opinion pieces on its website calling attention to the need for a better legal framework to govern news services.

Toutiao has succeeded with a strategy that’s essentially the opposite of most media organizations. It relies on AI and machine learning to find stories, format them and then customize news feeds for each reader. There’s not a single editor on staff. “We believe in technology,” says Zhang.

The strategy appears to be working. Toutiao’s valuation is more than twice the market cap of Wall Street Journal parent News Corp. and seven times that of the 166-year-old New York Times.

China’s Top Online News Site Draws Government Paper’s Scrutiny

Whether Zhang can defend his business model is another matter. Boodry thinks there is a real risk for Toutiao from rising competition. The startup’s sky-high valuation is built on fast revenue growth from expanding users and aggressive advertising. But he sees user growth slowing and little room for more advertising.

“They already monetize pretty aggressively,” Boodry says. “It’s hard to see it go up from there.”

Zhang says the company has always had competition. He says its growth in users and revenue actually accelerated this year. “We are doing very innovative work. We are not a copycat of a U.S. company, both in product and technology,” he says.

Indeed, ByteDance is competing for talent in one of the most competitive segments of the labor market globally. Salaries for AI talent are surging in the U.S. too, according to hiring data firm Paysa. In the U.S., Ph.D.s from prominent programs can start at $400,000 and experienced AI engineers often make seven figures, says co-founder Nikhil Raj.

Zhang isn’t backing off his aggressive plans, despite the controversies over pay and business practices. Asked about one competitor’s concern that Toutiao is trying to hire 200 AI engineers, a huge number given the limited pool of talent, Zhang says that’s not quite right: “It may be more than 200.”

Courtesy Bloomberg