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Season 3, Episode 5: Alibaba

Season 3, Episode 5: Alibaba

Mon, 24 Sep 2018 01:28

We continue our China Tech series with perhaps the most incredible entrepreneurial journey in history: Alibaba and its indefatigable founder, Jack Ma. How did an unknown 30 year-old English teacher from a second tier Chinese city build the world’s 7th largest company by market cap (and the largest in China) in just 20 short years? This is one story you don’t want to miss.


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Yeah, off that. Here we go. Yeah, like Google suggested search. What happened to Yahoo Stake and Alibata? Oh, wait, I forgot about Altaba. Oh, God. The remaining company is Altaba, which is a holding company of everything that wasn't Yahoo. Altaba is worth 10 times more than what Verizon paid for Yahoo itself. Right. Oh, they have a website. Look at this. Company profile. Independent. This is on their website. Altaba Inc is an independent publicly traded, non-diversified, closed and management investment company registered under the 1940 Act. Wow. What a mess. Welcome to season three, episode five of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today we are continuing our quest to more deeply understand China tech with Alibaba. So before we dive in a few fun facts about Alibaba, they had the largest US-based IPO of all time. Alibaba is China's biggest tech company. Alibaba's market cap, even at their current scale, doubled in the last year and they were valued at over half a trillion dollars earlier this year. So you think about only a few companies are racing up to a trillion and that's gotten all the news cycle. Alibaba, halfway there, growing very quickly, we may see a new trillion dollar company here in the next year or two. They're the number one retailer worldwide in front of Amazon or Walmart. Holy crap. I don't think I knew that before researching this episode. And yet through all this, there are a bit of an enigma. Founder Jack Moss says that we are not an e-commerce company. We enable others to become e-commerce, but they themselves don't feel that there is a difference. It's fair to have a direct comparison between them and Amazon. And if only they were like somewhere you could go to get a really good story and understand the history and the facts of how all of this came to be. Yes. It's interesting for me, Alibaba, I think before we started doing the research was the of the big Chinese tech companies, the one that I felt like I understood the least. I'm pumped to have sort of a little bit more of my hands around who the company is and how they came to be. So super excited to dive into that today. One of the hardest as you say big Chinese tech companies to understand and yet arguably the most important one. So here we go. Here we go. Well, if you're new to the show, you can check out our Slack at It's the place where David, myself, and over 1600 of our favorite listeners discuss episodes right right after we release them along with real time hot takes and the biggest tech news of the day. Either way, if you guys haven't clicked the link in the show notes from the recode episode and watched Kara's interview with Stuart Butterfield when Slack was tiny spec makers of glitch and watched her video interview, it's amazing. Let's just say the world is better off that they pivoted into Slack. So I probably are presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders. So we knew there's a natural fit. We know the host of founders. Well, David, sender. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how the group is together. And they say it's like the best curriculum for founders and executives. Erilie, as we use your show for research a lot, I listened to your episode of the story of Akiyama Rita before we did our Sony episodes, this incredible primer. You know, he's actually a good example of why people listen to founders until acquired because all of history's greatest entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and they're such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them. Because in my opinion, the greatest such a printer to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's My Hero. So the reason I did that is because I want to find out like I have My Hero's who were their heroes. And the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well, listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. All right, David. Do you want to take us in? Yes. So two quick notes before we do. One, we're going to do our best and listeners. You will be the judge in this episode. But we don't have Hans and Zara with us or anybody who really knows the history of Alibaba besides ourselves. And that's Hans and Zara from the 996 podcast by GGV Capital, which joined us for the Xiaomi episode. Exactly. And GGV, as we will see along, was actually investors in Alibaba at one point in time. So we'll do our best, but certainly I would expect our audience in China might be more familiar with Alibaba's history than us. So anything we get wrong, hit us up in the slack and we will correct later. Second note, almost all of the history in fact does come from a fantastic English language book about the history of Alibaba, called Alibaba, the house that Jack Ma built by Duncan Clark, who is an investor and a former consultant investment banker based in Asia, who actually was an advisor to the company. So he's not just an author or journalist who came in. He actually had worked with the company and then wrote this great book that came out in 2016. So if you want to even more deep dive, go read the book. But with that, let's start the story. You know, my research starts in 99 when the company is founded in my head. I was thinking like, okay, we'll start 99 and we'll take it over the next 19 years. I'm guessing where you're going to start is a little bit before 99. A little bit before, I was debating going back like how many thousands of years to go back, but I'm going to save that for the carve out. So I promise we will go back thousands of years, but not until the carve out. Perfect. We are actually going to start in 1964 when a young boy named Ma Yoon is born in Hangzhou, China, which is a city about a two hour drive from Shanghai. Until recently it was a sort of new government classification of cities in China, Tier 2 city. It is now a Tier 1 city, thanks to Alibaba, which is headquartered there. But at the time, it was nothing like it is today. This was right before the beginning of the cultural revolution, which is obviously a time of great, great turmoil in China, lasted from the mid 60s to the mid 70s, and actually Ma Yoon's grandparents were persecuted during the cultural revolution. So there's a lot of turmoil going on. But when Ma is about 10 years old, something pretty important happens, and that is that Richard Nixon makes his famous trip to China, opening up China to the West. And that's really one of the beginning moments of the Chinese government and society becoming more open and evolving and towards the form of government that they have today. One of the cities that Nixon visits on his trip to China is Hangzhou. It's an incredibly beautiful city. People back in the West kind of see this and see the video coverage of his trip there, becomes a tourist destination. And so lots of Americans and other English-speaking people are now coming to China visiting Hangzhou. And Ma, for some reason, he becomes obsessed with English. He's never been outside of Hangzhou. His parents are like super lower middle class. He becomes obsessed with English, he wants to learn it. So what he does, he starts pretty much every day bicycling from his house to the hotel where Nixon had stayed in Hangzhou, which becomes a tourist destination. And he just hangs out at the hotel and he starts chatting up English-speaking tourists who are there and offering to take them on free tours. And he does all this just because he wants to learn to speak English. Pretty amazing. And he does this for basically all of his middle and high school career. And while he's doing this, one tourist who he's chatting with and showing around the city says, you know, your given name, you and Ma's is last name, but it comes first in Chinese. Your given name, you know, it's kind of hard to remember and pronounce for English speakers. You need an English name. And Ma's like, okay, like what do you suggest? And this tourist who's woman is like, well, my husband's name is Jack. And our son's name is Jack. So how about Jack? And Ma's like, great. I'm now Jack. And that is how Jack Ma. Very, very creative for him. This is for him. Very, very creative. Jack, also very creative, as we've seen here, unfortunately not very good at math. So the college entrance exams, the nationalized college entrance exams in China, please sell a large priority, a high priority on math. Jack is not good at math. And still to this day, you know, he gives these interviews. He's very self-effacing, but he gives these interviews. He's like, I don't really understand technology. Like, you know, all this coding stuff is, you know, Greek to me. And it's totally a front, by the way. He fails his college entrance exams twice because he can't score high enough on math. He scores like the lowest percentile possible on math. He's graded everything else. He fails twice. He finally tries a third time. He passes. He gets a high enough grade. He gets into the Hangzhou Teacher's Institute for college. This is not a very good college. But he goes there, he learns, he studies English there, he trains to become an English teacher. Then he graduates, he has to get a job. Turns out, he loves telling this story. Kentucky Fried Chicken, KFC. And just come to China. Benzlavi, you obviously saw this story too. Amazing story. Amazing story. KFC had just come to China. They're opening up KFCs all over. They're hiring people to work in, you know, as cash registers or, you know, cooks in KFC. They're just hiring like anybody with a pulse basically. They come to Hangzhou. They have 23 open positions, 24 people interview for this position, including fresh graduate Jack Ma. And he's the only person who is not hired by KFC. They hire all 23 other applicants for the KFC and Hangzhou. Jack gets rejected. And this is the moment where Jack files that away and says, when I'm on stage at Davos and telling my story, this is going to be. You too can make it if you pull yourself by your bootstraps. Yeah. When I am one of the richest people in the world and retire to, to beat Bill Gates at his own game, we're jumping ahead of ourselves. If there's one thing that he is, is his superpower is he is never disheartened or discouraged. He gets a job anyway, working as an English teacher in Hangzhou. He's making $12 a month at this point in time. This is the 80s now, mid 80s, into the late 80s early 90s. China though, you know, through all this is slowly introducing capitalism and entrepreneurship back into society. Because during the cultural revolution, like entrepreneurs were persecuted. Anything that looked like capitalism was definitely a no-no. But the government is transitioning. So finally in 1994, he's like confident enough that the business environment has evolved in China. He's always wanted to start a company. He pledges to himself. He's 29 years old. He pledges to himself that now is the right time he is going to start a company before he turns 30 within the year. So he starts his first company, the Hangzhou High-Bout Translation Agency. High-Bout means hope in Chinese. And it's a translation company. They're focused on helping local companies, you know, kind of do business overseas, with particularly with English-speaking countries. And at first it's kind of a side business. He starts the company, but he keeps his job as a teacher, and he's working on the side. And something kind of amazing happens. So he's in Hangzhou, and there's another county, just south of Hangzhou, called Tang Liu. And Tang Liu, the county had entered into this contract with an American company to build a highway that was going to connect the county and the city of Hangzhou. And they'd hired this company about a year ago, nothing had happened. And so they were like, we need to send somebody over to America and just like, meet with this company and like figure out what is going on. So they hire the high-bow translation agency, and Jack, and they send him over to America. Jack arrives in California. So details of a little sparse here. Jack actively says he does not, he prefers not to talk about this. As we will see, very traumatic. Turns out that the company and the guy behind it were basically a fraud. And Kermit, like there was no company. They had just signed this contract with Tang Liu, the county of Tang Liu, to build this highway, but there was no construction company. Jack shows up. He unclear if he gets kidnapped or held hostage or something. The guy behind this company is like, I don't, you can't go back to China and like tell them that you've discovered that I'm a fraud. He ends up getting held hostage, quote unquote, in a hotel in Las Vegas. Yeah. And he manages to escape from the hotel in Las Vegas and somehow get himself out of the city and he's trying to get back to China and he gets to Seattle. He has friends who are also English teachers in Seattle. This is now 1995. He's his first time. He speaks great English. He's an amazing orator as we'll link to him, sure, in the show notes several of his talks. He's escaped. He's on the run. He finds himself in Seattle. And while he's staying in Seattle, he's trying to find a way to get back to China and back to Hangzhou. A friend of who the people he's staying with is working. This is 1995 working for an internet consultancy business in downtown Seattle because it's 1995. Like, hey, Amazon is like there. This is the Go Go years, the internet. The friend of the friend takes Jack one day to the office in the US bank building in downtown Seattle right there and shows him what he's working on. He shows him the internet. Jack's never seen the internet before and he's like, oh my God. It is a life changing moment. So the first thing he does, the first thing you can think of, he searches on the internet for beer. And Jack's like, he's still what he talks about to the States. Like, I don't know why I searched beer. I don't even drink beer. But beer was the first thing that came to mind. And he notices, he searches beer. He sees all these results for American beer, Mexican beer, German beer. But there's no Chinese beer. And he's like, oh, well, I'll search China and see what comes up. Basically nothing comes up for China. And he's like, I wonder how he's searching in that. Yeah. So I wasn't able to figure that out either. I mean, there were search engines or a sort of, are we pre-yahoo? Yahoo existed, right? Huh. Yeah, Yahoo definitely existed. Yeah. And exciting. Maybe altavisto is around then. This has whisperings of our previous episode with Kara where she was like, I saw the internet and there's instantly got it. Like this was going to change the world. And I think Jack had that sort of similar insight of like, I don't know why anybody's doing anything else. This kind of like basically directly leads to Alibaba here. Although we're going to, you're going to have to sit through another 20 minutes of stream facts before we get there. But, but he searches, he searches, and he's like, all right, well, nothing shows up. I should just like make a page for, for Hope translation agency. You know, like this is a great people search for China. And then they'll find my translation firm. So on the spot, he's in the office of this internet consultancy. He just hacks together like, he has them like, you know, he's like, oh, he'll put like my info up there. They create a website for, for my high-bow translation agency. And there's, there's only text has the name and a phone number. And there was an email address. It must have gone to the internet consulting firm or something. Later that day, they get five emails for translation business requests. So you from the US, one from Japan, one from Germany. And so his friend, the friend of the friend is like, hey, Jack, you've got some like business requests coming in. And he's like, business are like, what? This is not so like, this is probably more business than they've done in like a year. And so he's like, okay, now I see the opportunity. I need to like, forget making this translation agency. I'm going to go back and I'm going to build a whole company to help Chinese businesses list themselves online. Like this generated so much demand for me. Like imagine all these other businesses in China. Do you know what else he saw and vowed while he was visiting Seattle? To crush Amazon. He apparently looked, he was like over on Queen Anne. Queen Anne Hills, a neighborhood in Seattle. And like looked around and saw a bunch of big houses and vowed one day, I will be rich enough to buy one of these houses. And it's so, I mean, literally while this is happening, like, I'm sure. So I looked this up, Amazon was not yet in there. I think it was their second or third headquarters was in downtown Seattle. I think they were still down in Soto. I'm sure Jeff Bezos and Shell Kaplan and everybody were like, just a mile down the road working on Amazon at this very moment. It's crazy. Crazy. Not about it. Totally crazy. Before he flies home to China, Jack does, he does deal with this internet consulting firm because of like as far as he knows, like they are the internet, you know, they're the gateway to the internet. He flies home to China and he brings a computer with him. He gets back and he creates a company, they deal with the internet and Seattle firm. It calls it China Pages. And he's going to do exactly, you know, what he said, he's going to start building websites for Chinese businesses. So he starts going around Hongzhou and talking to all these companies that produce things or offer services and like, hey, we can get you business. We'll put you on the internet. The one problem is that the internet doesn't exist yet in China. I mean, you can get on the internet in China, but like maybe only the government can, like definitely nobody in Hongzhou is on the internet. Like, and definitely not these small businesses. So they're like, are you trying to scam me? Like what are you talking about? It doesn't go super well. Like you get some customers, but it's not a wild success. At the same time, I mean, the government sees the power of the internet. They are starting to push the internet and technology through the state on enterprises as like a way the future in something China wants to get involved in. Turns out that there was a state owned, an SOE, a state owned enterprise backed company that was also doing sort of the same thing. They end up acquiring China pages and rolling it up into this quasi government quasi private entity. Jack moves to Beijing. That's not like when we think about an ex, that's not like life changing for Jack in any way. unclear what the economics were here. I mean, basically like the government acquired the business. But certainly, certainly not life changing. As a result, Jack moves to Beijing because that's where the government is. He ends up leaving the company. He's kind of disillusioned at this point. Well, I mean, he's not easily disillusioned, but he's disillusioned with this company. He goes to work for another government agency that's working on another initiative for bringing the internet to China called InfoShare. He's really interested in this. He thinks, okay, this is great. This is the government is now going to push what I was trying to do with China pages. And InfoShare launches the China market site. And what the China market site, the goal was to allow producers of commodities. So soybeans, rice, whatever commodities, nails, parts, whatever, to list their goods for sale on this site and for buyers to contact them. And all of the discussion is going to happen in these secure chat rooms on the site. And this is essentially what Alibaba would become. But because it's a government agency, you have to go through both buyers and sellers, have to go through an insane amount of bureaucracy just to get onto the site. They got to go to the local government agency. They got a register. They got to wait for all this stuff. They got to talk to a thousand ministers. So Jack is like, this is it. This is what is going to work. But there's all this friction, all these barriers to entry. He's like, what's going to happen? At the same time, Yahoo, which we referenced earlier, has just gone public. They are like the world, internet darling. Everybody in America is crazy about Yahoo at this point, people in China are figuring out, oh, this portal thing, like, and it wasn't searched at the time it was directories. This is like the key to unlocking the internet for consumers. So there are three companies that sprout up in China, Sina, Sohu and Netis. So they've all popped up. And Jack, of course, sees all this happening and he's like, okay, this is really interesting. Yahoo, this is pretty interesting. 1997 rolls around. Jack's been doing this. So the government for a little while. And turns out who comes over to visit China and visit Beijing and the government? Jerry Yang. Even better than Richard Nixon. Even better than Richard Nixon, exactly. Not CEO at the time, but founder and chairman of Yahoo. Very comes to Beijing. And the government is like, all right, well, we need someone who is both a government employee and gets this internet thing to show Jerry around. And who does that end up being Jack Ma? Pretty cool. I didn't realize until digging into this a little bit that that was long before Alibaba that they started this relationship. Well, not that long before Alibaba, as we'll see. But yes, before Alibaba, it's when Jack's a minister in the government. And he's the envoy assigned to Jerry. So he goes through these great pictures of Jack and Jerry and some other Yahoo executives on the Great Wall of China, do it all these tourist sites and Jack's there with him the whole time. So as he gets to know Jerry, he realizes that like, okay, my vision here, if there's any chance, I'm going to realize it. It's not going to happen within the government here. I need to go become an entrepreneur and do this. So he leaves the government. He moves back, he leaves Beijing, moves back to Hangzhou. And he brings a bunch of his colleagues from the China market initiative within the government. He brings a bunch of them back with him to Hangzhou. And he decides that they're going to start a company. So Jack and his wife rent an apartment, very famous apartment that we will see at building 16 one lakeside gardens in Hangzhou. They start the company there with all these people. There are 18 co-founders of this company. So it's amazing. Would you look at like the the founding photo, like you expect to see like a few people in the dorm room or a few people in a garage or this must have been like maybe a year into the company or something, but like, nope, it's all 18 people. They're all co-founders. They're all piled into the department. Yeah. Because when we did the Xiaomi episode, it was like there's seven or eight co-founders of Xiaomi's. It was something like that. Like, yeah, 18 co-founders of all about. That's not amazing. It's like, it's the tech theme a little bit, but like think about if you can actually stay organized, what an accelerant to a business. If you have that many people from day one, instead of, you know, biting and scratching for every person you're going to bring on, especially if you've all worked together before. Totally. Yeah. And what's going to say, not only is this, like the team is fully formed, but they've all built this already within the government. Like, this is an airlift here. They just airlifted the team from Beijing to Hangzhou. So Jack's trying to figure out what he wants to call the company. He doesn't want this to be just a Chinese company. Because remember, this is all about international trade. And he wants these businesses, you know, commodity suppliers and other businesses to be able to do business with companies anywhere around the world, you know, on the first day of the website for his company, he had requests from the US, from Germany, from Japan. He wants a name that'll work in any language. He also wants a name that starts with the letter A. So he settles on Alibaba. He's inspired by the term open sesame. And it was something like he thought of the name. And then I think he even, he was like at a cafe and then asked the server, when I say Alibaba, what does that mean to you? Or what is it invoked to you? And the server says open sesame and he grins and he's like, perfect. And then he goes and he like asks like 18 people on the street, the same thing. And then there are, he gets like some significant number also said open sesame. He was like, perfect. Perfect. Yes, exactly. He starts walking around Hangzhou asking all these people, English speakers, Chinese speakers, everybody. And everybody's like, yeah, open sesame. And that's he wants like Alibaba to be the magic word to opening business opportunities. So and that's of course from the what's the classic story of the Arabian nights? Yeah, a thousand and one Arabian nights. Yeah, yeah, yeah. Yeah. So he he starts the company turns out is owned by a Canadian guy. It takes them, I think it takes them about a year to negotiate buying the domain name from them. But they do buy from for something like $4,000 or something from a Canadian businessman. Domain names just keeps showing up on acquired. I know. Boy, if there's one thing that's constant among a bunch of our companies, it's long drawn out domain name acquisitions. Seriously. So they start the company and it's exactly what as we've said, what they were, what they were doing, what's trying to market. It's a bulletin board for businesses that you're going to businesses are going to be able to find demand for their products or services and then be able to chat with potential customers and facilitate transactions. This may be apocryphal, but Jack talks about this now. He kind of takes inspiration from his favorite movie, which is Forest Gump and the Bubba Gump Shrimp Company in in Forest Gump where the shrimp company like they made their money. They turned into a big business by harvesting shrimp like tiny shrimp, like not like big swordfish or whales or whatever, like all these other businesses. And so he's like, we're going to do the same thing. We're going to harvest the shrimp. And then invest in Apple like that's that. Exactly. Slightly different. Yeah. So he's like, we're not going to focus on big businesses. We're going to focus on really, really small businesses, the shrimp. And he's like, okay, so they get going and they start signing up these small businesses. As they're getting going, a pretty unlikely person with a very different background. Somehow here's about this new company, Alibaba. Got named Joe Say, who is a Hong Kong based private equity investor. And Joe's pretty interesting. So Joe grew up in Taiwan. And again, remember like Jack grew up during the cultural revolution and you know, Taiwan's floating friend, Jack's grandparents were persecuted, but Jack's family stayed in China. They became communists. So there's a little bit of a like culture clash there. So, grows up Taiwan, hands up going coming to the US, he goes to the Lawrenceville School. He goes to prepped boarding school, Lawrenceville in New Jersey, right down the Redmond Princeton. Hands up going to Yale for college. He goes right into Yale law school. He then works for I believe Sullivan and Cromwell, super white to law firm in New York. And then he gets into private equity and then he comes back to Asia and he's working in Hong Kong as a private equity investor. So a completely different background. And he hears about Jack and Alibaba. He's like, I got to go visit this guy. He goes over to Hangzhou. He visits them in the apartment and he's like, this is crazy. Like Jack is completely nuts. Like this guy is like crazy, but he has these 17 other people that are with him. And he decides like, you know, if one person is saying, has this crazy idea, like he's probably crazy. But if you've got all the people, it's probably a movement. We will definitely link to this in the show notes. Dave and I were I messaging about it last night. There is a wildly cool video from this time period of Jack Ma sort of rallying the troops. He's getting everyone fired up and he's pacing around the apartment and it's, you know, 1990, what, 1999? Actually, it's a little later. So this is when they launched Talbao a couple years later. So the apartment's going to come back. It looks like it's about 18 people. I mean, really, the team doesn't seem to be really very close. I think it's like seven or eight people that launch that launch Talbao. But basically the same thing had happened with the original Alibaba. The takeaway from this video is a few fold. One, he's sort of lecturing on the verdict of hard work and of the virtue of hard work. And he said, look, if we're an eight to five culture, then we shall go get different jobs. There's other things for us to do here. This is we're going to be round the clock. This is all in. The only way we'll win is by doing this. And the second interesting point is he looks at says, I have been to Silicon Valley and I have seen the way those companies work. And he's, I mean, alluding to Jerry Yang, of course. And he says, we need to be more like them. And we need to go and have that, that work ethic, not the work ethic that, you know, we're used to here. And hearing that from 99 is totally fascinating because that is in many ways completely flipped now. I mean, heck, the 996 podcast is called 996 for 99 hours a week, six days a week. The Chinese work ethic is, you know, near unmatched. And when we look at the, well, this is really the beginning of it. And at the other important point he makes is that our competitors are Yahoo, our eBay, our Amazon. They're not the other companies in China. Nobody else was really thinking this way at the time. And so Joe is like, he's smitten. He goes back to Hong Kong. And he tells his wife, he's like, I want to go join these guys. And his wife's like, how about we both go visit them? So Joe, he's making over $700,000 a year. This is 1999, making over $700,000 a year doing PE in China. He brings his wife over, convinces her that like, no, this is going to be a thing. They moved to Hangzhou and he accepts the role. He's the COO and CFO of this newly formed company, Alibaba, for a salary of $600 per year. It's jobs in. Yeah. Unreal. Well, they paid off. So probably maybe at the, maybe at the insistence of Joe's wife, Joe's like, we need to get rid of some money for this company. So he's like, I got this. You know, he's super white to he knows all this stuff. He's working in private equities. Like, we'll do this. We're going to go over to the, we're going to go over to California. We're going to go over to the US. We're going to go to Sand Hill Road. We're going to go pitch all the VCs like this is great, like, we'll raise money. Let's just like put together a pitch deck and like, it's 1999. We'll raise money. No problem. Jack is like, I don't do pitch decks. I just tell the story. And Joe's like, no, I really think we should have a pitch deck. It's a very accurate. It's a very accurate, like Nick, like, yeah, if you want to, yeah, you can come and hang out and VR if you want to hear our story, but I'm not going to like send you a PowerPoint. Yeah. And that worked in 2016. That doesn't work in 2009. So they come over. Everybody at Sand Hill's like, who are you guys? You're in China? Like, you're doing what? Like, yes, send me your deck. Like, anyway, it doesn't work. They come back. They haven't raised any money. But there is something that happens shortly thereafter, which is a company called goes public. And this is the dot com boom. Nobody even knows what China dot com does. It may or may not do anything, but all of a sudden it has a multi billion dollar market cap. China, the internet, big opportunity. So Goldman Sachs, of course, has an office in Hong Kong as well. And there's an investor there named Shirley Lynn. And she knows Joe. And she's looking now for Chinese internet investments. And she sees that Joe is like gone to move to Hongzhou and join Dalai Baba. She's like, I'm going to go see what's up. So she comes over. She comes to the apartment building 16 one lakeside gardens in Hongzhou. And she's like, how about I buy your company for Goldman? And Jack and Joe are like, well, you know, we don't really want to sell like a majority share to you. And Shirley offered $5 million for a majority share of the company. They negotiate her down to 50%. They're going to sell 50% of the company into Goldman for $5 million, $10 million valuation. Boy, that is a delutive little seed round there. I mean, large seed round. Very delutive. Shirley brings it back to Goldman Investment Committee. She's like, that's $5 million. Like this isn't going to be a big deal. Goldman's like, I don't know about this. Like, this seems crazy. Like, can we like reduce our stake down and syndicate some of it? So they do. Goldman invest $3.3 million. They get a 33% stake. They syndicate out the rest of it. And they raise $5 million. So they start growing a couple of weeks later. Shirley's like, she really likes these guys. She's taken by Joe, taken by Jack. She starts talking them up. She talks them up to another Goldman client, Masayoshi Sun, over at Softbank in Japan. And freaking believable. Totally unbelievable. So remember, Jack has already met Jerry Yang for two at a sleep through his government job. Now Goldman has invested in in Hollywood. But owns 33% of the company. They're talking it up to Masayoshi. And they're like, yeah, you should just come meet this guy, Jack. Masayoshi meets Jack in Hong Kong. Within five minutes, Masayoshi is like, I like this guy. I want to invest. Typical Masayoshi. But conviction-based investor. And I don't remember, we're called exactly. But I believe his initial offer is he's like, he wants to buy a lot of the company. He's like, how about I invest $40 million in the company for a 40% stake? So remember, they were just valued a couple of weeks ago at $10 million. Goldman bought, or it goes going to buy half of it. They got cold feet. They bought their scooter company or something. Seriously. A couple of weeks later, nothing has really changed. Masayoshi is like $100 million valuation. I'm going to buy 40%. So again, Jack and Joe, they're like, I don't know. How about half of that $20 million for a 20% stake? Same $100 million valuation. Masayoshi apparently evels them back with him minutes and he's like, go ahead. I'll have my people see to it. Within weeks, they go to Sandhill. They strike out. Now they've got $25 million. They're valued at $100 million. They've sold a lot of the company, unfortunately, though, as we will see. They have all these resources. What do they do? They go back to Silicon Valley and they hire a senior engineer away from Yahoo, named John Wu, to become CTO of the company, and they're going to build the technical team in Silicon Valley. Yeah. Very, very bold. So this is all year 2000 now. Unfortunately, though, the bubble bursts and all of this behavior, you know, the tide goes out and everybody who's, you know, not wearing swim trunks gets exposed. Alibaba is, of course, part of this. Fortunately, though, they had not spent that much of the money when the bubble popped. They still had $20 million in the bank, but they've got this crazy structure where they've got a Silicon Valley tech team. They still have no business model, by the way. They're listing businesses. They don't take a take rate on the transactions. So they have zero revenue. Just to make sure we hammer it home, because I think it's like important to be explicit about this. There are B2B marketplace. Like they are helping small and medium-sized businesses find other small and medium-sized businesses doing international commerce. There's some structured, some unstructured. So there's sort of discussion boards for unstructured, sort of commerce or negotiation. And then there's the structured, you know, Amazon style. I'm going to click this button and buy this many things. But it's really, I think at this point, it's really just all unstructured. Like, it's just a bulletin board. Maybe there's some of the structured stuff, but they're only beginning to build that. Yeah, I think it's important to sort of anchor on, okay, this business doesn't really look anything like Amazon. They're not a first party seller. They don't have a formalized third party seller ecosystem. It's, hey, if you want to do commerce, you should come here and will loosely help facilitate that. Money can flow through our platform. Exactly. But they don't take any of the money. So the bubbles burst, it's now 2001 and fortunately they have the 20 million in the bank, but they have kind of no prospects and no business model. They hire a guy from GE, Savio Kwan, to come over as COO and kind of be the adult in the room here. Jack ends up giving half of his office to Savio. He scales, Savio's like, you have this Silicon Valley tech office. This makes no sense. Let's shut that down. That's gone. They cut monthly burn by half and they kind of write it out and they figure out the business model. And the business model that they land on, they're kind of inspired by, I remember the meeting with with Jerry Yang and Yahoo and Yahoo really working. They figure out that like, taking a take rate of transactions doesn't make a lot of sense in China because it's such a, like that's orthogonal to the way things work there. People are coming online for the first time. They don't understand like why they would give a cut of their business to somebody else. What does work is sort of what Yahoo does and what Google does is getting these SMBs, get them more business. They're totally willing to pay for more business. And so what they land on is essentially an advertising based model where anybody can join Alibaba lists their services in the marketplace. But if you want to get featured in the marketplace and have more prominent placement, you can buy placement. You can get paid a promote kind of like the, you know, how eBay let you in the old days. I'm sure they do still do something similar, put a purple box around and appear first in search results and sort of you can either pay on a SaaS basis or pay on a per transaction basis or I'm sorry, a per listing basis to sort of bump up your, your likelihood of being the selected supplier. Totally or or like adwords, right? Like, you know, people are searching for things. You can get the organic results, but like there's also the featured adwords at the top. And so kind of as a result of this, Alibaba essentially becomes like if you imagine Amazon and Google all in one, like imagine Amazon without Google where everybody is searching like the place where you start your search for something is Alibaba and the place where you transact is Alibaba turns out that's a pretty good business model. Yeah. And it's important to point out too. You mentioned it doesn't make as much sense in China for a business to just say, oh, yeah, you can have a cut of the revenue because that's sort of the expectation that there's all these pieces of infrastructure and we give a little cut of revenue to each one. And you know, we're able to preserve some amount of margin and then that's our business. In China, even today, the e-commerce ecosystem is so much less developed, the sort of delivery system and the payment processing and all, you know, it's, I think we take for granted in the US all this sort of trusted infrastructure that exists that make it really easy if you don't just become your own e-commerce site. You can. I mean, Shopify makes it easy, the payment process is making all these things make it easy. In China, it's ludicrously difficult to start your own e-commerce company. And so it makes tons and tons of sense to go do it on another platform. It's not painfully obvious right away when you're like, oh, yeah, they'll just take a cut of revenue. That's the way that these things work. Well, you got to remember too, like in the US, pretty much everybody at this point knows what the internet is. Now we're into the early 2000s, like businesses understand, like, oh, yes, the commercial platform, like, and this is not the case in China. Like people don't know what it is. And so Alibaba actually, the development still have extremely large sales force of these are like people that are going and knocking on doors of physical, small, medium-sized businesses throughout the country in the provinces all over and being like, hey, we can get you more business via this thing called the internet. Don't even worry about what the internet is. I mean, at this point everybody knows what the internet is, but back then it was like, hey, we'll just get you business. It's a super different education and value prop sales proposition. It's interesting thinking about outbound sales to do education around you should have your business on the internet. Totally. I mean, like US-based internet marketplaces, like, you know, the saying is this is actually not true in practice, but the belief is like, oh, yeah, you don't like spend money on acquiring supply, like supply comes to the platform because like, you know, your eBay or your Airbnb or whatever and people are like, oh, I can make money doing this. Like, of course, I'll join the platform and make money and then give the platform a cut of the money. That's not how it works in China, at least at this time. So it starts working really well. 2003 comes around though and they've got a challenge, which is eBay has decided that they want to be a global company. So Meg Whitman is now CEO of eBay. eBay has gone public there. We know one of these darling internet stocks, even though, you know, they've kind of made it through the crash. Yahoo is in shambles. eBay is the new Silicon Valley star. They decide they're going to go global. They're going to come to China and how are they going to do it? They end up acquiring a company that was a competitor to Alibaba called each net, but they're focused on consumers. Now, the line in China between consumers at this point and the very small businesses that Alibaba is going after is pretty blurry. And so there's, you know, while Alibaba, as we've said, is always a B2B marketplace. Like, it's actually not that, I mean, some of these are very, very small businesses run by individual people offering goods and services on the platform. It's not that much of a stretch to say like, you know, this kind of looks like eBay in a lot of ways. Jack is now pretty worried that eBay and each net are going to start coming after them and competing with them. He decides he needs to do something about it. But the main Alibaba platform, he doesn't think is the right way to go about it because it's all the marketing and all the positioning is focused on B2B. So what does he do? He creates a skunk works team. This is where the video comes in of the top people within the company. And he's like, we're going to go somewhere. We're going to start a new product within Alibaba. Where are we going to go? We're going to go back to the apartment. Okay. That starts to come together. It comes back to the, so building 161, like, some jobs in the Macintosh. Told that they're going to fly the pirate flag in the apartment complex. I believe there were seven people who started to out what would become tabo with an Alibaba in this apartment. He gives this amazing speech and there's a documentary being made. And that's where the video is there. I think it's called the crocodile in the Yang Sea or something like that. We'll link to it. And it's like, we need to build a official B2C marketplace here in China to compete with eBay. They decide that they're going to call it tabo, which literally means treasure hunt. And it's completely secret, totally clandestine. Nobody at Alibaba knows that this is happening except for Jack and this skunk works team. So they start building it and then to test it, they were like, well, we can't let anybody know we're doing this. Why don't we just, like, start buying and selling stuff on the platform ourselves? So Jack gives, he gives needed, he's like, everybody's got to go home, find four things that they want to sell on the platform, bring it back and then, like, we'll list them for sale. So they list, they find a bunch of stuff, they list for sale, then they're just buying and selling stuff themselves. And then they start telling a couple people and then slowly third party demand comes on the platform. They're still just selling their own stuff. It's kind of like a snowball rolling down a hill. It just starts building and building and building to the point where people start hearing about this new, this new site called tabo. People are talking about it in Hangzhou. Alibaba employees start coming to Jack and they're like, Jack, like, we've got a new competitor away. Totally. Totally. Totally, it is like, you know, people like it. You all have shares in that competitor. So he finally does a big corporate event, doesn't announce him, brings the team on stage and announces that tabo is Alibaba. And apparently, like, people go nuts. Totally awesome. Totally awesome. So they start now competing against eBay and like, they start winning. So the other important thing about tabo is just like Alibaba, they don't have a take rate. So they're not taking a cut of the transaction. 100% of the money goes from the buyer to the seller. It's a pretty good way to grow. Pretty good way to grow. See, yeah. And eBay, of course, takes, you know, has a cut and they're, yeah, if Megwapins, they're either about to be or are a public company right now, they have pressured to definitely public company. And they're not doing it. And, indeed, eBay goes on a total offensive because tabo starts taking market share. eBay had basically 100% market share of, you know, of an eBay product in China. It drops to 50% within a year. Tabo's taking share, eBay, Megwipmin and a whole bunch of the senior executives at eBay. They actually move to China for several months because they're like, this is so strategically important that we are going to go all in and turn this around. There's an amazing, there's an HBS case study about this of like eBay's complete fiasco in China. And they're pummeling Alibaba in the press. They're like, this isn't a business. This is like, you know, you're selling dollars for 50 cents. And like, we have a real business in the meantime, Meg comes over to Hangzhou and meets with Jack and tries to buy Alibaba and offers 150 million for Alibaba. Remember, they already value you at 100 million several years ago from from Softbank, Amasa. Jack and Joe are like, no. No, but we may use you as a stocking horse. Well, that will that will come around in just a second. Yes, no, but no, no team you, but maybe to somebody else externally. And all of their earnings releases, eBay's talking up like how great they're doing in China. But internally like they're super, super worried. So after this meeting, Jack and Joe are like, okay, eBay's like, literally Meg Whitman is now living in China. We need to do something. We don't have, we haven't raised any more money since the Softbank round. We need a lot more resources to compete with eBay for tabo. So they go over to who else, Jack's old friend Jerry Yang. Hey, you remember when we were checking out the Great Wall together? Yeah, exactly, exactly. So they meet with Jerry. Jerry's pretty excited about what's going on. Jerry offers a billion dollars for a 40% stake in Alibaba. The fundraising history of this company is insane in terms of valuations. It's kind of like today, insane of terms of valuations. Like they are selling just huge, huge chunks of the company. They do the deal. So they sell another 40% of the company to Yahoo. And Yahoo had already tried to invest in some of the other portals in China. And they'd realized just like Jack had come to the realization that like a portal slash search engine type business doesn't make as much sense in China. What makes sense is this fully bundle, you know, eBay, you know, in Amazon plus Google model here at Google Yahoo. And Softbank was already a major shareholder in Yahoo to the Yahoo Japan partnership. So Jerry's like, okay, great. Let's do this. I'm going to make a big bet. Jack is super inclined to do this because he trusts Jerry. You know, Jerry's going to be around for a long time. I'm really doing this deal, you know, as a person to person deal. Indeed. And I mean, Jerry, like this is huge conviction. I can't remember what we call exactly, but Yahoo only has like three billion of cash at this point. And they're just hummeled in the bubble bursting. And so they're only just coming out the other side here. And as we'll see, they're about to get into a whole world of hurt in the next couple of years. This is like a super high conviction bet. They're investing like essentially a third of Yahoo's cash into this Chinese company. That's fighting eBay. So they do it. They raise the billion dollars. Turns out they probably didn't even really need to raise the billion dollars because eBay China just kind of like, it's a house of cards and collapses under its own weight and mismanagement and eBay that this point then goes off and buy Skype potentially in part to discover up the disaster that was China like, hey, look over here, which we didn't get into on our Skype episode. But it's a fun, fun side note here. So they do that. Taobao wins in China. They are now the dominant and only player in B2C. And of course, they've got the legacy Alibaba B2B marketplace business as well. The company is just growing like crazy. So on the back of all this a couple years later, in November 2007, they decide, you know, Taobao is growing like crazy. It's still young. Jack and Joe decide, what if we want to go public? We want to raise some more capital. But Taobao's still young. What if we list just the legacy Alibaba business? So they do that. Which is interesting. We should take a quick second here to look at that. Lots of businesses go public when they have a legacy business and a new growth business. And a lot of times what they'll wait to do is wait a few quarters into the new growth business. So there's some predictability there. So they're able to forecast earnings. I was racking my brain when I was reading this of businesses that took the opposite approach. I was saying, somehow we will only IPO the legacy business line and keep the new growth business line private. I mean, at least in sort of the small number of US-based IPOs that I'm aware of, that is not something. I don't even know how you would structurally do it. Like you create a holding company, you know, you IPO one business, the holding company owns a bunch of the IPO company and the new small company. But anyway, it's super messy. It is super messy. The other interesting thing to remember here and, you know, impossible to know. Like the cap table for Alibaba is pretty crazy at this point. You know, Jack and Joe and all the other co-founders and employees, the other co-founders got serious equity by the way. Like this was super not normal of Jack. Like it wasn't like they're just token co-founders. Like they had a lot of equity. They own such a small percentage of the business at this point. Right. And then there's Goldman, there's Softbank and there's Yahoo. What year are we in right now? So we're now in 2007. One thing worth pointing out. And it's almost just like as a, like a point finger in laugh. In 2004, Goldman decided that they should exit the business. And so Goldman managed to turn their $3.3 million on a $10 million valuation of Alibaba into a magnanimous $22 million in 2004 when they exited the business. Unbelievable. This is unbelievable. So what happened was Shirley Lynn, who is the champion for Goldman. She had left Goldman. And this is the point I meant to say this earlier. eBay is now competing very vocally and on the world stage in China. Talking about how they're going to crush Alibaba. Everybody else at Goldman is like, woof, we better get out of this dog. And so the Goldman partnership decides to unload this investment. They sell it off to an investor group of which a large part of was GGV. And that's how GGV ended up becoming a shareholder in Alibaba. Yeah, that was before obviously the Jerry Yang deal. So that happens literally within a year. Yahoo, invests a billion dollars in the company. eBay completely collapses and Goldman makes uncharacteristically for them probably the worst financial decision maybe in history. Private company investing is a whole different ballgame. It's hard. It's thrashy. Yeah, I mean, this is pretty bad. This is a pretty bad decision. Because like what's the downside for Goldman to just keeping this? Like why not? No, but anyway, so we're now in 2007. They've decided they're going to IPO the legacy Alibaba business. They do that. It goes public on the Hong Kong Stock Exchange in November 2007. Value to nine billion dollars at the IPO closes day one of trading at 26 billion dollars. But again, Talbot, you know, is not part of this. Nor is the other big part of the business that they developed probably really through and learned through their fight with eBay. They have this even newer business called Alipay. And Alipay started as the Alibaba version of PayPal. You know, as they're now competing with eBay and doing B2C in China, they realize that people in China like a big barrier to them adopting this platform is they don't have credit cards or credit or any way of transacting online. And so they need to have a platform like this. So they create the essentially copy PayPal, create Alipay. And it starts growing hugely so much so to the point that like you could start to see now, start to see at this point. And certainly now, Alipay is like the largest financial institution in China because all of these masses of Chinese consumers coming online for the first time. You know, they don't have bank accounts, but they're now transacting online. They need Alipay and it becomes essentially their financial institution. It's probably worth a little bit of a detour at this point to talk about the ownership structure of Alipaba itself. So Alipaba has taken all this investment from Yahoo and others for a variety of reasons it is tricky to directly invest into a Chinese entity. So a Chinese entity cannot be owned by a foreign ownership group, especially to the tune of 40% of the business. There's something called a variable interest entity or a VIE that is set up in the Cayman islands that is the entity that Yahoo and others actually own. And then there are contractual business relationships between the Cayman Islands entity and you know, Alipaba proper that is actually owned by Josiah and Jack Ma. So it's important as we sort of finish here the story of Alipay to understand exactly what Yahoo owns equity in and exactly how that structure works and why it was set up. And this all comes to a head pretty much immediately. So the capital that they raised at like a see Alipaba goes back up to the new Alipaba group and is going to be used to fund continuing the build out tabo and Alipay very very shortly thereafter in the beginning of 2008. Yahoo's going through all sorts of struggles. Microsoft offers to buy Yahoo very publicly. And this is all plays on the press and probably most of our listeners are where we'll have to do an episode someday. And in fact, Cara Swisher does the best coverage of this. So I'm actually part of what kind of makes the act two of her career. Jack and Joe though, they're like, oh no. Like if Yahoo sells to Yahoo owns 40% of Alipaba group like if Yahoo sells to Microsoft, then what's going to happen? And all of a sudden Microsoft is going to own 40% of Alipaba. They start freaking out and they start talking to Jerry and trying to find ways to buy back the stake that just two years earlier Yahoo had invested in Alipaba. Fortunately for Alipaba and I got to imagine perhaps as part of this, Jerry Yang rejects the offer from Microsoft to buy Yahoo. But shareholders are like getting out the pitchforks. They demand Jerry Yang's resignation because like Yahoo itself was way overvalued by Microsoft in this acquisition offer. But people didn't quite realize how special Alipaba was yet and how much Yahoo owned of it. So Yang gets forced out and new CEO Carol Bartz comes into Yahoo and she and Jack do not get along. Like there is serious, serious bad blood here because Carol's brought in to be like champion of shareholders and like realized shareholder value at Yahoo. And now people are realizing through all this like, oh, a big party Yahoo's value is this Alipaba stake and Jack and Joe are like, I'm trying to build a company here. So this does not does not go well. And this is where the drama with Alipay really starts. So as this is going on in China, remember there are no big consumer banks like their banks. And like most people in the country do not have traditional consumer bank accounts. And it becomes pretty clear that Alipay or any of its competitors like these new PayPal like entities are going to be the way the majority of Chinese people bank. The government freaks out about this. So the government and remember now Alipaba Group is owned mostly by foreign national people and corporations. You know, saw you got soft bank in Japan, you've got Yahoo in the US, you had Goldman Sachs who then sold their stake to GDV and others. The Chinese government is like, this isn't going to fly. So they start talking about passing new regulation that all financial entities have to be owned 100% by Chinese nationals, both entities and persons. Which of course, Alipay technically is, but sort of spiritually isn't. Because they have all these contracts in place to do profit sharing with the ownership group of the Cayman entity. Right, right. Exactly. It was not going to fly there. So while this is happening, and of course, Jack Ma is bickering with Yahoo and Carol Bartz, Jack transfers Alipay outside of Alipaba Group into a new entity that he and Joe and other other Chinese nationals control. And they transfer it for a value of $51 million by any measure, probably not an accurate reflection of the true value of Alipay. Which again, is now the biggest bank in China, essentially. And it only sort of comes out in like a footnote of like a quarterly update, the next quarter that they did this. And they use some phrase like, I don't have it exactly in front of me, but like we've unintegrated Alipay from the entity or something like that. Well, remember Alibaba is, this is an issue for, which is public on the Hong Kong Stock Exchange. It's a major issue for Softbank and Yahoo. And so it's unclear whether Jack and Alibaba told Softbank and Yahoo that they were going to do this, even if they did Yahoo and Softbank did not disclose this in their financial reporting. Like what they should have done is immediately issued a case to their shareholders and said that this is happening. They didn't. And so this triggers like all sorts of investor unrest, SEC investigations, all sorts of stuff. Because this is massive value that shareholders of, you know, again, Yahoo and Softbank aren't getting this information. It's worth just because we won't cover this too much later. It's worth flashing forward to today. Alipay becomes ant financial. Ant financial is close to an IPO. I think it's like the largest financial institution in the world or on its way to be. I know it's bigger than Goldman Sachs. This is, it's, the story is crazy. We've done as much work as we can to figure it all out. Again, listeners, if you know more than us, let us know. And we're trying to keep these episodes shorter, which is going phenomenally well right now, isn't it? Yeah, phenomenally well. Anyway, finally in 2012, Alibaba settles the situation with Yahoo. They agree that after years of bickering that Alibaba is going to buy back half of Yahoo stakes, a 20% Alibaba for $7.1 billion, plus an agreement that another 25% of the stake Yahoo will exit either in an IPO or sell back directly to Alibaba, which Yahoo, I think does do. They sell 27% at the IPO. They do. But that's not all of Yahoo's stake, as we'll see in just a second. So, but at least it's voting right. So now once that's happened between Softbank and Yahoo, they no longer control majority ownership in Alibaba. This paves the way for Alibaba Group to file to go public, which they do in 2014. Alibaba Group buys back all of the shares, so pulls that off the Hong Kong exchange so that they can IPO the whole thing on the US exchange, on the New York Stock Exchange, notably not the NASDAQ, which tech stocks typically go out on, but Alibaba Group sites, two bankers. We did not trust the stability of the NASDAQ platform after the Facebook debacle, since we're going to be doing a significantly larger IPO and trading was halted for four hours or whatever when Facebook went out. Totally. And trading still gets halted when Alibaba comes out, but it wasn't, wasn't as bad. Only five billion dollar IPO in 2014, the still the largest IPO in history closes up anywhere. Oh, like, like period. Full stop. And just to put that in some context, Visa in 2008 was 18 billion. Facebook was 16 billion. GM in 2010, when the government re-ipioded was only 16 billion dollars, Goldman Sachs just to give a, because we're, because they're a big part of this episode. In May of 99, they IPOed for 3.7 billion. So to give you a sense of the true scale of this, there's four IPOs ever above 15 billion dollars, and then they quickly go down into the 3, 4, 5, 6 range after that. So yeah. The end of the first day up 25% at a market cap of just under 240 billion dollars, which at the time is larger than Amazon and eBay combined, which is crazy. And again, I remember this happening, like most people, you know, in the US even in tech, they were like, oh, Alibaba, like what's that's like the Amazon of China again, right? Like, you know, people didn't really understand this. But the institutional community was like, this was the hottest IPO of all time. And finally unwinding this whole crazy structure and getting access to investors in this is incredible. Yeah. And I've got some good acquired IPO trivia here. So the guidance was 60 to 66 per share at price at 68. The stock actually opened at 92 and then went out from there. Like everything about this was crazy. Alibaba's underwriters announced that they had exercised a green shoe option to sell 15% more shares than originally planned, boosting the total IPO to 25 billion from the originally planned 21.8 billion. David, do you know what a green shoe option is and why it is called that? I did actually used to know the answer to both of those questions. I think I recalled that please elucidate. Basically, it's when the underwriters are allowed to support the share price after the offering without putting their own capital at risk. So they're basically allowed to sell more to support the share price. The reason it's called a green shoe option was the first company to ever do it and have this written in as a term with their underwriters was green shoe manufacturing, which is now stride right. What do you know? There you go. There's your trivia for the day. I always thought it was the white shoe law firms of... I thought that too. Yeah. I guess it was green shoes because their bankers make so much more money than the lawyers who only have the white shoes. Good to know. In this IPO, when Yahoo sold their stake, that was a casual 9.4 billion in cash flowing into an entity that has no cash and no growth, which is just fascinating to think about and how rare that is. Well, let's come back to that. So the IPO happens. There's some ups and downs that we'll just gloss over here as a public company. By a year later, they're actually trading under the IPO price. Things aren't going well. There's some drama with the Chinese government about piracy on the platform that all get settled. As a result, though, Jack had already stepped back into the chairman role of Alibaba Group. He was no longer CEO of either Alibaba, or he was never CEO of Tabao or Team Aller Alipay. The CEO of Alibaba Group, though, Jeffrey Liu gets replaced by the CEO Daniel Zhang, who's now still the CEO of Alibaba Group. Anyway, though, 2017, Yahoo gets acquired by Verizon. So now what is Verizon going to own? Because Yahoo still owns 15% of Alibaba. Which is crazy, right? They sold 9.4 billion and they still own 15% of the public company. Right. So what's going to happen to this is for a US telecom company now going to own 15% of Alibaba? No. Yeah. So as it turns out, and I remembered reading this at the time, but it had completely forgotten about it. What Verizon actually bought was not Yahoo Inc. but was Yahoo's internet presence and their website and their brand and the whole Yahoo business. But they did not buy Yahoo Japan or the stake in Alibaba, which were then transferred to a separate entity, sort of all the remaining pieces of Yahoo that are not Yahoo that went to Verizon. And that separate entity is called Altaba. I think this is actually like the best part of the whole story for all the crazy stuff. Yeah. And the link goes, this is the best part of the story. So Altaba is a publicly traded company based out of New York that owns two things. Actually, I think they're about to own one thing because it sounds like they're divesting Yahoo Japan. They own a series of other things, actually, including some of Seek Geek, some of Eastman codecs, some of paperless, some of Hortonworks. They're doing some investing. They owned like a 6% stake in snap at one point. Yeah. Yeah, yeah, yeah. Which they sold in September 2017 for $70 million. So Altaba is this thing that is worth a bunch because it owns 15% of Alibaba. It's a publicly traded thing with a market cap of $38 billion that by looking around LinkedIn has 10 employees, all of which are finance and operations. And the CFO is based in Omaha, Nebraska. Yes. Yes. Every employees in New York and San Francisco, except for the CFO and Omaha, crazy that this entity exists. Yeah. $38 billion market cap for Altaba, which, yeah, okay, that's crazy. 10 people at this company, $38 billion market cap. The crazier thing is that 15% of Alibaba, like the value of their stake in Alibaba, is over $80 billion. Like Alibaba is now a 420 something billion market cap company. Well, Altaba's market cap is like $38.39 billion. So I don't know. Right. Yeah. No, it's trading at a significant discount to the value of their... Oh, interesting. Because they can't get liquid on it. Yeah, I think it's that the market thinks like, this is crazy. Like, a, Jackman, Alibaba probably hate this. And so they'll do anything as they have done in the past to transfer Alibaba. So it could be like share tenders for lower prices. Yeah. Who knows what's gonna... Like, there's just risk here of like, what's gonna happen. But like, that's a serious, serious discount to the value of the shares that they have. That's a good way to get some potentially high-risk exposure to the Alibaba upside. Indeed. Indeed. Or you could just buy Alibaba stock. The end of the story here, I promise, is just this week, Alibaba announced, Jack Ma announced that he is going to fully retire. One year from September 10th, so September 10th, 2019, he is going to fully remove himself from the company. He will no longer be chairman. Daniel Zhang, the current CEO, is going to also assume the chairman title. And he's going to turn himself full-time to philanthropy, similar to Bill and Melinda Gates. Pretty cool. Pretty cool. It's amazing. Now that you know his story, listeners, he is... He is just absolute icon and hero in China. I mean, if you think Bezos and Gates and Elon Musk kind of combined, he's inspired the masses. Well, and what's so cool, his story is so unique. I mean, he was born right before the Cultural Revolution happened in a Tier 2 city in China and didn't start his first company until he was 29 years old. Was terrible at math. You know, like, still jokes, he doesn't get technology. But like, from that, he has become arguably like, you know, I mean, up for debate, but you can make an argument that Alibaba is the most important technology company in the world right now, has turned it into half a trillion dollars in market cap. If you're listening to this episode, it's worthwhile to walk away with a little bit of an understanding of the shape of the current Alibaba business because they have a lot of different brands. And I think I was pretty confused coming into this before doing the research. So I sort of try to consolidate a little bit of an understanding of what all their properties are and what their strategy is. So we talked about We've talked about Taubao, which is their consumer to consumer marketplace, which is the most popular consumer to consumer marketplace in the world. And the phrase is, if it's not available on Taubao, it's not available anywhere in China or probably anywhere in the world, they've launched a new site,, since, you know, somewhere along the lines, and I don't have great dates here. But that is like Alibaba, but instead of being international, it's a domestic B2B trade site in China. They also have, which is B2C. It's an online marketplace for quality brand name goods that competes with It's similar to, you know, think third party sellers selling to consumers. That's Tmall. They've got Ali Express, which is also B2C, like Tmall, except in sort of sort of quality brand name goods, it's small businesses in China that can sell anywhere internationally. So you can buy, you know, it's actually pretty fun to go to Ali Express and just see what kind of crazy stuff you can buy. It often will take like three to nine weeks to ship to you in the US and it may or may not come. And you have really no idea who you're buying from or any sort of quality standards, but like stuff is crazy cheap. And it's super eccentric and you can find wild stuff. And it may be like how it's pictured, it may be not, but I've bought some stuff and it's super fun to see what you can find on Ali Express. They also have Etao, which is a shopping search engine. Obviously, Ali pay, which they've spun out. And then Ali Baba Cloud Computing is sort of their big bet on the future. And when you look at their financials today, Cloud Computing represents 6% of revenue. The China commerce is 70% and international commerce is 8%. 6% coming from Cloud Computing, 7% coming from what they call digital media, which is interesting to juxtapose against an Amazon. We keep hearing AWS, AWS, AWS, it's a super high margin business relative to the rest of their business. AWS, their quarterly revenue last quarter was 11%. So you sort of look at these high growth, high margin, things inside of these companies, Microsoft, Amazon, Ali Baba, their Cloud Computing division. They're sort of right in that same ballpark. I think AWS looks to be about twice as big. But I think AWS may include some of what Ali Baba would call digital media and innovation efforts. So when you kind of squint, you can see that both of these businesses are trying to make Cloud Computing a real higher margin part of their business at sort of at the same time and using the same strategy there. So. And then of course, the other piece, which as we discussed, is not part of Ali Baba group, but is part of this business, which is like Goldman Sachs plus Bank of America plus PayPal all in one, which is Ali pay. Yep, absolutely. Absolutely. And might end up being bigger than all of this combined. So that's sort of the sense of what the revenue streams and the properties owned by Ali Baba are. And I wanted to finish with a quote from Jack Ma that really sort of sums up, it's a little bit of a block quote here, from 2015, we'll include a link in the show notes to a talk that he gave. But he frequently has asked this question, what is the difference between Amazon and Ali Baba? And he said the difference is we do not buy and we do not sell, but we help small businesses to buy and sell. This is 2015 numbers, but we have 10 million small businesses on our site that buy and sell every day. We do not deliver packages ourselves, though we have more than two million people who help to deliver our 30 million packages per day. We do not own warehouses, but we manage tens of thousands of other small and medium-sized delivery companies. We do not own any inventory, but we have more than 350 million buyers, 120 million buyers coming to shop with us every day. Our global revenue is 390 billion, possibly bigger than Walmart globally. Here in America, e-commerce is e-commerce. In China, e-commerce is a lifestyle. It's like Starbucks. It's not about how much people like coffee, it's about the lifestyle of going to Starbucks. So it's fascinating thinking about sort of the shape of the business, the fact that it's a super low asset. It's a very asset-like business relative to Amazon that has warehouses and delivery trucks. It's about like 20,000 more delivery trucks or something. Alibaba has none of that. None of it. Super asset. Jack also talks about his, I think he means this as his vision, but also the business model of the company. They support entrepreneurs. He was an entrepreneur in China multiple times before starting Alibaba. So how do they make all that work? There are thousands of entrepreneurs who have logistics companies that operate on the platform. There are thousands of entrepreneurs who are sellers on the platform. They just provide the platform for everybody. As you say, I mean, it's kind of like we were talking about earlier. It's like Amazon plus Google. It's Amazon with the capital attributes, intensity attributes of Google. That's a great way to phrase it. Yeah, super cool. That's in an hour and a half or less. The history of facts, Alibaba. Should we move on? Yeah. We do narratives on the show. So we're switching our narrative theme to be specific to what's the bull case, what's the bear case. I think we've made a lot of it along the way here. The bull case is easy. When they were getting ready to IPO, they had 280 million customers spending 300 billion a year on everything. It was the dominant way that people bought things on the internet in the largest emerging economy in the world. They handle 86% of online retail sales in China. How bananas is that? That's a bunch of bananas. I don't know. I don't know the share price, but it's not hard to believe that this is going to be a juggernaut for a long time. I guess I don't know how to look at how much is priced in, but the bull cases, come on, guys. How could you not believe in this? There's a few reasons to be a bear. People, one was that the IPO price, people believe, was too high because they do have a large growth multiple. The company is expected to continue growing at this crazy rate that it's been growing. Of course, we're talking in terms of 2014 here, but it's already a huge company. It's already doing 86% of e-commerce in China. How could it possibly keep growing at the rate that it needs to in order to fulfill the market cap? The other bear case is people basically saying, look, I don't trust the structure. I'm not directly buying a share in the thing that creates the value. I'm buying shares in a thing that has an agreement with a thing that creates value. I think this was probably the biggest knock against the company and the IPO. The risk is what is going on with Alipay? Right. Not to mention, whenever you're buying a Chinese IPO, there's the factor of I don't know how risky things that the government could do will be. Like forcing potentially force. It's unclear why they did it, but probably because at least in the park as the government, forcing this business to transfer its most promising, potentially largest future business outside of the company. That's the sort of bear in bull case. If you look at where at IPO'd in 2014, the market cap was... That's under 240 billion. Okay. It has approximately doubled since then. It was up in the low 500s earlier this year. It's now down around 400. But over what four years they've managed to double their market cap. They obviously generated a ton of cash and continue to reinvest that. Well, we're bleeding into tech names, so I might as well just say it. I can't think of... We haven't covered the B and the T head of of BAT in China. It's Baidu and Tencent. So we may revise this statement after doing that, but I don't think so. I think you can make an argument that there is no entrepreneur and no company that has ridden a bigger wave better than Alibaba has. That wave is the consumerization of China and the rise of middle class in China from nothing. If you think about Alibaba, it went from... They just timed this perfectly. Capitalizing on businesses being started in China. So entrepreneurs, this is the beginning of Maid in China. Alibaba was there for that and helped facilitate Maid in China getting distributed around the world. Then they were there with TABOW to bought in China. What are all the entrepreneurs and people who started businesses and people who work in these businesses who've now made money? They want to producing things now they want to consume. Alibaba rode that better than anybody and eBay at its own game. Now what's next is what happens to all that wealth in China? Who manages it? Where are these people going to keep their money? How they going to manage it? How they going to grow it? Who's best positioned to do that? Alibaba and Alibaba, it's incredible. It really is the ultimate marketplace business. I think you think about the ultimate... There's a... bleeding into my... on page 139 of the F1, which is sort of the foreign filing of the S1, they have a slide that's the network effect on and across our marketplaces. There are a Disney-like amount of arrows that are between all these different properties and how it all fuels each other. David, not only do they ride the wave well, but they created just an incredible number of modes around their business and around how it's absolutely a no-brainer for everyone in the ecosystem to use their infrastructure. Totally. I'm so excited that Jack Ma's retiring because we're going to have to call him up at Wave and ask you to weaken back his new business. I'm sorry. He's the best marketplace entrepreneur of all time. We'll take basis, but I think head to head, I would have to choose Jack here. Bold. Another one that I've got is just as customer obsessed as Amazon. Jack regularly says the priorities of our business are that the customer is number one employees are number two and the shareholders are number three. A big part of why he talks about that is when things have gone rocky for our business, shareholders have gone away and Capital hasn't always been there for us and certainly hasn't been incredibly supportive and our employees stick with us, but it's really always about the customer. A lot of people say that it's easy to say, but when you prioritize things, the important bit that you're saying is not what you're calling the first priority, it's what you're calling not the first priority and being willing to commit to being consistent in saying that that other thing is not the highest priority for us. I think in doing a lot of crazy things to satisfy the customer, they're often giving up margin, but it's been a 20-year bet much like Amazon to do that. Well, it's about trade-offs, right? You've seen it in the history, right? They Jack was willing to be incredibly generous, perhaps to the point of ludicrously so with the company's equity, not only in equity for employees, but the investments he took and how much he was willing to give up to shareholders. But it comes from a mindset of what do I need to do to build the base to have the employees who can serve the customers? I need that capital. OK, I'll sell 40% of the company because that's going to help me have the employees and the infrastructure to serve the customers best. My other tech team that I think this story illustrates really well and this is subtle and hard to get in the investing world and hard to get right. But Jack does this so well in the company. If you're in a market that is, you think is going to grow rapidly in the future, like small businesses in China, like consumers in China, like wealth in China, what matters is not who has the most market share of that market today. What matters is who is going to have the most market share tomorrow. And this is like, I mean, that sounds obvious, right? But look at, I think you can apply this framework to food delivery in the US, right? Like food delivery was a super quote-unquote over-invested category a few years ago. You had door dash, you had postmates, you've got caviar, you've got Amazon Prime now and all the stuff. And people are like, why are people throwing money at this and like, what is it matter? And isn't this category done? Well, no, it was just getting started, right? And so now, you know, door dash is what, like, a $5 billion company, right? People thought it was crazy to invest in that. But what mattered wasn't like who was winning at the time. But mattered was who was going to win in two or three years when the market was much, much bigger. Mm-hmm. It's a great point. Yeah, I think you and I are having a conversation around a separate topic last week. And actually, we were, this is what we were thinking about. We were thinking about acquired sponsorship stuff. And we were like, great, we have this pile of money from sponsorship. How much should we plow into growth? And you said, well, do you still think there's growth ahead of us? And I was like, well, absolutely. And you're like, well, then all of it. And in fact, more, how do we go, you know, like, where can we go borrow to be able to invest even harder? And so it's such an interesting framework for thinking about a business that it's like, to the extent that you believe there's growth ahead of you, you should invest 110% and to the extent where you feel like you've had all the growth you can, that's when you start harvesting. Yeah, totally. Or like, you know, Google Dropbox, both great examples of this. Before Google, there were lots of search engines, right? So, you know, altivist or Yahoo or whatever had so much more market share. But like the question was in the totality of the search market, where like most consumers have not yet come online. And so like there was still an opportunity to win those future consumers. Same in storage. Like, there were tons of storage companies before Dropbox and Box, right? But like, the vast majority of the market hadn't happened yet. And so they could win that future market. Well, so you move on to grading? Let's do it. So normally the way that we grade IPOs is for the post IPO shareholders of the entity was or just say the shareholders of the entity was IPOing a good idea and did it allow them to do value creating activities with the cash that they generated. That's also relative to their other options. Probably Baba is such an outlier in every way that I can't point my finger to one thing having that cash allowed them to do that if they didn't IPO, they wouldn't have been able to do. I can't point my finger to like one reason why they needed to go public. But like, it was the inevitable thing. They did it in a phenomenal way. They've grown really well since then. It's hard to not see this B and A and it kind of breaks a lot of our criteria. Yeah. Well, even just think about this, right? The stock has doubled since the IPO four years ago. Okay. Sounds fine, right? That sounds like not bad performance but not amazing. But what does that mean? The stock has doubled. That means that at IPO, it was a $240 billion market cap company. They have created $240 billion of market cap creation in the basis rather than a relative one. Exactly. That's insanity. Where else can you go park $200 billion, to turn it into $400 billion? One of like Apple or Amazon a few years ago. No, well, they don't have the same growth. Anywhere close to the growth rates. No, they do. Amazon is definitely a better investment. Yeah. Amazon was a better investment in terms of market cap creation. But what's interesting about this, I'll get to great a kind of promise, is what has happened is so clear, like doing this episode, doing this research to me is now so clearly I see where the Vision Fund came from. Because like, Massa and Softbank parked a long time ago a small amount of money. But like, when this was the largest IPO ever, right? And in four years has doubled in size and that's created $250 billion of market cap. I think he saw that and was like, oh, these huge, huge tech companies and huge categories can still create like, it's, it's, is your value creation ahead of you or behind you. It took Alibaba 19 years to get to a $240 billion market cap. It took them four years to create another $240 billion of market cap. You can invest these huge, huge sums of capital and still get massive dollar returns on it. So you look at that and then you look at like, through that lens and you look at what they've done with ride sharing, with Uber, with Grab, with Dede, with all the other ride sharing companies they've invested and other stuff that they're doing, I think it's just I think it's informed by this insight, right? Yeah, that's a really good. I mean, he had a front row seat to all of it. So he's a lot of reason to believe that it's possible and can happen again. Yeah. Now, of course you're like going to be wrong on this. But. That's why it's a fund. Well, then that's why it's a fund, right? But like, that's what, that's what's interesting here is like, if something works, it's almost like venture capital dynamics, like you two X a huge investment, but you just two X like that's $250 billion a market cafe there. Like that can pay for a lot of losers. It can. Yeah. So, grade this was for sure an A because otherwise like this value creation, A wouldn't have happened in the public markets. But B, I think it's unlocked like a whole new way of thinking about technology investing and we may look back on this in a few years and be like, man, what were we smoking back then? But I think if you look at the fundamentals of a Vali Baba and the business, just like we've been talking about, it's like, it's real, you know, like they're going to be the largest financial institution in China. They already are. They're going to be the largest financial institution in the world. That's incredible. Yeah. For sure. Well, ant financial episode will have to come soon. Yeah. Coming soon. All right. All right. Carvouts. Carvouts. All right. Mine is the origins podcast by the guys over at Notation Capital, which is a great podcast all around. But on episode 33, they had Mike Maples, Jr. from Floodgate Capital on. And Floodgate was really one of the first seed funds in 2005, 0405 in the Valley. And Mike is brilliant and a visionary and knows what he's talking about and he's got some numbers to prove it. So he revealed on the podcast, they invested $750,000 in lift at 5.5 million post. They were in Twitch at a 3 million pre. They were in Weebly at a 2.1 million pre. I mean, they've just had some awesome, awesome investments over the years. This podcast is so interesting because so the origins podcast is a podcast for LPs and sort of about the relationship between VCs and LPs. There's sort of no one who's thought more deeply about that than than Mike over the years. And one of the really interesting points that that he talks about is how your fun size is your strategy. And a lot of people set out with a strategy and then raise a different fun size because they were targeting something and didn't hit it. Or they were oversubscribed and decided to open it up more. Or in some ways somehow their fun size ended up being discongerant from their strategy because they were aiming on a set of things where there was only a finite number of companies but they were very successful. So now they have a freaking huge fund and they have to figure out what to do about that. I haven't been this enlightened on sort of thinking about the venture landscape in a while. And I think that if you're interested in why venture is hard and what competencies it takes to be a venture investor, it's really, really interesting. And I can't suggest it highly enough. So Mike Maple's Jr. on the origins podcast. Super good. I love the origins guys and Mike was just great on this podcast. So definitely, definitely recommend it. This has been my life for the past two years is figuring out our strategy at wave and our fun size and aligning all that. It's actually a lot harder than you might think. We've had to do a lot of thinking and planning around that and are still doing so even after we've raised the fund and are making investments. So super great. Anybody who cares about the business venture, we will love this podcast. Mine is very relevant to this episode. So way back, I can't remember what episode, maybe with Snap, we did as, I think I did as a car about the Sunsouz, the Art of War, which is fantastic. Always worth rereading. Sort of inspired by that and some other stuff. And this mini series on China that we're doing, I just finished reading The Romance of the Three Kingdoms, which is another ancient Chinese text. And it's kind of like, this is a super bastardization of it. But like, in general, you could think of this as like a very extended, novelized version of the concepts in the Art of War. It's super cool. It was written in the 14th century about like the second century, the three kingdoms era of China and battles between them and famous generals and warlords. It's super cool. It's historical fiction. All of these things happen. They definitely didn't happen as described in the novel. There's magic and all sorts of stuff. It's like a novelized version of history and really fun to read. It gives a lot more insight into the very short stuff in the Art of War. I'm like, oh, that's what he's talking about, right? Cool. I got to add to the list. It's a long list. Yeah. If you've got a couple of months to get through thousands of pages of translated Chinese texts, highly recommend it. Perfect. All right, listeners, that's going to do it for today. Thanks for going on another journey with us. If you like the show, tell your friends, scream it on the internet. However, your favorite way to do so or leave us a review on Apple podcasts. Indeed. We'll see you next time.