Alibaba

by Duncan Clark

  In China, the Taiwan-born Jerry Yang became a hero. The public was fascinated to learn how an immigrant to the United States had become a billionaire before the age of thirty.

  Suddenly there was a flurry of interest in Yahoo’s “portal” business model, its directories and search engine connecting users to the rapidly expanding universe of online content. Chinese portals, or men hu (literally “gateway”) began to appear. A triumvirate soon emerged as the country’s “portal pioneers”: Wang Zhidong, Charles Zhang, and William Ding. Unlike Jack, they had all excelled at their studies and had strong technical backgrounds. The firms they founded were Sina, Sohu, and NetEase.

  Portal Pioneers

  Wang Zhidong, the founder of Sina, was already well known, famous for having created several popular Chinese language software applications—BD Win, Chinese Star, and RichWin—that helped people in China use the Microsoft Windows operating system. Born in 1967 to poor but well-educated parents in south China’s Guangdong Province, Wang excelled in math and science. He secured a place at Peking University, where he studied radio electronics. In 1997, Wang was the first of the three portal pioneers to raise significant outside investment—nearly $7 million—for his firm, Stone Rich Sight, based on his proven track record as a software developer. In the summer 1998 he launched a dedicated website featuring soccer results in time for the FIFA World Cup held that year in France. This generated a lot of traffic, and the company shifted its focus from software to the Internet, later merging with another company to become Sina.

  Charles Zhang (Zhang Chaoyang), the founder of Sohu, was born in Xi’an. One month younger than Jack, he won entry to Tsinghua University to study physics before heading on to the Massachusetts Institute of Technology (MIT). After attaining a Ph.D. in physics, Charles stayed on as a postdoc, working to foster U.S.-China relations through MIT’s Industrial Liaison Program. Inspired by the success of Netscape and Yahoo, Charles decided to launch his own Internet company. His original plan was to launch it in the United States, but as a recent Chinese immigrant he felt excluded from the mainstream, including being unable to attract the interest of the media—something unlike the two other media-shy portal founders—he was particularly attached to. “I constantly thought I was an outsider. For example, here [in China] I receive interview invitations, but in the States I would probably never have been able to be on their news shows. So I came back.”

  Charles returned to Beijing in 1996. He set up his company with the encouragement and financial support of two MIT professors, including Ed Roberts, who at the time of Sohu’s IPO four years later held a 5 percent stake. Charles was the sole returning student, known as “sea turtle” (haigui) of the three pioneers. His greater exposure to the U.S. technology scene gave Charles a head start. In February 1998 he was the first of the three to launch a Chinese-language search engine and a website directly inspired by Yahoo, even down to the name he chose for his venture: Sohoo.com, later changing the name to Sohu.com.

  William Ding (Ding Lei) was born in Ningbo, seven years after Jack. He studied computer science in a technology university in Chengdu. After returning home to Ningbo to work for the local branch of China Telecom, William moved to Guangzhou in southern China to work for the U.S. database company Sybase, then for a local technology firm. In 1997 he launched his own venture, which rolled out the first free, bilingual email service in China. William’s venture soon became profitable with the income generated by licensing the email software to other companies. In the summer of 1998 William switched his business from software development to the Internet and launched his website NetEase.com. Initially popular in southern China, NetEase quickly signed up email users all over the country, 1.4 million by the end of 1999.

  While Wang Zhidong, Charles, and William were surfing the waves of China’s exciting new dot-com sea, Jack was languishing on the dusty dot-gov shore. His job title was general manager of Infoshare Technology, a company set up by the China International Electronic Commerce Center (CIECC),2 itself a unit of a department of MOFTEC. At CIECC Jack led the development of MOFTEC’s official website, www.moftec.gov.cn, which launched in March 1998. Calling some of his China Pages colleagues to join him in Beijing, Jack then developed another website for MOFTEC, www.chinamarket.com.cn, which launched on July 1, 1998.

  The China Market site, which listed more than eight thousand commodities divided into six categories, invited visitors to post supply and demand information and enter into “confidential business negotiations in encrypted Business ChatRooms.” The new site attracted the praise of government officials, including MOFTEC minister Shi Guangsheng, who called it a “solid step by China to move into the age of e-commerce.” The official Chinese government news agency, Xinhua, commended the site for its “information reliability and orderly operation,” with all visitors vetted by the government to ensure that they were valid businesses.

  The reality, though, was that all the offline bureaucracy involved in registering on the website made it unappealing to businesses, especially because the website could not facilitate any orders or payments. In other words it was just a bigger and government-backed version of China Pages. Jack fervently believed in the unfolding age of e-commerce, but he also knew that the future belonged to entrepreneurs, later recalling that “it was too tiring doing e-commerce in the government. . . . E-commerce should start with private enterprises.” Working for CIECC, Jack was buried by the many layers of government officials above him, including Xing Wei, his fierce boss at CIECC.3

  Jack became increasingly frustrated as he watched the triumvirate of portal pioneers gain momentum: “Here I was, I had been practicing for five years in the Internet field,” Jack recalled. “Everything was changing very quickly. If I stayed in Beijing I couldn’t do something really big; I couldn’t realize my dreams as a public servant.”

  But his government perch ended up giving Jack another lucky break: his first encounter with Jerry Yang, the cofounder of Yahoo. In the coming years, the fates of Jack Ma and Jerry Yang would become ever more closely intertwined.

  As the general manager of Infoshare, and a fluent English speaker, Jack was asked to receive Jerry Yang and his colleagues, who in late 1997 came to Beijing to look for opportunities for Yahoo in China. Jack’s experience as a self-appointed tour guide in Hangzhou came in handy now in Beijing since Jerry was traveling with his younger brother Ken, and was keen to see some of the sights. Jack introduced him to his wife, Cathy, and they took Jerry, Jerry’s brother, and Yahoo vice president Heather Killen to visit Beihai Park, opposite the Forbidden City, and the Great Wall. Here they took a photo that would play an important role in helping separate Jack from the pack, illustrating Jack’s early meeting with the global king of the Internet at the time.

  Jack as Jerry’s tour guide at the Great Wall. Heather Killen

  Jack; his boss, Xing Wei; Jerry Yang; and Heather Killen in front of a photograph of then President Jiang Zemin. Heather Killen

  On the visit Jack also took Jerry and Heather to meet the vice minister of MOFTEC. Jack’s charm offensive paid off. In October 1998, Infoshare was appointed the exclusive sales agent for Yahoo in China.

  But Jack was already actively planning to slip free of the constraints of government. Back at the Great Wall, Jack organized an off-site meeting with some of his Infoshare colleagues, an outing since feted by the company as the unofficial launch of Alibaba. But Jack was worried about the consequences for him and his planned new venture of walking out of his government job. A friend advised Jack to feign illness, a common ruse in China to escape from such predicaments. Jack did in fact come down with appendicitis a few months later, but by then he was already back in Hangzhou and his new venture was well under way.

  Jack and some of the cofounders of Alibaba at the Great Wall of China in late 1998. The company would be launched a few months later. Alibaba

  What’s in a Name

  Jack decided to call his new venture Alibaba, a curious name for a Chinese company.


  Jack has been asked many times why he chose an Arabic name for his company rather than something derived from his passion for Chinese martial arts or folklore. Jack was attracted, he said, by the “open sesame” imagery, since he hoped to achieve an opening for the small- and medium-size enterprises he was targeting. He was also looking for a name that traveled well, and Alibaba is a name that is easy to pronounce in many languages. He liked the name since it came at the beginning of the alphabet: “Whatever you talk about, Alibaba is always on top.”

  In China, a song titled “Alibaba Is a Happy Young Man” was popular at the time, but Jack says the idea came to him4 for the website on a trip to San Francisco: “I was having lunch, and a waitress came. I asked her: ‘Do you know about Alibaba?’ She said, ‘Yes!’ ‘What is Alibaba?’ And she said, ‘Open Sesame.’ So I went down to the street and asked about ten to twenty people. They all [knew] about Alibaba, Forty Thieves, and Open Sesame. I think, this is a good name.”

  But there was a problem. The domain name alibaba.com was registered to a Canadian man who was asking for $4,000 to transfer it over, a transaction that involved some risk if he didn’t hold up his side of the bargain. So Jack launched5 the Alibaba site using alibabaonline.com and alibaba-online.com instead. Alibaba cofounder Lucy Peng recalled how the early team members had joked they were working for “AOL,” short for “Alibaba Online.”

  Jack soon after decided to buy the alibaba.com domain name.6 Alibaba executive vice chairman Joe Tsai later recounted to me that Jack was nervous about wiring funds to the Canadian owner before he could be assured of gaining control (a problem that the escrow function of Alipay would later solve): “He didn’t have that kind of money, so was scrounging around. But Jack is a very savvy businessman, he has that innate ability to say, ‘All right, I’m gonna trust this guy.’ A lot of entrepreneurs don’t trust other people.” Jack went ahead with the wire transfer to the Canadian, who (true to national stereotypes) proved honest, and Jack gained control of alibaba.com.

  The widespread recognition of the Alibaba name has saved Jack a lot of money in marketing expenses and a ready supply of imagery such as the forty thieves, and 1,001 nights, and other elements he still often incorporates into his speeches.

  Lakeside Gardens

  Alibaba was launched in Hangzhou by Jack’s friends, supporters, and colleagues, including some who joined him from China Pages7 and Infoshare.

  Jack convened a meeting on February 21, 1999, at his Lakeside Gardens (Hupan Huayuan) apartment in Hangzhou. Confident in his future success, he arranged for the meeting to be filmed. With the team seated around him in a semicircle, some wearing coats to fend off the damp cold inside the chilly apartment, Jack asked his converts to ponder the question: “In the next five to ten years, what will Alibaba become?” Answering his own question, he said that “our competitors are not in China, but in Silicon Valley. . . . We should position Alibaba as an international website.”

  The reality was that Jack, late to the portal game now dominated by Sina, Sohu, and NetEase, had to find his own niche in the China Internet market. The portals were trying to capture the growing number of individual users coming online, but Jack was going to stick with what he knew best: small businesses. In contrast to the business-to-business sites in the United States that were focused on large companies, Jack decided to focus on the “shrimp.” He found inspiration from his favorite movie, Forrest Gump, in which Gump makes a fortune from fishing shrimp after a storm: “American B2B [business-to-business] sites are whales. But 85 percent of the fish in the sea are shrimp-sized. I don’t know anyone who makes money from whales, but I’ve seen many making money from shrimp.”

  Jack with other cofounders and supporters of Alibaba in the Lakeside Gardens apartment in Hangzhou, October 30, 1999. Alibaba

  When Jack created Alibaba in early 1999 China had only two million Internet users. But this would double in six months, then double again, reaching nine million by the end of the year. By the summer of 2000 there were 17 million online.

  Personal computers still cost a hefty $1,500, but prices began to fall as new market entrants like Dell set up shop in competition with homegrown companies Founder, Great Wall, and Legend (later rebranded as Lenovo). Sales of new PCs, still going mostly to businesses or government users, hit five million in 1999.

  The government’s policy of “informatization” was making the Internet more affordable. Getting a connection from the local phone company still took months and could cost as much as $600. But in March 1999 the government scrapped the installation fee for second phone lines and made it cheaper to surf8 online, too, cutting the average price from $70 per month in 1997 to only $9 by the end of 1999.

  Millions of young, educated people were coming online at their colleges or workplaces, others at the thousands of Internet cafés that were mushrooming across the country. Yahoo’s business model in the United States was to make money from the growing market for online advertising. The three China portals in turn planned to grab a piece of a fast-growing online advertising cake,9 which grew to $12 million in 1999 from only $3 million the year before. But even in the States Yahoo was losing money, and in China the bulk of Internet users had little disposable income to excite advertisers. The potential revenues for the portals were way below their expenditures. Yet in the upside-down logic of the unfolding dot-com boom, losses were not only acceptable but worn as a badge of honor: the bigger the loss, the grander a firm’s ambition. Venture capital (VC) firms were there to bridge the gap.

  Before Alibaba was even out of the starting gate, Sina, Sohu, and NetEase had started to win the backing of VCs, competing aggressively for new users and investment.

  Sina10 was formed by the December 1998 merger of Wang Zhidong’s firm SRS with the U.S. company Sinanet, founded by three Taiwan-born students11 at Stanford University. Daniel Mao, an early investor in SRS at the Walden International Investment Group, helped broker the merger. Sina.com was launched in April 1999 and the following month raised $25 million in VC from investors, including Goldman Sachs, Walden, and Japan’s SoftBank.

  Sohu raised $10 million in 1998 and more funding12 the following year on the back of soaring traffic on its Chinese-language search engine. Founder Charles Zhang was relishing his newfound celebrity status in China, and he brought on Stanford-educated returnee Victor Koo (who later left to found Youku, China’s answer to YouTube) to beef up Sohu’s management. He also tried, unsuccessfully, to hire Jack as his COO.

  NetEase was the last of the three portals to raise VC funding for the simple reason that founder William Ding didn’t really need to: He could count on a steady flow of licensing revenues from the webmail software he had personally developed. William Ding had by far the highest equity stake of any portal founder—58.5 percent—when his company went public in 2000.

  Watching from the sidelines, Jack realized he would have to hustle if he was to ever catch the attention of VCs or catch up with the portal pioneers who were speeding off into the distance. For Alibaba to thrive he would have to foster a relentless work ethic, ensuring a clean break from the bureaucratic culture that he and some of his colleagues had just left behind in Beijing. Jack exhorted the group assembled in his apartment to “learn the hard working spirit of Silicon Valley . . . If we go to work at 8 A.M. and get off work at 5 P.M., this is not a high-tech company, and Alibaba will never be successful.”

  Jack likes to put Silicon Valley companies on a pedestal, but he also likes to rally his team by saying Alibaba could knock them off it: “Americans are strong at hardware and systems but in software and information management, Chinese brains are just as good as American. . . . I believe that one of us can be worth ten of them.”

  Alibaba was formed at a time when the inflating dot-com valuations made even his loyal converts nervous about whether the bubble would soon burst. Speaking to them in his apartment Jack sought to reassure them: “Has the Internet reached its peak? Have we done enough? Is it too late for us to follow?
. . . Don’t worry. I don’t think the dream of the Internet will burst. We will have to pay a very painful price in the next three to five years. It is the only way we can succeed in the future.” To rally the troops, Jack set a goal of achieving an IPO within three years. “Once we become a listed company, what each and every one of us will gain . . . is not this apartment, but fifty apartments like this. We are just charging forward. Team spirit is very, very important. When we charge forward, even if we lose, we still have the team. We still have each other to support. What on earth are you afraid of?”

  Although Jack and Cathy together were the lead shareholders, Alibaba was cofounded by a total of eighteen people, six of whom were women. None came from privileged backgrounds, prestigious universities,13 or famous companies. This was a team of “regular people,” bound together by Jack’s energy and his unconventional management methods. To build team spirit, Jack drew on his love of Jin Yong’s novels and gave each of his Alibaba team members nicknames. His own nickname was Feng Qingyang. In Jin Yong’s book Swordsman,14 Feng is a reclusive sword and kung fu master, preparing young apprentices to be heroes. As a former teacher, Jack identified with Feng and his “unpredictable yet nurturing”15 character.

  Joe Tsai Comes to Hangzhou

  In May 1999, Jack met Joe Tsai,16 a Taiwanese-born investor then living in Hong Kong. Joe would become Jack’s right-hand man, a role he still performs more than seventeen years later. The association between the two would become one of the most profitable and enduring partnerships in Chinese business.