by Duncan Clark
The shock waves from China.com’s July 1999 IPO reverberated across the mainland’s nascent tech community. How had a guy with a website that almost no one had heard of raised so much money overnight? The IPO unleashed a frenzy of investments and deal making as entrepreneurs across the country concluded, “If China.com can do it, so can I!”
Chapter Seven
Backers: Goldman and SoftBank
The Internet [is like] beer . . . the good stuff is at the bottom. Without the bubbles, the beer is flat and nobody would want to drink it.
—Jack Ma
On its first day of trading on the Nasdaq, China.com—a company with only $4 million in annual revenues, on which it had lost $9 million—closed the day worth $1.6 billion. Peter Yip had listed only a small number of shares, so investors cast around looking for other China Internet stocks to buy. The problem was, there weren’t any.
Seizing the opportunity, venture capitalists and entrepreneurs leapt into action. In Hong Kong there was a sudden explosion of tech gatherings, speed-dating exercises between young entrepreneurs and the investors that wanted to back them. One of the largest meet-ups was called “I&I,” short for “Internet & Information Asia.” The event had been around for a while, typically with a few people gathering around a table in one of the tiny bars of Lan Kwai Fong, just up the hill from the city’s main central business district. But the China.com IPO changed all that. Suddenly hundreds of people showed up at I&I, the venues switching to five-star hotels like the Ritz-Carlton as banks and law firms tripped over one another for the right to sponsor the champagne and hors d’oeuvres. Hong Kong was ready to package the deals, but the market and the entrepreneurs to build the companies were across the border in mainland China. Suddenly Beijing and Shanghai were awash in deal makers. The China Internet bubble had officially begun and new dot-com ventures started to sprout up like weeds. Alibaba would have to fight for its share of sunlight.
Media Coverage
Before even the VCs had showed up, foreign media arrived to cover the China Internet story. Jack became a regular fixture at tech and investor conferences around the country, his comments so quotable that the Los Angeles Times called him a “sound-bite machine.”
Soon after the China.com IPO, a BusinessWeek magazine cover story named Jack one of “China’s Web Masters.” Alibaba had yet to generate meaningful revenues but BusinessWeek predicted that investing in B2B e-commerce could mean an even bigger payoff than investing in China’s three portals.
On August 31, 1999, an article written by my colleague Ted Dean appeared in Hong Kong’s leading English-language daily, the South China Morning Post.1 Ted had first met Jack a year or so earlier when Jack was still working for the government. In the article, Ted predicted that Alibaba “may turn out to be a global powerhouse” in B2B e-commerce. Jack laid out his ambition: “We don’t want to be number one in China. We want to be number one in the world.”
In our small investment consultancy, we were hearing a lot of those kinds of statements and were already becoming a bit cynical about the dot-com boom. But after interviewing Jack for the article in Hangzhou a few days earlier, Ted told me there was something about Jack that was different. I knew I had to meet him.
When Jack invited me to visit, I hopped on a train from Shanghai to Hangzhou. I booked myself back into the Shangri-La Hotel, the same hotel where Jack as a boy had first approached David Morley to practice his English. After checking in I took a taxi over to the Lakeside Gardens apartment.
I was immediately struck by Jack’s infectious enthusiasm and capacity to charm, influenced no doubt by growing up in a household where both his parents practiced pingtan, the traditional art form that includes comedic routines.
In his article, Ted had quoted Jack saying, “If you plan, you lose. If you don’t plan, you win.” After working in Beijing, the land of the five-year plan, I found Jack’s spontaneity refreshing. Foreign professionals2 began to enter Jack’s orbit, giving Alibaba an international flavor within months of its founding. Alibaba also had a strong component of female executives,3 adding to the achievement of women making up one third of its founding team—in contrast to many Silicon Valley–based companies.
Goldman Invests
Meanwhile, in Hong Kong, shortly after their unsuccessful fund-raising trip to Silicon Valley, Joe had started negotiations with Transpac, a Singapore-based fund, about investing in Alibaba. Soon they had agreed to a term sheet that would value Alibaba at $7 million.4 But Transpac insisted on an onerous provision5 and Joe wanted to walk away.
He then called up a friend at Goldman Sachs. Like Joe, Shirley Lin was born in Taiwan and educated in the United States. The two had met a decade earlier. For Alibaba it would prove to have been a fateful encounter.
In the summer of 2015, I met up with Shirley in New York to talk about Goldman Sachs’s transformative investment in Alibaba in 1999. Shirley and I have known each other since 1999. We had been classmates at Morgan Stanley, the investment bank we joined fresh out of college. While I stayed on at Morgan Stanley, Shirley had left after a few years for Goldman Sachs to start making investments in technology and Internet companies across Asia.
Ten years before the Alibaba deal, Shirley and Joe had met by chance on a long plane ride from Taipei to New York. “I was going back to Harvard, he was going back to Yale. We were seated adjacent to each other.” She remembers Joe’s face was buried for most of the trip in a book on constitutional law. He remembers Shirley intently reading the Wall Street Journal, cover to cover. After a while they struck up a conversation. Contemplating the books and exams that awaited them back at college, “pretty soon we were both lamenting each other’s fate,” Shirley told me.
As Jack and Joe had already discovered, there weren’t many investment firms in Asia with much experience in technology companies. In 1999, Shirley was already busily placing bets6 on China Internet companies, ultimately investing in all three portals. Goldman invested directly in Sina and NetEase, and indirectly in Sohu.7
Goldman had given Shirley and her team a lot of leeway, provided she kept the investments below $5 million. This was peanuts to Goldman, whose Principal Investment Area (PIA) unit would make $1 billion in investments in tech companies from 1995 to 2000, one-quarter in companies based in Asia.
With so few funds already on the ground in Asia, Shirley was bombarded with requests for investment from her Harvard classmates and other friends pursuing the new wave of dot-com riches. The quality of the business plans was pretty low, often simple copy-and-paste jobs. Shirley and her team worked around the clock, wading through stacks of pitch documents, investing, she estimates, in less than one in a thousand.
While the easy route was to invest in companies with at least one known quantity—founders who were classmates or friends—for the China Internet story Shirley had a strong preference in finding homegrown talent. “I really thought that to invest in China, you have to know the local market.”
But scouring through China start-ups had its drawbacks. Traveling on unpaved roads in provincial cities, Shirley felt more like a loan officer with the Asian Development Bank than an investment banker. She also had a hard time being taken seriously: “Even though we were at Goldman, people in China didn’t know who we were. They asked, ‘Are you Mrs. Goldman? Are you married to the owner of this business?’ They thought Goldman and Sachs were two people who owned the company, and I must be married to one of them.”
So when Joe Tsai approached her about a start-up run by a local entrepreneur in Hangzhou, she was interested, particularly when he told her he planned to join the company. Shirley decided to fly up from Hong Kong to Hangzhou to meet Jack in late September 1999.
Jack, she recalled, was “as local as it gets.”
“I went up to the apartment, where they were all working twenty-four/seven. . . . The whole place stank. Jack’s ideas were not entirely original—they had been tried in other countries. But he was completely dedicated to making them work in China. I
was moved by what I saw.”
As with Joe before her, Shirley was less impressed by the business itself than by the team, the real reason she would decide to invest: Who were they? What was their history? Knowing Joe checked one box. Seeing Jack and the team in action checked another. “Really, it was all about Jack and his people.” Shirley remembers being impressed by how hard Jack’s wife, Cathy, was working. She and Jack toiled away, she recalled, like “revolutionary comrades.”
Alibaba had been approached by other investors, but Shirley knew that the backing of Goldman would make all the difference for an unknown start-up in China. They discussed the investment over tea. If Goldman invested, she told Jack and Joe, she would personally ensure Alibaba was known to the world. With B2B competitors like MeetChina waiting in the wings and actively fund-raising, the offer proved too tempting to resist. Shirley negotiated to acquire a majority stake in Alibaba for $5 million. She headed back to Hong Kong, where her colleagues Paul Yang and Oliver Weisberg8 drew up the term sheet for the investment.
The following weekend Shirley was swimming with her family at the Repulse Bay beach on the south side of Hong Kong Island when her cell phone rang. It was Jack. He really wanted to do the deal but asked Shirley to leave him more equity. If Goldman took a controlling stake in his company, he explained, he couldn’t feel like a true entrepreneur. Jack told her how he’d put everything into the venture. “This is my life,” he said. Shirley replied, “What do you mean this is your life, you’ve only just started?” Jack explained, “But this is my third venture already.” Jack finally convinced her. The term sheet for the investment had been drawn up, but there were brackets around the numbers so it would be an easy change. Goldman would invest the $5 million for 500,000 shares, half the company, while retaining veto rights over key decisions.
Just after she had agreed to the new terms, mid-conversation with Jack, she accidentally dropped her cell phone into the sea. Oops, she thought to herself. Well, I guess there goes $5 million.
Jack had succeeded in securing a big-name investor in what would prove a critical step in Alibaba’s story. But he would also come to regret selling such a large stake in the company, 50 percent, which he would never recoup. In reality, though, Jack had little choice. He was an unproven entrepreneur based in a provincial city in China who was negotiating with a huge, global financial institution. But having already given out a lot of equity to his cofounders and now 50 percent to investors, he ended up with a much lower share of his company than many of his peers. Jack would later joke, only half-kidding, that it was the “worst deal I ever made.”
When Shirley took the deal to her investment committee, which oversaw all the fund’s investments, she encountered an unexpected snag. They pushed back. If Goldman invested the full $5 million, the fund would need to gain the approval of their investors. “Please get rid of some,” they told her. So, Shirley reduced Goldman’s stake to 33 percent. Now she quickly had to find investors for the other 17 percent.
Today the thought of having to cast urgently around for buyers willing to pay $1.7 million for a 17 percent stake in Alibaba, now worth tens of billions of dollars, is laughable. In the end she brought in Thomas Ng of Venture TDF, who had met Jack and Joe that summer in Palo Alto, for half a million dollars. Fidelity Growth Partners Asia came in for another half a million. Joe had already told his employer that he was going to join a start-up in China. When Joe informed his boss, Galeazzo Scarampi, that he had found investors and was going to leave to join Alibaba, Investor AB also came in for a slice. Transpac rounded out the balance of the $1.7 million investment alongside Goldman’s $3.3 million.
Some of the investors, including Venture TDF and Fidelity, held on to their stakes all the way through Alibaba’s 2014 IPO, generating returns of billions of dollars.
When the Goldman-led round was finalized on October 27, 1999, the investment cemented Joe’s authority as Jack’s right-hand man.
The $5 million round led by Goldman was a start, but peanuts compared to the war chest of the three China portals, who were besieged by eager investors as the Nasdaq began its vertiginous climb, gaining 80 percent in eight months, valuing its component companies at $6.7 trillion in early 2000.
All eyes were on the companies who positioned themselves as the Yahoo of China, as well as the moves of Yahoo itself in China. In September 1999, Yahoo, then valued at $36 billion, announced a partnership with Founder, the largest local PC manufacturer at the time, targeting the mainland.9 At the same time, Sohu, Sina, and NetEase ramped up their fund-raising.
Sina would raise the most, including $60 million in November 1999 from investors, including Goldman Sachs and SoftBank, putting the company in pole position for an IPO in the United States. Sohu raised $30 million, its founder Charles Zhang capturing the mood of the day: “This is a game of spending money and how fast you can spend money.” Even William Ding at NetEase relented, raising in two rounds $20 million from investors, including Goldman Sachs, but not without venting his frustration that now “people never ask you about your new products. . . . They only ask you, ‘When is your IPO?’”
On October 7 Alibaba tried to grab some of the limelight with a press conference in Hong Kong to announce a new version of its website and disclosing that it was open to an IPO in the United States or on the planned “second board” of the Hong Kong Stock Exchange, the Growth Enterprise Market.
Caught up in the excitement of Hong Kong, Alibaba also announced that it would move its headquarters there from Hangzhou. Jack had been spending most of his time in Hong Kong, working with Joe and some new recruits out of a conference room in Goldman’s office. The contrast couldn’t have been greater between Alibaba’s humble, second-floor Lakeside Gardens apartment in Hangzhou and its new perch atop the gleaming Citibank Plaza skyscraper with breathtaking views over Victoria Harbor.
To support Goldman’s newest portfolio company, Shirley Lin conducted a series of interviews with media in Hong Kong, even going on local television stations to spread the word about Alibaba. “My Cantonese was so bad back then they had to subtitle me,” she recalls.
When Goldman moved to even shinier new offices atop billionaire Li Ka-shing’s brand-new Cheung Kong Center, Alibaba signed a lease on its own impressive (and expensive) new space, the first major outlay from Goldman’s $5 million that had hit the bank. Alibaba could get down to business.
Its business was simple: to become the leading website in China for business-to-business leads. To match buyers with sellers, Alibaba organized its members’ postings into twenty-seven industry sectors, such as “Apparel & Fashion,” “Electronics and Electrical,” and “Industrial Supplies.” Users could sign up for free to receive notification of trade deals, and search for offers to buy or sell within a sector or a geographical area. By October 1999, Alibaba had signed up more than forty thousand users. Now it had to go for a much higher quantity of users, while maintaining the quality of the messages tacked onto its virtual bulletin board.
Most of the sellers on its site were export or trading companies in China, including a strong representation of firms led by Zhejiang entrepreneurs. The Internet was still new for many of these firms, but they quickly became loyal users of Alibaba.com. Many lacked the scale or connections needed to trade through the state-owned trading companies, and some were located in remote areas that made traveling to trade shows like the Canton Fair too expensive. Having grown up among them and served them as clients of Hope Translation and China Pages, Jack had a keen sense of what these small firms needed: “Most SMEs [small and medium enterprises] have a very changeable dynamic. Today they might sell T-shirts, tomorrow it could be chemicals.”
To attract buyers, Alibaba needed to ensure vendors’ listings were translated accurately into English. Drawing on the talent pool of university graduates in Hangzhou, Alibaba started to hire English-speaking editors to ensure that the posts on the bulletin board were complete, intelligible, and properly categorized. Leveraging his contacts from M
OFTEC in Beijing, Jack also hired recruits with trade know-how to make the website attractive to foreign buyers.
Posting on the site, for buyers and sellers, was free—a central tenet of Jack’s approach throughout his career. His “if you build it, they will come” approach helped him pull clear of any rivals. If visitors to Alibaba.com were able to make new trade leads, he figured, they would demonstrate increasing loyalty, or “stickiness” to the website.
But while free was great for users, it was a tough business model. Alibaba was vulnerable to any downtime in the Internet funding frenzy. Also, as traffic grew dramatically on Alibaba’s website, maintaining the quality of postings was a big job. If Alibaba wasn’t careful it could be overwhelmed. Another challenge was the increasing competition for talent. In the dot-com boom, skilled employees constantly jumped ship to rival ventures or, tapping the growing pool of venture funding, tried their luck at their own start-ups. The cost of talent started to spiral upward, including for the software developers, Web designers, and project managers that Alibaba would need to build out its offerings.
Here Alibaba had two important things going for it: Hangzhou and Jack Ma. Unlike Beijing and Shanghai, where turnover of qualified employees was a major headache for entrepreneurs, Hangzhou had a deep pool of fresh graduates and very few local employers. In addition, Alibaba benefited from Hangzhou’s relative isolation. There weren’t really any rivals to poach his employees. A few other technology firms were located in the town, such as UTStarcom or Eastcom, but in the dot-com craze these were fast becoming “old economy” ventures. Alibaba also benefited from Hangzhou’s distance from Shanghai—then some two hours away. For young talented engineers in Hangzhou who wanted to work for a fast-growing Internet venture, Alibaba was it.