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From ripoff to kingmaker: How Alibaba’s IPO could create a new Silicon Valley power broker

The days in the U.S. when the word “Alibaba” represented a fabled Middle Eastern folk tale instead of a Chinese e-commerce giant are long over. The company name is being whispered through the hallowed halls of Wall Street and Silicon Valley alike, and assuming all goes well with its enormous IPO next week, it shall soon be imprinted in history.

Alibaba is expected to set a record with the largest U.S. IPO ever when it goes public on the NYSE next week, a title that has been held for the last six years by Visa, which went public in 2008. Its core product is Tmall, a marketplace connecting retailers selling products and customers buying them, much like [company] Amazon [/company], but it has a range of other services too. From a Groupon-like daily deals site called Juhuasuan to an eBay-like site called Taobao, [company] Alibaba [/company] processed $248 billion in merchandise payments on its marketplace properties in 2013. Those marketplaces saw 231 million active buyers and 8 million active sellers during the same time span.

According to the company’s public filing, Alibaba is mainly using the IPO to raise funds for its expansion in China. But its recent activity tells a slightly different story, with the behemoth investing in roughly half a dozen American startups in the last year alone. It’s too soon to know if such activity is the beginning of an Alibaba effort to take on America, or just a big PR stunt for the company in advance of its U.S. IPO.

If Alibaba chooses to turn its sights on the Western market, that would have big implications for the Silicon Valley startup and tech scene. After all, the company is a triple threat: an investor, a potential corporate acquirer, and a competitor to the likes of Amazon and eBay. It’s also a valuable asset for [company] Yahoo[/company], which still holds a 22.5 percent stake in Alibaba thanks to a smart, early investment by Yahoo co-founder Jerry Yang.

We don’t know where the next few years will take Alibaba, but at the very least it will be going head-to-head with these bigger American companies in developing markets. It will be using loads of American cash to do so, and assuming it continues its investing streak, it will be stashing some of that money in smaller American startups.

Alibaba’s rise to the top

Alibaba got its start in Hangzhou China in 1999, the brainchild of school teacher Jack Ma. It initially launched with the vision of helping small and medium sized retailers sell their wares to customers over the Internet. It was a bit of an Amazon ripoff, albeit one that hadn’t been successfully tried in China. Over the years, the company expanded, building a separate site that was a bit of an [company] eBay [/company] ripoff, and then a payments processor that was a bit of a [company] PayPal [/company] ripoff.

Jack Ma (left) and some other founders in 1998. Source: www.alibabagroup.com
Jack Ma (left) and some other founders in 1998. Source: www.alibabagroup.com

These days, it’s described as a cross between Amazon, eBay, and PayPal for China, but that analogy doesn’t entirely capture all that Alibaba does. The company has morphed and grown over the years, and this handy Quartz visualization shows that Alibaba has branches that could map to twelve different U.S. companies, from Hulu to Kaplan. From a mobile operating system to compete with Android (AMOS) to a messaging app to compete with China’s WeChat (Laiwang), Alibaba is a rainbow company with products that span a range of industries.

It has a sizeable income to show for that. Although its revenue — estimated to be $8 billion in 2013 — is surpassed by that of Amazon’s $74.45 billion in 2013, Alibaba makes a far higher profit off its revenue than Amazon does. Since Alibaba doesn’t sell its own merchandise — it merely acts as the middleman between retailers and customers — its estimated operating profits in 2013 were 48 percent, whereas Amazon’s was 1 percent.

The Yahoo investment in Alibaba was made during an era when the American consumer web company ruled as king, and Alibaba was an unproven startup out of Asia. But in the years since, Yahoo’s brand power has plummeted while Alibaba started raking in huge profits. As a result, Yahoo’s Alibaba chunk is now worth roughly $34.6 billion — almost as much as Yahoo itself at $40.1 billion. As some have said, Yahoo is essentially two different businesses: A sprawling consumer web company and an Alibaba shareholder. As part of the Alibaba IPO agreement, Yahoo agreed to sell off a chunk of its shares, which will give it a cash windfall to try to revitalize its struggling business.

Alibaba.com official launch ceremony in 1999. Source: www.alibabagroup.com
Alibaba.com official launch ceremony in 1999. Source: www.alibabagroup.com

The e-commerce giant takes on America

In the past year, we’ve seen Alibaba creep into America as it began preparing for its IPO. In June 2013, it made its first publicly reported American investment, taking part in a round in online sports retailer Fanatics that valued Fanatics at more than $3 billion. In October it followed up with two more, in mobile search engine Quixey and subscription shipping company ShopRunner. In March, it led a round in messaging app Tango, then two weeks later took part in a $250 million round in rideshare company Lyft.

But it wasn’t done there. A few months later rumors abounded — later disproved — it was heading up Snapchat’s latest round, one that would value the ephemeral messaging company at $10 billion. Soon after, it invested in gaming company Kabam, leading a Series E that valued Kabam at $1 billion.

VCs in Silicon Valley are starting to take notice. There is a new giant in their investing midst, pouring millions into American companies that hadn’t even made it to China yet like Lyft and ShopRunner.

Alibaba is throwing big numbers around, leading rounds in the hundreds of millions, some that value the recipient companies in the billion plus club. But it doesn’t appear to have much of an investment thesis, with the company targeting a wide range of markets. That has led some VCs, like Chris Evdemon from Chinese-based fund Innovation Works, to conclude Alibaba is just doing it for the press. “I see [the American investments] more as brand-building, networking exercise and IPO ‘window dressing,’ and I fail to see the strategic value, assuming that Alibaba wants to bring its business to the world,” Evdemon told me. “Most of them are relatively disparate with each other and also fairly expensive.”

Alibaba-2

It’s possible that Alibaba is throwing its weight in a few different directions to see what works out. In the process, the company can gather intel and a deeper understanding of different American markets, win the trust of investors, and potentially lay the groundwork for it to attack a range of American sectors. After all, most of the companies it has invested in, although wide ranging, all fit with various aspects of Alibaba’s rainbow business itself.

If Lyft chose to go into logistics and delivery, the way Uber has, Alibaba has a front row seat and a powerful American delivery partner. If it doesn’t, Alibaba has an ally in fast delivery service ShopRunner. Its messaging product in China, Laiwang, has an American counterpart in Silicon Valley messaging app Tango, and Kabam gives Alibaba a gaming edge, a market that has proved to be a big moneymaker for Alibaba rival Tencent.

[go_inject size=”full”]Andreas Stavropoulos, a partner at fellow Tango investment firm Draper Fisher Jurvetson, isn’t surprised by the fact that a company as large as Alibaba is testing out a lot of options. “You can’t afford to be a silo and say, ‘We’re going to put up a website and sell things to people,’” Stavropoulos told me. “I think their strategy is to stay friendly and try to be a valued partner in areas they think are strategic for their future.”

Having Alibaba as an investor doesn’t just mean more money. It opens up a huge country, 1.35 billion people, and an entire new sector of the world for expansion. Until now, consumer web companies in America have struggled to take their product East, running into regulatory hurdles and socio-cultural differences. But Alibaba can offer expertise and help to those looking to make the leap. That’s the reason gaming company Kabam chose Alibaba as its lead investor. As Kabam COO Kent Wakeford told me, “The market in China is very different from the rest of the world… [With Alibaba] there’s a commercial partnership.”

What does the Alibaba IPO mean for the little guys in tech?

The implications of another e-commerce giant could be substantial for the American startup scene.

“Alibaba is making us take China seriously for the first time,” Ethan Kurzweil of Bessemer Venture Partners told me when we were chatting about the IPO. “A Chinese company as an actual internet competitor, that’s something we haven’t really seen before.”
[pullquote person=”Ethan Kurzweil” attribution=”Ethan Kurzweil, Bessemer Venture Partners”]”Alibaba is making us take China seriously for the first time.”[/pullquote]

He’s not the only one to think that. Stavropoulos of DFJ mirrored the sentiment. He explained that we’ve been thinking of success in China as consumer web companies that adapt a model from America and take it East, but we haven’t really seen the reverse. “I think it’s something a lot of people are paying attention to,” Stavropoulos said.

It would be very difficult for Alibaba to make headway in the American market, as entrenched as Amazon and eBay already are, but it’s one of the few companies out there with any hopes of doing so. Alibaba has the scale and resources to go up against the behemoths.

For smaller e-commerce startups, that would be a positive development since at the moment there are limited acquirers in the sector, depressing the entire market. “More bidders in an auction will be a good thing,” Kurzweil said. “That would give a jolt to the ecosystem.”

We haven’t seen Alibaba make any big acquisition moves in America yet. The company has instead focused its takeovers largely on the Chinese market. Although it launched 11 Main, a visually appealing ecommerce site geared to the American market, it hasn’t thrown much weight behind the product, instead choosing to let it grow slowly through invitation only.

Even if Alibaba doesn’t choose to tackle Western shores, its huge fund of IPO money will be used to help it compete against Amazon, eBay, and PayPal abroad, a welcome distraction for the smaller American ecommerce companies laboring to succeed in the shadow of these monoliths. “A lot of their corporate attention will be focused on global instead of just dominating the U.S.,” Kurzweil said. “In our portfolio Shopify will benefit from that.”

The Chinese consumer web has a new champion

The scale of the Alibaba IPO serves as a wakeup call for the tech market: The Chinese consumer web can no longer be ignored as a regional curiosity. The companies started there can harness the huge population to build equally huge, powerful consumer web companies, companies that can reach and even surpass their American counterparts as they expand globally. “Some of these organizations are now finally large enough, cash-rich enough and – more importantly – confident enough to finally come out of the Chinese ‘walled garden’ domestic market and compete globally,” Innovation Works’ Evdemon explained.

If Amazon and eBay weren’t scared before this IPO, they should be now. And rising consumer web startups now know they have another deep-pocketed exit lane they can take advantage of when it comes time to sell.

 

This story has been updated to correct the spelling of Kurzweil’s name in the last two instances it appeared.

2 Responses to “From ripoff to kingmaker: How Alibaba’s IPO could create a new Silicon Valley power broker”

    • This IPO is very well managed. It is very unlikely that it will see huge gains as there is little individual investor participation. Typical CEOs want to deal with mutual funds rather than small investors.