Alibaba

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. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links:Alibaba: The House that Jack Ma Built https://www.amazon.com/dp/B0124PP3AA/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1Jack Ma’s famous speech in the Hangzhou apartment https://www.youtube.com/watch?v=Up9-C4_8dVoJack Ma on not competing https://youtu.be/zkTQ1653TUA with Amazon https://www.youtube.com/watch?v=xQTGjLXWP8MCarve Outs: Ben: Mike Maples on the Origins podcast https://overcast.fm/+Gj5UPIb5wDavid: Romance of the Three Kingdoms https://www.amazon.com/Three-Kingdoms-Chinese-Loyalty-Translation-ebook/dp/B00JIDTFRO/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1537662602&sr=1-1&keywords=romance+of+the+three+kingdoms

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Yeah, that.

• 0:01David Rosenthal?

  Here we go.

• 0:02Ben Gilbert?

  Yeah, like does for.

• 0:03David Rosenthal?

  Google suggested search, what happened to Yahoo stake in Alibaba?

• 0:06Ben Gilbert?

  Oh, wait, I forgot about Alibaba.

• 0:08David Rosenthal?

  Oh, God.

• 0:09Ben Gilbert?

  The remaining company is Alibaba, which is a holding company of everything that wasn't Yahoo. Alibaba is worth 10 times more than what Verizon paid for Yahoo itself.

• 0:20David Rosenthal?

  Right. Oh, they have a website. Look at this. Company profile, independent. This is on their website. Alibaba Inc. is an independent publicly traded, non-diversified, closed and management investment company registered under the 1940 Act. Wow, what a mess.

• 0:47Ben Gilbert?

  Welcome to season three, episode five of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:54David Rosenthal?

  I'm David Rosenthal.

• 0:56Ben Gilbert?

  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.

• 1:40Ben Gilbert?

  Holy crap, I don't think I knew that before researching this episode. And yet, through all this, they're a bit of an enigma. Founder Jack Ma says that we are not an e-commerce company. We enable others to become e-commerce, but they themselves don't feel that it's fair to have a direct comparison between them and Amazon.

• 2:00David Rosenthal?

  Man, if only, if only there were like somewhere you could go to get a really good story and understand the history and facts of how all of this came to be.

• 2:09Ben Gilbert?

  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.

• 2:25David Rosenthal?

  One of the hardest, as you say, big Chinese tech companies to understand and yet arguably the most important one. So, here we go.

• 2:35Ben Gilbert?

  Here we go. Well, if you're new to the show, you can check out our Slack at acquired.fm. It's the place where David, myself, and over 1,600 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.

• 2:51David Rosenthal?

  By the 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 speck makers of glitch and watched her, her video interview, it's amazing. Let's just say the world is better off that they pivoted into Slack.

• 3:16Ben Gilbert?

  Probably. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:37David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 3:58Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:20David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:38Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. All right, David, you want to take us in?

• 5:07David Rosenthal?

  Yes, let's do it. 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.

• 5:22Ben Gilbert?

  And that's Hans and Zara from the 996 podcast by GGV Capital, which joined us for the Xiaomi episode.

• 5:28David Rosenthal?

  Exactly, 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 of facts 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 former consultant and 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

• 6:09David Rosenthal?

  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.

• 6:20Ben Gilbert?

  You know, my research starts in 99 when the company's founded. In my head, I was thinking like, oh, that, okay, well, like, we'll start 99, you know, we'll take it over the next 19 years. I'm guessing where you're going to start is a little bit before 99.

• 6:32David Rosenthal?

  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.

• 6:44Ben Gilbert?

  Perfect.

• 6:44David Rosenthal?

  We are actually going to start in 1964, when a young boy named Ma Yun is born in Hangzhou, China, which is a city about a two hour drive from Shanghai. Until recently, it was a, in the sort of new government classification of cities in China, a tier two city. It is now a tier one city, thanks to Alibaba, which is headquartered there. But at the time, it was, it was nothing like it is today. This was right before the beginning of the Cultural Revolution and, which is obviously a time of great, great turmoil in China.

• 7:23David Rosenthal?

  Lasted from the mid 60s to the mid 70s. And actually, Ma Yun's grandparents, not his parents, were persecuted during the Cultural Revolution. So there's a lot of, 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, of the Chinese government and society kind of becoming more open and evolving and towards the form of government that they have today. One of the cities that Nixon visits on his, 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. It becomes a tourist destination.

• 8:09David Rosenthal?

  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, his parents are like super lower middle class. He becomes obsessed with English. He wants to, he wants to learn it. So what he does, he, 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, and he does all this just because he wants to learn to speak English. Pretty amazing. He does this for like basically all of his like middle and high school career. And while he's doing this, one tourist

• 8:54David Rosenthal?

  who he's chatting with and, and you know, showing around the city says, you know, your given name, Yun, Ma's his last name, but which comes first in Chinese, your given name Yun, it's, it's kind of hard to remember and pronounce for, for English speakers. You need an English name. And Ma's like, okay, like, what do you suggest? And this tourist's woman is like, well, you know, 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.

• 9:26Ben Gilbert?

  Very creative of her.

• 9:28David Rosenthal?

  Very, very creative. Jack, also very creative, as, as we've seen here. Unfortunately, not very good at math. So the college entrance exams, the nationalized college entrance exams in China place a large priority, a high priority on, on math. Jack is, is not good at math. And still to this day, you know, he, 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 upfront, 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 great at everything else. He fails twice. He, he finally tries a third time. He passes. He gets a high

• 10:11David Rosenthal?

  enough grade. He gets into the Hangzhou Teachers 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, had just come to China. Ben's lab, I'm sure you saw this story too.

• 10:33Ben Gilbert?

  Amazing story.

• 10:34David Rosenthal?

  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 in Hangzhou. Jack gets rejected.

• 11:08Ben Gilbert?

  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 gonna be, you too can make it if you pull yourself by your bootstraps.

• 11:20David Rosenthal?

  Yeah, when I am one of the richest people in the world and I retire to, to beat Bill Gates at his own game.

• 11:28David Rosenthal?

  Well, 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, kind of like mid 80s into 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.

• 12:09David Rosenthal?

  So finally, in 1994, he's like confident enough that the business environment has evolved in China and it's now safe to be an entrepreneur. 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 HiBo Translation Agency. HiBo 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, he starts the company, but he keeps his job as a teacher and he's working on the side.

• 12:52David Rosenthal?

  And something kind of amazing happens. So he's in Hangzhou and there's another county just, just south of Hangzhou called Tonglu. And Tonglu, 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, 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, the HiBo Translation Agency and Jack, and they send him over to America. Jack arrives in California. So details are a little sparse here. Jack actively says he does not, he prefers not to talk about this.

• 13:37David Rosenthal?

  It's, as we will see, very traumatic. Turns out that the company and the guy behind it were basically a fraud and criminal. Like there was no company. They had just signed this contract with Tonglu, the county of Tonglu to, 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, the guy behind this company, he's like, I don't, you know, you can't go back to, you can't go back to China and like tell them that, you know, you've, 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.

• 14:20David Rosenthal?

  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, we'll link to, I'm sure in the show notes, several of his, of his talks. He's escaped, he's on the run. He finds himself in Seattle. And while he's staying in Seattle, while 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. Cause you know, it's 1995, like, hey, Amazon is like there, you know, 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,

• 15:05David Rosenthal?

  and shows him, you know, what he's working on, 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.

• 15:22David Rosenthal?

  And Jack's like, you still, when he talks about this, he's 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 like what comes up. Basically, nothing comes up for China. And he's like,

• 15:43Ben Gilbert?

  I wonder how he's searching in 1995.

• 15:45David Rosenthal?

  Yeah. So I wasn't able to figure that out either. Like, I mean, there were search engines, right?

• 15:51Ben Gilbert?

  Yeah, yeah, yeah.

• 15:52David Rosenthal?

  Sort of. Are we pre Yahoo? Yahoo existed, right? Yeah, Yahoo definitely existed. Yeah. And exciting. Maybe AltaVista was around then.

• 16:04Ben Gilbert?

  This has whisperings of our previous episode with Kara, where she was like, I saw the internet and just 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.

• 16:15David Rosenthal?

  This kind of like basically directly leads to Alibaba here, although we're gonna, you're gonna have to sit through another 20 minutes of history and facts before we get there. But, but he searches, he searches, and he's like, all right, well, nothing shows up, huh? I should just like make a page for, for Hope Translation Agency, you know, like this is, this is great. People search for China and then they'll find my translation firm. So on the spot, he's in the office, this internet consultancy, he just hacks together, like, he has them like, you know, he's like, oh, yeah, I'll put like my info up there. They create a website for, for HiBo Translation Agency. And there's, there's only text, has the name and a phone number. And there was an email address. It must've gone to the internet consulting firm or something.

• 16:56David Rosenthal?

  Later that day, they get five emails for translation business requests. Three 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 or go like, what? This is nuts. 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 need 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.

• 17:34Ben Gilbert?

  Do you know what else he, he saw and vowed while he was visiting Seattle?

• 17:39David Rosenthal?

  To crush Amazon?

• 17:41Ben Gilbert?

  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.

• 17:54David Rosenthal?

  And it's so, I mean, literally while this is happening, like, I'm sure. So I, I looked this up. Amazon was not yet in their, 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 Shel Kaplan and everybody were like, just a mile down the road, working on Amazon at this very moment.

• 18:16Ben Gilbert?

  It's crazy to think about.

• 18:17David Rosenthal?

  Totally crazy. Before he flies home to China, Jack does, he does a deal with this internet consulting firm. Cause 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, a computer with him. He gets back and he creates a company, uh, there's a deal with the internet, Seattle firm. He calls it China Pages. And he's going to do exactly, you know, what, what he said. He's going to start building websites for Chinese businesses. So he starts going around Hangzhou and talking to all these companies that produce things or you know, 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,

• 19:00David Rosenthal?

  definitely nobody in Hangzhou is on the internet like, and definitely not these small businesses. So they're like, uh, 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-owned enterprises as like a way of the future and 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.

• 19:43Ben Gilbert?

  That's not like, when we think about it, that's not like life-changing for Jack in any way.

• 19:47David Rosenthal?

  Unclear what the economics were here. I mean, basically like the government acquired the business, certainly, certainly not life-changing. And as a result, Jack moves to Beijing because that's where the government is. He ends up leaving the company. He's, he's kind of disillusioned at this point. Well, 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. And he's really interested in this. He thinks, okay, this is like, 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, and what the China market site, the goal was to allow producers of commodities, so

• 20:31David Rosenthal?

  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 gotta go to like the local government agency, they gotta register, they gotta wait for all this stuff, they gotta talk to, you know, a thousand ministers. So Jack is like, this is it. Like this is the, this is what is gonna work. But like, there's all this friction, all these barriers to entry. He's like, ugh, what's gonna happen? At the same time,

• 21:13David Rosenthal?

  Yahoo, which we referenced earlier, has just gone public. They are like the world, you know, 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 NetEase. So they've all, 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 with the, in the government for a little while. And turns

• 21:58David Rosenthal?

  out, who comes over to visit China and visit Beijing and the government? Jerry Yang.

• 22:05Ben Gilbert?

  Even, even better than Richard Dixon.

• 22:06David Rosenthal?

  Even better than Richard Dixon, exactly. Not CEO at the time, but, but founder and chairman of Yahoo. Jerry comes to Beijing and, and the government is like, all right, well, we need some, you know, we need someone who like is both a government employee and gets this like internet thing to kind of show Jerry around. And, and who does that end up being? Jack Ma.

• 22:29Ben Gilbert?

  Pretty cool. I didn't realize until digging into this a little bit, that that was, you know, long before Alibaba, that they started this relationship.

• 22:37David Rosenthal?

  Well, not that long before Alibaba, as we'll see. But, but yes, before Alibaba, it's when Jack's, Jack's a minister in the, in the government and, and he's the envoy assigned to Jerry. And so he goes, there are these great pictures of Jack and Jerry and some other Yahoo executives, you know, on the Great Wall of China, doing all these, you know, tourist sites. And Jack's there with him the whole time. So as he, 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, like it's not going to happen in a, within the government here. I need to, I need to go become an entrepreneur and do this. So he leaves the government, he moves back, he leaves Beijing, moves back

• 23:20David Rosenthal?

  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 161 Lakeside Gardens in Hangzhou. They start the company there with all these people. There are 18 co-founders of this company.

• 23:45Ben Gilbert?

  It's amazing when you look at like the, the founding photo, like you expect to see like a few people in a 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 this apartment.

• 24:01David Rosenthal?

  Yeah. I mean, what was it when we did the Xiaomi episode, it was like there are seven or eight co-founders of Xiaomi's, or something like that. Like, yeah, 18 co-founders.

• 24:11Ben Gilbert?

  It's kind of 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.

• 24:26David Rosenthal?

  Totally. Yeah. That's exactly what I was 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, 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, 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.

• 25:14David Rosenthal?

  He's inspired by the term open sesame.

• 25:18Ben Gilbert?

  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 does that invoke 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, he gets like some significant number also said, open sesame. And he was like, perfect.

• 25:40David Rosenthal?

  Perfect. Yes, exactly. He starts walking or wandering 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, the magic word to opening business opportunities.

• 25:56Ben Gilbert?

  So. And, and that's of course from the, what's the classic story? The Arabian Nights.

• 26:00David Rosenthal?

  Yeah, 1001 Arabian Nights.

• 26:02Ben Gilbert?

  Yeah, yeah, yeah.

• 26:03David Rosenthal?

  Yep.

• 26:03Ben Gilbert?

  Yeah.

• 26:04David Rosenthal?

  So he, he starts the company. Turns out Alibaba.com 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, they do buy Alibaba.com from, for something like $4,000 or something from a Canadian businessman. Domain names just keep showing up on acquired.

• 26:25Ben Gilbert?

  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.

• 26:32David Rosenthal?

  Seriously. So they start the company and, and it's exactly what, as we've said, what they were, what they were doing with China market. It's a bulletin board for businesses that you're gonna, businesses are gonna be able to find demand for their products or services and then be able to chat with potential customers and, and facilitate transactions. This may be apocryphal, but, but Jack talks about this now. He kind of takes inspiration from his favorite movie, which is Forrest Gump. And, and the Bubba Gump shrimp company in, in, in Forrest 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.

• 27:17David Rosenthal?

  And so he's like, we're gonna do the same thing. We're gonna harvest the shrimp.

• 27:20Ben Gilbert?

  And then invest in Apple. Like that's.

• 27:24David Rosenthal?

  Exactly.

• 27:24Ben Gilbert?

  Slightly different. Yeah.

• 27:27David Rosenthal?

  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 it was 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 hears about this new company Alibaba, guy named Joe Tsai, 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 splitting. And 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. Joe grows up in Taiwan. He ends up going, coming to the US.

• 28:11David Rosenthal?

  He goes to the Lawrenceville School. He goes to prep boarding school, Lawrenceville in New Jersey, right down the road from Princeton. He ends 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 like completely different background. And he hears about Jack and Alibaba. He's like, I gotta go visit this guy. So 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, and he decides like, you know, if one person is saying, has this crazy idea,

• 28:55David Rosenthal?

  like he's probably crazy, but if you've got 18 people, it's probably a movement.

• 29:02Ben Gilbert?

  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?

• 29:21David Rosenthal?

  Actually, it's, it's a little later. So this is when they launched Taobao, a couple of years later. So this is the apartment's going to come back.

• 29:28Ben Gilbert?

  It looks like it's about 18 people. I mean, it really, the team doesn't seem to get really big.

• 29:32David Rosenthal?

  I think it's like seven or eight people that launched, that launched Taobao. But, but basically the same thing. Happened with the original Alibaba.

• 29:38Ben Gilbert?

  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, 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 and 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.

• 30:18Ben Gilbert?

  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 when we look at the.

• 30:35David Rosenthal?

  Well, this is really the beginning of it. And the other important point he makes is that our competitors are Yahoo, are eBay, are 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, uh, how about we both go visit them? So Joe, he's making, 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 a role.

• 31:17David Rosenthal?

  He's the COO and CFO of this newly formed company Alibaba for a salary of $600 per year.

• 31:25Ben Gilbert?

  It's Jobsian.

• 31:26David Rosenthal?

  Yeah, unreal.

• 31:28Ben Gilbert?

  Well, it paid off.

• 31:30David Rosenthal?

  So probably maybe, maybe at the insistence of Joe's wife. Joe's like, we need to go raise some money for this company.

• 31:39David Rosenthal?

  So he's like, I got this. Like, you know, he's, remember he's super white too. He knows all the stuff. He's working in private equity. He's like, we'll, 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 gonna go pitch all the VCs. Like, this is great. Like, we'll, 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.

• 32:05Ben Gilbert?

  It's very rec room. Like Nick, like, yeah, if you wanna, yeah, you, you can come and hang out in VR if you want to hear our story, but I'm not gonna like, send you a PowerPoint.

• 32:14David Rosenthal?

  Yeah. And that worked in 2016. That doesn't work into 1999. So they come over, everybody at Sand Hill's like, who are you guys? You're in China? Like, you're doing what? Like, yeah, send me your deck. Like, anyway, it doesn't work. They come back, they haven't raised any money. But there is something that happened shortly thereafter, which is a company called China.com goes public. And this is the dot com boom. Nobody even knows what China.com does. It, it may or may not do anything, but all of a sudden it has a multi-billion dollar market cap. And everybody's like, China, the internet, big opportunity. So Goldman Sachs, of course, has an office in, in Hong Kong as well.

• 32:56David Rosenthal?

  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 has like, gone to, moved to Hangzhou and, and, and joined Alibaba. She's like, I'm gonna go see what's up. So she comes over, she comes to the apartment, building 161 Lakeside Gardens in Hangzhou. And she's like, how about I buy your company for Goldman? And Jack and Joe are like, ah, well, you know, we don't really want to sell like, a majority share to you. And, and Shirley offered $5 million for a majority share of the company. They negotiate her down to 50%. They're gonna sell 50% of the company to Goldman for $5 million, $10 million valuation.

• 33:35Ben Gilbert?

  Boy, that is a, that is a dilutive little seed round there.

• 33:39David Rosenthal?

  I mean, large seed round.

• 33:42David Rosenthal?

  Shirley brings it back to Goldman Investment Committee and she's like, this $5 million, like this isn't going to be a big deal. And Goldman's like, I don't know about this. Like, this seems crazy. Like, let's, can we like reduce our stake down and syndicate some of it? So they do. Goldman invests $3.3 million. They get a 33% stake. They syndicate out the rest of it and they raise $5 million bucks. So they start growing. 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 Son, over at SoftBank in Japan. Unbelievable. Totally unbelievable. So remember, Jack has already met Jerry Yang, fortuitously,

• 34:24David Rosenthal?

  through his government job. Now Goldman has invested in, in Alibaba, owns 33% of the company. They're talking it up to Masayoshi and they're like, yeah, you should just, just come meet, like, come meet this guy, Jack. Masayoshi meets Jack in Hong Kong. Within five minutes, Masayoshi's like, I like this guy. I want to invest. Conviction, baby. Conviction-based investor. And I don't remember, recall 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 was gonna buy half of

• 35:09David Rosenthal?

  it. They got cold feet. They, you know. It's like their scooter company or something. Seriously. Couple of weeks later, nothing has really changed. Masayoshi's like, $100 million valuation, I'm gonna buy 40%. So again, Jack and Joe, they're like, I don't know. How about, how about half of that, $20 million for a 20% stake? Same $100 million valuation. Masayoshi apparently emails them back, like within minutes and he's like, go ahead. I'll have my people see to it. Within, you know, weeks, they go to Sand Hill, 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

• 35:52David Rosenthal?

  away from Yahoo named John Woo to become CTO of the company. And they're going to build the technical team in Silicon Valley.

• 36:02David Rosenthal?

  Yeah, very, very bold. So this is all, you know, 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.

• 36:38Ben Gilbert?

  Just to make sure we hammer it home, because I think it's like important to be explicit about this. They're a B to B 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...

• 37:03David Rosenthal?

  And 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.

• 37:12Ben Gilbert?

  Yeah, I think it's important to sort of anchor on, okay, that 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 we'll loosely help facilitate that. Money can flow through our platform.

• 37:29David Rosenthal?

  Exactly. But they don't take any of the money.

• 37:33Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 37:47David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 38:01Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 38:11David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 38:29Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 38:45David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 39:02Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 39:11David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. 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

• 39:55David Rosenthal?

  kind of inspired by, remember that, you know, the meeting with, with Jerry Yang and Yahoo and Yahoo really working. They figure out that like, that 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. Have them, 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, list

• 40:36David Rosenthal?

  their services in the, in the marketplace. But if you want to get featured in the marketplace and have more prominent placement, you can buy placement.

• 40:46Ben Gilbert?

  And to get paid to 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.

• 41:05David Rosenthal?

  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.

• 41:35Ben Gilbert?

  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, 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 want to just become your own e-commerce site, you can. I mean, Shopify makes it easy. The payment processors make it, all these things make

• 42:18Ben Gilbert?

  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, that's the way that these things work.

• 42:34David Rosenthal?

  Well, you gotta remember too, like in the US, pretty much everybody at this point knows what the internet is. You know, now we're into the early 2000s, like businesses understand like, oh yes, the commerce platform, like, and this is not the case in China. Like, people don't know what it is. And so Alibaba, actually, they develop and still have extremely large sales force. These are like people that are going and knocking on doors of physical, small and 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, you know, hey, we'll just get you business, you know? It's a super different like education and value prop,

• 43:19David Rosenthal?

  sales proposition.

• 43:20Ben Gilbert?

  It's interesting thinking about outbound sales to do education around you should have your business on the internet.

• 43:25David Rosenthal?

  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 you, 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, 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-

• 44:04David Rosenthal?

  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 EachNet. 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.

• 44:45David Rosenthal?

  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, oh, this kind of looks like eBay in a lot of ways. Jack is now pretty worried that eBay and EachNet 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.

• 45:30David Rosenthal?

  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.

• 45:36Ben Gilbert?

  Ah, okay. That starts to come together.

• 45:39David Rosenthal?

  It comes back to the episode. Building 161.

• 45:41Ben Gilbert?

  Very like Steve Jobs in the Macintosh.

• 45:44David Rosenthal?

  Total. They're going to fly the pirate flag in the apartment complex. I believe there were seven people who started Taobao, what would become Taobao, within Alibaba, in this apartment. He gives this amazing speech and there's a documentary being made, and that's why the video is there. Well, I think it's called The Crocodile and the Yangtze or something like that. We'll link to it. And he'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 Taobao, 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.

• 46:25David Rosenthal?

  So they 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 it to me. 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 they list, they find a bunch of stuff, they list it for sale, then they're just buying and selling stuff themselves. And then they start telling a couple of people and then slowly third party demand comes on the platform. They're still just selling their own stuff. That'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

• 47:09David Rosenthal?

  this new, this new site called Taobao. 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.

• 47:21David Rosenthal?

  Totally, totally. And he's like, you know, and people are getting really worried.

• 47:25Ben Gilbert?

  You all have shares in that competitor.

• 47:28David Rosenthal?

  So he does, he finally does a big, a big corporate event, does an announcement, brings the team onstage and announces that Taobao is Alibaba and apparently like people go nuts.

• 47:42David Rosenthal?

  Totally awesome. Totally awesome. So they start now competing against eBay and like they they start winning. So the other important thing about Taobao 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.

• 48:00Ben Gilbert?

  It's a pretty good way to grow.

• 48:02David Rosenthal?

  Pretty good way to grow.

• 48:04Ben Gilbert?

  And eBay, of course, takes, you know, has a cut and they're, yeah, if Meg Whitman's there, they're either about to be or are a public company right now. They have pressure to

• 48:13David Rosenthal?

  Definitely a public company.

• 48:14Ben Gilbert?

  Have margin here, you know, they're taking a take rate and they're having fees because that's eBay's business model and, you know, Taobao says we're not doing any of that, at least for now.

• 48:23David Rosenthal?

  Yep, yep, not doing it. And indeed, eBay goes on a total offensive because Taobao starts taking market share. eBay had basically 100% market share of B2C, of an eBay-like product in China. It drops to 50% within a year. Taobao's taking share. Meg Whitman and a whole bunch of the senior executives at eBay, they actually moved 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 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're selling dollars for

• 49:04David Rosenthal?

  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're already valued at 100 million several years ago from SoftBank and Masa. Jack and Joe are like, no.

• 49:26Ben Gilbert?

  No, but, but we may use you as a stalking horse.

• 49:30David Rosenthal?

  Well, that will, that will come around in just a sec. Yes, no but. No, no to you, but maybe to somebody else. Externally, in 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 is 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 Taobao. So they go over to, who else? Jack's old friend, Jerry Yang.

• 50:09Ben Gilbert?

  Hey, remember when we were checking out the Great Wall together?

• 50:12David Rosenthal?

  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 valuation. It's kind of like today, insane in terms of valuations, but 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, you know, search engine type business doesn't make as much sense in China. What makes sense

• 50:55David Rosenthal?

  is this fully bundled, you know, eBay, you know, and Amazon plus Google model here, Google or Yahoo. And SoftBank was already a major shareholder in Yahoo through the Yahoo Japan partnership. So Jerry's like, okay, great. Let's do this. I'm gonna make a big bet.

• 51:09Ben Gilbert?

  Jack is super inclined to do this because he trusts Jerry, thinks Jerry's gonna be around for a long time. I'm really doing this deal, you know, as a person to person deal.

• 51:18David Rosenthal?

  Indeed. And I mean, Jerry, like, this is huge conviction. I can't remember or recall exactly, but Yahoo only has like 3 billion of cash at this point and they've gotten pummeled 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, under its own weight and mismanagement. And eBay at

• 51:59David Rosenthal?

  this point then goes off and buys Skype, potentially in part to just cover 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 of 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, we want

• 52:40David Rosenthal?

  to go public? We want to raise some more capital, but Taobao's still young. What if we list just the legacy Ali, the B2B Alibaba business?

• 52:50David Rosenthal?

  Do that.

• 52:51Ben Gilbert?

  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 the 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 can, they're able to forecast earnings. I was racking my brain when I was reading this of businesses that took the opposite approach of saying, somehow we will only IPO the legacy business line and keep the new growth business line private. I mean, that's at least in sort of my, the, 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.

• 53:31Ben Gilbert?

  Like you create a holding company, you know, you IPO one business, the holding company owns a bunch of the IPO'd company and the new small company. But anyway, it's super messy.

• 53:42David Rosenthal?

  It is super messy. The other interesting thing to remember here, and you know, impossible to know, but 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.

• 54:08Ben Gilbert?

  Right. And then there's Goldman, there's SoftBank and there's Yahoo. What year are we in right now?

• 54:13David Rosenthal?

  So we're now, we're now in 2007.

• 54:14Ben Gilbert?

  One thing worth pointing out, and it's almost just like as a, like a point finger and 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.

• 54:41David Rosenthal?

  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, 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, poof, 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,

• 55:26David Rosenthal?

  probably the worst financial decision maybe in history.

• 55:29Ben Gilbert?

  Private company investing is a whole different ballgame. It's hard. It's thrashy, you know?

• 55:33David Rosenthal?

  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? You know? 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, November 2007, valued at $9 billion at the IPO, closes day one of trading at $26 billion. But again, Taobao, 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

• 56:17David Rosenthal?

  of PayPal. You know, as they're now competing in with eBay and doing B to C in China, they realized 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, they 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.

• 57:03David Rosenthal?

  They need Alipay and it becomes essentially their financial institution.

• 57:08Ben Gilbert?

  It's probably worth a little bit of a detour at this point to talk about the ownership structure of Alibaba itself. So Alibaba 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 Alibaba proper that is actually owned by Josai and Jack Ma. So it's important, as we sort

• 57:53Ben Gilbert?

  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.

• 58:02David Rosenthal?

  And this all comes to a head pretty much immediately. So the capital that they raised at Legacy Alibaba goes back up to the new Alibaba Group and is going to be used to fund continuing to build out Taobao 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, you know, all plays out in the press, and probably most of our listeners are aware, we'll have to do an episode someday. And in fact, Kara Swisher does the best coverage of this of anybody really, part of what, you know, kind of makes the act two of

• 58:38David Rosenthal?

  her career. Jack and Joe, though, they're like, oh no, like if Yahoo sells to, Yahoo owns 40% of Alibaba Group. Like if Yahoo sells to Microsoft, then what's going to happen? Then all of a sudden, Microsoft is going to own 40% of Alibaba. 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 Alibaba. Fortunately for Alibaba, and I got to imagine perhaps as part of this, Jerry Yang rejects

• 59:16David Rosenthal?

  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 Alibaba was yet and how much Yahoo owned of it. So Yang gets forced out and new CEO Carol Barts 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 realize shareholder value at Yahoo. And now people are realizing through all this like, ooh, a big part of Yahoo's value is this Alibaba stake. And Jack and Joe are like, I'm trying to build a company

• 1:00:00David Rosenthal?

  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 they're, they're banks, yes, but 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 that the majority of Chinese people bank. The government freaks out about this. So the government, and remember now Alibaba Group is owned mostly by foreign national people and corporations. You know, you've

• 1:00:41David Rosenthal?

  got SoftBank in Japan, you've got Yahoo in the US. You had Goldman Sachs who then sold their stake to GGB 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.

• 1:01:02Ben Gilbert?

  Which of course, Alipay technically is, but sort of spiritually isn't since they have all these contracts in place to do profit sharing with the ownership group of the Cayman entity.

• 1:01:14David Rosenthal?

  Right, right. Exactly. It was not gonna, was not gonna fly there. So while this is happening, and of course, Jack Ma is bickering with Yahoo and Carol Bartz, Jack transfers Alipay outside of Alibaba 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 a accurate reflection of the true value of Alipay, which again, is now the biggest bank in China, essentially.

• 1:01:48Ben Gilbert?

  And it only sort of comes out in like a footnote of like a quarterly update the next quarter that, 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.

• 1:02:03David Rosenthal?

  Yeah. Well, remember Alibaba is, this isn't an issue for Alibaba.com, which is public in, 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 gonna 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 8Ks 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, and SoftBank aren't getting this information.

• 1:02:47Ben Gilbert?

  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.

• 1:03:04David Rosenthal?

  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.

• 1:03:11Ben Gilbert?

  And we're trying to keep these episodes shorter, which is going phenomenally well right now, isn't it?

• 1:03:15David Rosenthal?

  Yeah, phenomenally well. Anyway, finally, in 2012, Alibaba settles the situation with Yahoo. They agree that, after years of bickering, that Alibaba is gonna buy back half of Yahoo's stake, so 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.

• 1:03:45Ben Gilbert?

  Which Yahoo, I think, does do. They sell 27% at the IPO.

• 1:03:49David Rosenthal?

  They do. But that's not all of Yahoo's stake, as we'll see in just a sec. But at least it's voting rights. 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.

• 1:04:11Ben Gilbert?

  Alibaba Group buys back all of the Alibaba.com 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 cites two bankers, "We did not trust the stability of the NASDAQ platform after the Facebook debacle, since we're gonna be doing a significantly larger IPO and trading was halted for four hours or whatever when Facebook went out."

• 1:04:42David Rosenthal?

  Totally. And trading still gets halted when Alibaba comes out, but it wasn't as bad. $25 billion IPO in 2014, still the largest IPO in history, closes up-

• 1:04:56Ben Gilbert?

  Anywhere.

• 1:04:57David Rosenthal?

  Yeah, period. Full stop.

• 1:04:59Ben Gilbert?

  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-IPO'd it, was only $16 billion. Goldman Sachs, just to give a, because they're a big part of this episode, in May of 99, they IPO'd for $3.7 billion. So to give you a sense of the true scale of this, there's four IPOs ever above $15 billion, and then they quickly go down into the 3, 4, 5, 6 range after that.

• 1:05:30David Rosenthal?

  Yeah. They end the first day up 25% at a market cap of just under $240 billion, 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.

• 1:05:59Ben Gilbert?

  Oh, yeah.

• 1:06:00David Rosenthal?

  And finally, unwinding this whole crazy structure and getting access to investors. And this is incredible.

• 1:06:06Ben Gilbert?

  Yeah, and I've got some good acquired IPO trivia here. So the guidance was 60 to 66 per share. It priced at 68. The stock actually opened at 92 and then went up 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?

• 1:06:37David Rosenthal?

  I did actually used to know the answer to both of those questions. I think I recall, but please elucidate.

• 1:06:46Ben Gilbert?

  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 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.

• 1:07:08David Rosenthal?

  Ah, what do you know?

• 1:07:10Ben Gilbert?

  There you go. There's your trivia for the day.

• 1:07:12David Rosenthal?

  I always thought it was like, same as like, the white shoe law firms of like, you know?

• 1:07:17Ben Gilbert?

  I thought that, too. Yeah.

• 1:07:18David Rosenthal?

  Yeah. I guess it was green shoes because, you know, they're bankers. They make so much more money than the lawyers who only have the white shoes. Good to know. Good to know.

• 1:07:28Ben Gilbert?

  In this IPO, when Yahoo sold their stake, that 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.

• 1:07:41David Rosenthal?

  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, but 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 gets 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 Taobao, or Tmall, or Alipay. The CEO of Alibaba Group, though, Jeffrey Liu, gets replaced by the COO Daniel Zhang, who's now still the CEO of Alibaba Group. Anyway, though, 2017, Yahoo gets acquired by Verizon. So now what is Verizon gonna own?

• 1:08:23David Rosenthal?

  Because Yahoo still owns 15% of Alibaba.

• 1:08:27Ben Gilbert?

  Which is crazy, right? They sold 9.4 billion and they still own 15% of the public company.

• 1:08:33David Rosenthal?

  Right. So what's gonna happen to this is a US telecom company now gonna own 15% of Alibaba? No.

• 1:08:41Ben Gilbert?

  Yeah, so as it turns out, and I remembered reading this at the time, but 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 Alibaba.

• 1:09:12David Rosenthal?

  I think this is actually like the best part of the whole story, for all the crazy stuff. And the like, this is the best part of the story.

• 1:09:19Ben Gilbert?

  So Alibaba 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 SeatGeek, some of Eastman Kodak, some of Paperless, some of Hortonworks, like they're doing some investing.

• 1:09:38David Rosenthal?

  They owned like a 6% stake in Snap at one point.

• 1:09:41Ben Gilbert?

  Yeah, yeah, yeah, that which they they sold in September 2017 for $70 million. So Alibaba is this thing that that is worth a bunch because it's it owns 15% of Alibaba. Like, 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.

• 1:10:07David Rosenthal?

  And the CFO is based in Omaha, Nebraska.

• 1:10:10Ben Gilbert?

  Yes, yes. Every employee is in New York and San Francisco, except for the CFO in Omaha. Crazy that this entity exists.

• 1:10:19David Rosenthal?

  Yeah, $38 billion market cap for Alibaba, which, yeah, okay, that's crazy. 10 people at this company have a $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.

• 1:10:39Ben Gilbert?

  Well, Alibaba's market cap is like 38, 39 billion. So I don't know.

• 1:10:44David Rosenthal?

  Right. Yeah, no, it's trading at a significant discount to the value of their.

• 1:10:48Ben Gilbert?

  Oh, interesting. Like because they can't get liquid on it?

• 1:10:51David Rosenthal?

  Yeah, I think it's that the market thinks like, this is crazy. Like, hey, Jack Ma and Alibaba probably hate this. And so they'll do anything, as they have done in the past, to like transfer Ali payout.

• 1:11:01Ben Gilbert?

  So it could be like share tenders for lower prices.

• 1:11:04David Rosenthal?

  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.

• 1:11:12Ben Gilbert?

  It's a good way to get some potentially high-risk exposure to the Alibaba upside.

• 1:11:17David Rosenthal?

  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, you know, similar to Bill and Melinda Gates.

• 1:11:53Ben Gilbert?

  Pretty cool.

• 1:11:54David Rosenthal?

  Pretty cool.

• 1:11:55Ben Gilbert?

  It's amazing. Now that you know his story, listeners, he is a 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.

• 1:12:07David Rosenthal?

  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-two 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, you know, arguably, like, you know, I mean.

• 1:12:31David Rosenthal?

  Up for debate, but you could make an argument that Alibaba is the most important technology company in the world right now, has turned it into, you know, half a trillion dollars in market cap.

• 1:12:40Ben Gilbert?

  All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:12:53David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:13:10Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:13:25David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:13:49Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:14:08David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:14:37Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you. 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 tried to consolidate a little bit of an understanding of what all their properties are and what their strategy is.

• 1:15:21Ben Gilbert?

  So we talked about Alibaba.com, we've talked about Taobao, 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 Taobao, it's not available anywhere in China or probably anywhere in the world. They've launched a new site, 1688.com, since, you know, somewhere along the lines, 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 Tmall.com, which is B2C. It's an online marketplace for quality, brand-name goods that competes with JD.com. It's similar to Amazon.com. You know, think third-party sellers selling to consumers, that's Tmall.

• 1:16:05Ben Gilbert?

  They've got AliExpress, which is also B2C, like Tmall, except in 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 AliExpress 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 AliExpress. They also Have eTao, which is a shopping search engine.

• 1:16:50Ben Gilbert?

  Obviously, Alipay, which they've spun out. And then Alibaba 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%, international commerce is 8%. But 6% coming from cloud computing, 7% coming from what they call digital media, which is interesting to juxtapose against an Amazon. You know, 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, Alibaba, their cloud computing division. They're sort of, you know, right in that same ballpark.

• 1:17:35Ben Gilbert?

  I think AWS looks to be about twice as big. But I think AWS may include some of what Alibaba 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.

• 1:17:56David Rosenthal?

  And then, of course, the other piece, which, as we discussed, is not part of Alibaba Group, but is part of this business, which is like Goldman Sachs plus Bank of America plus PayPal all in one, which is Alipay.

• 1:18:11Ben Gilbert?

  Yep, absolutely.

• 1:18:13David Rosenthal?

  And might end up being bigger than all of this combined.

• 1:18:15Ben Gilbert?

  So that's sort of the sense of what the revenue streams and the properties owned by Alibaba 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 Alibaba? 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 2 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."

• 1:18:57Ben Gilbert?

  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 the shape of the business, the fact that it's super low, low asset. Like, it's a very asset-light business relative to Amazon that has warehouses and delivery trucks. They just bought like 20,000 more delivery trucks or something.

• 1:19:38David Rosenthal?

  Alibaba has none of that. Yeah.

• 1:19:40Ben Gilbert?

  None of it. Super asset-light.

• 1:19:42David Rosenthal?

  Jack also talks about like his, you know, I think he means this as like his vision, but but also the business model of the company. Like, 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 this. It's like Amazon plus Google, you know, like it's Amazon with the capital attributes, intensity attributes of Google.

• 1:20:16Ben Gilbert?

  It's a great way to phrase it.

• 1:20:18David Rosenthal?

  Yeah, super cool. So that's in an hour and a half or less.

• 1:20:26David Rosenthal?

  The history of fax value of it. Should we move on?

• 1:20:30Ben Gilbert?

  Yeah, yeah. I mean, we do narratives on the show, so we're switching our narratives 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 a in the largest emerging economy in the world. They handle 86% of online retail sales in China. Like, how bananas is that?

• 1:21:00David Rosenthal?

  That's a bunch of bananas.

• 1:21:02Ben Gilbert?

  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. Or I guess I don't know how to look at how much is priced in, but the bull case is, 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. I mean, the company is sort of expected to continue growing at this crazy rate that it's been growing. And of course, we're talking in terms of 2014 here, but it's already a huge company. Like, it's already doing 86% of online, of e-commerce in China. So how could it possibly keep, keep growing at the rate that it needs to in order to fulfill the, the market cap?

• 1:21:45Ben Gilbert?

  The other bear case is people basically saying, look, I don't, 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.

• 1:21:58David Rosenthal?

  I think this was probably the biggest knock against the company in the IPO. And the risk is like, what is going on with Alipay? Like,

• 1:22:05Ben Gilbert?

  Right, right. And not to mention, whenever you're buying a Chinese IPO, there's the factor of I don't know how risky things that the, the government could do will be.

• 1:22:15David Rosenthal?

  Like forcing, potentially force, I mean, it's unclear why they did it, but probably because of, at least in part because of the government, forcing this business to transfer its most promising, potentially largest future business outside of the company.

• 1:22:30Ben Gilbert?

  Yeah. That's the sort of bear and bull case. If you look at where it IPO'd in 2014, the market cap was...

• 1:22:40David Rosenthal?

  Just under 240 billion.

• 1:22:41Ben Gilbert?

  Okay. So, you know, has, has approximately doubled since then. It was up in the five, low 500s earlier this year. It's now down around 400, but you know, over what, four years, they've managed to, to double their market cap. They obviously generated a ton of cash and continue to reinvest that.

• 1:22:58David Rosenthal?

  Well, we're bleeding into tech names, so I might as well say it. I mean, like, I can't think of, you know, we haven't covered the B and the T yet of BAT in China.

• 1:23:07Ben Gilbert?

  Baidu and Tencent.

• 1:23:09David Rosenthal?

  Yes. So we may, I may revise this statement after doing that, but I don't think so. Like, I think you could make an argument that there is no entrepreneur and no company that has ridden a bigger wave better than Alibaba has. And that wave is the consumerization of China and the rise of middle class in China from nothing. And if you think about Alibaba, it went from like, you know, they just timed this perfectly. They went from capitalizing on businesses being started in China. So entrepreneurs, you know, the beginning of, this is the beginning of made in China. Alibaba was there for that and helped facilitate made in China getting distributed around the world.

• 1:23:53David Rosenthal?

  Then they were there with Taobao to bought in China. You know, what do all the entrepreneurs and people who started businesses and people who work in these businesses who's now, who've now made money, they want to, producing things, now they want to consume. Alibaba rode that better than anybody and beat eBay at its own game. Now what's next is like, what happens to all that wealth in China? Like, who manages it? Like, you know, where are these people going to keep their money? How are they going to manage it? How are they going to grow it? Who's best positioned to do that? Alibaba and Alipay. You know, it's incredible.

• 1:24:24Ben Gilbert?

  It really is the ultimate marketplace business. I mean, I think about like the ultimate sort of, well, there's a, bleeding into mine, 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. And there are a Disney-like amount of arrows that are between all these different properties and how it all fuels each other. And David, not only did they ride the wave well, but they created it just incredible number of moats around their business and around how it's absolutely a no-brainer for everyone in the ecosystem to use their infrastructure.

• 1:25:04David Rosenthal?

  Totally, totally. I mean, I'm so excited that Jack Ma is retiring because we're gonna have to call him up at Wave and ask him, you know, we can back his new business.

• 1:25:14Ben Gilbert?

  Yeah. Oh, I'm sorry.

• 1:25:16David Rosenthal?

  Yeah, I mean, he's the best marketplace entrepreneur of all time. I mean, you know, we'll take Bezos, but like, I think head to head, I would have to choose Jack here.

• 1:25:24Ben Gilbert?

  Wow, 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. And a big part of why he talks about that is, you know, 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, you know, 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

• 1:26:09Ben Gilbert?

  highest priority for us. And so 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.

• 1:26:20David Rosenthal?

  Well, it's about trade-offs, right? I mean, like, and you've seen it in the history, right? Like, 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, you know, the investments he took and how, you know, how much he was willing to give up to shareholders. But it comes from a mindset of like, what do I need to do to build the base to have the employees who can serve the customers? Like, I need that capital. Like, so, okay, I'll sell 40% of the company, like, because that's going to help me have the employees and the infrastructure to serve the customers the best. My other tech team that I think this story like illustrates really well, and this is subtle

• 1:27:05David Rosenthal?

  and hard to get in the investing world and hard to get right, but like, Jack does this so well and the company. If you've got a, 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, and this is like, I mean, that sounds obvious, right? But like, look at, I think you can apply this framework to food delivery in the US, right? Like food delivery, you know, was a super quote unquote over invested category a few years ago. You had DoorDash, you had Postmates, you've got Caviar, you've

• 1:27:50David Rosenthal?

  got Amazon Prime Now and all this stuff. And people are like, why are people throwing money at this? And like, why does it matter? And, you know, isn't this category done? Well, no, it was just getting started, right? Like, and so now, you know, DoorDash is what, like a $5 billion company, right? And like, people thought it was crazy to invest in that. But what mattered wasn't like, who was winning at the time. What mattered was who was going to win in two or three years when the market was much, much bigger.

• 1:28:15Ben Gilbert?

  It's a great point. Yeah, I think you and I were having a conversation around a separate topic last week. And actually, we were, this is what we're 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. In fact, more. How do we go, you know, like, where can we go borrow to, to be able to invest even, 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, that's when you start harvesting.

• 1:28:56David Rosenthal?

  Yeah, totally. Or like, you know, Google, Dropbox are both great examples of this. Before Google, there were lots of search engines, right? Google, you know, AltaVista, 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 we move on to grading.

• 1:29:32Ben Gilbert?

  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. Alibaba is such an outlier in every way that I can't point my finger to one thing that, that 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.

• 1:30:15Ben Gilbert?

  They've grown really well since then. It's hard to not see this being A and it kind of breaks a lot of our criteria.

• 1:30:23David Rosenthal?

  Yeah, well, even just think about this, right? Like the stock has doubled since the IPO four ish years ago. Okay, sounds fine, right? Like 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.

• 1:30:49Ben Gilbert?

  Value creation basis rather than a relative one.

• 1:30:51David Rosenthal?

  It's like, yeah, exactly. Like that's insanity.

• 1:30:54Ben Gilbert?

  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, they don't have the same growth, anywhere close to the same growth rates. No, they do. Amazon is definitely.

• 1:31:06David Rosenthal?

  Amazon was a better investment. Yeah, yeah. Amazon was a better investment in terms of just market cap creation. But what's interesting about this, I'll get to grading, I 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 Masa and SoftBank parked, you know, 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 thus created 250, call it billion dollars of market cap. I think he saw that and was like, oh, these, these huge, huge tech companies and huge

• 1:31:48David Rosenthal?

  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 Didi, with all the other ride sharing companies they've invested in, other stuff that they're doing. I think it's just, I think it's informed by this insight, right?

• 1:32:25Ben Gilbert?

  Yeah, that's a really good, I mean, he had a front row seat to all of it. So he has a lot of reason to believe that it's possible and can, can happen again.

• 1:32:34David Rosenthal?

  Yep. Now, of course, you're like, gonna be wrong on this, uh, but-

• 1:32:38Ben Gilbert?

  That's why it's a fund.

• 1:32:40David Rosenthal?

  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, you 2X a huge invest, but you just 2Xed, like, that's $250 billion of market cap there. Like, that can pay for a lot of losers.

• 1:32:58Ben Gilbert?

  It can.

• 1:32:59David Rosenthal?

  Yeah. So, uh, 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 Alibaba and the business, just like we've been talking about, it's like, it's real, you know? Like, they're gonna be the largest financial institution in China. They already are. They're gonna be the largest financial institution in the world. That's incredible.

• 1:33:39Ben Gilbert?

  Yeah, for sure. Well, Ant Financial episode will have to come soon.

• 1:33:43David Rosenthal?

  Yeah, coming soon.

• 1:33:46David Rosenthal?

  All right.

• 1:33:47Ben Gilbert?

  All right. Carve outs?

• 1:33:49David Rosenthal?

  Carve outs.

• 1:33:50Ben Gilbert?

  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, 04, 05 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 Lyft 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

• 1:34:30Ben Gilbert?

  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 he talks about is how your fund size is your strategy. And a lot of people set out with a strategy and then raise a different fund 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 fund size ended up being incongruent 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

• 1:35:14Ben Gilbert?

  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 Maples Jr. on the Origins Podcast.

• 1:35:37David Rosenthal?

  Super good. I love the Origins guys. And Mike was just great on this podcast. So definitely, definitely recommend. And it's been, this has been my life for the past two years is figuring out our strategy at Wave and our fund size and aligning all that. And it's actually a lot harder than you might think. And we've had to do a lot of, a lot of thinking and planning around that and are still doing so even, you know, after we've raised the fund and are making investments. So, super great. Anybody who cares about the business of venture, people love this podcast. Mine is very relevant to this episode. So way back, I can't remember what episode, maybe it was Snap. We did as, I think I did as a carve out the Sun Tzu's The Art of War,

• 1:36:21David Rosenthal?

  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. And it's, it's super cool. It's historical fiction, like all of these things happened.

• 1:37:04David Rosenthal?

  They definitely didn't happen as described in the novel. Like there's magic and all sorts of stuff. But it's like a, like 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. It's like, oh, that's what he's talking about.

• 1:37:22Ben Gilbert?

  Huh, huh. So cool. I gotta add to the list. It's a long list.

• 1:37:26David Rosenthal?

  Yeah. If you've got a couple of months to get through thousands of pages of translated Chinese text, highly recommend it.

• 1:37:34Ben Gilbert?

  Perfect.

• 1:37:35David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:37:42Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:37:53David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:38:13Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:38:25David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:38:36Ben Gilbert?

  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.

• 1:38:49David Rosenthal?

  Indeed. We'll see you next time.