Pod Insights Equity Podcast LinkedOut About this episode In today's episode, talk our way through some big breaking news from the technology world so that we can better understand just what is going on.
Danny and Alex got together late Friday on a Twitter Space to discuss Microsoft's decision to pull LinkedIn from the Chinese market, a move that lit up headlines around the world. That LinkedIn was still in China in 2021 may feel more surprising than the news that it will exit that particular market, but the moment matters all the same as it marks the end of an experiment -- could a mega-tech company have a US HQ and a first-party service live in China?
Er, no, it turns out. Not really.
Microsoft found itself jammed between its own ethics, and governmental censure. It was a lose-lose for the company, so pulling the plug was the smart move. The company isn't going to miss the revenue.
For startups, the Microsoft decision is a good reminder that doing business in China is at a minimum very hard for non-Chinese companies, and perhaps impossible. Recall that Microsoft had to work with a Chinese company (21Vianet) to get Azure into the country at all, and that the Chinese government is using a few companies to build a new OS for the country so that it can replace Windows.
Precisely how good that OS will prove is not yet clear, at least from a consumer perspective.
And then we riffed on GitLab's IPO. My favorite topic of the week. You'll see why it came up when you hit play. Chat Monday!
Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products.
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Transcript 0:09 Speaker 00 Hello and welcome back to Equity. This is an Equity shot. We are diving into all things LinkedIn, China, Microsoft, regulatory and tension-filled. It's going to be an absolute blast. I have Danny Crichton with me. Danny, hello. This is the weekend officially for everyone tuning in. How you doing?
0:25 Speaker 01 It's good. It's not the weekend yet, but another 20 more meetings on this Friday and we're almost there.
0:30 Speaker 00 Well, we're putting this out on the weekend. So technically, everyone listening is, this is Saturday. So hi, you know, congratulations on making it to the weekend. What's not going to make it to the weekend, though, is LinkedIn in China. Big news out this week from Redmond, where the software company is based. Danny, this feels like a long time coming and I'm not super surprised by it, but it did drop seemingly out of the sky. So what's the context for people out there who are catching up on this story?
0:56 Speaker 01 I mean, for years, LinkedIn was the only Western or US-based social network that was in China. You know, Facebook has famously been cut out of the Middle Kingdom for literally its entire existence. Twitter hasn't been accessible. Wikipedia is not available. You know, go down the list, there's almost nothing, except for LinkedIn. And for reasons that are have always been a little bit mysterious, Microsoft has been able to sort of dodge a lot of the constraints around social networks that have been placed on other Western companies, partly because they have Microsoft Azure, Windows and a couple of other products that are obviously very important on the mainland. So LinkedIn has been there since, I believe, 2014, if I'm doing my math correctly. And for the last six or seven years, it's grown up. It's been mostly focused on professional social network, no different than sort of the United States. So it tends to have less political coverage, less controversy, unlike
1:41 Speaker 01 Twitter, you know, TikTok or Facebook, up until the last couple of months. And in these last couple of months, China has been cutting down quite aggressively on social network, on media in general. And two weeks ago, the Chinese version of LinkedIn basically shut out a bunch of US journalists from the platform, basically banned them from having profiles on the mainland. And then we found out, I guess what, Wednesday or yesterday, that Microsoft was going to completely pull out of China when it comes to the LinkedIn product.
2:11 Speaker 00 Yeah, and that's going to come by the end of the year, but I want to go back even further down into March. I think we didn't really pay a lot of attention to this when it happened, but I'm just grabbing from a New York Times headline that I have pulled up here. China Punishes Microsoft's LinkedIn Over Lacks Censorship. That's from March of this year. So to me, the decisions to later censor journalist profiles probably came from Microsoft trying to live up to the wrist slap that it got from the CCP earlier this year. And so it made a little bit more sense to see once I had gone back and done some research on the context of this. But all that's to say, even though this feels like it fell out of the sky, like an anvil onto some sort of like Disney character, no, it's actually a long time coming. And this is, there were, I don't know, rumblings in the background that we should have caught, frankly. I feel a little bit like I should have known better.
2:56 Speaker 01 Well, this isn't unique to Microsoft, right? So the Chinese government has been cracking down on ByteDance, which owns TikTok or Douyin on the mainland. There's been an incredible focus on basically controlling the narrative on a lot of these social network platforms. So ByteDance has hired tens of thousands of content moderators.
3:13 Speaker 00 Yes.
3:14 Speaker 01 Alibaba and Tencent has done the same on their related networks. And so, you know, in many ways, this is just sort of the mainstream issue that all tech companies in China are facing these days, which is a vastly different regulatory environment than they were experiencing even one year ago.
3:27 Speaker 00 Yeah, and it doesn't seem to be hitting pause. The changes keep coming. And this is not just an economic thing. This is also hitting culture and so forth. I mean, China's government banned certain celebrity fan clubs they thought were insubtilious to the youth. They're banning video game time. It's really, I don't want to say a whole cloth remaking, but it's certainly a turn of the ship when it comes to how the government is sticking itself into the lives of Chinese people. But I think, Danny, that when you think about the technology angle by itself, this pullout by Microsoft is kind of the end of the attempt to bridge the gap between China's internet and the global internet. It feels like this was the last major link across the two that was owned by a US company.
4:09 Speaker 01 I think that's right. I mean, when you look at the data and the history of the last 20 years, you know, American companies for years have been trying to get access, particularly technology companies.
4:17 Speaker 00 Oh, yeah.
4:18 Speaker 01 You know, there is hardware access. So Apple is obviously very popular with iPhones on the mainland. But when it comes to the media side of things, it has always been very, very tricky. Even search engines, Google famously pulled out of China in 2010 over a fight around a hack on Gmail that was related to Tibetan separatists. And so they had made the decision to move to Hong Kong, redirect .cn users to the HK users, and have not been back since. Obviously, again, Facebook was never given access. So Microsoft was sort of the one-off person that was sort of able to do both. They had invested a lot, not just in building out, I think, the infrastructure for LinkedIn, but Microsoft has thousands of AI jobs in its research center in multiple Chinese cities and has always kind of invested heavily to try to bridge that gap. And I think you're
5:01 Speaker 01 absolutely right, Alex. Times have changed, and I think it's become much clearer that trying to bridge that gap is basically impossible for most tech companies today.
5:10 Speaker 00 Yeah. And one thing that I was thinking about in the context of this and kind of major software companies and where China sits is I'm like, well, you know, they do use Windows still. You know, it's still very popular in China. It's pirated quite often, but you know, it's still kind of the OS of record. And so I did a little digging, Danny, and two Chinese companies, CS2C and Tianjin Kylin, in 2019 announced they were going to join forces and they were going to essentially work together to make a homegrown OS that could replace Windows, digging a little bit closer to the recent time. Seems to still be a couple of years out. I don't think it's going to make a 2022 deadline, but they did use the Kylin system in some recent space tech, and so it's kind of getting out there into the world. The question is, how good is a Chinese Communist Party-approved
5:55 Speaker 00 OS going to be? I'm not optimistic that it's going to be fantastic and better than Windows 11, but certainly that would further decouple China's kind of computing world from ours.
6:07 Speaker 01 Well, there's a lot of focus on strategic autonomy, right? And so when you look at the OSes, there's a huge goal to sort of build everything in-house. You want to control the process, soup to nuts. I'm sure the CCP version of Windows will have great desktop wallpaper. You probably can't choose what it will be.
6:23 Speaker 00 No.
6:23 Speaker 01 I will say, as a fun fact, that North Korea actually has its own version of Linux called Red Star OS.
6:28 Speaker 00 It does. I knew that, too.
6:30 Speaker 01 And it's fairly locked down, as one could imagine. But like, I think- Look, it's a big country, it's a big market, and I think there's an immense amount of opportunity still when you have 1.3 billion consumers, almost all of whom are online, all of whom are spending heavily in all these different products. But the fear has been over the last couple of years, and particularly over the last year for the CCP, that the tech companies have just gone too big, too powerful, too independent, too allowed to run their own ship and their own narrative, and the reins are going back on to them. So, look, I think Microsoft made the right move here. I don't think they had a choice. I'm glad that they sort of chose to do this expeditiously and just sort of, you know, they didn't fight it for two years and have a whole battle over it. I think the writing was on the wall.
7:14 Speaker 01 But that leads to a big question, because Microsoft doesn't just own Windows or LinkedIn, it also owns GitHub. And GitHub is by far one of the most important repositories of all code, open source, closed source, doesn't matter. And there's a huge challenge, there's been a debate for the last couple of years about what China's going to do about GitHub. Because for developers on the mainland, they need access to all this code, yet it is also a repository for all kinds of information and data that the CCP by and large wants to censor. And there's been a huge conflict over there.
7:47 Speaker 00 Yeah, and I'll throw in there that there's actually some use of GitHub by certain people in China to get around certain speech rules and so forth. So there's actually kind of a bit of a revolutionary tie-in there. I will say that if you're not familiar, Beijing is building its own version of a Git-style tool. It's called Gitie, or maybe Gitie, one of the two. It's G-I-T-E-E. And it's like GitLab, it's like GitHub, but it's from Beijing. So I don't know if it's better or worse, or whatever, but that's another tool they can put out and then begin to preclude access to other products out there, and then further kind of like siloize themselves. My general impression, Danny, and I have to talk about my own politics here, but like, as a capitalist and as someone who's been to more than one place in the world and has
8:30 Speaker 00 met lots of folks, is that there's a lot of folks everywhere who are pretty smart and do cool things, and I don't think even one country as large as China will be able to out-innovate the world.
8:40 Speaker 01 I think that's right. I mean, look, famously, the Japanese computer science market is actually quite cloistered compared to the rest of the market. So there's a lot of folks who try to bridge the Japanese AI research community to the US research community. I think the same thing will show up in China. Some of that, in the Japanese case, is a language barrier. In China's case, obviously, it's going to be a political barrier. There's an opportunity when you're not in the mainstream, right, that you can do different things. There's opportunities to be original. You can actually control a lot of products. They'll go in different directions. So I can imagine, just from the fact there's now two people working on the same thing, that you will get some additional innovation. But these projects move so quickly that without access to the global repository of knowledge that goes
9:23 Speaker 01 on around computer science and AI, like, I don't know how it's tenable. My assumption is, is that certain projects will be allowed across the firewall on a case-by-case basis, will be brought into Giddy. Not so dissimilar from how Linux has package managers and you can sort of upstream different packages onto your OS. And sometimes there's folks who are checking the security of those before it comes down to you. So my guess is they're going to find a hybrid model that works for them that doesn't bode well, I think, if you are a Chinese AI researcher wanting to be at the edge of the field.
9:53 Speaker 00 No, absolutely not. And I think, you know, the one thing I was looking for in the kind of Q3 venture capital data was a slowdown in China. I was really expecting, you know, given the last couple of months of regulatory crackdown, that there would be a dissipation of capital flowing into Chinese startups. Not really, according to the data that I've seen so far. So I'm curious where that money is going and what that kind of says about the future of the Chinese technology world. But let's pivot back to the Git discussion and talk a little bit about GitLab. Danny, did you track this IPO? You and I haven't talked so much in the last week, because we usually do. So I don't know where you are on GitLab.
10:26 Speaker 01 I didn't track the IPO. I've tracked the company for years. I've always been a huge fan of GitLab. One of the most original, you know, open source, fully remote companies, very kind of stridently unique in that way. And it's just a great product. I mean, if you talk to engineers, at least my engineering friends, and I don't want to open up any massive, you know, wars going on over tooling, but I will say GitLab has a very good reputation, has done very, very well, has grown tremendously. And even a couple of years ago, it was getting valuations that shocked people when it came to revenue multiples, which probably leads into the IPO.
10:57 Speaker 00 Well, yes, but I want to pause on the on the product point because I got some tweets yesterday talking about this because I was getting on the phone with the CEO Sid, who I've known for a year or two now. And I, you know, I just did my usual thing. I'm like, hey, talking to the CEO. If you have any questions, you know, pop off and I'll grab some good ones and include them in my list. And people were like in two camps. There was the GitLab sucks GitHub rules camp. And then there was the GitLab is great GitHub sucks camp. And I was like, I didn't even know there was a holy war here. And I apparently I just stumbled into one. It's like opening the door and everyone's fighting like, oh, I want to close that door. But it's great to see back to your point, two competing products, similar space battling it out for supremacy. And there does seem to be ample room for both of them, given the company's growth.
11:41 Speaker 00 It's on a $232.5 million run rate worth, according to market watch, right before we jumped on the podcast here, roughly $15 billion. That gives it Danny a revenue multiple of 38,419.7, which I cannot fully understand. And so I was hoping you could tell me from the venture perspective, why, why priced at 77, which was way above its raised range, and then why it's now worth a hundred bucks a share? I'm confused.
12:08 Speaker 01 I mean, it's the best of breed when it comes to SaaS, right? If we're talking about hundreds of different SaaS companies, I think traditionally GitLab has really built up a reputation of having best in class metrics, best in class operating leverage. You know, again, they're fully remote, so they don't have offices. You actually get rid of even some margin that other SaaS companies that are best of breed don't have either. And, and when it comes to the product, they're in the space where there's, there is a network effect to these sorts of repository products because you're working with different development teams. They've got to work on one shared resource. So you're the system of record for all code. And, you know, when you look at this market, yes, GitHub, there's GitLab. There's a few other players. There's one that went to a private equity company a few years ago that runs on called Depot. And I'm forgetting his name right now.
12:52 Speaker 00 Yes, I remember that transaction. Yeah.
12:54 Speaker 01 They, that was when I was at Google, that was the code base mechanism, repository mechanism back then. Look, I think it's done extraordinarily well. And look, their competitor is GitHub, which is owned by Microsoft. And I think there's an assumption the market That look if you're best of breed competing against the stolid competitor that's a big tech company that's probably making a huge amount of investment, you can do a lot of damage. Now, I think it's interesting because GitHub to me is one of the few acquisitions I think has been super successful. Nah Friedman, very smart guy, running the company over there, doing very successful things. GitHub has expanded tremendously. So, you know, part of this is also the secular trend of just the number of developers in the world. You know, code is just getting more important to the economy. There's more people using it. And
13:36 Speaker 01 so you have this huge wave of, think of all the Gen Z'ers who are currently coding on, on, you know, Roblox or Minecraft, who are going to become the engineers of the future. They're all going to be on GitLab in 10 years. Huge, huge tailwinds behind them.
13:50 Speaker 00 You do know that we work with some Gen Z people. They're not nine.
13:56 Speaker 01 You know, the bulk, the bolus of the people.
13:59 Speaker 00 The bolus of the people. Yes. That's how Danny refers to children.
14:06 Speaker 00 What I want to say is, you know, looking at, looking at GitLab at its IPO share, IPO price of $77 a share, it was the fourth or fifth best valued SaaS company in revenue multiple terms in the market. And now it's appreciated even greater. And so now it's probably top three in the, in the world, which is pretty impressive. Danny, what I was struck by was the fact they started there out the gate. They showed up, they went public and they earned essentially a bronze medal valuation, you know, on day one. And I think in the old days, you had to go public and then earn that a little bit more. And I'm curious if you think this will lead other unicorns to try to jump in the pool, given that this just got a bear hug from public investors.
14:45 Speaker 01 I mean, just one data point among many, right? I think people are looking at the full data set. I think they're seeing a lot of positive numbers across the board. Outside of our discussion on Equity Podcast of Rent the Runway, which is running into a little turbulence on the runway, mostly because they're running out of runway. The reality is, is if you don't have physical products, I mean, Could you imagine two companies that are more opposed, right? GitLab is in the cloud. It has amazing network effects, unbelievable operating leverage versus you're managing physical inventory in stores and you're mailing dresses out over the, you know, over actual shipping lines.
15:18 Speaker 00 Yeah, and you have to buy the dresses. You have enormous capex.
15:21 Speaker 01 You have enormous capex and then depreciation. And then you have depreciation for all this stuff. So, look, it's an amazing business. It's in line with most other SaaS companies. It's another notch in the hat for the model. You know, think five years ago, we were still struggling to get SaaS companies out into the public markets. It's just another real strength.
15:39 Speaker 00 Yeah. And just to put a little cap on what Danny was saying earlier about kind of best-in-class metrics, I just grabbed some numbers for us. In 2020, a pandemic year that had much turbulence, GitLab had net retention of 148%. A number that got slightly better, and now it's 152% in the first half of this year. Danny, any enterprise SaaS company that has net retention over 125 is sitting pretty. 150 is, in my experience, very rare at scale. Not that hard when you've got two customers, but like, you know, once you have a natural customer base. It's super impressive.
16:12 Speaker 01 And look, it's also, it's a dollar retention, right? So they're pulling in not only more users, they're also raising the amount of money per user with advanced features, which is what they've been offering for the last couple of years. So across the board, very, very strong. And, you know, I would use the term anti-fragile. You know, when the pandemic hit, it actually became stronger because it was already remote. You didn't have to change everyone to work from home. That's how they operated the last couple of years. And their customers had to do the same thing, which became even more important if you're working on code. So altogether, I think it's a very strong company, best of breed, and I think they're getting the premium they deserve for that. Of course, that begs a huge question, which is, as these premiums get higher and higher and higher, one wonders, can these companies actually grow into the premium that they're being affixed?
16:56 Speaker 01 That, to me, is still a very open question. It is very expensive, let's be clear.
16:59 Speaker 00 It is. I tried to ask Sid about their net retention and if that helped them get to revenue predictability ahead of their IPO, and he declined to answer that directly. Just gonna point that out. And last thing here, Danny, looking back in time, 2019, late, GitLab raises money from the private markets at like a $2.7 billion pre, roughly $3 billion post-money valuation. Now it's worth 15. So who is the real villain here? Is it the Wall Street bankers, or is it the venture capitalists? When it comes to underpricing.
17:29 Speaker 01 We always talk to these things. I actually think, I think the revenue versus valuation back in 2019, I think would be even more insane.
17:39 Speaker 01 So I actually think it was very ambitious then, and it's still ambitious and they've grown into it a little bit better. So, so to me, like, again, it's, it's the pandemic effect going on here. I actually think no one actually made a mistake here.
17:49 Speaker 00 That, that is the most generous, polite, kind and loving comment that has ever happened on this podcast.
17:55 Speaker 01 I mean, it's also two years and two years is a long time in enterprise ads. And if you continue to grow, like we've seen, we've seen examples where the valuation goes up 4, 5X in like a year.
18:03 Speaker 00 Yes, the vision fund doesn't count. You cannot, you cannot index off of Tiger and the vision fund because they are drunk. And therefore they're not acting rationally. Maybe it'll work out. I've done some funny things drunk that works out fine, but most didn't. And that's that. Anyways, we're out of time. That's that. We adore you all. We're back Monday morning. I'm Alex. That's Danny. We're out of here.
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