Company Deep Dive: Alibaba’s Origins

By: Eli Levi  |  December 19, 2021
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By Eli Levi, Business Editor

Alibaba was founded in 1997 by Jack Ma. Earlier that year, Jerry Yang, founder and Chief Executive Officer (CEO) of Yahoo was visiting China, when Ma was selected to be Yang’s tour guide. Meeting Yang, one of the most brilliant minds of his age, influenced Ma’s understanding of the internet. Shortly after Yang’s visit, Ma founded Alibaba with seventeen of his friends in a now-famous apartment in Hangzhou, China. 

Alibaba began as a bulletin board for businesses with a built-in chat capability between buyers and businesses. This eventually developed into one of the largest e-commerce platforms in the world. Joe Tsai, who was working in Hong Kong for Yahoo and receiving a $700,000 annual salary, was so convinced of Alibaba’s success that he left Yahoo to go work for Jack Ma at Alibaba. Tsai assumed the positions of Chief Operating Officer (COO) and Chief Financial Officer (CFO) for a salary of $600 a year.

Alibaba’s success continued in 1999 when Goldman Sachs, arguably the most prestigious investment bank, made the first investment in Alibaba. Originally, Shirley Lin, the head of Goldman’s investing group in China, wanted to invest $5 million for 50% of Alibaba, but Goldman headquarters thought it was too much for a seed round investment. Instead, they used the same valuation metric but only invested $3.3 million for 33% of Alibaba. Around the same time Masayoshi Son, founder of Softbank, invested $20 million for a 20% stake in Alibaba. Now that Alibaba was flush with cash, the company hired John Wu away from Yahoo to be Alibaba’s Chief Technology Officer (CTO). Alibaba continued to expand its services and became a dominant player in China. 

Always looking for more ways to grow, Ma formed a team in 2003 to create a new platform called Taobao to compete with eBay. Ma brought the team back to the original apartment in Hangzhou where he had founded Alibaba. Taobao was a secret project known only to Ma and the team. While the team was creating Taobao, they needed a way to test the platform, but since it was a secret project they could not use any typical public methods. Instead, Ma ordered everyone to find four things to sell on the platform. By transacting with each other the team tested Taobao. Slowly the team leaked the existence of Taobao (although not that it was a subsidiary of Alibaba), and the platform began to grow rapidly. Some employees at Alibaba expressed their concern about Taobao being a threat to Alibaba as they did not yet know that Taobao was a subsidiary of Alibaba. Finally, Ma announced that Taobao was, in fact, owned by Alibaba. 

This announcement started a war with eBay. Early on Taobao performed well and because of this early success, eBay moved its management team to China to squash the new competition. Concerned that eBay would beat out Taobao, Goldman sold its shares of Alibaba for $22 million. If Goldman had held those shares until the present day, the shares would be worth more than Goldman’s market cap of $127 billion. Alibaba needed more capital to compete with eBay so Yahoo invested $1 billion for 40% of Alibaba. Shortly after Yahoo’s investment, eBay in China collapsed. 

Later, Alibaba had a $25 billion initial public offering (IPO) in 2014 the largest IPO to date. Jack Ma and Alibaba have a fascinating history and there is only so much I can include here. Jack Ma, despite not being great at math and buying his first computer at age 33, managed to found the most successful company China has ever seen. Never be scared to dream big.

 

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