Alibaba, The House That Jack Ma Built: Open Sesame to future riches

Jack Ma started with a vision. Taking his inspiration from Silicon Valley, the aspiring Chinese entrepreneur created his online retailer Alibaba from humble beginnings in a chilly apartment – and 17 years later it is worth $262bn.

Like many people in business, Jack Ma failed before he succeeded. His first two companies, China Pages and Infoshare, were unable to keep up with bigger players in the early days of China’s internet. By 1999 he was stuck in a boring government job, and then he decided to start a company called Alibaba.

This story is recounted in Duncan Clark’s book Alibaba, which has been short-listed for this year’s Financial Times and McKinsey Business Book of the Year Award. The book benefits from Clark’s time as an adviser to Alibaba while it was still a fledgling.

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You can buy the book here or here.

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The excerpt

Jack decided to call his new venture Alibaba, a curious name for a Chinese company.

Jack has been asked many times why he chose an Arabic name for his company rather than something derived from his passion for Chinese martial arts or folklore. Jack was attracted, he said, by the “Open Sesame” imagery, since he hoped to achieve an opening for the small and medium-­size enterprises he was targeting. He was also looking for a name that travelled well, and Alibaba is a name that is easy to pronounce in many languages. He liked the name since it came at the beginning of the alphabet: “Whatever you talk about, Alibaba is always on top”. In China, a song titled Alibaba Is a Happy Young Man was popular at the time, but Jack says the idea came to him for the website on a trip to San Francisco: “I was having lunch, and a waitress came. I asked her: ‘Do you know about Alibaba?’ She said, ‘Yes.’ ‘What is Alibaba?’ And she said: ‘Open Sesame.’ So I went down to the street and asked about 10 to 20 people. They all [knew] about Alibaba, Forty Thieves, and Open Sesame. I think, this is a good name.”

But there was a problem. The domain name alibaba.com was registered to a Canadian man who was asking for $4,000 to transfer it over, a transaction that involved some risk if he didn’t hold up his side of the bargain. So Jack launched the Alibaba site using alibabaonline.com and alibaba-online.com instead.

Jack soon after decided to buy the alibaba.com domain name. Alibaba executive vice chairman Joe Tsai later recounted to me that Jack was nervous about wiring funds to the Canadian owner before he could be assured of gaining control : “He didn’t have that kind of money, so was scrounging around. But Jack is a very savvy businessman, he has that innate ability to say: ‘All right, I’m gonna trust this guy.’ A lot of entrepreneurs don’t trust other people.” Jack went ahead with the wire transfer to the Canadian, who (true to national stereotypes) proved honest, and Jack gained control of alibaba.com.

The widespread recognition of the Alibaba name has saved Jack a lot of money in marketing expenses and a ready supply of imagery such as the forty thieves, and 1,001 nights, and other elements he still often incorporates into his speeches. (For example: “Alibaba might as well be known as ‘1,001 mistakes.’ But there were three main reasons why we survived. We didn’t have any money, we didn’t have any technology, and we didn’t have a plan.”)

Starting on a small scale

Alibaba was launched in Hangzhou by Jack’s friends, supporters, and colleagues, including some who joined him from China Pages and Infoshare.

Jack convened a meeting on February 21, 1999, at his Lakeside Gardens apartment in Hangzhou. Confident in his future success, he arranged for the meeting to be filmed. With the team seated around him in a semi-circle, some wearing coats to fend off the damp cold inside the chilly apartment, Jack asked his converts to ponder the question: “In the next five to 10 years, what will Alibaba become?” Answering his own question, he said that “our competitors are not in China, but in Silicon Valley … We should position Alibaba as an international website.”

The reality was that Jack, late to the portal game now dominated by Sina, Sohu, and NetEase, had to find his own niche in the China internet market. The portals were trying to capture the growing number of individual users coming online, but Jack was going to stick with what he knew best: small businesses. In contrast to the business-to-­business sites in the United States that were focused on large companies, Jack decided to focus on the “shrimp.” He found inspiration from his favourite movie, Forrest Gump, in which Gump makes a fortune from fishing shrimp after a storm: “American B2B [business-to-­business] sites are whales. But 85 per cent of the fish in the sea are shrimp-­sized. I don’t know anyone who makes money from whales, but I’ve seen many making money from shrimp.”

When Jack created Alibaba in early 1999 China had only 2 million internet users. But this would double in six months, then double again, reaching 9 million by the end of the year. By the summer of 2000 there were 17 million online.

Personal computers still cost a hefty US$1,500, but prices began to fall as new market entrants like Dell set up shop in competition with homegrown companies Founder, Great Wall and Legend (later rebranded as Lenovo). Sales of new PCs, still going mostly to businesses or government users, hit 5 million in 1999.

The government’s policy of “informatisation” was making the internet more affordable. Millions of young, educated people were coming online at their colleges or workplaces, others at the thousands of internet cafés that were mushrooming across the country. Yahoo’s business model in the United States was to make money from the growing market for online advertising. The three China portals in turn planned to grab a piece of a fast-­growing online advertising cake, which grew to $12 million in 1999 from only $3m the year before. But even in the States Yahoo was losing money, and in China the bulk of internet users had little disposable income to excite advertisers. The potential revenues for the portals were way below their expenditures. Yet in the upside-­down logic of the unfolding dot-­com boom, losses were not only acceptable but worn as a badge of honour: the bigger the loss, the grander a firm’s ambition. Venture capital (VC) firms were there to bridge the gap.

Jack realised he would have to hustle if he was to ever catch the attention of VCs or catch up with the portal pioneers who were speeding off into the distance. For Alibaba to thrive he would have to foster a relentless work ethic, ensuring a clean break from the bureaucratic culture that he and some of his colleagues had just left behind in Beijing. Jack exhorted the group assembled in his apartment to “learn the hard working spirit of Silicon Valley … If we go to work at 8am and get off work at 5 pm, this is not a high-­tech company, and Alibaba will never be successful.”

Jack likes to put Silicon Valley companies on a pedestal, but he also likes to rally his team by saying Alibaba could knock them off it: “Americans are strong at hardware and systems but in software and information management, Chinese brains are just as good as American … I believe that one of us can be worth 10 of them.”

Alibaba was formed at a time when the inflating dot-­com valuations made even his loyal converts nervous about whether the bubble would soon burst. Speaking to them in his apartment Jack sought to reassure them: “Has the internet reached its peak? Have we done enough? Is it too late for us to follow? … Don’t worry. I don’t think the dream of the internet will burst. We will have to pay a very painful price in the next three to five years. It is the only way we can succeed in the future”. To rally the troops, Jack set a goal of achieving an IPO within three years. “Once we become a listed company, what each and every one of us will gain … is not this apartment, but 50 apartments like this. We are just charging forward. Team spirit is very, very important. When we charge forward, even if we lose, we still have the team. We still have each other to support. What on earth are you afraid of?”

Alibaba was co-founded by a total of 18 people, six of whom were women. None came from privileged backgrounds, prestigious universities, or famous companies. This was a team of “regular people”, bound together by Jack’s energy and his unconventional management methods. To build team spirit, Jack drew on his love of Jin Yong’s novels and gave each of his Alibaba team members nicknames. His own nickname was Feng Qingyang. In Jin Yong’s book Swordsman, Feng is a reclusive sword and kung fu master, preparing young apprentices to be heroes. As a former teacher, Jack identified with Feng and his “unpredictable yet nurturing” character.

All they needed now was to find investors. Joe Tsai set out with Jack for San Francisco.

On arrival, they checked into a cheap hotel off Union Square, then headed down the next morning to Palo Alto to meet some VCs. The meetings did not go well. Joe recalls being peppered with questions: “What are you trying to do? What’s your business model?” But they didn’t even have a pitch book. “I had tried to prepare something, like a business plan.” But Jack said he didn’t do business plans, telling Joe: “I just want to go and meet people, and talk to them about it”.

The trip was a failure. The VCs weren’t really interested in business-­to-­business (B2B) e-­commerce, which seemed dull compared to the excitement surrounding Yahoo. There were a couple of B2B examples that raised venture money – Ariba.com and Commerce One – but they were US-based and served a much more mature market than Alibaba.

Yet Jack was convinced that as the largest supplier of labour-­intensive commodities to the world, China was ready for B2B e-­commerce.

Postscript

Jack Ma was right, of course. While his initial effort at VC fundraising was a flop, by October 1999 he had secured funding from a group of investors led by Goldman Sachs. In a deal that now seems incredible, they acquired 50 per cent of Alibaba for $5m.

In time Alibaba extended beyond Ma’s B2B blueprint and became a mass-market retail colossus.

In September 2014 the company’s $21.4 billion initial public offering in New York ranked as the biggest IPO in US history. Today Alibaba has a stock market value of $262bn.

* From Alibaba © 2016 by Duncan Clark. Reprinted courtesy of Ecco, an imprint of HarperCollins Publishers