Alibaba is doing to Amazon on its home turf, what Amazon did to incumbent leaders in numerous European and Asian countries – take the fight to them and work aggressively towards the dominant position. Amazon has done this in Germany and Russia for example, as detailed here. But the Alibaba group is doing this by taking subtle yet sure steps in the US.
Jack Ma-led Alibaba group, valued at a whopping $190-200 billion has filed for an IPO in NYSE. The markets are expecting this to be such a massive fund raising exercise that many other IPOs are being postponed or delayed to avoid any clashes with this one. The US online retail sales topped $262 billion in 2013 according to various analysts, making this a very attractive market to enter.
US Investment Team
So how exactly is the Alibaba group making its forays into the US? Through startups! The group created a formal US investment team about a year ago with the express intention of making investments in US startups. The group is led by Liberty Media Corp’s e-commerce executive Michael Zeisser, Peter Stern an investment banker from Credit Suisse who advised Alibaba group on the $7.6 billion stock repurchase from Yahoo! and Danielle Wong, a Yale University MBA. The team reports directly to the group’s co-founder and Head of Strategy Joe Tsai, signifying its importance to Alibaba’s scheme of things.
The team’s stated interest areas include Mobile, Digital Media and Logistics Services. Looked at in another way, the investments appear to be made in Messaging, Retailing and Peer-to-Peer activities.
Investments Till Date
The team has been very aggressive in making large investments in a short timeframe. Of course, one reason could be that making investments in risky startups as a private entity is much easier compared to once the group is a publicly listed company given the change in scrutiny levels. The major investments made till date are as follows:
- Tango Me: Led a round of $215-280 million in April 2014. Tango is a social networking app that lets people play games, send text messages and make phone and video calls
- Lyft: Led a round of $250 million, in this Uber competitor which lets users request safe and affordable transportation
- 1st Dibs: Invested $15 million. This is an online marketplace connecting dealers to consumers interested in antiques, jewelry, design, vintage fashion and art
- Kabam: Invested $120 million. Kabam is a mobile gaming company developing free-to-play core games available on mobile devices, the web and other platforms
- Fanatics: Participated in a $170 million round. Fanatics retails officially licensed sports merchandise
- ShopRunner: Invested $206 million in this online retail platform that aggregates deals and delivers using a 2-day shipping service. This is considered a competitor to the Amazon Prime loyalty service
- Quixey: Invested in this search technology provider for content within mobile apps
Some of these investments were made prior to the formation of the investment team.
Show Me The Money
Benefits for Alibaba group: Why are they buying startups?
- Globalization: Alibaba group’s revenue is extremely dependent on the China market currently. They see the need to globalize and enter newer markets to diversify their sales and hence their risk
- Strong Cash Flow: With the China market working as a well-oiled engine generating strong cash flows, the question of whether to build something in-house or to buy it from outside will tilt more and more towards ‘buy’, given the benefit of faster time to market with buying
- Buy an option in the future: By observing the technology landscape and having a stake in potential future innovators, they are buying themselves an option to acquire it fully, while also preventing their competitors from taking a competing ownership
- Insights into an unfamiliar market: Given that the company has not operated in the US, these acquisitions will provide them an opportunity to understand how the consumers operate and make their buying decisions
Benefits for the startups: Why are they willing to accept investments from a Chinese company?
- Strategic Advice: Given Alibaba’s track record of aggressive growth and rapid expansion, these US startups can learn a thing or two about these things from the horse’s mouth
- Quick Deal Making: In the ultra competitive US investment market, speed of deal making is of the essence for startups. And Alibaba is closing deals within 30 days of the first meeting in some cases
- Access to China: For these US startups, China has been a bewildering maze of complex buyer behavior, regulations and competition. With support from Alibaba group, they can now have a real shot at this enormous market
Although Alibaba group started investing in the US from 2010 onwards with the acquisition of Auctiva which developed tools for ebay retailers, the pace has picked up in the past year. Most of Alibaba’s investments in the US have come from its own network. For example, Shop Runner is founded by Scott Thompson, who was a CEO at Yahoo!, Fanatics was introduced by Masayoshi Son, the Softbank founder who has invested in Alibaba group and Quixey was introduced by GGV Capital that invested in Alibaba in 2003. They now need to look outside for further investments.
The relatively large investments are a good way to show their long-term commitment to the US entrepreneurship landscape, while also getting access to the hot startups by being embedded there. The valley investor ecosystem can be closed, exclusive and almost incestuous, where a few can control access to information about hot sectors and startups. These investments provide Alibaba group access to this exclusive club over time.
Chinese companies do not outright buy or take up managing stake in the US companies for fear of political backlash and outrage in the entrepreneurship ecosystem. They usually take 10-30% stake, build a network of companies over the years and gradually absorb them. Alibaba’s strategy seems no different, although the equity numbers for these investments are not public information.
Alibaba, which handles more transaction volumes than Amazon and ebay put together, seems to have its sights set on US as it gets ready for the IPO. It is going to be a battle that might redefine online retail in the US.
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