eBay announced today plans to separate itself into two companies, one the core eBay marketplace business and the other is the PayPal payments business. This is a move that’s been contemplated by folks both inside the company and outside for many years. Recently prominent activist shareholders have also been “encouraging” eBay management to spin off PayPal as a way to maximize shareholder value.
First let me say that it’s made a lot of sense for the two companies to be a combined entity over the last 12 years. When we sold PayPal to eBay in 2002 we had just gone public earlier that year. The business was strong and profitable (>$100M revenue, gross margins 50%+), but PayPal also faced challenges… diversifying beyond eBay sellers (many sell both on and off eBay), increased regulation, continued international expansion, etc. Being part of eBay helped PayPal tackle all of these things, plus it allowed PayPal to continue capturing payment share within eBay (today >70% of all eBay transactions closed with PayPal). eBay’s marketplace cashflows also provided capital to grow the PayPal business.
We had an immensely talented and entrepreneurial team at PayPal which famously went on to build many other businesses (the PayPal mafia). But in all candor it’s not obvious that we would have been best positioned to build PayPal as a public company for a decade. The payments landscape was different back then… Visa and MasterCard were not-for-profit consortiums owned and controlled by the largest banks. The “smartphone” consisted of Palm Treos and early Blackberries.
So all in all, eBay’s acquisition of PayPal was good for PayPal and great for eBay and the two as a combined entity made a lot of sense for a long time. But for PayPal to maximize it’s potential as a payments platform the company must be unshackled by eBay. Today’s payments landscape is far more dynamic… Visa and MasterCard are publicly traded companies themselves. As incumbents they’re still not terribly forward thinking, but they’re more innovative today than they were a decade ago. There are obviously other companies that have attempted and largely failed to build meaningful payments businesses (e.g. Google, Amazon) and now others like Apple that will try. Crypto currencies are still in their infancy but regardless of whether Bitcoin ever becomes a widespread medium of exchange, the blockchain has significant potential to change the way transactions are conducted and how counterparties interact.
There are two things that are incredibly hard to do but are essential to building a valuable payments company. One is to build large scale consumer adoption + merchant acceptance… we did this at PayPal by piggybacking on the growth of eBay’s marketplace, and as a combined entity PayPal pushed strongly into offline payments. The most remarkable thing that PayPal achieved, and what it makes it different than pretty much every other attempt at payments innovation, has been to create a lower cost source of funding for digital transactions. We did this by getting consumers comfortable with funding via bank account (ACH) and by building innovative and robust risk management systems to deal with all the inherent limitations of ACH (not real time, no guarantee of sufficient funds, etc). We did this out of necessity back when PayPal was still a private company. Had PayPal relied solely on credit cards for funding buyers’ transactions, we would have probably failed on multiple dimensions… it would have been extraordinarily difficult to build a profitable business and the credit card associations cumbersome rules (and at times adversarial approach to PayPal) may very well have put us out of business.
The opportunity and challenge for PayPal going forward will be to take this competitive advantage and further extend the usage of PayPal into online and offline transactions. People frequently fixate on “mobile” as being the next big thing in payments… we’d all like to be able to use our smartphone as the payment token rather than a plastic rectangle with a magnetic stripe. But the grand slam opportunity isn’t simply to use a phone tied to a credit card account (as Apple Payments is attempting to do), it’s to tie a mobile app to other ubiquitous stores of value as PayPal can do with bank accounts or credit accounts (old BillMeLater). Unshackled, PayPal has a shot at this now.
GrabCAD today announced their acquisition by Stratasys (NASDAQ: SSYS). All of us at NextView extend our congratulations to founder Hardi Meybaum and the rest of the GrabCAD team. There’s a variety of coverage of it in the tech press (BetaBoston, TechCrunch), but I wanted to share the story of how we came to know the company and how the future (now past) unfolded.
I first met Hardi at the beginning of 2011 here in Cambridge. He was wrapping up GrabCAD’s participation in the Seedcamp accelerator program, and the Seedcamp startups were in the US to visit potential advisors and investors in Boston, New York, and SF. My partner Rob had also been introduced to Hardi separately by an experienced CAD exec (Mike Volpe – now Hubspot’s CMO).
I was impressed by Hardi as an entrepreneur in our first meeting there in the Seedcamp mentoring sessions. He had a clear vision of what he hoped to achieve with GrabCAD… to make collaborative CAD design easier in our connected world, where CAD engineers and product designers are more distributed.
It was still early days for the company then, at the time we invested in GrabCAD’s seed round in the spring of 2011 they had around 3,000 engineers in their community. But my partners and I saw the potential for the community to grow virally, just as LinkedIn did, and to be monetized with a variety of products built on top of this community. GrabCAD also had very high engagement in terms of the % of engineers actually sharing large, complicated CAD files in the system. CAD software is used in designing nearly every man-made product on the planet, and a substantial amount is spent per engineer on CAD software but when GrabCAD started there were few good tools for collaboration.
Hardi moved the company from his home in Estonia to Boston to be embedded in the deep CAD software ecosystem here (Solidworks – Dassault, PTC, etc) and was part of TechStars Boston’s second class. Fast forward to today and there are over 1.5 million CAD engineers and product designers using GrabCAD. That’s something like 30-40%+ of the CAD engineers in the whole world that are part of GrabCAD’s community, or using their paid products like Workbench (SaaS storage / collaboration). Companies like GE, ABB, and others are also using Workbench or have tapped the GrabCAD community for outsourced design work.
Working with Hardi as an investor has been rewarding. I saw that even first time CEOs can be very decisive… Hardi never put off important decisions, even when they might have been challenging for him personally. I got to share some of our early dashboards from LinkedIn as GrabCAD crafted their own dashboards for early viral growth. And thanks to Hardi I got to meet the President of Estonia.
Congrats again not only to Hardi but to the entire GrabCAD team. The distributed design & manufacturing revolution is still in its early innings. As part of Stratasys, who’s also acquired MakerBot and other startups, there’s a lot more to do with the GrabCAD community and platform. Onward and upward.
One of our portfolio companies, Plastiq, announced yesterday that they raised a $10M Series B led by Khosla Ventures and are planning to move their headquarters from Boston to San Francisco. We’re thrilled for the company to have a great investment partner joining the syndicate and one with deep payments expertise having backed companies like Square, Stripe, Fundbox, and others. In fact I introduced Plastiq CEO Eliot Buchanan to my former PayPal colleague Keith Rabois at Khosla.
Some lament the relocation of Plastiq and other companies who start in Boston but end up moving to Silicon Valley or other startup hubs. To these folks, Boston’s founder pool is a leaky bucket… a young founder who moves to Silicon Valley, New York, or elsewhere is a sign of frailty of Boston’s startup ecosystem.
I believe this is completely the wrong way to think about things.
Boston is utterly unique as an innovation hub, particularly when looking at the pool of young entrepreneurs starting businesses just out of undergrad or grad school. Yes the Bay Area has Stanford and Berkeley and New York has NYU and Columbia, but here we have this immense group of talented people… a quarter million in total at more than 50 colleges and universities in greater Boston, 7-10x the college population in other cities. And this is a truly renewable resource as every year a new crop of smart, ambitious people with innovative ideas walks in the doors of Harvard, MIT, Tufts, BC, BU, Babson, Northeastern, and all the other schools just as one crop walks out. Yes some will depart Boston immediately or in time, but an incredible number stay both short term and longer term. Far more than the number of my classmates who stuck around Philly after Penn.
In that regard our startup talent pool here in Boston isn’t a leaky bucket… it’s a everlasting, self-replenishing spring. And talent flows in many directions (all three co-founders of NextView are all Silicon Valley transplants to Boston).
At NextView we’ve been privileged to collaborate with Eliot and many other entrepreneurs who set out to build a company right after college or grad school. In fact if you look just at Harvard, something like 15% of NextView’s portfolio was founders starting right after Harvard undergrad or HBS. We’ve worked with entrepreneurs from other universities around Boston here too, but this is just an example of one university. Plastiq has spent the last 3+ years building here in Boston, and even after their HQ moves a good chunk of their team including some core engineering will remain here in Boston. Similarly ThredUp founder James Reinhart built his company here in Boston in the early years after graduating from Harvard (HBS/Kennedy) before deciding to continue building ThredUp in SF. But others like InsightSquared (co-founder/CEO Fred Shilmover started after HBS, now approaching 100 employees) and Whoop (co-founded by Will Ahmed & John Capodilupo as Harvard undergrads) have remained in Boston and are building great businesses here for the long term.
The Boston ecosystem may have failed young entrepreneurs 7-10 years ago. Facebook is of course the highest profile example, as Mark Zuckerberg famously moved to Palo Alto after early attempts to attract capital, advice, and mentorship here in Boston were unsuccessful. We should rightly reflect when Boston fails young entrepreneurs as we might have in the past, but this isn’t the case today. When our ecosystem supports founders and helps them thrive we should celebrate these companies, even if at some phase they expand beyond Boston.
As investors, once we join with entrepreneurs as capital partners we are 100% committed to their success. For the record I believe Plastiq, ThredUp, and other startups which build early in Boston but ultimately relocate have ample access to talent, capital, and customers here to build very large businesses for the long term in Boston if they so chose. Even Zuckerberg said shortly before Facebook’s IPO “If I were starting a company now I would have stayed in Boston.”
I would have been happy if Plastiq had decided to remain headquartered here in Boston. But by the same token we support founders who decide that their company is best served by opening offices elsewhere and even relocating their HQ. And I celebrate the companies like GrabCAD who relocate to Boston because they feel this is the best hub for their startup to prosper.
I hope that the Boston ecosystem can start to realize we don’t have a leaky bucket, we have an everlasting spring of talent which is a singular blessing. Maybe it’s the curse of the Bambino from 100 years ago when some of the first young talent departed Boston. But either way we should acknowledge that our startup hub is truly unique in terms of our constantly renewing talent pool, and celebrate when our ecosystem successfully supports these founders even if they don’t remain in Boston forever.
Those of you who know me are probably aware that I’m a rabid soccer (football) fan. I’ve been a devoted fan of Arsenal for nearly two decades, former MLS season ticket holder (both San Jose Earthquakes when I lived in the SF Bay Area and New England Revolution here in Boston), attended World Cup 2002 in South Korea, and was fortunate to see both gold medal soccer matches in Bejing 2008 Olympics (US women’s victory, Argentina men’s victory). Every four years the whole world gets to celebrate this great game and our shared passion for it with the World Cup.
Success in the World Cup, just like success as an entrepreneur, depends on a mix of skill, hard work, and luck. Virtually every sovereign nation on the planet fields a squad in an attempt to qualify for one of the 32 spots at the World Cup itself and of course only 16 progress to the knock-out phase and only 1 will ultimately lift the cup in victory.
The winner of the World Cup will play only 7 matches in the span of a couple weeks which doesn’t seem like a lot. Yet the tournament winnows the field in a fairly deterministic and consistent fashion. Luck (good or bad) impacts nearly every team at some point in the tournament, and some squads make it farther than their skill might predict through sheer effort and will. But no country has ever won the World Cup on the basis of luck or hard work. Ask England how they feel about their bad luck in 1986 when Diego Maradona’s “Hand of God” goal knocked them out of the tournament. Yet anyone who’s seen a meaningful chunk of the 1986 World Cup will tell you incontrovertibly that Maradona was the standout player of the tournament and Argentina’s overall victory was well deserved. You’d be hard pressed to say any of the winners in the tournament’s 80+ year history hadn’t earned their triumph.
The ecosystem of tech startups is a similarly efficient winnowing machine. As a tech entrepreneur you know that the odds are long from the outset, that most startups are ultimately unsuccessful. Luck plays a role and with the benefit of hindsight, there are obviously startup outcomes that benefit from bull/bubble markets or seemingly irrational behavior. And hard work and perseverance does sometimes help some companies seemingly overachieve what otherwise might have happened. At times it may feel as though just a little more hard work can manufacturer success or the success of other startups feel like flukes.
But at the end of the day, the marketplace and the World Cup are both ruthlessly efficient. Just as a select few nations have truly earned the right to call themselves World Cup Champions, only a select few transformative and enduring companies will emerge from the startup ecosystem. The Microsoft’s, Google’s, Facebook’s, and other startup champions have earned their success just as Brazil, Italy, Germany, and other World Cup Champions have.
Enjoy the drama, splendor, and excitement of World Cup 2014!
My first two posts on this mammoth S-1 covered a high-level sizing of Alibaba and a deeper dive into some of Alibaba Group’s governance which in some ways mirrors the Politburo structure. Today I’m going to analyze monetization across Alibaba’s various businesses. How exactly is each marketplace and complementary service monetized? How does that stack up against analogous US internet companies? And most importantly how attractive is the whole based on the sum of the underlying parts?
Unfortunately Alibaba doesn’t actually break out revenue by marketplace or business unit. What we can glean from the S-1 is a qualitative understanding of the monetization of each marketplace, as well as a clearer understanding of revenue from the wholesale part of Alibaba (Alibaba.com/1688) vs the retail parts (Taobao, Tmall, Juhuasuan) and how much comes from China vs non-China (<10% of revenue is non-China).
Here’s what we know about the key retail marketplaces:
Taobao (marketplace for individuals & small sellers – akin to eBay) –> Sellers on all the Alibaba marketplaces can purchase advertising on Taobao in a variety of forms including CPC keywords, CPM display, and as a commission on closed sale (Taobaoke – like an “internal” affiliate fee). There are no commissions on closed sales (other than Taobaoke) or placement fees on Taobao. Some Taobao sellers also pay a monthly subscription for software (Wangpu) which helps them create better looking and easier to manage storefronts.
Tmall (storefronts for larger, branded merchants like Nike, Gap, etc.) –> While Tmall is frequently compared to Amazon.com, it’s business model is totally different. In fact JD.com, which priced it’s IPO yesterday, is a direct seller (e.g. stocks inventory) and is really more analogous to Amazon. Alibaba’s Tmall is a true marketplace like eBay, though many of the types of products sold on Tmall would be equivalent to what US consumers buy retailers own websites or Amazon. The bigger merchants on Tmall sell their branded wares and pay a commission to Tmall of 0.5 – 5.0% based on product category for all sales settled through Alipay (~80% of Alibaba’s GMV is settled through Alipay). Also other Tmall merchants can advertise on Tmall in both CPC keyword and CPM display formats, but small sellers from Taobao or Juhuasuan are not permitted.
Juhuasuan (group buying / flash sales – akin to Zulily, Gilt, etc) –> Juhuasuan sellers pay 0.5 – 5.0% (based on product cateogry) of all sales settled through Alipay similar to Tmall, though additionally Juhuasuan generates revenue from placement fees paid by sellers to secure a particular slot based on category, time, etc.
1) Retail E-Commerce Brings Home the Bacon – While Alibaba’s roots were as a wholesale (B2B) marketplace, retail commerce drives the company both today and in the future. The wholesale marketplaces now account for <20% of the group’s total revenue and have essentially stopped growing, whereas the retail e-commerce revenue is still growing >65% YoY. In a couple years the wholesale part will probably be <5-10% of the total.
2) Tmall Monetizes Better Than Taobao – We don’t know the precise breakdown of revenue between the two, but we do know that for every $1 of GMV Alibaba generates more revenue from Tmall than Taobao. The makeup of the revenue is different too (see #4 below).
3) Alibaba Monetizes at a Far Lower Rate than eBay – eBay generated about $8.3B in revenue from its marketplaces last year (excludes revenue from PayPal and eBay Enterprise) on $76.4B in GMV. So for every $1 of GMV that flowed thru its marketplaces, eBay captured about 10.8 cents. Alibaba on the other hand generated $6.5B in revenue in 2013 from its retail marketplaces on $248B in GMV. So Alibaba captured only 2.6 cents out of every $1 in GMV that was sold on its marketplaces. But Alibaba is clearly making it up on volume as they say.
4) It’s Unclear if Alibaba Looks Like an Media Company or a Marketplace – To be clear, Alibaba’s sites are obviously marketplaces. They drive huge volumes of transactions and Alibaba doesn’t hold inventory like an Amazon. But it’s not clear if the monetization of the group as a whole looks more like Google or more like eBay. Taobao is essentially monetized through advertising, albeit ad buying done by sellers across the Alibaba marketplaces. Taobao drives significant traffic across all Alibaba’s marketplaces and there seems to be a real ecosystem/network effect at work here. This is pretty different from eBay, which generates some revenue from ads & marketing services, but the vast majority (80%) from transaction fees. Tmall generates a lot from transaction fees and probably some from ads though again we don’t know the precise split. If and when we know more about the split between Taobao and Tmall revenue, we’ll have a greater understanding of what the best financial analog is for Alibaba.
5) Alibaba Is Still Growing Like a Weed – Astonishing as it is for a company with a quarter trillion in GMV and approaching $10B in revenue, Alibaba is still growing as a whole nearly 60% each year. Wholesale is essentially stagnant but China retail which again is the main driver is growing faster than the whole (65% YoY). While China now has >600 million internet users, that still means there’s another half billion or so that are not yet on the internet. So there’s reasonable prospects Alibaba’s retail commerce engine will continue to grow at a fairly rapid clip for awhile.
Note (1): I’ve attempted to split out non-commerce revenue for the various companies to make an apples-to-apples comparison, or as close as we can get based on publicly reported numbers. So for Alibaba I stripped out revenue from cloud computing and other activities, for eBay this excludes PayPal and eBay Enterprise (the division composed of the old GSI, Magento, etc), and for Amazon I stripped out Amazon describes as “non-retail” revenue (AWS, etc).