AGILEVC My idle thoughts on tech startups

May 22, 2014

RMB2My 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.

      Slide1

 

Key Takeaways:

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.

 

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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).

May 15, 2014

Growth Guides Icon We’re launching a series of platform initiatives here at NextView in 2014.  Today we’re pleased to announce the first in a series of Growth Guides.

What’s a Growth Guide?  Well our focus here at NextView is helping exceptional seed stage companies get things off to the best possible start. Simply put these Growth Guides are a step-by-step playbook which cover a specific need that seed stage companies may face in their first 12-24 months.  They include practical time-saving advice as well as Q&A with founders on how they’ve tackled these issues, making them a useful read for both execs and individual contributors.

Our first Growth Guide covers Content Marketing for Startups.  While all of us here at NextView contribute to these efforts, the driving force behind this guide is Jay Acunzo, NextView’s Director of Platform, and an experienced marketer from his time at Hubspot, Google, and Daily Break.  This growth guide draws upon not only our collective experience but also what we’ve learned from running workshops and talking with a range of startups across stage and industry.  Our goal is for these Growth Guides to be useful not only to the startups we invest in here at NextView, but for the broader startup community.

We’re excited to be able to bring these Growth Guides to the seed stage ecosystem.  So stay tuned because in coming months we’ll be developing Growth Guides that cover a range of issues from product to sales to engineering.

May 9, 2014

politburoOne of the first things that caught my eye when I started reading the Alibaba Group S-1 was a section on page 7 of the filing regarding something called the “Alibaba Partnership”.  It quickly struck me that the Alibaba Group’s corporate governance in some ways mirrors China’s Politburo.

Some context… like many startups, the founders of Alibaba still own substantial stakes in the company and believe it’s in the company’s best interests for them to retain an outsized influence in the company’s governance longer term.  Such an approach is common in Silicon Valley… Google, Facebook, LinkedIn, and others have dual-class equity structures which give the holders of one class of shares (typically founders) disproportionate voting rights relative to their fully-diluted ownership stake in the company.

Dual-class ownership structures have been around long before Silicon Valley was transformed from orchards.  Companies like Ford and the New York Times Co. have long had dual-class ownership which has enabled their founding families to maintain significant control.  So in that respect the Alibaba Partnership’s special governance rights aren’t that unusual.  FWIW, the members of the Alibaba Partnership currently own about 14% of the total shares of the Alibaba Group prior to the IPO.  The Alibaba Partnership also owns a chunk of Alipay which technically Alibaba doesn’t own (more on that in the future).

What’s interesting about Alibaba is that rather than having a dual-class share structure, an entity referred to as the “Alibaba Partnership” (technically called Lakeside Partners) has the right to appoint a majority of the board directors of Alibaba Group.  This right is a perpetual right in the company’s articles of incorporation, and can only be changed by a vote of 95% or more of Alibaba Group’s shareholders (an implausibly high approval level for any shareholder resolution).

Theoretically Alibaba’s shareholders must still approve the directors nominated by the Alibaba Partnership, but in the event a nominee is not approved it doesn’t really matter… the Alibaba Partnership has the sole discretion to appoint an “interim” director in their place until the next annual shareholder meeting.  Interestingly this structure was enshrined in conjunction with Alibaba’s two major shareholders, SOFTBANK and Yahoo.  Yahoo and Softbank have pledged to vote their shares in favor of the directors nominated by the Alibaba Partnership.  In return SOFTBANK gets a board seat on the Alibaba Group and founders Jack Ma and Joe Tsai agreed to vote their shares in favor of SOFTBANK’s director nominee.

Alibaba Partnership’s Structure

The Alibaba Partnership is composed of 28 members all of whom are members of Alibaba’s management or affiliated companies.  Each member has one vote regardless of their shareholdings in Alibaba and new members of the Alibaba Partnership can be added annually, first by nomination of the “partnership committee” followed by 75% approval of the existing partners.  Partners remain as long as they are still part of Alibaba’s management, maintain certain thresholds of their share ownership, or unless they are removed by a simple majority vote of other partners.

The Partnership’s stated goal is to preserve the culture (“our mission, vision, and values”) that was established by this group over the years in running Alibaba in a spirit of partnership.  Whether intentional or not, to me this mirrors the Politburo of China’s Communist Party.  The Politburo is composed of 25 members, and it’s power comes from the fact that these members all hold influential positions within China’s government just as the Alibaba Partnership members hold executive roles in the Alibaba Group.  Like the Politburo’s “standing committee” of 7 which holds even more influence, the Alibaba Partnership has a “partnership committee” of 5 members which serve for longer terms and increased influence in running the partnership.

I’m not suggesting that Alibaba Group or the Alibaba Partnership are directly connected to or influenced by the Chinese Communist Party.  I don’t think there’s anything sinister in the structure.  But I find it fascinating that a principal common to dominant tech companies (enshrining founder control) is in Alibaba’s case is analogous to the Politburo structure.  Just as China has a robust form of “capitalism with Chinese characteristics” I suppose the Alibaba Partnership represents dual-class ownership with Chinese characteristics.

May 7, 2014

As I’m sure you’ve heard, Alibaba officially filed to go public yesterday.  I believe this may be the most anticipated tech IPO of all time… some may argue Facebook was a bigger deal, but Alibaba’s offering has been “in process” for a long time and may very well be the largest IPO ever both in terms of size of offering and initial market cap of the company.

My S-1 deconstructed posts over the years (Facebook, Groupon, Kayak, et al) have usually been a single long read.  Alibaba simply too big of a company and there’s way to much in this S-1 to do it in a single shot.  But there’s a ton of interesting bits on everything from growth rates to corporate governance, so I will still do a deep analysis though will serialize this into a couple posts.    I’ll first start with a brief background on the genesis of Alibaba and a top level sizing of the company and its underlying businesses.

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Alibaba’s Genesis  Alibaba was founded in 1999 by Jack Ma and 17 other colleagues, and like most startups they began as a small group working out of Ma’s apartment in Hangzhou.  The initial business, Alibaba.com, was a B2B marketplace to enable global buyers of manufactured goods to connect with Chinese wholesalers and suppliers of such goods.  At the time B2B marketplaces were huge in the US… during the late ’90s bubble companies like VerticalNet and others were valued in the tens of billions.

By the late ’90s the economic reforms of Deng Xiaoping had helped propel China into an upward growth trajectory but this was still two years before the term “BRIC” was created.  For perspective, China’s entire economy has grown more than 600% since Alibaba was founded.  Even more staggering… when Alibaba started there were 9 million Chinese people on the internet.  By the end of 2013 there were 618 million, or growth of nearly 7,000%.  Clearly betting that the internet in China would be “big” someday has paid off for Alibaba.

Just How Big Is Alibaba?  You may know that Alibaba is a huge company and may also know that it has several underlying businesses.  Here’s a quick breakdown for you.

  • Alibaba/1688.com – this is the B2B marketplace for connecting wholesale buyers worldwide with Chinese manufacturers and distributors for a range of goods.  While B2B was the origin of the company, the Alibaba/1688 marketplace has evolved more towards a complementary business to the rest of Alibaba in that much of the use of the B2B marketplace is by sellers on Alibaba’s retail marketplaces (Taobao, Tmall, Juhuasuan) to source their goods.  Today the B2B (aka wholesale) portion of the business only accounts for about 11% of Alibaba Group’s overall revenue.
  • Taobao – this is a “P2P” or “C2C” marketplace for relatively small sellers to connect with retail buyers for goods.  It’s not a perfect analogy but broadly speaking it’s similar to eBay, though the vast majority of Taobao transactions are fixed price rather than auction format.
  • Tmall – this is the B2C marketplace, where large companies can sell directly to retail buyers.  Akin to Amazon.com, Tmall is primarily used by large brands like Nike, Gap, and others to sell online in China.
  • Juhuasuan – this is a group buying or flash sale marketplace.  People compare it to Groupon frequently which helped pioneer “flash sales” in the US, though Groupon historically has sold a lot of service based offers (restaurants, spas, etc) whereas Juhuasuan is primarily products like a Zulily, Gilt, etc.
  • Alipay – this is the payments arm of Alibaba, usually compared to PayPal in the US.  A key distinction is that the primary benefit of PayPal originally was to enable small merchants to accept electronic payments seamlessly, at a time when most had to rely on checks and money orders in the mail.  Alipay’s primary benefit is as an escrow service ensuring the seller gets paid and the buyer gets their purchase, which gives comfort to both parties in a Chinese society where the rule of law and trust between individuals can be a greater concern than in the US.
  • China Smart Logistics – this is a JV that Alibaba Group owns 48% of, created in partnership with the 5 largest delivery companies in China (e.g. the UPS, FedEx, DHL equivalents).  This lets sellers on Alibaba’s marketplaces connect effectively with packing and delivery providers, and for consumers to seamlessly track and manage delivery of their purchases.

Alibaba Group doesn’t break out revenue by each marketplace, though they do separate the revenue from China vs rest of world and between wholesale and retail commerce.  They also break out the revenue of ancillary businesses like the web services unit.

So just how big is Alibaba Group?  Well I’ve included below one of many infographics in the S-1 that gives you some of the hard stats.  No matter how you slice it, the numbers are fairly staggering.

  • A Quarter Trillion in GMV – total gross merchandise volume (GMV) for Alibaba Group was $248B USD in 2013.  Let me repeat that… a quarter trillion USD.  eBay’s GMV for 2013 was $76 billion and Amazon’s was about $100B.  So that makes Alibaba Group about 40% larger than Amazon + eBay combined in terms of total goods sold.
  • 11 Billion Orders – Alibaba processed 11.3 billion orders in 2013 across 231 million active buyers, so roughly 50 orders per active user.
  • Half A Trillion in Payments – total payment volume (TPV) through Alipay was $518B USD in 2013.  For reference, PayPal was $180B USD in TPV in 2013, which makes Alipay nearly 3x bigger than PayPal.

With all those mind blowing stats though, Alibaba did roughly $8.5B USD in revenue for 2013.  In that regard it’s only about 1/2 the size of eBay/PayPal and means that the revenue per transaction is far lower.  In my next post I’ll do a deeper dive into exactly how each of Alibaba’s businesses monetizes and try to compare those to the analogous US-based companies.

Alibaba-stats

April 28, 2014

alchemyI watched the first episode of HBO’s Silicon Valley last night. Yes I know I’m several weeks behind at this point, but I wasn’t sure if I was going to get into this series (still not sure actually). FWIW I’m a big fan of Mike Judge’s films like Office Space and Idiocracy, and also enjoyed his prior TV shows. But as I said to my wife, I suppose it’s a little like a doctor watching ER back in the day or a cop watching contemporary crime dramas.

In that very first episode we have a brief glimpse at the aftermath of a successful exit worth “hundreds of millions” and then also the main character’s dilemma of whether to accept a $10 million offer for a fledgling side project. And it occurred to me that tech entrepreneurs’ success is a little like alchemy to the average person.

Picture this… some people that seem at the fringes of the mainstream (developers & entrepreneurial types) do some stuff that you don’t really understand (innovation & company building) and then poof the entrepreneur possesses vast riches. Today’s journey from startup to $19B acquisition by Facebook must seem comparable to turning base metals into a pile of gold for the average 13th century man on the street. Regardless of how important one thinks luck may be in entrepreneurial success, and it undoubtedly plays a material part, most people know that startup success is not exactly the same as hitting the lottery. But the success of software entrepreneurs it is less understood and probably feels less intentional to the average person than most other forms of accomplishment.  And perhaps those of us in the entrepreneurial ecosystem could do more to foster a broader understanding.

Most people can grasp other forms of success in some way. Few will ever achieve the investment success of Warren Buffet, but wide swaths of society have at least tried their hand at buying a couple shares in a brokerage account or allocating their 401k in some way. Lots of people played little league or tried out for sports as a kid, so while few of us will ever be A-Rod, Tiger, or Tom Brady we have some sense of what it must take to climb to the heights of professional sports.

But relatively few people have written a software application. Few have quit secure jobs and gone without paychecks to pursue an entrepreneurial dream. Few have mapped out a market opportunity in detail, and then fought and scrapped to bring an innovative product to that market. And even fewer have done all three and been successful in the process.

The easy thing to do would be to simply say “most folks don’t understand tech entrepreneurship”. But those of us who live and work in “Silicon Valley” could probably do more to help the broader world understand what entrepreneurs actually do and also don’t do. Tech entrepreneurship and building innovative, successful businesses should rightly be celebrated by our own ecosystem and society more broadly. But we can also hopefully admit that not every startup is truly changing the world.  Perhaps we’re a little commercially minded in addition to disrupting a market and improving customers’ lives.  Hard work is always involved but occasionally we simply get lucky.  And all of this is ok to admit.

Hopefully those of us in the startup ecosystem can speak truth to all these, in addition to highlighting the determinism, brilliance, and effort that goes into entrepreneurial success.  Perhaps then it won’t feel like alchemy to the rest of world.

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  • I'm a former Silicon Valley entrepreneur turned East Coast VC. I co-founded NextView Ventures, a seed-stage VC firm based in Boston, in 2010. Read More »

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  • Rob Go
     - 9 hours ago
    The new @Wayfair holiday TV ad (featuring my home). Sneak peak here http://t.co/OmoNrxHy9V
  • Rob Go
     - 1 day ago
    Cool design focused event @bladebos Nov 6. Limited seats available! http://t.co/qHjU4WBeTx
  • Lee Hower
     - 2 days ago
    @vcparty that statement is true. FRC's LP base looks pretty similar to Sequoia's though
  • Lee Hower
     - 2 days ago
    @vcparty agree. some LPs have to bend their model, though best LPs don't care much about concentration - they focus on accessing best funds
  • Lee Hower
     - 2 days ago
    @vcparty thx - would slightly disagree trad'l LPs & smaller funds are misfit… best seed funds have trad'l LP base (albeit concentrated)

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