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).
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.
One 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.