How Goldman Sachs won and lost with China's Alibaba

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Fifteen years ago, when Shirley Lin started talking to Jack Ma about investing in Alibaba, he wanted to sell 10 per cent of his company for $5-million (U.S.).

Alibaba wasn't much then, just a small collection of people who got their start in an apartment building a website to connect businesses with consumers.

Ms. Lin was with Goldman Sachs Group Inc., where she helped lead the firm's "principal investment area" in Asia, a private-equity arm that sought out promising companies around the world. The fund held billions. It was hardly a fair fight.

What Ms. Lin ended up with was a deal any investment banker could love: $5-million for 50 per cent of Alibaba, with Goldman given control of the board and anti-dilution rights that meant it would never have to spend another dime to hold its stake.

It was a gold-plated agreement, in a company Ms. Lin believed in. She was, like many who would follow her, convinced that Mr. Ma, the Alibaba founder who is now a billionaire and icon of China's new generation of entrepreneurs, was worth backing.

But almost immediately, she ran into trouble.

Goldman wasn't eager to pour $5-million into a small and potentially risky company, and asked that other investors join the deal. Eventually, the Goldman investment was pared down to $3.32-million.

Even then, Goldman Sachs was the first major outside investor to put money in Alibaba, a company whose meteoric ascension to the pinnacle of Chinese e-commerce has primed it for what may be the biggest IPO in world history.

A series of estimates have suggested the online juggernaut is now worth hundreds of billions; recently Morningstar predicted a $26-billion IPO, which would imply a total equity value of $220-billion.

But Goldman sold out in 2004, happy with $22-million, a tidy return of nearly seven-fold.

"It was far too quick, you cannot believe it," Ms. Lin says today, in her first public comments on the matter.

She is no longer with Goldman Sachs, and now teaches in the Master of Social Science in Global Political Economy program at Chinese University of Hong Kong. Goldman owns none of Alibaba any more, although it is one of six lead underwriters in the company's IPO, a reason it offered in declining comment. But "every time I see someone at Goldman, they still tell me, 'Shirley, I didn't do it. I had nothing to do with the sale,'" Ms. Lin said.

When Ms. Lin started criss-crossing China in the 1990s, searching out new investments, she found herself confronting an unexpected question.

"Those days, when I went to a meeting and said I was with Goldman Sachs, they asked me if I was Mrs. Goldman or Mrs. Sachs. They had never heard of the firm," said Ms. Lin.

China was then, particularly for an outside Goliath such as Goldman, fertile ground but difficult terrain. "There was no competition for about five years," Ms. Lin said. "We were one of the few big games in town." But finding investments meant bouncing across unpaved roads to factories and sorting through a fire hose worth of ideas.

"We would get literally 500 business plans a week," Ms. Lin said. But "everything in China was very murky." Figuring out what was worthwhile meant picking 10 out of the 500 to see, travelling to find them and then, on rare occasions, investing.

Ms. Lin helped shepherd Goldman money into a series of Internet companies that would gain household recognition, including Sohu, NetEase and Sina. "I even thought of merging Sohu, NetEase and Sina, since we owned them all," she said. "This was 2000. It was really amazing." When she ran into opportunities over her own approval limit, she teamed with others, such as Foxconn's Terry Gou, who invested with her in Semiconductor Manufacturing International Corp. – now one of the biggest semiconductor makers in the world.

"It was really wonderful, heady days," she said.

When Ms. Lin first began speaking with Alibaba, it was a small company in a sea of contenders. "Really, it was all about Jack and his people," Ms. Lin said.

At the time, Goldman sorted its Chinese prospects into two camps: those heavily reliant on expats, and those with a more local bent. Alibaba was firmly the latter. "And I really thought that to invest in China, you have to know the local market," Ms. Lin said. Mr. Ma, an English teacher turned Internet pioneer, "was as local as it gets." Plus, he was a born entrepreneur.

She was sold.

The deal was signed Oct. 27, 1999. Fidelity Growth Partners Asia invested alongside Goldman.

Mr. Ma "recently jokingly said doing the deal with me [in terms of selling 50 per cent] was the 'worst' deal he's done because he sold too much," Ms. Lin said. "But he sure was happy to get our investment. I don't think any of us thought how big it would ever become." And at the time, it didn't hurt Alibaba to have the Goldman Sachs name behind it.

Others soon saw the company's promise. In early 2000, Masayoshi Son, founder of Japanese phone and Internet giant SoftBank, led a group to invest $20-million. SoftBank later added to that sum, and now owns 34.4 per cent of Alibaba, a share that, depending on the IPO price, is likely worth $60-billion to $75-billion.

But it wasn't immediately obvious that Alibaba was a winner. Often forgotten in the company's meteoric growth tale is that early in its life, in the midst of the global dot-com bust, it stumbled badly. It looked like it might join the legions of other companies tripping into a corporate grave.

Within three years, Goldman had marked down its Alibaba investment by 50 per cent. "They thought it was hopeless," Ms. Lin said.

Huge numbers of other startups failed outright. At one point, China had some 2,000 small companies looking at models similar to Alibaba, said Peter Liu, the founder and chairman of WI Capital Group who is one of the pioneers of venture capital in China. "Those days it was just the wild wild west," he said.

"In the early to late nineties, a lot of foreign direct investment going in got wiped out."

For Goldman, too, small Internet investments never fit comfortably into its multibillion-dollar private equity fund. "They were not interested in most of the things we were doing in China. They wanted quicker results," Ms. Lin said.

She helped keep the Alibaba investment intact while she was at the firm. But in May, 2003, she left. Early the next year, Goldman sold. At the time, it looked like an undeniable win – a massive increase in just over three years.

It didn't take long to see that the exit was early. The very next year, Yahoo's Jerry Yang invested $1-billion for 40 per cent of Alibaba; Yahoo still holds 22.6 per cent.

But by then Goldman was out, missing out on a return that, today, would have been massive.

"In the 10,000 times is very much an understatement," Ms. Lin said.

Editor's Note: An earlier online version of this article incorrectly said Shirley Lin teaches at City University in Hong Kong. In fact, she teaches at Chinese University of Hong Kong and University of Virginia.