It was early 2003. I was an Associate at Battery Ventures and decided to make a trip to Beijing to learn more about the Chinese VC landscape. It was an unusual time to go to say the least. The global markets were still recovering from the dotcom bust in 2000. Additionally, there had been a breakout in November 2002 of a respiratory virus in China called SARS (Severe Acute Respiratory Syndrome). This virus, a type of coronavirus, was highly contagious and had a high fatality rate—particularly among the elderly. Any of this sound familiar?
Within that context, I made my way to China looking to meet some of the emerging tech companies and the VCs who backed them. The market felt highly depressed - it was pretty much a ghost town. International investment interest in China was almost non-existent, and local activity was slow. Everyone was surprised to see me given SARS, therefore many were more than happy to meet with me to generate interest in China. I met with leading Chinese investors who were relatively unknown in U.S. markets - like Lip-Bu Tan (who is now Intel’s CEO) and several others. It was on this trip that I met with a member of the team from Goldman Sachs’ local VC affiliate, who had led the first institutional round in Alibaba in 1999.
At that time, Alibaba was an online listing site that helped Chinese manufacturers and foreign exporters find each other. Founded by Jack Ma, Alibaba was showing strong growth as it was enabling global trade (ironic given our current trade war). Despite occupying a compelling seam, Alibaba had multiple near-death experiences in the early 2000s. That’s what happens when you take a high-burn Internet company into the dotcom bust. Due to some of these challenges, Goldman was looking to sell its position in Alibaba at a ~$250 million valuation.
When I returned to the office, I briefly mentioned this opportunity in my trip debrief. It was not a realistic investment for a firm with no history, presence, or experience in China. Plus, the name "Alibaba" just sounded ridiculous to American ears. Little did I know at the time that Alibaba would become arguably the preeminent Chinese tech company with a current market cap of $250 billion - 1,000x the valuation that Goldman was willing to sell at. Little did I know as well that the Chinese tech and VC industry would explode from that point forward becoming one of the world's great markets for tech innovation for years to come.
That episode is one of several key inputs that has informed my philosophy of being contrarian. At the time, China was viewed as a near impossible place to invest in. It was seen as a country with compounding risks: political risk, currency risk, regulatory risk, human rights risk - not to mention the health risk from the SARS outbreak. Though it had a lot of promise and strong growth, Alibaba wasn’t a household name, had nearly run out of cash, and one of its earliest investors was looking to exit. This was not a setup for a home run investment.
Or so I thought. There’s a simple lesson from that experience that has stayed with me throughout my career: to generate a great return on an investment, it’s much easier if you invest when a quality company is highly out of favor and exit when it’s highly in favor, than the other way around. The movement from out of favor to in favor, paired with strong compounding, sets the stage for significant multiple expansion between entry and exit. That’s how home run investments are made: strong growth x strong multiple expansion.
So now, when I see them, I find myself uniquely leaning into investment opportunities in strong companies that are highly out of favor for whatever exogenous reason. My colleagues might sometimes think I’m crazy (which is totally fair) - but crazy is investing in Alibaba in the middle of SARS, after the dotcom bust. Which, of course, I should have done.
(Thanks for reading - feel free to reply to this email with feedback and other types of posts you might suggest for the future.)
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