Tristen Langley: Start-ups Within Chinese Internet Companies Generate Great Value

In this episode of China Money Network, co-founder of Amalfi Capital, Tristen Langley, talks with our host, Nina Xiang, on Alibaba Group's $586 million acquisition of an 18% stake of Sina's Weibo, her investment firm's winning and losing bets, and the future challenges facing China's e-Commerce industry. Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below. Q: Alibaba Group just bought 18% of Sina's Weibo for $586 million, valuing the Chinese twitter-like site at $3 billion. Do you think it's a fair valuation? A: Weibo has almost 500 million users, and is still growing. Compared to Twitter and other U.S. comparable, the valuation is probably modest. But this is a very strategic alliance. So a lot of the valuation is driven by Alibaba's motivation to leverage Weibo's audience. It's estimated that 14% of Weibo's traffic is being pushed onto Alibaba's Taobao site. That sort of potential synergy makes the valuation very reasonable for Alibaba. Q: Sina expects that the new strategic alliance will generate $380 million in extra revenue over the next 3 years. Do you think users' habits will be changed? A: Any group who communicates on a free platform and doesn't expect to be marketed to can be disengaged (when there is an effort to sell products to them). But by this alliance, Taobao has an opportunity to innovate around product discovery (among Chinese consumers). I think the ways consumers become aware of products still haven't been fully explored in China. Another thing is, Alibaba has a lot of cash. I did a quick tally of Tencent, Netease, Baidu, Focus Media, Qihu, Sina and Alibaba, there are all together $13 billion of cash sitting on their balance sheet. Q: Where do you see as some good new venues for these companies to invest the cash? A: We've seen (misjudgment) over time. Netease, for example, was putting their cash towards pig farms in 2010. Thank goodness that Netease is now looking to develop their own content and games. So I think the cash should go into their own innovations. It's estimated that about 18% of the options from 2010 to 2012 were given to Weibo's management team as an incentive to create value in essentially a start-up within a big public company. Tencent has proven that this kind of investment (into start-ups within a big company) can have a clear internal rate of return (IRR) and be extremely advantageous. Q: Alibaba is facing competition on all fronts. How do you see China's e-Commerce industry's competitive landscape evolving in the next few years? A: The offline and online worlds are going to meet in ways that present unprecedented challenges. For example, Suning Appliance bought Redbaby, an online e-Commerce site for baby goods and now expanded to other products. Redbaby started from catalog services, developed into online e-Commerce, to telephone ordering. This merger with Suning will present extreme challenges just integrating the back-end systems. But Alibaba and Taobao are still well ahead of the game. It's up for others to catch up, form alliances to take on the gorilla in the room. Q: Tell us some background on Amalfi Capital that you co-founded? A: Amalfi Capital is a global technology investment fund with a long-short equity strategy. Co-founder, Paul Weide, and myself founded the firm in 2010. We interview around 500 entrepreneurs, engineers and CEOs from around the world every year. We build this thematic approach to profile about 50 companies from that group. Then we choose about 20 to 30 companies that we invest in. Our portfolio has a 60% to 80% exposure in China. Q: When you were working at venture capital firm, DFJ (Draper Fisher Jurvetson), you led its investment in Skype. What was the most difficult judgment you had to make at that time? A: Back in 2003 when Skype was launched, Voice over IP was nothing new. When I saw the deal, it was 12 engineers who had already received $5 million in series A funding and have already acquired 1.7 million users. At that time, the big question was always the business model. Also, would the users stay with Skype or would a competing technology take away users? We invested $20 million alongside with Index Ventures in February 2004. We knew it was a race to capture the world quickly. After we invested, Skype ended up adding one million users a week from 100,000 users a week. What I learned is the importance of market entry and user acquisition. Skype had very low cost structure and low customer acquisition costs. Now at Amalfi Capital, we think about these two aspects all the time when we make our investment decisions. Q: What kind of performance you have been able to achieve so far? A: From August 2010, our accumulative return is 18% net of fees. The biggest contributor to our performance is Netease, a tremendously undervalued company sitting on a pile of cash. It also has strong assets between its online games, World of Warcraft and Fantasy Westward Journey. The other one is Alibaba, which we own indirectly through Yahoo. Tencent is another stock we like. We also shorted Millennial Media and Verifone. We own some of these stocks indirectly because we couldn't get exposure any other way. For example, we also invest in Australia-listed SEEK Australia. It now owns 74% — moving to 79% — of Zhaopin.com, the number two jobs searching website in China. You can't own Zhaopin because it's still privately held. Q: Can you share some investments that didn't work out as planned? A: One company is JiaYuan, an online dating website that IPOed at around $10 per share. The stock is now around $5. This company faces competitive pressures in mobile from MoMo and other free services. It has been misunderstood by the market and has suffered since its IPO. About Tristen Langley: Tristen LangleyTristen Langley is co-founder of Amalfi Capital, a long-short equity investment fund focused on technology and China. Previously, Langley was a business development and marketing manager at Skype Technologies for North America. From 2002 to 2005, she was an analyst at venture firm, Draper Fisher Jurvetson (DFJ) where she initiated the firm’s investment in Skype Technologies.