In 1999, Wall Street bank Goldman Sachs was one of the first investors in Chinese e-commerce company Alibaba, investing $3.3 million in what was then a scrappy startup operating out of its founder’s apartment in Hangzhou.
Shirley Lin, who worked for Goldman’s private equity fund, said she was offered the chance to invest $5 million for a 50 percent stake, Financial Times reported. Instead, she said her colleagues decided $5 million was too risky and they opted for investing a “safer” $3 million.
Five years later, in 2004, Goldman sold its stake in Alibaba for $22 million — almost seven times its original investment.
“Goldman Sachs has a reputation for consistently holding the winning lottery ticket numbers. But it got rid of the ticket that (was) poised to be one of (2014’s) biggest payoffs,” New York Times reported in 2014.
Some of the early investors who bought Goldman Sachs’s stake have since made up to 30 times their original investments as the company’s value skyrocketed.
“In many ways this was a remarkably successful investment until, that is, you realize that today those shares would be notionally worth more than $200 billion before dilutions are taken into account,” wrote Lawrence Burns, an investment manager at Baillie Gifford, in a Financial Times column.
If Goldman Sachs had held its Alibaba investment instead of banking the profits, that investment “would have been worth nearly double the value of the whole of Goldman Sachs today,” Burns wrote.
When asked why Goldman Sachs sold, Lin answered predictably, Burns wrote: “They wanted quicker results”
“The point is clear,” Burns added. “In investing, it is often not only wrong to bank profits, it can be the worst mistake you make.”
In almost every client meeting, Burns said he is asked “about our sell-discipline. No one has ever asked me about our hold-discipline. That is a great shame, as the larger cost to clients’ returns comes from the inability to hold on to superstar companies when their returns are ticking upwards,” he wrote.
In 1999, Goldman Sachs led Alibaba’s first round of investment, which raised $5 million and included Fidelity Growth Partners Asia, a venture capital arm of the mutual fund Fidelity. The investors in that round secured a 40 percent stake in the company, New York Times reported.
At the time, Jack Ma’s company was not well known. “No one would lend him any money or provide capital for the business,” according to an executive who knew him.
That changed in January 2000, when Japanese tech group SoftBank and its founder, Masayoshi Son, invested $20 million in Alibaba and promised more.
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When the tech bubble burst in 2000, Lin was often quoted in news reports saying that Goldman Sachs took a long-term view on China. But by 2003 Goldman’s private equity unit was losing faith in Chinese startups. “There was no way of telling that Alibaba would become the success that it has become today,” a source told New York Times.
As a consolation prize, Goldman was one of six investment banks that ran Alibaba’s initial public offering. Alibaba went public in 2014 and raised $25 billion — making it the largest IPO in history until then.
Alibaba has a market cap today of $661.811 billion. Goldman Sachs, which went public itself in 1999, has a market cap of $114.188 billion.
Goldman missed out on a return that, today, would have been massive. If Goldman’s $3.5 million investment in 1999 represented a 28 percent stake in Alibaba, and Goldman had held, its stake today could have been worth a possible $185 billion. That’s more than Goldman is worth today.
