Alibaba Brings Silicon Valley Thinking to the Street

The Cayman Island holding company dressed in Chinese online retailer’s clothing could be huge or illegal. And investors are all in.

Wall Street and Sand Hill Road are two different thoroughfares historically dominated by two different mindsets: Manhattan’s Uber-hailing, pinstriped analysts care about performance while Sand Hill Road’s Tesla-driving, hoodied venture capitalists care about potential. Is that reductive? Absolutely, but you have to look no further than television commercials for E-Trade to see that a form of the performance-obsessed Wall Street mentality has trickled down to the masses. Average American investors check the line-graphed progress of their stocks rather than proprietary code and have more fear of abject failure than the Peter Thiels or Marc Andreessens of the world, who have war chests that allow them to lose battles and keeping fighting. Thanks to the Chinese retailer Alibaba and its charismatic founder Jack Ma, that may be about to change.

Today’s IPO is so significant because Alibaba is and isn’t a Chinese retailer – not exactly. The popular view of the business as a sort of Eastern Amazon misunderstand’s the nature of the company about to be valued at over $200 billion. Unlike Jeff Bezos, Jack Ma is in the business of moving other people’s units. Alibaba is actually more similar to eBay, which serves as an engine to sell other people’s products, but unlike eBay the site doesn’t charge a commission fee. Alibaba makes money when the businesses that use it advertise their wares and jockey for position. That matters largely because it explains why the newest company on the New York Stock Exchange isn’t exactly Chinese.

Americans can’t buy stock in a Chinese company because of Chinese laws against foreign investment so what brokers actually spent the morning trading were shares in Alibaba Group Holding Limited, a Cayman Islands-based entity entitled to the profits of Alibaba China, which is still basically controlled by Jack Ma. In other words, anyone investing in Alibaba is making a bet on Jack Ma as a leader and as a businessman capable of navigating the narrow alley between business and the politburo, which could shut down the whole thing by claiming the company’s structure breaks Chinese law. Ma will have to navigate the legalities surrounding international investment in a similar way Uber’sTravis Kalanick has maneuvered around cities’ livery statutes.

Investing in Alibaba is unlike investing in more mature American companies. The company has tremendous upside – 1.36 billion consumers helps – and massive potential downside. It is run by a guy most people refer to as “Crazy Jack” and it eschews the creation or sale of goods in favor of providing a service. It is, in short, precisely the sort of tech firm that receives investment from VCs rather than casual traders. The floor is low, the ceiling is high, and there is no value in physical assets. That’s exciting stuff for E-Traders, who have been watching the big money game in California from the sidelines. 

Alibaba represents a chance to take a stroll on Sand Hill, but it isn’t all sunshine and jogging coeds. Investing in Alibaba is about seeing potential, but with one sort of potential comes another.

Photos by Andrew Burton / Getty Images