Ant IPO and China's "Startup Debt" Problem

Last week, Chinese tech stocks went through a mini rollercoaster.

The Wall Street Journal first reported that regulators were close to completing their cybersecurity investigations of Didi, Full Trust Alliance, and Kanzhun, sending stock prices up. Then Bloomberg reported that the China Securities Regulatory Commission (CSRC, China’s SEC) began the processing of reviving the highly-anticipated Ant Group IPO, sending stock prices up some more. All this enthusiasm was soon damped when CNBC reported that both Ant and CSRC denied that a new IPO is being discussed and worked on.

The whiplash of these headlines tend to cause further confusion of an already confusing situation, but it does seem to me that some kind of “end” is on the horizon. While most media narratives like to frame all this as a “crackdown”, another framing I find more clarifying is China removing its “startup debt”, which I first introduced in a previous post.

In short, every organization – a company, a bureaucracy, a country – needs to remove some amount of “debt” periodically in order to grow and evolve sustainably. If you analogize the Chinese economy to being a single company, its startup journey began in 1978 with Deng Xiaoping’s “opening and reform”. Since then, this “company” grew at a torrid pace, but this 40-plus-year-old startup has never made a concerted effort to clean up all its “startup debt” until 2020. If Jack Ma did not give that speech, China may have delayed this unavoidable task further.

(You can read our translation of Jack Ma’s infamous Bund Finance Summit speech HERE (premium content))

In other words, whether you call it a “crackdown”, “reform”, “removing startup debt” (my preferred framing), or something else, everything that has happened in the last two years is long overdue. Given all the news last week, it is worth extending this “startup debt” framing further and think about if/when the Ant IPO is back on track, what does it really mean.

The “Startup Debt” Experience

For readers who’ve worked in a tech startup before, the notion of “startup debt” should feel familiar. But for readers who’ve worked primarily in government, policy, academia, or even investment firms that don’t get involved in a company's operations, this concept can feel foreign, so I’ll do a quick explainer.

Every startup accumulates some amount of “debt” at various stages of its creation and growth. The original engineering team may have chosen the wrong stack or programming language to build the product. The company might’ve selected the wrong HR and benefits provider that did not offer good enough health benefits to retain employees over time. The founding CEO may have hired the wrong early exec to build its go-to-market team. These are all real examples of “startup debt”.

Accumulating “startup debt” is unavoidable and not necessarily a bad thing – it simply reflects the set of tradeoffs and priorities that a company’s leader has to contend with at a given point in time. If you build the perfect tech stack, but have no user or customer, this “over building” can waste a lot of money and kill the company. If your product found traction and took off like a rocketship, but your backend architecture does not evolve fast enough to scale, that can also kill the company. It’s not easy to strike the perfect balance between driving growth or removing debt. And it usually takes a tech startup 8-10 years to reach a stage of maturity where “removing startup debt” is warranted.

For a company, these “debts” often come in the form of technical architecture, organizational structure, and business processes.

For a country, these “debts” often come in the form of regulatory clarity, institutional policymaking, and governmental capacity.

Every emerging economy is essentially an early stage startup at different stages of growth and maturity, where the question of “when should we start cleaning up our startup debt” always looms on the horizon.

It’s worth noting that this question does not only apply to young companies or emerging economies. Mature companies and countries need to answer it too or risk decline. The US Senate’s current effort to update America’s woefully outdated antitrust regulations and introduce a cryptocurrency bill are both examples of a mature economy doing so.

Famous Tech Debt Examples

Before we talk about the Ant IPO and how to think about China’s overall “startup debt” removal progress, let’s look at a few well-known tech debt removal examples, in brief, to put in context just how complicated these undertakings are, even in the well-defined, well-scoped context of a single company. We will look at three examples that span both the US and China tech sector: Facebook, Dropbox, and Alibaba.

Facebook (From “Break Things” to “Stable Infra”):

The most high-profiled startup tech debt removal is Facebook (or Meta)’s transition, from the controversial “Move Fast and Break Things” ethos, to the decidedly more boring “Move Fast with Stable Infra”. This transition began in 2014, exactly 10 years after Facebook's founding.

It’s safe to say that the progress of this transition is still on-going and nowhere near completion. For example, Instagram suffered downtime as recently as November 2021. As the company evolves into a full-blown Metaverse company, its infrastructure will have to continue evolving to support this new paradigm. Facebook was famously a MySQL shop, a popular open source relational database that is fast and reliable with small-size, transactional data. This technology won’t work with social networking in a VR world, where everything is real-time interactive and image-heavy.

In summary:

• Facebook’s time from founding to “tech debt removal” transition? 10 Years
• Time to completion? TBD (7 years and counting)

Dropbox (From AWS to Private Cloud):

The cloud storage company, Dropbox, once a darling of Silicon Valley, had one of the most epic “tech debt” removal stories. A few years prior to its IPO in 2018, it transitioned from using AWS to building its own private cloud with custom servers, all the while maintaining its service with no downtime. This transition was necessary both as a massive cost-saving measure and to reduce its strategic dependency on AWS. The whole story was dramatically told in this Wired magazine article. (For more of my thoughts on Dropbox, see previous articles “Should Dropbox Enter the Cloud Business?” Part 1 and Part 2)

In summary:

• Dropbox’s time from founding to “tech debt removal” transition? 6 Years
• Time to completion? 2.5 years

Alibaba (From IOE to AliCloud):

When Alibaba was founded in 1999, the entire Chinese tech sector was dependent on American infrastructure technology vendors, both hardware and software. The so-called “IOE” stack, as in IBM, Oracle, EMC, makes up the standard stack of server, database, and storage that every tech company started on, including Alibaba, Tencent, and Baidu.

As Taobao and AliPay took off, Alibaba’s infrastructure cost also skyrocketed, presenting a similar challenge that Dropbox was wrestling with vis-a-vis AWS. Thus, Alibaba began removing its “tech debt” in 2009 by starting the “remove IOE” initiative, documented in this Zhihu thread. The slide below was part of an internal Taobao presentation, detailing the transition goals:

• From IBM to commodity PC server
• From Oracle to MySQL (yes, the same open source MySQL Facebook uses which Oracle later bought via its Sun Microsystems acquisition in 2010)
• From EMC to mid to lower-grade storage unit

This transition was completed in 2013 and paved the technical foundation and expertise needed to build AliCloud. It's also safe to say that without this “removing IOE” initiative, Ant Group would not be where it is today

In summary:

• Alibaba’s time from founding to “tech debt removal” transition? 10 Years
• Time to completion? 4 years

So how should we use these examples by companies to think about the Ant IPO and China’s country-wide process of “removing startup debt” at large?

Ant IPO: Timing and Significance

There is a good chance that the Ant IPO will resume in earnest some time in 2022. If so, that would put the time between this IPO getting pulled down to then revived at two years.

Two years is not a long time, in the context of “removing startup debt”. Among the three examples I cited, even the most well-defined, well-scoped project, namely Dropbox’s, took 2.5 years!

The thing with “removing startup debt” is while the cleaning is going on, you can’t stop operating, stop growing, or stop experimenting with the next new thing. One big, new thing that the Ant IPO is supposed to help answer is how will a high-profiled dual-listing on the Hong Kong and Shanghai stock exchange play out, where foreign investment interest will be extremely high? Will it be a free for all, or will there be restrictions and ownership limits placed on foreign capital?

What the Ant IPO can answer is just one dimension of a myriad of “startup debt” that China is removing, in order to grow more sustainably.

As I mentioned in my previous post, China’s “startup debt” is multifaceted and accumulated over a multi-decade period, which is partially why the so-called “crackdown” from two years ago felt so intense. Some of this “startup debt” is literally just debt (like Evergrande). Some of this debt is technical (like the new data governance, data privacy, and cybersecurity regulations). Some of this debt is regulatory (like antitrust, fintech reform, foreign and domestic IPO, and capital market access). Some of this debt is cultural (like outlawing for-profit after-school tutoring and limiting minors’ videogame playing time).

While a few of these areas are making progress and inching closer to clarity, other realms are still being cleaned out and will take a long time to complete. Coupling this with the disruptive execution of the dynamic zero-Covid policy, completely removing China’s “startup debt” will be a decade-long process, not a two year sprint.

Thus, a 2022 Ant IPO should not be seen as the beginning of the end, but the end of the beginning.