In 2009, lengthy earlier than Jeff Yass turned a Republican megadonor, his agency, Susquehanna Worldwide Group, invested in a Chinese language actual property start-up that boasted a complicated search algorithm.
The corporate, 99Fang, promised to assist consumers discover their good properties. Behind the scenes, staff of a Chinese language subsidiary of Mr. Yass’s agency have been so deeply concerned, data present, that they conceived the thought for the corporate and handpicked its chief govt. They mentioned in a single electronic mail that he was not the corporate’s “actual founder.”
As an actual property enterprise, 99Fang in the end fizzled. But it surely was important, in line with a lawsuit by former Susquehanna contractors, due to what it spawned. They are saying that 99Fang’s chief govt — and the search expertise — resurfaced at one other Susquehanna enterprise: ByteDance.
ByteDance, the proprietor of TikTok, is now one of many world’s most extremely valued start-ups, value $225 billion, in line with CB Insights, a agency that tracks enterprise capital. ByteDance can also be on the heart of a tempest on Capitol Hill, the place some lawmakers see the corporate as a risk to American safety. They’re contemplating a invoice that would break up the corporate. The person picked by Susquehanna to run the housing web site, Zhang Yiming, turned ByteDance’s founder.
Courtroom paperwork reveal a fancy origin story for ByteDance and TikTok. The data embody emails, chat messages and memos from inside Susquehanna. They describe a middling enterprise experiment, founder-investor stress and, in the end, a robust search engine that simply wanted a objective.
The data additionally present that Mr. Yass’s agency was extra deeply concerned in TikTok’s genesis than beforehand identified. It has been broadly reported in The New York Occasions and elsewhere that Susquehanna owns roughly 15 p.c of ByteDance, however the paperwork clarify that the agency was no passive investor. It nurtured Mr. Zhang’s profession and signed off on the thought for the corporate.
Susquehanna has tens of billions of {dollars} at stake as lawmakers debate whether or not TikTok provides its Chinese language proprietor the facility to sow discord and unfold disinformation amongst People. As Susquehanna’s founder, Mr. Yass doubtlessly has billions using on the end result of the talk.
Mr. Yass, a former skilled poker participant, can also be the one largest donor this election cycle, with greater than $46 million in contributions by way of the top of final yr, in line with OpenSecrets, a analysis group that tracks cash in politics.
Susquehanna has turned over Mr. Yass’s emails as a part of the case, in line with courtroom paperwork. However these emails should not included within the trove that was made public, leaving Mr. Yass’s private involvement in ByteDance’s formation unknown.
The data surfaced in a Pennsylvania lawsuit. Former Susquehanna contractors accuse the agency of taking cutting-edge search expertise to ByteDance with out compensating them. Susquehanna denies the accusations, saying that ByteDance didn’t obtain any expertise from the true property web site. “These claims are with out advantage and we’ll defend ourselves vigorously,” an organization spokesman mentioned.
The data have been unsealed this month. After The Occasions downloaded them and started asking questions, legal professionals for Susquehanna mentioned that the paperwork had been inadvertently made public. The choose resealed them on Tuesday.
Attorneys for each events declined to remark. ByteDance, Mr. Yass and Mr. Zhang both didn’t reply questions or didn’t reply to messages searching for remark.
Whereas the 2 sides dispute the origins of ByteDance’s expertise, the paperwork clarify that the corporate itself emerged from 99Fang’s actual property efforts. “Our search, picture processing, advice, and so on. are very highly effective,” Mr. Zhang wrote in a 2012 electronic mail, “however these items utilized to actual property are very restricted.”
Somewhat than match consumers with properties, Mr. Zhang laid out plans that yr to match customers with lighthearted content material, creating prototype pages known as Humorous Footage and Fairly Babes. He described the brand new mission as a “brother enterprise” that will share expertise with the true property web site.
Years later, a director for Susquehanna in China would write to a colleague that the housing web site deal had led to “the beginning of ByteDance.”
How It All Began
In 2005, Susquehanna created the Chinese language subsidiary, SIG China, to spend money on start-up corporations.
One early funding was Kuxun, a portal that targeted on job listings, housing commercials and journey. Mr. Zhang, then in his early 20s, was the positioning’s technical director, and SIG China seen him as a promising expertise.
He left the corporate for a job with Microsoft. However in 2009, as SIG China ready to spin off Kuxun’s actual property part into its personal enterprise, the funding agency lured Mr. Zhang again and put in him because the chief govt of the brand new firm, 99Fang.
“Now we have recruited the highest engineer of the housing channel again to steer the technical crew,” SIG China staff wrote in an inside memo.
However the relationship between Mr. Zhang and SIG China was sophisticated, data present.
He described himself as 99Fang’s founder however owned few shares, the paperwork say.
In 2011, Tim Gong, an SIG China managing director, vented about Mr. Zhang amid an obvious dispute over shares. “Kuxun and 99Fang have been each NOT based by him,” Mr. Gong wrote to a colleague. The complete context just isn’t clear, however he ends the message by seeming to counsel parting methods with Mr. Zhang: “We will let him go.”
By 2012, actual property not excited Mr. Zhang. After finding out the lifetime of Apple founder Steve Jobs, he mentioned in an electronic mail to SIG China, he realized that he wanted a profession change. Social media alternatives have been sprouting up as folks purchased cellphones. He prompt that 99Fang’s search expertise wanted a distinct objective.
The diploma to which Susquehanna steered Mr. Zhang’s profession over the course of years has by no means been a part of the ByteDance story. In a Chinese language-language weblog put up, Joan Wang, an SIG worker, has written about assembly Mr. Zhang at a espresso store to debate what would develop into ByteDance. He mapped it out on a serviette, she wrote.
Internally, in an funding memo, she wrote that Mr. Zhang sought Susquehanna’s “understanding and permission” to go away 99Fang and create a brand new firm.
‘Fairly Babes’ and a Massive Gamble
Pivots in focus are frequent in enterprise investing. Much less frequent is a change as dramatic as shifting from actual property to social media. Probably the most profitable start-ups — Fb, WhatsApp, Alibaba — advanced in scope however not drastically in objective.
By March 2012, courtroom paperwork present, the nascent mission had a brand new title: Xiangping, which roughly interprets to “share feedback.”
Mr. Zhang created a prototype app, Fairly Babes, that customers appeared to take pleasure in, the memo learn. Fragments of Xiangping’s early existence survive in archived kind on the web.
Within the funding memo, Ms. Wang wrote that by choosing content material for customers, Xiangping may engineer virality and improve “stickiness.” Somewhat than have customers seek for what they wished, in different phrases, the brand new firm would choose it for them.
“Social community expertise might be used to trace person habits, predict person curiosity, and construct relevancy and advice engine,” the memo reads.
ByteDance’s expertise has advanced, however TikTok nonetheless delivers movies that customers need to see and share. That curation is on the coronary heart of the hassle to ban TikTok. Some lawmakers worry having such a robust algorithm within the fingers of an organization with Chinese language possession.
In 2012, SIG China valued the start-up at about $9 million and invested slightly over $2 million. Its legal professionals mentioned in courtroom paperwork that it had since “contributed lots of of thousands and thousands in additional investments.”
From there, the corporate’s story is well-known. It rebranded itself as ByteDance and purchased the lip sync app Musical.ly, which it used as the muse for TikTok. By 2018, ByteDance had develop into one of many world’s Most worthy non-public expertise corporations.
Susquehanna’s guess on an unproven founder just isn’t uncommon. What’s distinctive about ByteDance is that it paid off so properly.
“A part of it’s they noticed one thing,” mentioned Steven Kaplan, who researches non-public fairness and enterprise capital on the College of Chicago Sales space College of Enterprise. “A part of it’s they bought fortunate.”
What’s Subsequent?
The Pennsylvania courtroom case could in the end go earlier than a jury, however no trial date has been set.
The Home handed a invoice in March that would power the sale of TikTok, and a Senate vote may come as quickly as subsequent week.
Along with his marketing campaign donations, Mr. Yass has funded a significant advocacy drive by way of the libertarian Membership for Progress to stop the banning of TikTok. That has proven blended outcomes to date, as many Home members backed by the group voted for a ban.
As with many items of laws, former President Donald J. Trump is a wild card within the invoice’s passage. As president, he tried to power a sale of TikTok. However he has since reversed his stance. He has additionally acknowledged assembly briefly with Mr. Yass however mentioned that they by no means mentioned TikTok.
Liu Yi contributed reporting, and Kitty Bennett contributed analysis.
