In 2009, long before Jeff Yass became a major Republican donor, his firm, Susquehanna International Group, invested in a Chinese real estate startup boasting sophisticated search algorithms.
A company called 99Fang promised to help buyers find the perfect home. Records show that behind the scenes, employees of Mr. Yas's company's Chinese subsidiary were heavily involved, as they conceived the idea for the company and handpicked its chief executive. They said in one email that he was not the “true founder” of the company.
99Fang as a real estate venture ultimately failed. But it was significant because of what it produced, according to a lawsuit filed by former Susquehanna contractors. The 99Fang chief executive and his search technology have reportedly resurfaced with another Susquehanna venture, his ByteDance.
TikTok owner ByteDance is now one of the most highly valued startups in the world, valued at $225 billion, according to CB Insights, a firm that tracks venture capital. ByteDance has also been at the center of the riot at the Capitol, with some lawmakers viewing it as a threat to U.S. national security. They are considering legislation that could potentially break up the company. Zhang Yiming, who was chosen by Susquehanna to run the housing site, became the founder of ByteDance.
Court documents reveal the complicated origin story of ByteDance and TikTok. The records include emails, chat messages and notes from inside Susquehanna. They describe a half-baked business experiment, tensions between founders and investors, and ultimately a powerful search engine that needed a purpose.
The records also show that Yas' company was more involved in the creation of TikTok than previously known. Although it has been widely reported in the New York Times and elsewhere that Mr. Susquehanna owns about 15% of ByteDance, the documents make clear that the company was not a passive investor. It nurtured Zhang's career and approved his company's idea.
Tens of billions of dollars are at stake for Susquehanna as lawmakers debate whether TikTok gives its Chinese owners the power to sow discord among Americans and spread disinformation. As the founder of Susquehanna, Mr. Yass could make billions of dollars on the outcome of the discussion.
Yas, a former professional poker player, is the single largest donor of this election cycle, having donated more than $46 million by the end of last year, according to OpenSecrets, a research group that tracks political money. be.
Susquehanna turned over Yas's emails as part of the lawsuit, according to court documents. However, these emails were not included in the published documents, and Mr. Yas's personal involvement in founding ByteDance remains unclear.
The records were revealed in a Pennsylvania lawsuit. Susquehanna's former contractors accuse the company of bringing cutting-edge search technology to ByteDance without compensation. Mr. Susquehanna denied the accusations, saying ByteDance was not provided with any technology by the real estate site. “These claims are baseless and we will vigorously defend them,” a company spokesperson said.
The records were unsealed this month. After the Times downloaded the documents and began questioning them, Susquehanna's attorney said the documents had been inadvertently released. A judge resealed them Tuesday.
Lawyers for both parties declined to comment. ByteDance, Mr. Yas and Mr. Chan did not respond to questions or respond to messages seeking comment.
Although the two sides dispute the origins of ByteDance's technology, documents reveal that the company itself was born out of 99fan's real estate business. “Our search, image processing, recommendations, etc. are very powerful,” Zhang wrote in a 2012 email. “However, these features that apply to real estate are very limited.”
That year, Zhang developed prototype pages called “Funny Pictures” and “Pretty Babes” with a plan to match users with light-hearted content, rather than matching buyers with homes. He described the new project as a “sibling company” that will share technology with the real estate site.
A few years later, a Susquehanna director in China wrote to a colleague that the residential land deal led to “the birth of ByteDance.”
how it all started
In 2005, Mr. Susquehanna established a Chinese subsidiary, SIG China, to invest in start-up companies.
One of its early investments was Kuxun, a portal focused on job listings, housing ads, and travel. Zhang, who was in his early 20s at the time, was the site's technical director and SIG China saw him as a promising talent.
He left the company to take a job at Microsoft. But in 2009, when SIG China was preparing to spin off Mr. Kushun's real estate division and launch its own business, the investment firm recalled Mr. Zhang and made him chief executive of the new company, 99 Fan.
“We have rehired a top engineer from the residential channel to lead our technical team,” SIG China employees wrote in an internal memo.
But records show that Mr. Zhang's relationship with SIG China was complicated.
Although he referred to himself as the founder of 99Fang, he held very few shares, the documents state.
In 2011, SIG China managing director Tim Gong opened up about Zhang amid an apparent dispute over the stock. “Neither Kushun nor 99fan were founded by him,” Gong said in a letter to his colleagues. Although the full context is not clear, he ended the message by saying, “I'm letting him go,” as if hinting at breaking up with Zhang.
By 2012, real estate no longer excited Zhang. He said in an email to SIG China that after researching the life of Apple founder Steve Jobs, he realized he needed a career change. As people bought cell phones, social media opportunities sprouted. He suggested that 99Fang's search technology needed a different purpose.
The extent to which Mr. Susquehanna guided Mr. Zhang's career over the years was not part of the ByteDance story. SIG employee Joanne Wang wrote in a blog post in Chinese about meeting Zhang at a coffee shop to discuss ByteDance's future. He made her plans on a napkin, she wrote.
The company wrote in an investment memo that Zhang sought Susquehanna's “understanding and permission” to leave 99Fang and form a new company.
'Pretty Babes' and big bets
Pivoting focus is common in venture investing. Changes as dramatic as the move from real estate to social media are less common. The most successful startups, Facebook, WhatsApp, and Alibaba, have evolved in scope but not dramatically in purpose.
By March 2012, this nascent project had a new name: “Xiangping,” according to court documents. This roughly translates to “share your comments.”
Zhang created a prototype app called “Pretty Babes,” and users seemed to like it, the memo said. Fragments of Xiangping's early existence remain in archived form on the Internet.
Wang wrote in an investment memo that Xiangping can increase virality and increase “stickiness” by selecting content for users. So instead of letting users search for what they want, the new company will choose it for them.
“Social network technologies are used to track user behavior, predict user interests, and build relevance and recommendation engines,” the memo said.
Although ByteDance's technology has evolved, TikTok still delivers videos that users want to see and share. That curation is central to efforts to ban TikTok. Some lawmakers are concerned that such powerful algorithms could fall into the hands of Chinese-owned companies.
In 2012, SIG China valued the startup at approximately $9 million and invested just over $2 million. The company's lawyers said in court documents that the company has since “contributed hundreds of millions of dollars to further investments.”
From there, the company's story is well known. The company rebranded itself as ByteDance and acquired lip-syncing app Musical.ly, which it used as the foundation for TikTok. By 2018, ByteDance had become one of the most valuable private technology companies in the world.
It's not unusual for Mr. Susquehanna to bet on unproven founders. What's unique about ByteDance is that it's been so successful.
“Part of it is that they saw something,” said Steven Kaplan, a private equity and venture capital researcher at the University of Chicago Booth School of Business. “Part of it is they got lucky.”
What's next?
The Pennsylvania case could eventually be tried by a jury, but no trial date has been set.
The House of Representatives passed a bill in March to force a sale of TikTok, and a Senate vote could come as early as next week.
In addition to campaign contributions, Yass has funded a major advocacy effort through the Libertarian Club for Growth to stop the banning of TikTok. So far, the results have been mixed, as many House members supported by the group have voted in favor of the ban.
As with many bills, former President Donald J. Trump has been a wild card for the bill's passage. As president, he tried to force a sale of TikTok. But then he changed his position. He also acknowledged that he met Yas briefly, but he said he never spoke to him about TikTok.
Liu Yi Contribute to the report kitty bennett Contributed to research.