In 2009, long before Jeff Yass became a Republican megadonor, his firm, Susquehanna International Group, invested in a Chinese real estate start-up that boasted a sophisticated search algorithm.
The company, 99Fang, promised to help buyers find their perfect homes. Behind the scenes, employees of a Chinese subsidiary of Mr. Yass’s firm were so deeply involved, records show, that they conceived the idea for the company and handpicked its chief executive. They said in one email that he was not the company’s “real founder.”
As a real estate venture, 99Fang ultimately fizzled. But it was significant, according to a lawsuit by former Susquehanna contractors, because of what it spawned. They say that 99Fang’s chief executive — and the search technology — resurfaced at another Susquehanna venture: ByteDance.
ByteDance, the owner of TikTok, is now one of the world’s most highly valued start-ups, worth $225 billion, according to CB Insights, a firm that tracks venture capital. ByteDance is also at the center of a tempest on Capitol Hill, where some lawmakers see the company as a threat to American security. They are considering a bill that could break up the company. The man picked by Susquehanna to run the housing site, Zhang Yiming, became ByteDance’s founder.
Court documents reveal a complex origin story for ByteDance and TikTok. The records include emails, chat messages and memos from inside Susquehanna. They describe a middling business experiment, founder-investor tension and, ultimately, a powerful search engine that just needed a purpose.
The records also show that Mr. Yass’s firm was more deeply involved in TikTok’s genesis than previously known. It has been widely reported in The New York Times and elsewhere that Susquehanna owns roughly 15 percent of ByteDance, but the documents make clear that the firm was no passive investor. It nurtured Mr. Zhang’s career and signed off on the idea for the company.
Susquehanna has tens of billions of dollars at stake as lawmakers debate whether TikTok gives its Chinese owner the power to sow discord and spread disinformation among Americans. As Susquehanna’s founder, Mr. Yass potentially has billions riding on the outcome of the debate.
Mr. Yass, a former professional poker player, is also the single largest donor this election cycle, with more than $46 million in contributions through the end of last year, according to OpenSecrets, a research group that tracks money in politics.
Susquehanna has turned over Mr. Yass’s emails as part of the case, according to court documents. But those emails are not included in the trove that was made public, leaving Mr. Yass’s personal involvement in ByteDance’s formation unknown.
The records surfaced in a Pennsylvania lawsuit. Former Susquehanna contractors accuse the firm of taking cutting-edge search technology to ByteDance without compensating them. Susquehanna denies the accusations, saying that ByteDance did not receive any technology from the real estate site. “These claims are without merit and we will defend ourselves vigorously,” a company spokesman said.
The records were unsealed this month. After The Times downloaded them and began asking questions, lawyers for Susquehanna said that the documents had been inadvertently made public. The judge resealed them on Tuesday.
Lawyers for both parties declined to comment. ByteDance, Mr. Yass and Mr. Zhang either did not answer questions or did not respond to messages seeking comment.
While the two sides dispute the origins of ByteDance’s technology, the documents make clear that the company itself emerged from 99Fang’s real estate efforts. “Our search, image processing, recommendation, etc. are very powerful,” Mr. Zhang wrote in a 2012 email, “but these things applied to real estate are very limited.”
Rather than match buyers with homes, Mr. Zhang laid out plans that year to match users with lighthearted content, developing prototype pages called Funny Pictures and Pretty Babes. He described the new project as a “brother enterprise” that would share technology with the real estate site.
Years later, a director for Susquehanna in China would write to a colleague that the housing site deal had led to “the birth of ByteDance.”
How It All Started
In 2005, Susquehanna created the Chinese subsidiary, SIG China, to invest in start-up companies.
One early investment was Kuxun, a portal that focused on job listings, housing advertisements and travel. Mr. Zhang, then in his early 20s, was the site’s technical director, and SIG China viewed him as a promising talent.
He left the company for a job with Microsoft. But in 2009, as SIG China prepared to spin off Kuxun’s real estate section into its own venture, the investment firm lured Mr. Zhang back and installed him as the chief executive of the new company, 99Fang.
“We have recruited the top engineer of the housing channel back to lead the technical team,” SIG China employees wrote in an internal memo.
But the relationship between Mr. Zhang and SIG China was complicated, records show.
He described himself as 99Fang’s founder but owned few shares, the documents say.
In 2011, Tim Gong, an SIG China managing director, vented about Mr. Zhang amid an apparent dispute over shares. “Kuxun and 99Fang were both NOT founded by him,” Mr. Gong wrote to a colleague. The full context is not clear, but he ends the message by seeming to suggest parting ways with Mr. Zhang: “We shall let him go.”
By 2012, real estate no longer excited Mr. Zhang. After studying the life of Apple founder Steve Jobs, he said in an email to SIG China, he realized that he needed a career change. Social media opportunities were sprouting up as people bought cellphones. He suggested that 99Fang’s search technology needed a different purpose.
The degree to which Susquehanna steered Mr. Zhang’s career over the course of years has never been part of the ByteDance story. In a Chinese-language blog post, Joan Wang, an SIG employee, has written about meeting Mr. Zhang at a coffee shop to discuss what would become ByteDance. He mapped it out on a napkin, she wrote.
Internally, in an investment memo, she wrote that Mr. Zhang sought Susquehanna’s “understanding and permission” to leave 99Fang and create a new company.
‘Pretty Babes’ and a Big Gamble
Pivots in focus are common in venture investing. Less common is a change as dramatic as shifting from real estate to social media. The most successful start-ups — Facebook, WhatsApp, Alibaba — evolved in scope but not drastically in purpose.
By March 2012, court documents show, the nascent project had a new name: Xiangping, which roughly translates to “share comments.”
Mr. Zhang created a prototype app, Pretty Babes, that users seemed to enjoy, the memo read. Fragments of Xiangping’s early existence survive in archived form on the internet.
In the investment memo, Ms. Wang wrote that by selecting content for users, Xiangping could engineer virality and increase “stickiness.” Rather than have users search for what they wanted, in other words, the new company would select it for them.
“Social network technology will be used to track user behavior, predict user interest, and build relevancy and recommendation engine,” the memo reads.
ByteDance’s technology has evolved, but TikTok still delivers videos that users want to see and share. That curation is at the heart of the effort to ban TikTok. Some lawmakers fear having such a powerful algorithm in the hands of a company with Chinese ownership.
In 2012, SIG China valued the start-up at about $9 million and invested a little over $2 million. Its lawyers said in court documents that it had since “contributed hundreds of millions in further investments.”
From there, the company’s story is well known. It rebranded itself as ByteDance and bought the lip sync app Musical.ly, which it used as the foundation for TikTok. By 2018, ByteDance had become one of the world’s most valuable private technology companies.
Susquehanna’s bet on an unproven founder is not rare. What’s unique about ByteDance is that it paid off so well.
“Part of it is they saw something,” said Steven Kaplan, who researches private equity and venture capital at the University of Chicago Booth School of Business. “Part of it is they got lucky.”
What’s Next?
The Pennsylvania court case may ultimately go before a jury, but no trial date has been set.
The House passed a bill in March that could force the sale of TikTok, and a Senate vote could come as soon as next week.
In addition to his campaign donations, Mr. Yass has funded a major advocacy drive through the libertarian Club for Growth to prevent the banning of TikTok. That has shown mixed results so far, as many House members backed by the group voted for a ban.
As with many pieces of legislation, former President Donald J. Trump is a wild card in the bill’s passage. As president, he tried to force a sale of TikTok. But he has since reversed his stance. He has also acknowledged meeting briefly with Mr. Yass but said that they never discussed TikTok.
Liu Yi contributed reporting, and Kitty Bennett contributed research.
